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Arotech Corporation (NASDAQ:ARTX)

F4Q2013 Earnings Conference Call

April 1, 2014 11:00 ET

Executives

Kenny Green - Co-Founder, Senior Partner, GK Investor & Public Relations

Bob Ehrlich - Chairman, CEO

Steven Esses - President

Tom Paup - CFO, VP, Finance

Analysts

Mike Crawford - B. Riley & Company

Alex Cushner - RW Baird

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Arotech's Fourth Quarter and Full Year 2013 Results Conference Call. All participants at present in listen-only mode. Following management's formal presentation instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded. You should have received by now the company's press release. If you have not received it, please contact Arotech's Investor Relations team at GK Investor and Public Relations or view it in the news section of the company's Web site www.arotech.com.

I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Mr. Green, would you like to begin please?

Kenny Green

Thank you, operator. I would like to welcome all of you to this conference call. I'd like to thank Arotech's management for hosting this call.

Yesterday, Arotech released its fourth quarter and full year 2013 results. In addition earlier this morning, Arotech announced its acquisition of UEC Electronics. By now, you should have all received a copy of those press releases, which are also available on Arotech's Web site at www.arotech.com.

With us on the call today are Mr. Robert S. Ehrlich, Chairman and CEO; and Mr. Steven Esses, President; and Mr. Tom Paup, Senior Vice President of Finance and Chief Financial Officer. Bob will first summarize the key highlights of the year as well as the acquisition followed by Tom who will review the company's financial performance. We'll then open the call for the question-and-answer session.

Before we start, I'd like to point out that this call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and there can be no assurance that they will, in fact, occur. Arotech does not assume any obligation to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand and the competitive nature of Arotech's industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission.

In addition, certain non-GAAP financial measures will be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company's current performance. Management believes that the presentation of these non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing core operations and prospects for the future.

Unless otherwise stated, it should be assumed that any financial discussed in this conference call will be on a non-GAAP basis. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release and in the 8-K filed with respect to the UEC acquisition.

And with that, I'd now like to introduce Arotech's Chairman and CEO, Mr. Robert Ehrlich. Bob, please go ahead.

Bob Ehrlich

Thank you, Kevin. Good morning everyone, and thank you for joining us today. This is a significant time for Arotech. Yesterday, after the close of business, we announced our full year 2013 results. We reported a record year in both revenues and earnings, and a truly turning point in our company.

In addition, this morning we announced the acquisition of UEC Electronics Corporation in Charleston, South Carolina. UEC complements and should considerably enhance our Battery and Power Systems division. This acquisition significantly expands market opportunities for us and creates the potential for operational and marketing synergies over time.

In a short while, however, Steven Esses, our President will discuss in some further detail the exciting new iron-flow battery program, our R&D team has been moving forward with. Our iron-flow storage battery has the potential to give our company an entry into a huge developing market for the product that we hope will be safer than and at least as efficient as the competing technologies, but much less expensive to operate and maintain. We will go into all of this in more detail in a few minutes.

Moving on to the major news of this morning, we announced this morning -- earlier today that we closed the acquisition of UEC Electronics Corporation, a company based in Charleston, South Carolina. UEC develops and manufactures electronic components and sub-systems primarily to military, aerospace, and industrial customers. Over the coming months, we will begin the process of combining UEC with our Battery Division. The initial acquisition price for UEC consisted of $28 million in cash and 775,000 shares of our common stock plus a potential earn out of an additional $5.5 million over the next two years. We will use approximately $5.5 million of our own cash, and our lending bank has provided us the remaining $22.5 million at very favorable rates which we expect to pay back over the next five years out of our own – of our company's cash flow.

I would like also to point out that the financing we did for this transaction was exceptional. Our bank agreed to lend us $18 million in a five-year senior term loan at an additional rate of 3.75 over LIBOR and an additional B term loan of another $4.5 million at initial rate of 5.5 points over LIBOR. With good future metrics, these rates could be reduced to 3.25% and 5% respectively. Tom Paup, our CFO did an outstanding job in organizing this financing for us which along with a reasonable purchase price multiple makes this a very accretive transaction financially.

There are a number of reasons why we are so excited about this acquisition, and why we believe it will be a good fit with our Battery and Power Systems Division. First in terms of R&D, UEC's team is multi-disciplined with strong engineering and manufacturing expertise. They add significant proficiency in electronics, engineering and development, systems integration, and testing. This combines very well with our R&D expertise which we already have in military and commercial grade battery technology and battery management. We believe that we can benefit from each of those technologies by working jointly on new product development.

