For those comfortable with the inherent risks of low-priced stocks, The Bowers Report specializes in micro-cap issues; here, editor Thomas Rice highlights the service's latest "Company of the Month."
Arotech Corp. (ARTX) is a defense and security products and services firm; it provides simulation for military, law enforcement, and commercial markets.
Its vehicle simulation systems cover a variety of vehicles, such as trucks, trains, buses, fire trucks, police cars, and ambulances.
Its military operations develop analytical models and simulations for tactical air and land warfare systems for the Department of Defense and industrials contractors.
The smaller of its segments, which accounts for 24% of the company's revenues, manufactures lithium- and zinc-air batteries, including the Soldier Wearable Integrated Power Equipment System (SWIPES).
In 2012, the firm sold its armor division. Over the past year, Arotech has turned around its financial in a major way.
For the past nine months, revenues grew 16.8%. And the company reported $2.7 million in positive earnings, compared to a $2.5 million loss of the same nine months last year.
The company's balance sheet has also improved. ARTX reported backlog of $74.4 million for the most recent quarter. Its current assets have grown from $36.4 million in December 2012 to $39 million in September 2013. Over the same period, current liabilities have dropped from 426.5 million to $19.4 million.
As a result, the company has grown its working capital and improved its current ratio. Book value has also improved, increasing from $2.61 to $2.98 per share.
Since the company decided to sell its less profitable armor division, its financials have shown very good progress. Revenues have continued to grow, and the company has hit profits and maintained them.
Despite the tough government environment, Arotech has continued to win contracts; ARTX reported backlog of $74.4 million for the most recent quarter.
One thing to watch with the company in the future is dilution. In September, the company issued 3.4 million shares of common stock in a public offering. While there are still just about 16 million shares, we are not worried at this point. Further dilution, however, is something to keep an eye on.
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Associated Press/Brennan Linsley When Hostess Brands went bankrupt in 2012, it triggered anxiety among employees at Ottenberg's Bakery, a family-owned enterprise in Maryland. The companies shared a pension plan, and if Hostess couldn't pay its retirees, Ottenberg's would have to pick up the tab. Gary League, 53, who has delivered Ottenberg's bread for almost three decades, worried he might lose his nest egg, maybe even his job. "If you have all these guys out on retirement and you only have Ottenberg's paying into it, the math doesn't add up," he said. "I was thinking I would have to work forever." Last week, he got the good news -- the U.S. government saved his benefits by sacrificing those of Hostess' drivers, who will now get a reduced payout financed by the government. League is one of 10.4 million Americans with retirements tied to multiemployer pension plans, large investment pools long considered low risk because they don't rely on a single company for financing. Two recessions, industry consolidation prompted by deregulation and an aging workforce have funds facing a $400 billion shortfall that has some near insolvency. Dozens already have failed, affecting 94,000 participants. Things are dire enough that a coalition of employers and labor unions is asking Congress for permission to cut benefits to retired truck drivers, miners and others as a last resort in order to prevent plans from going under. The proposal has divided unions and their allies, triggering a lobbying battle as a legislative deadline approaches and retirement security looms large as a growing economic concern. $2 Billion LIability Leads to Plan Being Carved up Hostess, maker of Wonder Bread and Twinkies, was one of two employers contributing to the Bakery and Sales Drivers Local 33 Pension Fund. When Hostess went bankrupt, Ottenberg's was left to foot the bill. President Ray Ottenberg didn't respond to requests for comment. Hostess had about $2 billion in liability to its multiemployer plans. Because of the bankruptcy, those pensions will get nothing from the company, said David Rush, chief financial officer of the Hostess estate, known as Old HB. "You have to repay your secured creditors first," he said. "It was an unfortunate situation." The Obama administration acted last month, taking 342 Hostess truck drivers out of the plan to rescue benefits for League and about 360 others. It was the third time in its 40-year history that the Pension Benefit Guaranty Corp. had carved up a fund. The PBGC engineered a merger of Ottenberg pensions into another plan. Since 2005, the agency has paid about $722 million to people in similar failed plans. A coalition of 40 labor and employer groups, including Bechtel Group, United Parcel Service (UPS) and -- at the time -- the International Brotherhood of Teamsters last year said pension trustees should be allowed to cut benefits to current retirees. The once-unthinkable idea is now gaining support as funds falter and unemployment, student debt and longer life spans leave people less financially prepared for retirement. "It's the first attempt by an industry or a sector of the economy to really address what's going to come back and bite us as a country," said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans in Washington and an author of its "Solutions Not Bailouts" report. "If you allow some of these plans to have flexibility, they can take action instead of waiting until the assets are depleted." Slippery Slope for Plans, Federal Agency Others disagree. Giving pensions that option would make the problem worse, and not