RADA Electronics Industries (RADA) Q1 2022 Earnings Call Transcript

RADA Electronics Industries (RADA)
Q1 2022 Earnings Call
May 10, 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 first quarter 2022 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 and Public Relations at 1 (2120 378-8040 or view it in the News section of the company's website, www.rada.com. 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

Yes. Thank you, operator. I would like to welcome all of you to this conference call to discuss RADA's first quarter 2022 results. I would like to thank RADA 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 pertain 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, and good day to all our call participants. Let's start with an overview of our results this quarter. We have just reported the results of the first quarter of 2022 with revenues of $22.5 million and adjusted EBITDA of $1.3 million. We see this quarter as a bump in the road and unrelated to the trend of what is going on around us.

In this quarter, we actually saw the peak of the impact of -- on our revenues of the continuing resolution in the United States. The passing of the U.S. budget was delayed from September and finally passed on March 11th with all-new defense spending effectively on hold for that period. We are very pleased that this is now behind us and we are already seeing new orders from the U.S.

begin again as our recent PR three weeks ago of new business mentioned. We should see the current quarter's results in the framework of the bigger picture, a growing need for Western countries to provide the best and most advanced active defense solutions for their maneuverable military assets and ultimately, the troops. And the recent war in Ukraine has very unfortunately made this all clear across the world. We are confident that our recovery will be fast.

We keep our revenue guidance of $140 million for the full year, and it should indicate to you that from our perspective here in May, post-CR, we expect to receive all the revenues missed in Q1 by year end. Our strong cash position, along with our confidence that this first quarter is an anomaly, allowed us to continue to produce, invest, acquire inventory, and recruit people as per our plans, and we did not pause for a moment given the opportunities ahead of us. Let's take a look at our end markets. Our software-defined and mobile radars are in the heart of modern warfare needs such as shorting defense, counter UAVs, active protection systems for armored vehicles, counter rocket artillery and motor, and such.

And now even more so evident by the war in Ukraine and the many images have blown out and burned shelves of stents and military vehicles that we all see on TV. In the recent years of our growth in the U.S. market to capitalize on our market position, we decided to produce radar to stock and apply a book and ship commercial approach. We are very fortunate that this unique approach, not only made us attractive to our U.S.

customers, but because it relied on high levels of inventories and components, it also shielded us from much of the negative impacts and challenges that COVID placed on us over the past two years, including what is now the supply chain constraints that everybody faces. Our U.S. market is now moving from the joint urgent operational need statement type of programs, meaning orders on a short and urgent need basis, into programs of record, a trend that will enable us to build many more products over a long period based on an order backlog, generating for us long-term revenue visibility and stable growth. Today, our radars have become the incumbent rather insight solution in quite a few significant platforms, some of which already have converted into programs of record that I just mentioned.

In 2022, we are not reliant on only a few customers and solutions. Furthermore, our book-and-bill strategy enables us to recover very fast from acquisition process delays and bureaucracy as we have experienced until mid-March. We are able to deliver radar from stock sometimes within days to the high satisfaction of our customers, especially during these days of both global supply chain problems and U.S. budget delays and now catch up.

I have only addressed the U.S. market until now, but as I explained in January at our analyst event and webinar, the rest of the world, which I divide into the Near East Europe/NATO countries and the Indian subcontinent should reach based on our estimation, revenue levels similar to the USA within three to four years and recent events have only made us more confident in this expectation. The Europe/NATO countries are typically following the doctoring and solution of the U.S. military and the need for short-range air defense and point defense is becoming widely recognized.

When we spoke with you in January, we said the market is in its incubation phase, but I believe we have advanced since then. We have already been engaged with quite a few prominent European weapon system providers, and our radars are being integrated and continuously tested as part of their solutions. To date, mobile short-range air defense encounter UAS programs first sporadic and in low volumes to European customers. However, we believe the current event will lead to an uptick in 2023.

We also evidence of growing interest in the U.S. in the integrated and proven systems we are already part of, as part of an immediate military support of Ukraine and neighboring countries. The near East and India markets are both making up around the need to mitigate the UAS and C-sUAS threats in view of recent attacks, which demonstrated significant damages. We expect growing sales of counter drone solutions to both markets during the current and especially next year.

