RADA Electronics Industries (RADA) Q2 2021 Earnings Call Transcript

RADA Electronics Industries (RADA)
Q2 2021 Earnings Call
Aug 02, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronic Industries second-quarter 2021 results conference call. [Operator instructions] As a reminder, this conference is being recorded. You should have all received by now the company's press release.

If you have not received it, please contact RADA's Investor Relations team at GK Investor & Public Relations at 1 (646) 688-3559, or view it in the news section of the company's website, www.rada.com. I would now hand over the call to Mr. Edhud Helft of GK Investor Relations. Mr.

Helft, would you like to begin, please?

Ehud Helft -- Investor Relations

Yes. Thank you, operator. I would like to welcome all of you to this conference call to discuss RADA's second-quarter 2021 results. I would like to thank the management for hosting this call.

With us on the call today are Mr. Dov Sella, chief executive officer; and Mr. Avi Israel, chief financial officer. Dov will summarize the key highlights of the quarter, followed by Avi, who will provide a summary of the financials.

We will then open the call for the question-and-answer session. Before we start, I'd like to point out that the safe harbor published in today's press release also pertains to the content of this conference call. And with that, I would now like to introduce RADA's CEO, Mr. Dov Sella.

Dov, go ahead, please.

Dov Sella -- Chief Executive Officer

Thank you, Ehud. Good day to our call participants. Let's start with the results summary. We are very pleased with the results and are performing according to our plans.

We show continued strong growth across the board. The Q2 numbers speak for themselves to our opinion. We have revenues of 28 million in the quarter, up 61% year over year and 12% sequential quarter. We have gross margins which are at 40%, 4.35%, or 435 basis points above the second quarter of last year.

Adjusted EBITDA is 6.3 million or 22% of our revenues versus EBITDA margin of 10% last year in the similar quarter. Overall, we are very pleased with the progress we make and the margin growth over the past year, which were ahead of our expectations. These results support our guidance of over 120 million in revenues for the whole full year. This is a revenue growth of around 60% year over year, which is very significant in absolute terms and enhanced further, given the fact that our revenue basis revenue base is now already significant.

We have a strong balance sheet with over $96 million in net cash at the end of the quarter. Our current cash level is more than enough to support our inventory plans and our need for secure the supply chain, enable efficient manufacturing, and enables us to continue to invest in our growth. Given the current global shortage of components, and the ongoing need to mitigate against any COVID-19 pandemic impact on our supply chain, we have taken the decision to strategically increase inventory levels to ensure availability of components for our ongoing production plans. We are also using our cash to double our manufacturing capacity both in Israel and the U.S.

Furthermore, this cash level allows us to maintain our competitive edge through high R&D, and it also allows us to capitalize on acquisition opportunities when they present themselves. Let's talk a bit about our markets. In terms of the summary of our markets, the positive trend in our markets, mainly around short CIS and base defense continue to develop. The U.S.

is the leading market, and we also see increased interest in the -- on a global basis. However, new opportunities in other geographies may take longer to materializing the current COVID-19 constraints, which sometimes make it more difficult to mature new relationships into orders. Only last week, we saw a drone attack on shipping in the Gulf of Oman. This, along with continued detects by drones and rockets in Iraq and the Gulf region, and recently also in North India, or further underlying the need for counter UAS section in today's world.

And today, RADA can address the detection of these threats the price and performance, which is feasible for mass adoption. Hence, our pipeline continues to broaden. Over the three years since the market really started to emerge, we have already issued the initial systems to quite a few new customers. In the coming years, we anticipate upside from follow-on orders to these initial orders, and we have satisfied so far and are in production for.

In terms of programs in which we are currently a part of, Marine Corps -- U.S. Marine Corps GBAD program is the program of record. However, there are some reorg in the program that affects revenues this year. It's a bit slow down.

We assume revenues will resume next year at the level of dozens of radars a year. U.S. Army M-SHORAD program is funded OTA. The U.S.

Army awarded general dynamics, the expected framework of 1.2 billion of contract, covering four brigades and 144 systems by mid-2023, each of which requires four hours full 360 emissary coverage. This year, we shall deliver dozens of systems to this program, which is our biggest this year, while revenues are expected to continue next year as well. Additional base defense and counter UAS potential programs in the U.S. are incubating after satisfying significant urgent needs to the Air Force and SOCOM, Special Ops, and others, and undergoing continued testing, it should support our growth in 2022 and onwards.