We expect that this will allow us to penetrate new markets with products that have a wider applicability. We also believe that UEC's outstanding engineering team has the right experience to help us solve certain issues which we are likely to face over the coming years related to the design and production of our iron-flow storage battery, which Steven will discuss further in a few minutes.

Secondly, we see the larger Battery Division having very strong sales and marketing capabilities as well as the potential to share resources and perhaps reduce operating expenses. We sell to similar customers and see significant up-sell opportunities for our products into their customer base. Their products are highly sellable throughout our customer base as well. UEC's major military and aerospace customers include the U.S. Army, Raytheon, and Boeing. UEC is an innovator in energy management and storage systems and renewable hybrid energy systems.

A most notable example of this is their GREENS program or Ground Renewable Expeditionary Energy Network System is a renewable power generation storage and distribution system for troops servicing in austere environment. UEC's activity in energy management and optimization are a natural complement to the activities of our existing Battery and Power Systems Division. UEC's extensive pipeline in combination with our backlog should enable us to continue to perform extremely well over the coming years.

Finally, we expect to be able to absorb this acquisition into Arotech with minimal increase in overhead cost at the (indiscernible) corporate level. To provide you with some details regarding the scale of the activities we are purchasing, UEC's 2013 revenues were approximately $32.4 million, and the business was profitable with over $4.5 million in EBITDA.

Now let me summarize the results of our existing business for 2013, which Tom will take you through in more detail in a few minutes. We grew to $89 million in 2013 a year over growth – year-over-year growth of 11% and the highest level of revenue in our history.

Our adjusted EBITDA grew to a remarkable $6.5 million from $2.6 million of last year. Our net income grew to $2.3 million from a loss of $2 million the year before. These results were well ahead of the original full year expectation we shared with you last year. At Simulation, 2013 was again a record year for sales of our Training and Simulation products. We generated $63 million in revenue from Training and Simulation, accounting for 72% of our overall revenue and yielding $10.2 million in adjusted EBITDA.

Each of our Simulation business areas made a substantial contribution to this particularly strong EBITDA level well in excess of our expectations for the year. Strong revenues, production efficiencies, and lower overhead growth combined to deliver these outstanding results. Our latest program, VCTS continues on track in the production phase. As on year end 2013, we delivered 23 VCTS suites to the U.S. Military and we are in schedule to deliver the remaining five. (inaudible) training of field suites had given the system very high marks in their post-training surveys. Our customer is very happy with our work and they anticipate being involved in continued support of the VCTS program. As the VCS initial production is – nears completion, we are working very hard to fill (inaudible) largest program in our division’s history with a number of opportunities in our pipeline.

Our BOSS program which we won last year continued its development efforts in 2013 in preparation for first article acceptance in early 2014. I am pleased to say that we have passed the in-plant government testing in February and are slated to begin installation of the first beginning in April of this year with production and delivery of the 17 additional units continuing through early 2016. Record sales of our IES MILO force-option simulators in 2013 included significant awards from the California Peace Officer Standards and Training units which we call Cal POST as well as the Saudi Arabian Defense forces.

We have also seen a resurgence finally in sales of our commercial driving and force-option simulators to the municipal market as the economy and those markets recover. With a fairly slow economic recovery and continued uncertainty regarding U.S. Military spending, some orders are expected in early 2014 have been moved out to later in this year and some into 2015. Nevertheless, we expect to continue to have outstanding performance.

I do note that our Simulation business has tended well and a step like a non-linear matter over the years while our growth in 2013 was extremely strong and we believe 2014 to be more of a consolidation year. Looking at our combined growth over the last five years, however, it is a very robust compound annual growth rate of 12% per annum. Based on our pipeline and backlog, I am hopeful that we will continue this growth rate going forward.

Moving on, I'd like to talk for some – for a moment about the Battery division and some of the recent developments in that division. In terms of the finances for the year, our Battery division generated $25.1 million in revenue and $1.5 million in adjusted EBITDA, both records for this division. In the Batteries area we have several exciting opportunities that we are developing which we believe can also significantly drove our revenue and profitability in the short and medium term future.

We continue to invest in the development of large format lithium batteries and chargers. We are seeing traction from our products particularly for unmanned submersibles and we believe we are beginning to see revenues from these by next year. We're also continuing developmental programs for high power lithium batteries for rockets, UAVs and tank starters some of which we start selling in later in 2014. In addition, we are developing and promoting the lithium-ion based batteries as a replacement for Lead-Acid batteries for military vehicles and for medical and commercial applications.

