RADA Electronics Industries (RADA) Q4 2021 Earnings Call Transcript

RADA Electronics Industries (RADA)
Q4 2021 Earnings Call
Feb 09, 2022, 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 fourth quarter 2021 results conference call. [Operator instructions] Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded.

[Operator instructions] I would now like to hand over the call to Mr. Ehud Helft of GK investor relations. Mr. Helft, would you like to begin?

Ehud Helft -- Investor Relations

Thank you, operator. I would like to welcome all of you to this conference call to discuss about the fourth quarter and full year 2021 results. I would like to thank RADA management for hosting this call. We have on the call today Mr.

Dov Sella, the chief executive officer to Mr. Avi Israel, chief financial officer. Dov will summarize the key highlights of the quarter, followed by our key core provided summary of this financial. We will then open the call for the question and answer session.

Troubling stuff, I'd like to point out that safe our group published in today's press release are could be done to the contents of the company. And with that, I would now like to introduce RADA's CEO, Mr. Dov Sella to discuss to you.

Dov Sella -- Chief Executive Officer

Thank you. Good day to all our participants. We had a call with our investor just a few weeks ago where we talked about our unique go to market strategy. We cover the status of our markets and discussed our 2022 guidance.

In today's call, we will provide a summary for our fourth quarter and full year of 2021, and the results this, reminds you of the Afari forecasts ahead and reiterate our guidance for 2022. So let's start with the financial highlights. We demonstrate year over year revenue growth in excess of 50% in recent years in some use well over 100 even such growth rates typically expected for successful early stage technology companies. And it is unusual to say that at least for established and profitable public companies like us, and even more so in the defense industry.

We reported the revenue of $417 million, up to 54% year over year, and we remind you that only two years ago in 2019, our only revenue was $44 million. And it's more than a third of what we have reported today. We are exceptionally proud of these results and even more so given the ongoing Corona pandemic and associated work and travel restrictions, the supply chain constraints and the product shortages, and specifically in the US, the delay in US budget for this year and the continuous resolution condition which you feel in effect. Our EBITDA for the year was $27.3 million versus $9.7 million last year.

It is almost three times a year over year over year growth while revenue grew 54%. EBITDA grow for 482% demonstrates the operating leverage in our business model, because of the investments made in the past few years in our business, especially in the US. On business operating expense footprint is right sized for today's revenue level, and our operating expenses now grow at a much slower rate than revenue. Furthermore, we have the manufacturing capacity for a revenue at significantly higher levels than what we are currently delivering, which gives us ample room to grow.

And beyond that, we have also built an ability to add new capacity, quickly, and at reasonable costs if needed in the future. In terms of our balance sheet, we ended the quarter with $9,779 million in our cash and we've absolutely no debt. Throughout the year, we have leveraged our strong cash level to increase our working capital, mostly or even the refullfilling conductors to avoid any supply chain issues. We are also planning to use our cash for potential M&A.

We are looking to extend our addressable markets beyond the current estimation of the organic team of $6 billion over the next decade and hope to be able to bring you some news on this front in the future. Let's discuss our 2022 guidance. In our annual list for few weeks ago, we issued our guidance for 2022 of $140 million or presenting growth of around 20% year over year. This is comprised of a number of factors, and $9 million are associated with unique revenues, which have a similar level to the revenues we achieved from this business over the past few years.

In the non-US assurance flashpoint defense market, we forecast over $40 million drawdowns freedom revenues during 2022. It includes also to counter UAF naturally. In the United States, the stabilization of the SHORAD and Point-Defense market for us, enables us to forecast our revenues based on the relevant line items in the US defense budget. About 90% of our guidance are cooperating in the defense budget line items.

It gives us good visibility, and we feel comfortable with our US forecast of $90 million for 2022. To that, I want to add that we often receive very short timelines and urgent need look and ship delivery requirements, with the whole process taking some time, very few weeks. This means we are also operating without the luxury of planning back, plan backlog for these types of orders. And it's one of the reasons we maintain a high level of inventory, so we can meet this demand.