As an example, our radars are included in the recent Parsons award of Air Force-based air defense or ABA an IDIQ, which with a ceiling of close to $1 billion over 10 years, 953 million to be precise. Our radars provide best-in-class performance for key ABAD missions, and we anticipate further fielding of radars as the program continues addressing variety of intended requirements. In terms of APS for fighting vehicles, our radars are embedded in LBT's iron fit solution. The Israeli Eitan AFV development is ongoing and so production will commence in the second half of 2022.

The U.S. arm is redly IFV testing is ongoing and will continue into 2022. We see production expected in '23 and onwards. The scope of the first brigade is over 600 radars, and we believe that the potential is higher than one brigade.

And there are several additional APS programs in our pipeline, each requiring potentially hundreds of radars with deliveries to start in 2023 and onwards. In summary, our results show as we are currently experiencing significant growth. We are performing according to our plans on the top line and somewhat ahead of expectations on improving our profit margins. We expect that the U.S.

and global markets for our products mature over the coming years and anticipate further growth in the coming years. From a financial perspective, we reiterate our revenue guidance for over 120 million for this year, representing around 60% year-over-year growth with gross margin sustainable at current levels. And given the leverage in our business model now, there is potential for further improvement of our operating margin. At this point, I'd like to hand over the discussion to Avi Israel, our CFO.

Ehud Helft -- Investor Relations

Avi? Avi?

Dov Sella -- Chief Executive Officer

Please hold the line. Now we are stepping into the room immediately. Avi, please?

Avi Israel -- Chief Financial Officer

Thank you, Dov. You can find our results on the press release we issued earlier today. As Dov mentioned, we are proud of our financial performance, and I will provide a short summary of the second-quarter results. Second-quarter revenues were $28.3 million, up 61% year over year.

Our gross margin in the quarter was 40%, compared with 36% in Q2 of last year. Operating expenses were 6.8 million, compared to $5.6 million in the second quarter of last year. I remind you that our current level of operating expenses support our current and expected operation in the short to midterm, so opex is expected to grow at a much lower pace than revenue. Hence, the business now contains additional operating leverage with the potential to further improve our operating margins.

Operating income was $4.5 million in the second quarter versus 634,000 in Q2 of last year. In the second quarter, we recorded a deferred tax asset of $6 million in view of our recent profitability. Adding the deferred tax asset, our net income was $10.4 million versus 707,000 in Q2 of last year. EBITDA for the second quarter was $6.3 million, which is 22% of revenues versus EBITDA of 1.7 million or 10% of revenue in Q2 of last year.

I would like to summarize and point out some highlights from our balance sheet as well. As of June 30, 2021, we had $96 million in net cash and zero financial debt. At June 30, 2021, our shareholders' equity stood at 143.5 million, financing 77% of our balance sheet. Given the current global shortage of components and the ongoing need to mitigate against any COVID-19 pandemic impact on our supply chain, we took a decision to strategically increase inventory levels to ensure availability of components for our ongoing production plan.

As of the end of the second quarter, the inventory level has increased to $31.6 million from $28.8 million as at the end of 2020. We plan for it to increase further in the coming quarters. In summary, as Dov mentioned and as the financial results demonstrate, we continue to be very pleased with our progress. That ends my summary.

We should now open the call for questions. Operator, please.

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question is from Sheila Kahyaoglu of Jefferies. Please go ahead.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Hi. Good morning, team, and thank you for the time. Maybe can you talk about the drivers of growth, what drove it, given how broad-based it was? Any particular areas of strength? Are you seeing any sort of areas of weakness as well as we've seen that from some of the defense suppliers?

Dov Sella -- Chief Executive Officer

I'm sorry. Could you repeat, please, Sheila, you were not exactly clear here.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Sorry about that. Can you hear me better now?

Dov Sella -- Chief Executive Officer

Yes.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Can you talk about where you saw areas of strength given your great growth in the quarter? And maybe any potential pockets of weakness, if at all? I know the growth was really good. Just given we've heard some weak commentary from some of the suppliers?

Dov Sella -- Chief Executive Officer

Yes. OK. The strength is coming from the U.S. market that was our first and foremost market.

As we as seen from the beginning, we are there in two or three already established programs like the M-SHORAD, which is our biggest the Marine Corps GBAD, now the ABAD there are potential for Celcom program to add very soon. And also, we have the prospect of APS emerging, and we have quite a few additional prospects there incubating with some other prime integrators and solution providers around high-energy lasers and the counter UAS solutions. So the U.S. market is showing real strength.