Now I'd like to turn this discussion over to Steven to give you some more information about the development of our iron-flow storage battery systems. Steven?

Steven Esses

Thank you, Bob. As you all know battery technology has moved into the spotlight, until the recent announcement such as Tesla's establishment of the Gigafactory to match produce and in the long run reduce the cost of lithium iron cells. This increase interest is well-timed highlighting the successful lab test of our [transit] (ph) iron-flow storage battery which we announced a few weeks ago.

To give you some background. Electricity generation can be highly variable especially in the supply – is generated from intermediate renewable sources such as sun or wind. A flow battery can store a massive amount of grid power produced by renewables and return to the grid as needed providing a buffer seeing the supply and demand of electricity.

For example in the solar power station more power might be generated at mid-day sun than is needed. The access power could be stored in a flow battery and used on demand without the need to generate additional electricity at that time. Flow battery plans can help minimize the necessity of building new fuel-based power plants to address military peak demand.

We can do this by storing energy at times and collecting energy at trough times reducing the need to scale fuel-based energy deductions to match the rise and fall of energy production and demand and from renewable production. This becomes even more critical as more renewables come online with their highly variable output. This is the integral part of the initiative to monetize the electrical – the current electrical power grid.

The market for grid storage is growing exceptionally quickly and we think it only accelerate as the use of renewable power generation increases throughout the world. According to Boston Consulting Group, the grid storage market is expected to exceed $400 billion by 2030. This represents the global storage capacity of 330 gigawatt.

To give some perspective, grid storage is currently less than 100 megawatts that's 1 gigawatt, so the market is expected to grow by 330x in only 16 years. As the market exceeds $300 billion or $500 billion or whether it happens like 2025 or 2035, it's not that important right now.

If our flow battery technology can capture even a small part of this phenomenal and quickly accelerating market, the potential for Arotech use. We believe we have a built better technology to achieve the goal of grids power storage that have substantial advantages of what currently exists. Our technology use an iron, iron components chemistry that is safe proven and its component are abundant.

Our technology has a very low total life cycle port including both a very low energy density capital costs and a low maintenance costs. This allows to demonstrate the potential customers a clear and significant high return on investments with the competing technology.

We could find a presentation on our Web site that explains this technology in greater depth. We are now moving to the second stage which will demonstrate a large scale lab pilot that we expect to complete by the end of 2014.

As we noted that our efforts of slightly – our efforts will slightly increase our R&D expenditure by about $0.5 million in 2014. We feel this is a small investment, and what could be a huge game changer for us and the world in a few years.

Back to you Bob for the discussion on guidance.

Bob Ehrlich

Thank you, Steven. Finally, I would like to conclude with reviewing the guidance that we just published for the year 2014. I should note that UEC will combine with Arotech's results only from the start of the second quarter as we only acquired this morning. This means that for 2014, we are including only three out of the four quarters of the UEC results. Also note that since Arotech and UEC has not yet had an opportunity to operate as a joint company, it is harder than normal for us to forecast our full year results, so we are being cautious in our outlook.

That being said, we nevertheless, expect full year revenues at this stage to reach between $117 million and $123 million and a non-adjusted EBITDA of somewhere between $8 million and $8.5 million. I do note that there is some final one-time acquisition cost that cannot – that we cannot estimate at this moment which will impact our EBITDA. Nevertheless, those are the general guidelines.

At the mid-point our guidance represents a 42% year-over-year growth in revenue and 27% growth in EBITDA. Please note that the financial guidance what we know today, while usually do not take an obligation to update this estimate in the future. We will try to be as open with you as possible and share any new information we have as the year progresses and as we get further integrated into UEC.

In summary, our company is a strong stable profitable and cash generating company. Given the UEC acquisition and all other positive developments we have seen recently, I'm more excited at this time than I have ever been with regard to our potential. We expect to emerge from 2014 as a different company from which we entered. While I believe 2014 should be a good year for Arotech, I feel we really could begin to reap the results significantly in our investments in the years 2015 and beyond.

And with that I turn it over to Tom for a review of the financials and discussion of our cash position.

Tom Paup

Thank you, Bob.