This type of customer of this new and growing market appreciate the top level and short-term and long supply that they receive from us. That they cannot typically find somewhere else, and it's a key factor in us winning new businesses with new customers. We note that these short-term donor owned revenues that are not part of our forecast represents a further upside to our US revenue expectation for this year. Let's take a look at our markets and their forecast for the coming year.

Longer-term, it is our goal to achieve $250 million in annual revenue within 3 to 4 years, which implies an accelerated acceleration of our revenue growth in 2023 and beyond. A significant driver will be the APF market, which is half of a potential market and very much in the incubation stage as the snow. We have currently a backlog to deliver returns to the own states and the level of about 30 million, and we expect to double or even triple meet by the end of this year, which means increased revenues in 2023 and beyond. In the US, the qualification testing of the iron fist on the Bradley Airfield.

It will take place during 2022, it's already ongoing. In terms of future potential, we also believe that the solution we are part of, namely the iron fist, is the real candidate for stryker vehicles as well, and other programs such as oil-free and APF or BPF advanced configuration such as maps are also include for growth potential in future use. Regarding the issue of flashpoint defense market in the USA, a rapid growth since 2017 is mainly due to the US and COAS and short market segment. And today's, we have delivered around $160 million of tactical radars to this is market segment in the US, over half of staff in 2022.

This reflects a new and emerging market for Russian acquisition processes, typically during joint urgent operational needs placements with relatively limited multi-year of visibility. We now see that they are market shifting into a phase of stable growth, with multi-year of planning and visibility reflected in light line items in the US defense budget as I mentioned earlier. But the urgency is still very much along as we see a violation drone and cruise missile attacks in the Near East in other geographies. Sure, the important defense programs such as the US and Fiji, but US Army, I'm sure that they still force a bat so conceived and others have become line items in the budget and reflect multi-year acquisition plans.

Such transition from Jaunes to program of workload or OTF, typically take a year or more. The fact that we are engaging multiple programs has ensured the sustained growth you're seeing from us in recent years, which we expect to continue in the future. While we are continuous resolution is still around and Jaunes compensated for some of the purchasing delays in the US, the recent awards of the so come seek multi-year program to enoil, a company which is our customer was over $1 billion dollars to them is an encouraging signal, that such delays will soon be over. Regarding the shore of the flashpoint defense markets in the rest of the world and these markets, is currently around a 25% of our total revenues.

And we believe that it will rise to the US levels within a very few years. The Near East often suffers from terrorist drones and cruise missile attacks. It's been an active market for radar since 2019 and continues to hold significant growth potential for the Europeans leads lay to countries, typically following the doctrine of in solution of the US military. And the need for SHORAD and Point-Defense is becoming recognized though.

Currently, the market is incubation phase, we are engaged in with quite a few prominent European weapon system providers, and our radars are integrated and continuously being tested as part of the solution. And we estimate that the rocket will uptick in the near future. The Indian market is also waking up around the need to mitigate the small UAF threats mainly and also short-range air defense  in view of the recent drone attacks. We expect significant initial phase of counter-drone solutions in this market in this year, 2022 and strong growth from the region beyond that.

In view of the size of this market and the regulatory environment we announced a few months ago our plans to set up in Indian JV with a local partner and establish local production capabilities. Let's summarize, in our 2021 results shown, RADA continues to experience very strong growth. Also in the top line and significantly amplified on the bottom line due to our operating leverage, which we are enjoying now. As the discussion of our guidance in the coming budget projects indicate, we expect the growth rate try to continue for the fulfillable future.

And finally, I want to thank the all RADA employees for their tremendous efforts and success in bringing these exceptional results in 2021. I'd like now to hand over the discussion to Avi Israel, our CFO.

Avi Israel -- Chief Financial Officer

Thank you, Dovie. Hi, everybody. You can find our results from the press release we issued earlier today. As we mentioned, we are very proud of our financial performance, and I will provide a short summary of the fourth quarter results in the year as a whole.