It is also surviving any question marks around declining of budgets and so on because we are in the priority channels in the modernization priorities of the army and they are addressing current and now there is threats that are in the focus of all military forces. We see the European market opening up but it is very gradual and slow. So here, it is behind our expectations. The Middle East opened up for us because the need is very clear.

However, the coverage slowed down things, and the U.S. market compensated last year dramatically for that. We do believe that the trend will show up probably toward the end of this year and into next year. So we do believe that the market is continuing to grow.

The APS market is working up on us, and it will start next year toward the end of the year with deliveries to a ton of fighting vehicles. So EPS should add a few tens of million dollars in '23 and onwards to our revenues. So that's the general view of the market.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Maybe can you talk about how you're thinking about exercising your use of the market just given your cash has stepped up, I think, from 30 million at the end of the last year to 96 million today, kind of what's the right buffer of working capital, how much you need, and how you're thinking about capital deployment?

Dov Sella -- Chief Executive Officer

If we assume organic momentum, as we experience until now, we have more than enough we are increasing our inventory levels because of what's happening in the semiconductor market, mainly but it is not coming close to what we have now. And we do strategize our way forward to ensure growth beyond 2024 and onwards. I mean, the next two, three years are already dictated by the decisions that we took two or three years ago, and we are launching three new radars this year. So we do believe that they will sustain and even enhance our both TAM and annual revenues.

And we are preparing our strategies toward M&A as well. And it is a bit too early to discuss. But we have the level of cash which is adequate to start this activity as well.

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

OK. Thank you so much.

Dov Sella -- Chief Executive Officer

Thank you, Shiela.

Operator

The next question is from Brian Kinzingler of Alliance Global Partners. Please go ahead.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Hi. Thank you so much for taking my questions. On recent calls, you discussed the goal to deeper penetrate Europe and you're moving quicker than that U.S. time line.

Can you talk about the progress you're making and will you need to add any local infrastructure there? And if so, can you share the expected time line?

Dov Sella -- Chief Executive Officer

As I mentioned earlier to Sheila's question. Europe is emerging, but not as fast as we thought. And the short and counter-UAV activity in Europe is relatively on a slower scale. We do see integrations.

We do see incubations. We are part of them in quite a few areas. But I think the market will wake up significantly, probably in 2023. Did I answer your questions because I didn't understand all the words you have said?

Brian Kinstlinger -- Alliance Global Partners -- Analyst

No. That's it. I mean, the other question was, would you need to add local infrastructure, but I guess not in is taking a little bit slower than you had previously anticipated.

Dov Sella -- Chief Executive Officer

Yes.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Yes. And then last quarter, and just now you talked about the three new Multi-Mission Hemispheric radars. And last quarter, you talked about them being in prototype. Are they still on track to being shipped by the end of the year were these radars in any way cannibalize or replace sales of your other products or are they totally complementary?

Dov Sella -- Chief Executive Officer

We don't see any cannibalization and we are on track.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

OK. Lastly, you addressed inventory a couple of times. I was curious, if I'm not mistaken, you have about five to six months inventories, how I count inventory versus cost of goods maybe I'm mistaken, but that's how I calculated it? Are you continuing to accelerate? Should we see -- if you're growing 60%, should we see that grow more than 60% over the next two quarters or so? Or how are you thinking about the remainder of the year?

Dov Sella -- Chief Executive Officer

It's -- Brian, it's more than five, six months. It's a little bit more than that. And our view is to further increase the level of inventory at the end of the day, it's important to support our growth, and this is the strategy that was adopted by rather management a year ago when COVID started, proved itself to be the right strategy. We decreased our level of inventory toward the end of 2020.

And now because of the circumstances in the semiconductor market, we have taken the same decision again and we believe that it's the right one.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Thank you.

Operator

The next question is from Peter Arment of Baird. Please go ahead.

Peter Arment -- Robert W. Baird & Co. -- Analyst

Yes. Good afternoon, Dov and Avi. Dov, maybe you could just give us your updated thoughts given that you're being strategic about kind of building out your inventory, just given the supply chain stress in regarding being cash flow positive is still a goal when you're thinking about this year and going forward?

Dov Sella -- Chief Executive Officer

We already presented a positive cash flow for operating activities in the first quarter. And we believe that this is the right path. And assuming this level of profitability and EBITDA, there's no reason why not to be cash flow positive. Yes.

We increased the level of inventory, but assuming that the second half of the year will be stronger in revenues than the first half. There's no reason to believe that operating cash flow from operations will be -- will not be positive.