Revenues for 2013 were $88.6 million compared to $80.1 million for 2012 an increase of 11%. Gross profit for 2013 was $24.1 million or 27% of revenues compared to $17.9 million or 22% of revenues for 2012, a 5 point increase in the gross margin percentage. The reason for the increase is primarily due to the product mix as well as a one time true-up which lowered the cost of goods sold on our VCTS project.

Adjusted EBITDA earnings before interest tax, depreciation and amortization for 2013 was $6.5 million compared to $2.6 million for the corresponding period last year and an improvement of 147%. We believe that the information regarding adjusted EBITDA enhances our overall understanding of our current financial performance. We compute adjusted EBITDA which is a non-GAAP financial measure as reflected on the financial schedules within our press release.

The $6.5 million 2013 adjusted EBITDA was slightly better than our full year guidance of $6.1 million to $6.3 million, which we gave last quarter. The company reported an operating income in 2013 of $3.5 million compared to an operating loss of $861,000 in 2012. The company's net income from continuing operations for 2013 was $2.3 million or $0.13 per diluted share compared to a net loss from continuing operations of $2 million or a loss of $0.14 per share in 2012.

For the fourth quarter, revenues reached $20.9 million compared to $22.1 million for the corresponding period in 2012 a decrease of 5%. Gross profit for the fourth quarter was $6.1 million or 29% of revenues compared to $5.3 million or 24% of revenues for the corresponding period in 2012 a 5 point increase in the gross margin percentage.

Our adjusted EBITDA for the quarter was $380,000 compared to $872,000 for the corresponding period of 2012, a decline of 56%. The company reported an operating loss for the fourth quarter of $271,000 compared to an operating income of $17,000 for the corresponding period in 2012.

Operating expenses for the quarter were $6.4 million as compared to $5.3 million in the corresponding year in 2012. The major portion for the increase is due to an increase in research and development expenses. The company's net loss for the fourth quarter of 2013 was $556,000 or $0.03 per diluted share compared to a net loss of $72,000 or flat for the corresponding period in 2012.

I would like to point out in our recent press release, the fourth quarter share count as noted was incorrect, our basic shares are 19,303,707 for the fourth quarter. And our diluted shares were 19,906,447 in 2012. Our 2013 full year share count in 2012 full year share count is correct.

Backlog of orders from continuing operations totaled approximately $58 million as of the end of the year December 31, 2013 compared to $87.7 million as of December 31, 2012. Backlog for simulation as of the end of the year was $45.9 million versus $72.4 million for the same period last year. Battery had a backlog of $12.1 million versus $15.3 million last year.

As of the end of the year, the company had $5.8 million in cash and $498,000 in restricted collateral deposits both as compared to the last year ending December 31, 2012 when we had $1.6 million in cash and $186,000 in restricted collateral deposits.

We had zero or no short-term bank debt and $1.8 million in long-term bank debt outstanding at the end of 2013 as compared to 2012 when we had $9.8 million in short-term bank debt and $1.9 million in long-term debt outstanding. We had $10.2 million in available unused bank lines of credit at the end of the year with our main bank as of December 31, 2013 under our $15 million credit facility under our FAAC subsidiary which is secured by the company's assets and the asset of the company's other subsidiaries and guaranteed by our debt.

The company had trade receivables of $12.4 million as of December 31, 2013 compared to $9.6 million as of December 31, 2012. We ended the year at 2013 with a current ratio that is current assets divided by current liabilities of 2.12 million up from December 31, 2012 when our current ratio was 1.37.

Back to you Bob.

Robert Ehrlich

Thank you, Tom.

We would like to look forward to take questions from the floor from people I wanted to ask those questions about either you didn't see our results for the year, our guidance or the iron flow battery.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) The first question is from Mike Crawford of B. Riley & Company. Please go ahead.

Mike Crawford - B. Riley & Company

Thank you. You mentioned the $32 million in revenue UEC generated last year as well as customers including Raytheon, Boeing, and the U.S. Army, and the $4.5 million of EBITDA, can you give us some sense of what product mix were delivered to those customers to comprise that revenue. And also on the EBITDA side, the comfort you have and the company maintaining that $4.5 million EBITDA minimum threshold, which is now currently you have on your new term loans? Thank you.

Bob Ehrlich

As you know Tom, breakdown of how much was military versus –

Tom Paup

I would say it's at least 75% military.

Bob Ehrlich

Mike, Tom believes from the data we have from the due diligence, it's about 75% of the business was military, so the substantial portion was GREEN. There were a number of other programs, the LAV program as well as a bunch of smaller contracts. But 75% or so of that $32 million represents military. The biggest commercial customer is Boeing.