We also remind you that we recently announced plans to set up an Indian joint venture company with a local partner by the end of 2022. Let's review our financial expectations ahead. I want to give you a little more perspective on our forward-looking financial expectations. We are confident that our recovery from current Q1 revenue level will be fast as evidenced by Q1 new business that we have announced just three weeks ago when we declared €29 million in new business, which is up 22% compared to previous year.

Our 2022 guidance of €140 million, which we reiterated this morning implies 20% revenue growth. We expect that our shares will convert into revenues along Q2 and the second half of the year. In terms of geographic breakout expectations of our full year revenues to remind you what we discussed in January, we expect the U.S. market to be about $90 million in revenues, while about 90% of our guidance are already incorporated in the defense budget line items and some already in our backlog.

The urgent nature of some of our anticipated revenues this year, also around Ukraine, which is not considered in our forecast represents further upside to our U.S. revenue expectations. For the non-U.S. market, we forecast about $40 million of radar revenues during '22.

And finally, we expect around $9 million coming from our legacy avionics business. We believe that our overall margins will not be affected by the CR delay in Q1 and revenues of the produced items will convert into profit and cash as per our regular margins. And if we were to add $9 million or so, based on our estimation for the first quarter and actually the street consensus, which estimated $31 million, gross margins and cash generation would have been in-line with our expectations. So, it's all about the top line -- the missing top line here.

On the opex side as I said earlier, we did not delay any of our investments and continue to move forward at full throttle. We talked up our main power as per our plan, which is now stabilizing at around 150 people in Israel and toward 90 people in the USA. Salaries increased somewhat due to manpower pressure by around 4% to 5% on the average. We had some one-time expenses of about $650,000 this quarter, which most of it will be absent in the coming three quarters when considering the opex.

And lastly in view of the increased cost of labor and supplies, we have also recently adjusted our selling prices accordingly. Before we summarize, let's have a short look at our new product launch. Our new developments, namely the nMHR, the xMHR, and the iCHR all are addressing the new and evolving needs of our defense markets and introduce increased ranges, higher accuracies, and additional very sophisticated and advanced features in these radars. These radars are starting field testing very soon, and we already have initial orders for them.

We believe these products have a bright future and present strong further growth potential, keeping us in the lead and widening our opportunities pipeline. So let's summarize. While Q1 revenue levels are below expectations, they are only a bump on the road and do not change the broader picture. Like all in our industry, we are pleased with the CR being completed and behind us.

The U.S. revenues, which shifted away from Q1 will be delivered along the remainder of the year, and there is no adjustment to our gross margin expectations or associated cash flow. Most importantly, there is no change to our full year guidance of $140 million, which is up 20% compared to 2021. We continue as planned without posing because of the opportunity, which is now rightly front of us, is big and very clear.

Beyond what I discussed with you only four months ago, the rest of the world has just had a strong waking up call with the unexpected war in Ukraine, and we believe this will translate to upside in the orders over the coming years, similar to the strong growth we experienced in the U.S. in recent years. Therefore, I'm very optimistic and very much look forward to our follow-on discussion in the next quarter. I'd like now to hand over the discussion to Avi Israel, our CFO.

Avi?

Avi Israel -- Chief Financial Officer

Thank you, Dov. Good day, everybody. Thank you for joining. You can find our results on the press release we issued earlier today, and I will provide a short summary of the first quarter results.

First quarter revenues were $22.5 million versus $25.2 million in the first quarter of last year. As Dobi noted, a large portion of our U.S. revenues were delayed due to the CR in the U.S., which should be delivered in the coming three quarters. Our gross margin in the quarter was 33%.

I note that our gross margins at a level of fixed cost within them, so they were impacted by the delay in revenues. I will also add that given our expectations for orders for the short-term deliveries, we have already made the preparation and build products for our inventories that will need to be delivered in the coming quarters. We believe that our full year gross margin will be at around similar levels that we have delivered in the recent quarters. First quarter operating expenses were $8.2 million, compared to $6.4 million in the first quarter of last year.

We believe this will be the peak for the year and should reduce slightly in the coming three quarters as the quarter had a number of one-time factors of about $650,000. Operating loss was $0.9 million versus $4.5 million of operating income in the first quarter of 2021. Net loss was $0.7 million versus $3.8 million of net income in the first quarter of last year. We reported an adjusted EBITDA for the first quarter of $1.3 million, which is 6% of revenues versus adjusted EBITDA of $4.8 million or 19% of revenues in the first quarter of last year.