Fourth quarter revenues were $31.8 million up 36% year over year. Full year 2021, revenues were $117.2 million, up 54% year over year. Our gross margin in the quarter was 41% compared to 39% in Q4 of last year. For the year, gross margin was 41% versus 37% in 2020.

Operating expenses in the quarter was $7 million compared to $6.2 million in the Q4 of last year. Operating expenses for the year was $27.2 million compared to $22.9 million in 2020. I remind you that our current level of operating expenses for both our current and expected operations in the short and medium-term, so opex is expected to grow at a much slower pace than revenues. Operating income was $6 million in the quarter versus $2.8 million in Q4 of last year.

For the year, operating income was $20.4 million compared to $5.5 million of last year. Adjusted EBITDA for the quarter was $8 million which is 25% of revenues, up 103% versus $3.9 million over 17% of revenues in Q4 of last year. For 2021, adjusted EBITDA was $27.3 million which was 23% of revenues, up 182% compared to $9.7 million, which was 15% of revenues in 2020. I would also like to summarize and point out some highlights from our balance sheet, as of December 31, 2021, we had $2,078.8 million in cash and absolutely zero financial debt.

Our shareholder's equity to that $156 million financing, 77% of our balance sheet and up from $72 million as of year in 2020. In summary, as was mentioned, and as the financial results demonstrates, 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. Ladies and gentlemen, at this time, we will begin the question and answer session. [Operator instructions] The first question is from Greg Konrad of Jefferies. Please go ahead.

Greg Konrad -- Jefferies -- Analyst

Good morning. Good quarter. I'm just getting into the outlook a little bit more, I mean, quarter 2020 to it seems like both of as strad, and point, and non-U.S. or both, maybe an incremental $10 million of sales in 2022 with the non-U.S., you know, a faster growth rate.

Can you maybe just give us an update on what you're seeing in that market around the world timing and maybe just thinking about 2022, what are the major program drivers this year?

Dov Sella -- Chief Executive Officer

The SHORAD in the US continues, but the big four and probably bigger than the SHORAD because, at least half of the program we have already delivered in 2021. But this stage of the program, the bigger ones can be so conceived and ABADs we do have our expectations and also GBADs of the Marine Corps. All of these what we call internally, the big four for us in the US with probably contribute over 60% of our revenues in 2022, and that's in the US. In the other places in the world, mainly the Middle East, India, as I've indicated, these are the major geographies.

And the also the integration and testing efforts in Europe, which are starting to accumulate a bits and pieces become a some significant numbers at the end. So that's the general overview of the of the SHORAD market.

Greg Konrad -- Jefferies -- Analyst

And then just to follow up on the $250 million revenue target out three to four years, you mean, how do you think about the visibility toward that revenue number, either through contact and hand or at least, the programs that you're already back into universities, including maybe competitive pursuits that you know, aren't decided yet?

Dov Sella -- Chief Executive Officer

We do believe that the US market is stabilizing, going off at the level of between $100 to $120 million, that's the market potential, basically. And we see it happening. We also forecast $90 million this year. So, that's assuming it stabilizes it over $100 million.

And we do believe that the rest of the world, a market of SHORAD and Point-Defense will climb to that level. So where you live, the $200 million within very few years. Add to that, active protection which such tools will affect our top line in 2023 and onwards. At the level of a few tens of millions of dollars and it will increase.

Maybe later, then you'll get the $250 within three to four years.

Greg Konrad -- Jefferies -- Analyst

Thank you, and then just last one for me. You provided our guidance for 22 and talked about ongoing trends of sales rising far faster than operating margins, and it seems like you're ahead or you are ahead of your margin target. I mean, is there a way to frame kind of the opportunity in 2022, just from the EBITDA margin perspective, just thinking about what's implied on an operating expense growth?

Avi Israel -- Chief Financial Officer

I think this is our big work. We have the four analysts that released their numbers for 2022. I would say that generally speaking, it looks like they are pretty in line with our expectations. We do not release guidance as far as EBITDA's concerned, but take into consideration the guidance for the revenues and assuming that we are expecting to maintain our gross profit at the level of 40% 41% that's the area.