Tom Paup

As far as the EBITDA Mike, we did substantial due diligence with our auditor BDO, we engaged to review the company, UEC's performance and relative to the $4.5 million, we feel comfortable with that and think that in the future we have a very good upside opportunity on that number.

Mike Crawford - B. Riley & Company

Tom, in your Battery and Power Systems business, you have a $12 million -- $12.1 million backlog at the end of the year versus $25 million in revenue generated during the year. I think it was mentioned that UEC had a substantial backlog at the end of the year 2013, do you have that number?

Bob Ehrlich

It was about $29 million. Our battery business, we just announced recently another $2 million order, our backlog in our Battery unit is about 15 and 16 at the moment.

Mike Crawford - B. Riley & Company

Thank you. And then you also – switching gears said that you had sort of shipped 23 of the 28 VCTS suites by year end, where does that number stand at the end of Q1?

Bob Ehrlich

We shipped another –

Steven Esses

We were down about 1 left Mike. So we were almost done with the VCTS, original 28 suites.

Bob Ehrlich

We are moving to BOSS Mike, and we are also, as I mentioned earlier, our opportunities for a number of contracts is much larger than it was a year ago. We have worked very hard to backfill that contract at the time it would come to an end.

Mike Crawford - B. Riley & Company

And with VCTS, there were two potential increases or extensions of the work, one being a fixed trailer, has there been any movement on either of these possibilities?

Bob Ehrlich

We continue to pursue all the opportunities in VCTS. We have nothing at the moment to announce officially.

Mike Crawford - B. Riley & Company

Okay. Further on your, existing battery – pre-existing battery technology, I think you had shipped 8 million of SWIPES to the army through nine months is that…?

Bob Ehrlich

That was two year; we shipped about 8 million over a two-year period. I think last year we did something close to 5.5 and the year before like 3.

Mike Crawford - B. Riley & Company

And what's your outlook for SWIPES according to your (inaudible) to IDF?

Bob Ehrlich

The two things that are interesting about SWIPES is the potential business with the IDF, they tested the first units and probably are very excited about. So we hope to see a significant order this year. And we also are, and have introduced to that marketplace the SWIPES with data collection what we call it I…

Steven Esses

ISPDS.

Bob Ehrlich

ISPDS it's a data version of SWIPES, and we have anticipation for a significant second half in that as well.

Mike Crawford - B. Riley & Company

And then, final question from me is, you mentioned one of the attributes that you appreciated, what you received was the potential engineering help that could give you as you develop your iron filled cyanide battery?

Bob Ehrlich

Yes.

Mike Crawford - B. Riley & Company

So what is it in particular that that might bring to the table there?

Steven Esses

Mike, it's their expertise in engineering and development. There is a lot of moving pieces when designing this new iron flow battery both on the mechanical side and on engineering side. And so what specific piece they're going to play, we're not sure. But they have a lot of – some of the things we've been looking at to outsource, they have some of those resources in-house on the engineering side. We think they can help us when its time to scale this up to the next stage.

Bob Ehrlich

What furthers that, what we will do over the next quarter is Steven will spend sometime with all the other people our Battery guys in South Carolina trying to identify which things are the low hanging fruit that we can work on together to enhance the business beyond what their opportunities are and ours.

Mike Crawford - B. Riley & Company

Okay. Thanks. Look forward to seeing you in our next conference next month.

Bob Ehrlich

Yes. Looking forward to it as well. We can take another question.

Operator

The next question is from our (indiscernible). Please go ahead.

Unidentified Analyst

Hi, guys. Had a few quick questions for you. First of all, could you tell me about the earn out, how likely is it that you expect to have to pay it and how will that be paid is that through cash or additional shares?

Bob Ehrlich

Of the earn out, the first year earn out the target is a minimum of $5.5 million to get to $1.25 million pay out if they get to $6.25 million, they get to full amount of $2.5 million but its scaled between $5.5 million and $6.25 million. We have optimism about them achieving the minimum and I think they have a very good chance of exceeding the full amount. The way we will pay for it at our option we can take cash or stock, is that right Steven?

Steven Esses

Yes, cash or stock.

Bob Ehrlich

Cash or stock at our option. So we have the right to elect how to pay them when they've earned enough. Obviously, if they get to the $6.25 million we will be happy campers that they've achieved that and we'll be happy to pay the additional. The same is true with the second year, in the second year the target was higher, its $7.75 million, again, scaled from seven and again $3 million of EBITDA a $3 million of cash payment that would again be at our option cash or stock.