I would like to further add that as an additional $9 million of revenues for the street consensus that were shifted to the coming quarters, as explained by Dov, has actually been delivered in the quarter, our gross margin, operating income, and adjusted EBITDA would have been pretty similar to our Q4 numbers. I would also like to summarize and point out some highlights from our balance sheet. As of March 31, 2022, we had almost $66 million in net cash and no financial debt at all. I note that as of Q1 end, all our needed cash investments in working capital and inventories have been made and are behind us.

We expect the cash level to increase strongly as revenue ramp up again toward the second part of the year. As of quarter end, our shareholders' equity stood at a record $156.2 million, financing 75% of our balance sheet. In summary, as Dov indicated, looking ahead, the second quarter is expected to show a significant jump in the record results, which will continue to improve throughout the rest of the year. That ends my summary.

We shall now open the call for questions. Operator, please. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question is from Peter Arment of Baird Please go ahead.

Peter Arment -- Baird -- Analyst

Yes. Good afternoon [Inaudible]

Dov Sella -- Chief Executive Officer

Peter? You are not heard clearly. Can you come closer to the mic?

Peter Arment -- Baird -- Analyst

Any better, Avi?

Avi Israel -- Chief Financial Officer

Not really.

Peter Arment -- Baird -- Analyst

All right. Maybe just go on with the next one, and I'll come back.

Avi Israel -- Chief Financial Officer

Thank you.

Operator

The next question is from Scott Forbes of Jefferies. Please go ahead. Please go ahead.

Scott Forbes -- Jefferies -- Analyst

We kind of finalize U.S. budget. When you look at that, is there anything that really stood out in terms of program funding? And as you look through the fiscal year 2023 special request, is there anything that kind of stood out there? What's your initial take on that?

Dov Sella -- Chief Executive Officer

We are not surprised, not with this year budget and not for next year, it's all based on our plans. We have four enquiry programs of record of similar like the SHORAD of the Army, the GBAD of the Marine Corps, now the ABAD of the U.S. Air Force, and also cell comm. set and quite a few additional opportunities around them in smaller scale.

So it continues to evolve and grow based on our expectations and plans.

Scott Forbes -- Jefferies -- Analyst

And then just on kind of inventory. I mean, it's still built kind of like $10 million in this quarter, I know you've talked about that related to the supply chain impact. I guess, how do you see the supply chain as it stands today? How has that changed versus last quarter? And then how do you think about maybe that wind-down of inventories to more normalized levels?

Dov Sella -- Chief Executive Officer

OK. Normalized is probably a relative term. We decided early on, as I mentioned in our review to adopt a commercial book and bill approach because it was a new and emerging market. And we know and saw the need for urgent deliveries.

So we topped up our inventories to enable us a stable production plan a year ahead, based on our pipeline and destination of conversion of pipeline into orders. So we maintained that. It protected us for all the products that we are currently selling. It protected us from any supply chain issues when this has started.

Now, when product programs are transferring to programs of code and we have visibility, we can relax. But I don't believe, we will go below six months ahead of inventories that will enable us six months of deliveries based on our plans. This is for the products that we are currently selling for the new products. We have our challenges around the delivery of components, as everybody else.

But we took a closer look at it quite a while ago, anticipating with this issue. And we feel that also for the new products. We are not going to be affected dramatically from the supply chain delivery times. We do see price changes here and there.

And unfortunately, we need to adapt our prices accordingly, and we are doing that.

Scott Forbes -- Jefferies -- Analyst

Thank you.

Operator

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

Peter Arment -- Baird -- Analyst

Good morning, Dov, Avi. Can you hear me?

Dov Sella -- Chief Executive Officer

Yes.

Peter Arment -- Baird -- Analyst

Sorry about that earlier. Thanks for your time this morning. Could you maybe just give us a little color on, the recovery of the revenue shortfall in Q1? Is that to all come through in the second quarter, or does it -- do you start to anticipate that moving into the second half of the year?

Dov Sella -- Chief Executive Officer

Until you get all the orders in your hand, you are not entirely sure, but we do anticipate that a significant part will convert already in this quarter. But to be realistic, we say that it will convert for sure until the end of the year. I hope, it will be in the next two quarters, meaning this one and the second one and the next one.