just for retirees, said Teresa Ghilarducci, an economist at the New School for Social Research in New York. Multiemployer payments are low and concentrated in economically distressed regions, including the industrial Midwest, she said. Once some pensions get the flexibility to cut benefits, others will want it, too, she said. It's a slippery slope that could lead to changes at single-employer pensions, which have 30.4 million participants. "It's bad for households, but it's also bad for the economy," Ghilarducci said. "In some of these communities, it's the retirees that are the mainstay." The PBGC, created in 1974, is on uneasy financial footing itself. The agency charges companies in multiemployer plans an annual insurance premium of $12 per plan participant, less than one-fourth of what other pension plans pay. The agency projects 173 multiemployer plans will exhaust assets, costing it an estimated $10 billion and leading to the insurance program's insolvency in 10 to 15 years. The agency is asking Congress for an increase in insurance premiums and more ability to intervene before funds are insolvent. Although the Hostess partition will cost the agency an estimated $22.5 million, it could ultimately save money because the entire pension plan likely would have failed without it, PBGC Director Joshua Gotbaum said. The agency partitioned its first pension in 1983 to save benefits for restaurant workers and manufacturers in and around Detroit. In 2010, it split a Chicago plan, protecting 3,700 truckers and putting 1,500 on government payouts. Now it's weighing carving up a second Hostess-related fund. "After we announced the Hostess partition we got calls from folks in other plans saying what about us?" Gotbaum said. "If we had a lot more money, we could do a lot more plans." Support for 'Solutions Not Bailouts' The nation's second-largest multiemployer fund, the Central States Southeast and Southwest Areas Health and Welfare Pension Funds, is also among the most troubled, with five retirees for every active employee. Covering 410,000 truck drivers, sanitation workers and others, the Teamsters plan paid out $2.1 billion more than it took in in 2012, with the average retiree receiving $15,000. In 2006, Congress passed the Pension Protection Act, giving funds such as Central States temporary leeway to cope with shortfalls. The law expires at the end of this year, and congressional lawmakers have no plans to renew it. Central States is one reason unions, including the Teamsters, lined up behind "Solutions Not Bailouts" last year. James P. Hoffa, then Teamsters president started hearing from his rank-and-file. He retreated in October, calling the proposal he helped craft a "mad rush to destroy what little semblance of retirement security exists in this country." "This issue is about basic economic fairness," Hoffa wrote in an Oct. 28 letter to House lawmakers. He called on labor unions to "ensure that the right to a dignified retirement remains sacrosanct." Hoffa spokesman Galen Munroe declined requests for comment. Cutting retirement income would be "a ticket to poverty," for some, said Bruce Olsson, a lobbyist with the International Association of Machinists, which has aligned with the Teamsters. "It puts the burden on people that are the most vulnerable. Retirees don't have the ability to make up that lost income." The last time Congress tried to rescue unfunded pensions, the move was attacked as a union bailout and failed, said former Representative Earl Pomeroy, a North Dakota Democrat who now advises the employer-labor coalition. Absent congressional action, more companies will abandon their obligations and leave retirees dependent on government aid, he said."You've got the hole getting bigger and bigger," Pomeroy said. "A haircut now beats a beheading later." Trustees at distressed funds can do only so much because the law dictates what benefits they can and can't cut. Had they been able to reduce accruals to retirees, they may have been able to save the Millwrights & Machinery Erectors Local Union No. 1545 Pension Fund. Stories of Two Men With Lower Benefits Peter Scarmozzi, a retired millwright living in Bear, Del., is among those willing to sacrifice. Scarmozzi, 66, is one of 179,000 participants in the millwrights' fund, about half of whom are retired. While the plan had suffered shortfalls before 2008, after the financial collapse, trustees calculated it would cost $23 per hour worked to restore it to health, up from less than $15. Some employers, including General Electric Co., want out and are now in court. "For 10 years we petitioned the trustees to cut the benefits back so the fund would survive," Scarmozzi said. "Now, it's going to fail." Kent Cprek, a lawyer for the Local 1545 fund, said trustees reduced what benefits the law allowed. Pension payments to existing retirees are off limits. "You're not allowed to cut every benefit," said Cprek, a shareholder at Jennings Sigmond in Philadelphia. Sacrificing part of Scarmozzi's pension a decade ago may have helped him and preserved benefits for younger millwrights today, including Thomas Hall, 55. Hall, who has installed turbines, generators and other large equipment for 33 years, began preparing for the worst in 2008. He and his wife cut spending and abandoned work on their unfinished house in North East, Md. Now the millwright fund could be insolvent as soon as next month, Scarmozzi said, and his $3,600 monthly pension will be replaced by an $800 check from the PBGC. "If I could find a part-time job, I'd take it," Scarmozzi said. "There's no golden years -- that stuff's gone." Hall said he will get $980 a month from the agency instead of his $4,000 pension. He's accrued another $226 so far from a separate fund he joined four years ago. "How healthy will that pension fund I'm contributing to now be in 10 years?" Hall said. "I'm stuck in a bad storm."