Unidentified Analyst

Okay. Great. And last year, how much did you benefit from the true-up in your comps?

Tom Paup

Slightly less than $1 million.

Unidentified Analyst

$1 million, okay. And should that impact you guys at all in the 2014 guidance?

Tom Paup

No. It did help us in the balance of 2013, when we did the true up because we increased the margin on the project over all. There will be some inclusion into 2014 and it's in the number that we're talking about all ready.

Unidentified Analyst

I'm sorry there should be some additional benefit this year?

Tom Paup

Yes. It's already included what we saw in the guidance.

Bob Ehrlich

Both included in the guidance.

Unidentified Analyst

Perfect. But that's non-cash, right?

Tom Paup

No, that's true profit.

Unidentified Analyst

Okay. All right, great. And my final question is, I was just a little confused by the guidance that you provided because if I take your 2000 results and add-in UEC's and even annualize that the pro forma number seems a lot less than the guidance that you have provided and I was just wondering what was the thought process behind that, is that just a function of your backlog being down year-over-year, or is there something else going on?

Bob Ehrlich

No. First of all, you have to remember that we're only getting nine months of the results, so you can't use their full year last year. You have to….

Unidentified Analyst

Yes. I seasonally adjusted it and still got…

Bob Ehrlich

This is a 75% on our results and a conservative take a look at what we think we can do going forward that was an early conservative guess.

Unidentified Analyst

It sounds like you're optimistic about UEC right, just based on the earn out numbers that you have provided, so that's why I was just a little confused about the guidance?

Bob Ehrlich

We anticipate that our Battery business being comparable to last year may be somewhat better and while the simulation can – revenues can approach last year because of the true-up the profitability we think we've scaled it back a little bit in our preliminary guidance.

Unidentified Analyst

Okay. Great. I'll just follow up with you on offline.

Bob Ehrlich

Okay. Great. Thank you.

Operator

The next question is from [Bernie Kalish of JMC Investments] (ph). Please go ahead.

Unidentified Analyst

Good morning, Bob. And all seems like a pretty good decent quarter according to me obviously, Wall Street didn't think so. But then again, it took Wall Street to get you from $1 to $6 is a long enough time. The flow battery, it seems like you have something significant being that you looking for a patent on, is there something that's different out there or just approving on what's out there?

Bob Ehrlich

We've applied for a patent we expect to have an issue, our technology is different from some of the competing technologies. Ours is iron, iron technology there are others that are different chemistries that have other features that we think are not as good as ours. We think the materials are very inexpensive, the manufacturing process is relatively reasonable and the expectation from what we can eventually bring a battery in at a cost per unit hour is very competitive.

So we have very high hopes for the battery, but its still early stages we're in the lab at this point proving out the technology, we will have a working model by year end and then we'll begin to build the (indiscernible) to demonstrate to people that we really have an entire system.

Unidentified Analyst

So basically something new, it's just on improvement of something it's out there?

Bob Ehrlich

It's something new.

Unidentified Analyst

Okay. And then second on the lithium, today all the talk is lithium with the test that has the big winning word today. The batteries that you're making for the tanks, is that some how able to go for a regular autos?

Bob Ehrlich

Right now we're focused on the potential market for tanks is new. So we're focused there. As you know we've had some bad experience in electric vehicle, we are building B&S systems to manage the electronics and the batteries in electric vehicles. But we are not currently looking to enter the easy markets as such. We will start with the tanks and then take a look again.

Unidentified Analyst

Okay. Good luck on your endeavors and UEC seems to be like you picked up at a bargain price. And hopefully things will continue.

Bob Ehrlich

Thank you.

Operator

The next question is from (indiscernible). Please go ahead.

Unidentified Analyst

Good morning. Further to the iron flow battery, if you have a working model at the end of this year, does that imply you have a kind of a prototype small production model in a year or two and then another year or two to a large production model or what is the timeframe be there?

Bob Ehrlich

The timeframe is to have a lab model this year by year end and then take the next 18 to 24 months to build a battery the size of a vehicle trailer.

Unidentified Analyst

Shipping?