Peter Arment -- Baird -- Analyst

OK. And then just the continuing resolution once that was signed for the fiscal 2022 budget in March, so did you see an immediate pickup in orders, is that what you're kind of alluding to with the $29 million in order activity that you said.

Dov Sella -- Chief Executive Officer

Yeah. If you take a look at the $29 million composure, a lot of it came from the U.S. And in the five months before that, we had minimal new orders coming from the U.S. due to the CR.

It's all about that. So the flow started. And we are optimistic.

Peter Arment -- Baird -- Analyst

OK. And then, just related to CRs, there are some concerns that because of the congressional elections this fall, that will have another CR, and just what are your thoughts on that impacting your 2022 outlook?

Dov Sella -- Chief Executive Officer

It's a bit far away from us to understand the total U.S. politics. But my estimation is that even if we will have a CR end of this year, it will be shorter. I think a lot of the current CR was around big parties and issues and the miss of consensus about the defense budget and the new administration.

I believe a lot of that will be behind us. I think also the Ukrainian war is making things more clear and urgent or decisive for the lawmakers in Washington. So CR is bad for business, for defense business. Let's hope it has a minimal effect, if at all.

Peter Arment -- Baird -- Analyst

Appreciate the call. And thanks, Avi.

Avi Israel -- Chief Financial Officer

Thank you.

Operator

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

Austin Moeller -- Canaccord Genuity -- Analyst

Good morning, Dov and Avi.

Dov Sella -- Chief Executive Officer

Hi, Austin.

Austin Moeller -- Canaccord Genuity -- Analyst

Hi. My first question here, is there any update from you on testing of the Iron Fist APS to the M2 Bradley?

Dov Sella -- Chief Executive Officer

Yes. Testing is on schedule. Results are good. I cannot say beyond that.

Austin Moeller -- Canaccord Genuity -- Analyst

OK. That's helpful. Do you guys have any update on the India JV and how we might expect revenues to ramp in that over the next year or two? And I know you've said that it can take a long time to ramp up in India, the things are sort of going better than expected so far.

Dov Sella -- Chief Executive Officer

Yes. India is always an enigma around the schedule and when things happen, we are believers. We have our internal goal to establish the JV by the end of this year, definitive agreement and so on, allocation of facilities, and starting to invest. I believe that when the market opens up at the beginning, it will open up in an urgency that at the beginning, we will supply from here.

And probably by next year's end, we will have production capability in country. And also, I hope that the business will support it. It is similar to what we did in the U.S. We started setting up our facility there when we saw that there is business and it's happening.

We started selling in 2017, and we set up our facility during 2018, we would like to adopt the same approach here.

Austin Moeller -- Canaccord Genuity -- Analyst

OK. Excellent. And then, in the plan for the fiscal year 2023 budget and beyond, have you heard anything about the latest news on the Army's thinking about how many total battalions of SHORADs they may ultimately purchase?

Dov Sella -- Chief Executive Officer

The original quantity is 144, that's firm, and it is moving even faster than original plan, basically also in view of what's happening now. We do see increasing quantities. I believe that the force structure -- original for structure that they've been talking about, the Army, is something like 10 to 12 battalions. It will be a mixture of the directed energy and the kinetic.

We are currently part of the kinetic. We have good momentum also around directed energy side. I do hope that we will stay on board for the whole quantity.

Austin Moeller -- Canaccord Genuity -- Analyst

OK. Good. Thank you for answering my questions.

Dov Sella -- Chief Executive Officer

Thank you.

Operator

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

Brian Kinstlinger -- Alliance Global Partners -- Analyst

OK. Great. Thanks for taking my question. It's a follow-up just on CRs in general; it's quite different for RADA today as opposed to past years? I've covered the stock and the impact of the CR that you have programs of record.

And if that's the case, you've seen CRs almost every year for the last 15 to 20 years. So is there a risk of something like this happening in December or the March quarter ongoing now, with CRs every year almost, why or why not?

Avi Israel -- Chief Financial Officer

I think that my experience with CR is relatively limited, I must say. But from my understanding and judgment, we were a bit unlucky in the fact that two of -- of phone call hours day, but then in circumstance were new. So the CR kind of heard them directly. However, once you are already a part of an established program of recording it is not categorized as new.