Stabilizing our opex, as I mentioned earlier and you can calculate the numbers technically, but the numbers of the analysts, the market consensus are pretty accurate.

Greg Konrad -- Jefferies -- Analyst

Thank you.

Avi Israel -- Chief Financial Officer

Thank you Greg.

Operator

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

Peter Arment -- Robert W. Baird and Company -- Analyst

Good afternoon Dov and Avi. Well, just kind a certain back and can you see how average that kind of the change that in the end of this past year. Now, 55% of the revenue in the second half of the year, I guess we think about doing that we've been having. It's like the way of interactive about how should you think about kind of modeling the changes in how you're thinking about it?

Dov Sella -- Chief Executive Officer

Well here, the condition of the US budget and the CR affects our first half, so we do expect that we will have a growth and maybe even quarterly and toward the end of the year, which will not be. We don't believe they are. But, you know, actually that was our situation for the last few years. And so, maybe it's going to be similar.

And I think that the start will be kind of similar to the end of last year over the last two quarters, but it will accelerate from there.

Peter Arment -- Robert W. Baird and Company -- Analyst

I think that's helpful. And then it will talk a lot about your ability to stay positive like enjoyed you. Maybe it was just easier how you think about that?

Dov Sella -- Chief Executive Officer

You know, even before COVID, we realized very early on that this is a new market, if we don't produce the stock, we are going to not to capitalize on the potential. And actually it became our one of our competitive advantages. And when COVID appealed, we kind of were immune. Then we decided to even a further enhance our inventories to over a year of supply, potentially based on our production plants.

And again, it is based on our pipeline and not on the backlog, because if you understand a lot of it is the book and ship, and that's where we are today. It's not a tough environmental thing. You see allocations all over, you see prices that are changing. We were immune until now, and I do hope that what we did there will keep us as such a longer and long 2022.

In some cases, we we have to pay more and we have to reflect it to our customers, but it's really in---. It's not overwhelming it's very in the long number.

Peter Arment -- Robert W. Baird and Company -- Analyst

It wasn't mean and maybe, I think last time you disclosed the backlog is around 30 million are loose and plans out in 2023, major milestones we should be watching for as we speak about 42 in terms of adding that backbone.

Dov Sella -- Chief Executive Officer

You know, we were literally, probably every quarter we announced the new business that we received along the quarter and we tried to defeat it. There was went which market segment. And so yeah, I mean, they followed the backlog accumulation or the new business accumulation around APS and you will have the picture we could with the APS as opposed to the urgency of the SHORAD and Point-Defense market in this business by nature is there is a long-term issue and you can plan ahead. Here we are, we are establishing backlog so every order that we receive is not there for immediate deliveries.

It's a split over two or three years, something like that. So I think if you follow our annual business announcements, you would have a very good picture. And we can always see, can elaborate more on that whenever needed.

Peter Arment -- Robert W. Baird and Company -- Analyst

Appreciate it. Congrats and well, thanks.

Dov Sella -- Chief Executive Officer

Thank you, Peter.

Operator

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

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Hi, guys, thanks for taking my questions. You laid out the potential for short and long-term, even APS to some degree. Of course, there's a finite market. So as you think about M&A and you thinking about complementary products to radars that can expand your market opportunity.

Maybe talk about your M&A priorities, please, and how advanced or any discussions you're having, right now?

Dov Sella -- Chief Executive Officer

Well, we are examining several opportunities as they come already, but we are certainly juggling formerly kind of formally within our company. We forward look the categories  are in general terms, and it is a bit too early to disclose the details. The categories are our technology, geography, a complementary, a product that makes sense to us, we don't want to lose our profile of a growing company technology growth company. We don't want to inflate our top line just to for the sake of having bigger numbers.