Bob Ehrlich

A shipping trailer and that would power a home for…

Steven Esses

Probably the shipping container will probably it's like 20 homes for about five hours. So it's the true scalability. In the lab right now, it will be a small battery enough to a couple of light bulbs. And then that's by the end of the year then you take that and you scale that up like Bob was saying, it's a shipping size container that would be able to supply back up power for 16, 20 homes to five hours. Once we're at that point your proven scalability and then it’s just really partnering up with one of the big energy producers to do real – in the field to test and pilot.

Unidentified Analyst

Right. And then who else is working on different (indiscernible) or different combinations of metals and technology…

Bob Ehrlich

If you look at our Web site you'll see some of the competitors and the costs of their batteries and some of the issues some of the things that they can't do that we do, its easier to start there by looking a the Web site and then you call Steven or myself for further information.

Unidentified Analyst

Okay. Thank you.

Bob Ehrlich

Sure.

Operator

The next question is from Alex Cushner of RW Baird. Please go ahead.

Alex Cushner - RW Baird

Yes. Hi, guys. Congrats on the great 2013 in terms of the dramatically improving the top-line and more importantly the bottom-line, so hats off to you guys. And it sounds like this, UEC deal was – is a good fit and that you paid for it in a non-dilutive highly accretive way, so hats off on that.

Bob Ehrlich

Good. Thank you for that. We're very excited about that company. We think we financed it well and bought it well and we have very optimistic outlook for what's kind of things that they can do and what we can do together with them.

Steven Esses

And do things with them.

Alex Cushner - RW Baird

Yes, it looks like the – yes, certainly pleased with the method of financing. Digging into this guidance a bit and I know its early days as you put these two companies together and you'll know more and you'll adjust appropriately. But, could you give me a sense of – so UEC is about $32.5 million last year. What was that growth rate versus 2012?

Bob Ehrlich

Actually they fell off a little. One of the things that made us opportunity for us, it had a slight decline into – some of the things they've anticipated for 2013 didn't materialize – didn't materialize and are falling into 2014. So it represented a real opportunity much like when we bought FAAC which did have a slightly down year before we bought it. We like to look for opportunities where we see tremendous upside potential where some of their opportunities have moved to the right and the seller is right for a reasonable transaction.

Alex Cushner - RW Baird

And so that's – so their EBITDA in 2012 was also greater than $4.5 million?

Bob Ehrlich

Yes. It was. And their margins tend around between 10% and 12% EBITDA.

Tom Paup

Yes.

Alex Cushner - RW Baird

Yes. And you guys are more running in 6% to 7% area.

Tom Paup

You are right.

Alex Cushner - RW Baird

So clearly you're picking up higher margin revenues.

Bob Ehrlich

Yes.

Alex Cushner - RW Baird

So, it's – following up on that, just a little bit here. It sounds like you expect batteries to grow – at the end of last quarter you said in the 4% to 8% area that still of this $25 million base, is that still the expectation or is that…

Bob Ehrlich

I think the Battery business could be flat to up 6% 7%. We have some things pending that hasn't yet closed, so we can't make and as I said it's early for us to make a more sophisticated guidance.

Alex Cushner - RW Baird

And you think – I guess hard question, what do you think it did to your growth rate on the Battery businesses?

Steven Esses

2014 fiscal.

Bob Ehrlich

In terms of going forward?

Alex Cushner - RW Baird

Yes.

Bob Ehrlich

Two year growth. We tend to look at 7% to 10% growth per annum.

Steven Esses

Over the last five years Battery has grown about between 7% and 10% a year, so pretty consistently. So I think that more or less we were optimistic to do the same thing on a consistent basis over the next few years. We think we can get to some place between 5% and 10% over the next two years per year. It doesn't always – Alex, it doesn't always lay out so cleanly...

Alex Cushner - RW Baird

Yes, of course. Some of that– (indiscernible) I mean – it's a nice growth rate, but given the confluence of market trends, your R&D, your renewed focus on this sector after disposing it armor a while ago. Just hoping that growth rate might be accelerating.

Bob Ehrlich

It could. I mean if some of these things that we're working on, it takes time to test when we develop a new product for the IDF for example. They test it considerably before they give us an order. So we can't tell you that it will happen in 2014 or 2015 but there will be at some point of breakthrough.

Alex Cushner - RW Baird

Yes, understand. And then, so you sort of got to this on the slides, but it sounded like your – did you do $8 million in - $5 in Q – you have done $5 million I guess through Q3 of last year. Could you do any SWIPES business in Q4?

Bob Ehrlich

Yes, we do.

Steven Esses

I don't have that top of my head, it was a…

Bob Ehrlich

For the year we did $5.5 million.