Peter Arment -- Robert W. Baird & Co. -- Analyst

OK. And then just related to kind of your capex, I know you had planned to put additional [Inaudible] chambers in place this year? And I think one was coming online in the U.S. and in Israel. Maybe you could just update us the status on where they stand?

Dov Sella -- Chief Executive Officer

Yes. The one in Israel is already up and running, and it is reflected in our fixed assets in the balance sheet. The one in the U.S. will come active toward the end of the year.

We stick to our plans and no significant change from our original plan.

Peter Arment -- Robert W. Baird & Co. -- Analyst

OK. And just, Avi, just quickly just because of the tax benefit that you had in the quarter, just -- Any thoughts about expectations in the second half of the year? What we should be looking at from a model perspective?

Avi Israel -- Chief Financial Officer

No. It's not a question of the first -- the second part of the year. It's a question of we came to the point in which we are presenting four sequential quarters with significant operating profit, significant in our terms obviously. As was presented in the financial statements of December 2020, I can update that as of the end of June, we have $60 million of NOLs in Israel.

Calculating an average around about 10% tax rate in Israel because of all the benefits and so on and so forth, we've recorded a deferred tax asset of 6 billion to be executed over the next few years. It's not a question of the next few quarters.

Peter Arment -- Robert W. Baird & Co. -- Analyst

Appreciate all the color and nice result. Thank you.

Avi Israel -- Chief Financial Officer

Thank you, Peter.

Operator

The next question is from Austin Moeller of Canaccord. Please go ahead.

Austin Moeller -- Canaccord Genuity -- Analyst

Hi, Dubi and Avi. Just my first question here. Do you see the impact of the troop drawdown in Afghanistan and the combat mission in Iraq is affecting your demand at all for any of these radars for counter-drone applications? Or is it more, we just saw another drone attack on an oil tanker in the Gulf of Oman, and probably even as the U.S. pulls out of Iraq and Afghanistan, they're going to continue to need equipment to defend their various air bases throughout the Middle East?

Avi Israel -- Chief Financial Officer

We believe that our -- when we step into programs like SHORAD and GBAD, it is not related to the deployment basically. It relates to the plans that the military forces have to equip their vehicles based on their four structure plans. So here, we don't see any changes. We are not exactly familiar with the very, very details of where our stationary solutions are deployed.

But at this stage, we don't see any drop of momentum because we do believe that the demand is much higher than what we have delivered up till now. So that's the picture on our end.

Austin Moeller -- Canaccord Genuity -- Analyst

OK. And then just on the next batch of 59 SHORAD strikers that are expected to be ordered by the U.S. Army before the end of the year. Is there any timing that you guys can provide and when you expect to receive that contract maybe in the next couple of months? Or just sort of stay tuned on that?

Avi Israel -- Chief Financial Officer

That the SHORAD program is on track and all expected orders are received.

Austin Moeller -- Canaccord Genuity -- Analyst

OK. And then just on the gross margin. So if I understood you correctly in your comments, you expect that you're going to be able to maintain gross margin at around 40% or 38 to 40% going forward? Or is that just sort of temporary results of your mix?

Avi Israel -- Chief Financial Officer

No. It is not temporary. We talked about it before in 40% was our goal. Actually, we have achieved it a little bit before our expectations and 40% of gross margin is our expectation for the future -- for the coming future as well.

Austin Moeller -- Canaccord Genuity -- Analyst

OK. Great. Thank you, guys.

Avi Israel -- Chief Financial Officer

Thank you, Austin.

Dov Sella -- Chief Executive Officer

Thank you, Austin.

Operator

[Operator instructions] There are no further questions at this time. Mr. Sella, would you like to make your concluding statement?

Dov Sella -- Chief Executive Officer

Yes. Thank you, operator. On behalf of the management, I would like to thank you all for but continued interest in our business. We will present at the Jefferies conference tomorrow and also in the Canaccord conference next week, and we look forward to speak with some of you in these venues again.

Otherwise, we look forward to speaking with you next time that we report our results. Stay well and healthy, and have a good day to you all.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Ehud Helft -- Investor Relations

Dov Sella -- Chief Executive Officer

Avi Israel -- Chief Financial Officer

Sheila Kahyaoglu -- Jefferies LLC -- Analyst

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Peter Arment -- Robert W. Baird & Co. -- Analyst

Austin Moeller -- Canaccord Genuity -- Analyst

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