So we are carefully examining the footprint in our strategic markets like we did in the US. We planned to do in India and maybe also in Europe. We'll see and maybe not directly, but also in the Middle East. We are continuously examining the technology market of radars around us and what's happening, and we don't have to invent the wheel every time.

And maybe we can enjoy the fruits of other and join forces. And these are the roughly categories the general categories that we are in these days and weeks. We are translating into action plan.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Great. And then my second question is clearly your inventory increased significantly from the end of September. You talk about what this inventory level covers is it all of 2022, Is it a little bit more or it's a little bit less based on your ginormous speculations? Thanks so much.

Dov Sella -- Chief Executive Officer

Well, our strategic decision was to have at least one full year of semi-conductors based on our estimations, and we continue to maintain that.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Great, thank you.

Dov Sella -- Chief Executive Officer

Thank you, Brian.

Avi Israel -- Chief Financial Officer

Thank you, Brian.

Operator

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

Austin Moeller -- Canaccord Genuity -- Analyst

Good morning, Dovie and Avi.

Dov Sella -- Chief Executive Officer

Good morning, Austin.

Austin Moeller -- Canaccord Genuity -- Analyst

My first question here, based on the 30 million that you forecast for active protection systems in 2023, are you confident that when Biden's fiscal year 23 budget comes out, probably in April, that will be a funding account to upgrade the Bradley's of the arms?

Dov Sella -- Chief Executive Officer

No, we are not confident we don't have a certainties. Unfortunately, because it, you know, it depends on successful testing, but we we are we are optimistic that once the testing is soon enough will prove successful, the budgets will come.

Austin Moeller -- Canaccord Genuity -- Analyst

OK, that's helpful. My second question, is the army expected to decide on purchasing additional SHORAD vehicles based on the testing that's currently going on beyond the existing 144 the first four battalions that you're already under contract for sometime this year?

Dov Sella -- Chief Executive Officer

The initial SHORAD plan of the army talked about 10 to 12, maybe 10, but then they the talks included maybe to 12 battalions altogether. That's the force structure that is probably needed by the army. However, it's not going to be purely kinetic, like what was done until now. And they're directly the action will kick in.

Their option directed energy will be completed in 2023 based on what we know, again, to be put on strike. Yes, and there is an initial effort done by the rocket capabilities, the branch of the army that put a few lasers on full strykers as prototype but it's going to be completed. We believe that our sense of onboard sensors will stay intact. That's our plan.

But then, we are working with the potential vendors of the lasers. We are working directly with the army at all to ensure that we stay there and it will be completed, as I said, in 2023. And maybe some more battalions, kinetic battalions in the configuration that we have now will be also added.

Austin Moeller -- Canaccord Genuity -- Analyst

OK, great. Thank you, that's very helpful. 

Dov Sella

Sure.

Operator

The next question is from Nahum Mushin. Please go ahead.

Unknown speaker

How are you doing Mr. Sella? I have a question, you talked about in the past about acquisitions. Did you mean that you want to acquire other companies or other companies to acquire you?

Dov Sella -- Chief Executive Officer

I can't talk about what I want to do and not what others want to do to me, so obviously when we are talking about M&A, we are talking about the ours. 

Unknown speaker

OK, and when do you think it's going to happen? 

Dov Sella -- Chief Executive Officer

Hopefully this year even. 

Unknown speaker

Great, thank you very much. 

Dov Sella -- Chief Executive Officer

Thank you.

Operator

Thank you. [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 your continuous interest in our business. And we will be presenting at the current conference tomorrow.

And if you want to speak to us, please either approach the conference organizers. But you always can approach our investor relations directly, and we will find the time to meet. We look forward to speaking with you in the next quarter and thank you very much and have a good day.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Ehud Helft -- Investor Relations

Dov Sella -- Chief Executive Officer

Avi Israel -- Chief Financial Officer

Greg Konrad -- Jefferies -- Analyst

Peter Arment -- Robert W. Baird and Company -- Analyst

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Austin Moeller -- Canaccord Genuity -- Analyst

Dove Sella

Unknown speaker

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