Alex Cushner - RW Baird

Okay. And you anticipate slight growing or?

Bob Ehrlich

Continuing where we're hoping for some significant increase from the IDF.

Alex Cushner - RW Baird

Yes.

Bob Ehrlich

As they adopt the product.

Alex Cushner - RW Baird

And, okay, great on IDF. And then any opportunity for this to move from Special Forces to big army in terms of U.S. Army?

Steven Esses

We're having those conversations but there's not been a commitment yet. So those conversations are ongoing.

Alex Cushner - RW Baird

Yes.

Steven Esses

We're optimistic, but it's very hard to see whether of course, all of the budget issues and everything whether that's going to be a 2014, 2015 issue. We also had some program changes in the specifications of the program that they wanted to do some redesign based on some of the field results, that stuff will take a little bit of time as well. So we're confident it's going to happen, it's hard to say when it's going to fall in.

Alex Cushner - RW Baird

Yes.

Steven Esses

What year, of course, it's going to fall into.

Alex Cushner - RW Baird

Understood. It seems like a great product and I certainly think you're right to be optimistic about it over a couple of year period. So Simulation, obviously, you had a superb year at $65 million or so million in revenues and it sounds like without having fully filled in the VCTS backlog as that you're kind of guiding to that to be down some to flat?

Bob Ehrlich

We're going to be close, yes.

Alex Cushner - RW Baird

Flat to down a little, is that the anticipation?

Bob Ehrlich

Well, I think yes, but we're hoping that some things will materialize, it will push that up but yes.

Alex Cushner - RW Baird

Got it, got it. Okay.

Bob Ehrlich

I think down slightly.

Alex Cushner - RW Baird

So, yes – let me so – that leads me to sort of that again that sort of big picture guidance because my understanding would be that if batteries are up some and Simulation is even down some, batteries higher margin business. Is that your EBITDA profile for 2014 would be slightly increased from the $6.5 million, if given this guidance, unless there is something unique in there? And I guess there are something somewhat unique in terms of the – or not even somewhat but unique in terms of additional increased R&D spending on this battery.

But, for looking for UEC to do $5.5 million or $4.4 million or $5 million pick a number, we're not – you're not baking in too much $2.5 million, $3 million, $3.5 million on core business EBITDA. I mean I know you guys have been extremely conservative in the past, can you kind of walk me through that?

Bob Ehrlich

Well, first of all, in our performance in Simulation last year as Tom mentioned, we had a true up of about $1 million. So that our EBITDA was really outstanding and somewhat extraordinary. So if you say that we could achieve a flat year in Simulation, our EBITDA would be somewhat lower because we don't have any true up that we anticipate. Battery should be based – and the UEC contribution will only be nine months and we're being very conservative on that because we don't know them well enough yet, they had – probably understand a very good first quarter and we're hoping that they can continue – while they're confident they'll do the $5.5 million until we spend some time there, we're not going to bake it into our guidance and so we have a little more opportunity to look out at ourselves.

Alex Cushner - RW Baird

Yes. Just sounds like a good, again congrats on the transaction, that sounds like you've – you paid for the right way and certainly increased the scope size and level of opportunity for the business.

Bob Ehrlich

Right. And we're very excited about it and we think it will be improving outlook but we want to get to know little better, we only close the deals an hour ago. So we won't have time to get better acquainted.

Alex Cushner - RW Baird

All right. That's it from me. Thanks.

Bob Ehrlich

Thank you, Alex.

Operator

(Operator Instructions) There are no further questions at this time. Before I ask Mr. Ehrlich to go ahead with his closing statements, I would like to remind participants that a replay of this call is scheduled to begin in 2 hours. In the U.S., please call 1 (888) 326-9310. In Israel, please call (03) 925. Internationally, please call 972 (3) 925-5901. A replay of this call will also be available in 3 hours on Arotech's Web site, www.arotech.com. Mr. Ehrlich, would you like to make your concluding statement?

Bob Ehrlich

Yes. I'd just like to thank our shareholders for continuing support as I think they are beginning to see some of the benefit of the support they have given us. We are obviously very excited about the outlook for the future while it's hard to predict quarter-to-quarter. We have a very good outlook for the year and into 2014 and into 2015 and 2016 and with our flow battery we see tremendous potential as it develops but we will keep everybody posted as we go along.

And I thank you for your continuing support.

Operator

Thank you. This concludes the Arotech Corporation's Fourth Quarter 2013 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.

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