Maybe it is not as quick as moving -- quick-moving, as without CR, but it is not hurt as we were ahead. So these two big programs that we were relying on actually caused a lot of the mix in Q4 and Q1.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Should we be clear, once those are more established programs CR, which keeps trending the same as last year? You'll be able to maintain those levels in years four when they're more mature programs. Is that what you're saying?

Dov Sella -- Chief Executive Officer

That's what I'm saying. And also, I'm saying that, we are very agile in deliveries. So once it recovers and they need more, we are adapting ourselves very quickly.

Brian Kinstlinger -- Alliance Global Partners -- Analyst

OK. Thank you.

Dov Sella -- Chief Executive Officer

Sure.

Operator

The next question is from Arnold Ursaner. Please go ahead.

Arnold Ursaner -- CJS Securities -- Analyst

Hi. Good morning. Can you comment on the margin differential between the products you sell to the U.S. government and the just-in-time more rapid products you're supplying to automations place?

Avi Israel -- Chief Financial Officer

When we sell from Israel, we sell at the same prices to everybody. In the U.S., at the beginning, we sold not directly, but through other companies, so they topped it up accordingly. But basically, we sell at the same prices.

Arnold Ursaner -- CJS Securities -- Analyst

OK. And your balance sheet is obviously quite strong in the market is not reacting well to our release this morning. Can you remind us if you have a share repurchase authorization in place? And in a broader sense, highlight your priorities for your growing balance sheet and free cash flow? Thanks.

Avi Israel -- Chief Financial Officer

We don't have any -- although, we have an outstanding year three, like we always do in the last four, some four and half years. We do not intend to use it now. Our cash flow situation, our cash balance situation is pretty strong. We don't believe that currently, we have any need for additional cash.

And we believe that as revenue will grow as we expected in the third quarter of 2022, the cash generation will be delivered.

Arnold Ursaner -- CJS Securities -- Analyst

So, Avi, I'm a little unclear. If you have excess cash and strong free cash flow, some good growth in the business, you funded inventories. I'm wondering, why your board doesn't think share repurchase as a higher priority at the moment given where your stock price is?

Avi Israel -- Chief Financial Officer

You're wondering what please. We're not understanding you here.

Arnold Ursaner -- CJS Securities -- Analyst

You have a board of directors, I can't understand, why share repurchase isn't a higher priority given your strong balance sheet, your free cash flow generation, you'll be working down the inventories as you sell finished goods, which will enhance free cash flow. I guess I don't understand your board's thinking why the share repurchase isn't a much higher priority in the short run given where your stock is trading? Thank you.

Avi Israel -- Chief Financial Officer

OK. So our priority is to grow our business. We believe that we have a very wealthy business -- very healthy business, sorry. And we raised money in the past from the market in order to grow the business and to make this company a great success.

That's our current strategy and our current strategy is not calling for a buyback of Rada shares.

Dov Sella -- Chief Executive Officer

Operator, do we have any more questions?

Operator

[Operator instructions] Our next question is from [Inaudible]. Please go ahead.

Unknown speaker

Hi. [Inaudible] My question is regarding the guidance. As you mentioned, 90% of the guidance is already marked in the U.S. budget or in specific lines in the budget.

Can you maybe refer a part on India, what are the major upside that you see for the guidance for this year?

Dov Sella -- Chief Executive Officer

You're talking about the Indian market.

Unknown speaker

No, apart from India, other upsides that may occur and are not currently in the guidance.

Dov Sella -- Chief Executive Officer

It's too early to say --

Unknown speaker

Like don't you see the European market started to wake up from what's happening?

Dov Sella -- Chief Executive Officer

We do see it. But remember, we are Rada's that are embedded in weapon systems. It's not immediate. We are not selling bullets and ammunition, it has its lead time.

It took us three years in the U.S. since Ukraine take one 2014 until we started to see revenues in 2017. I hope that in Europe, it will be much less, but it will be one year, 1.5 years at least. Directly to Europe, I mean, However, we do see -- and this is maybe a potential upside.

We do see momentum around the systems that we are already embedded being in the U.S., being relevant to Europe and Ukraine in adjacent countries. But it's a hope and we need to wait a while until it materializes.

Unknown speaker

My second question is regarding laser foreign exchange policy of hedging. We see the U.S. dollars now getting much upper against the Israeli shekel and the euro. Do you have any like hedging policy?

Dov Sella -- Chief Executive Officer

Absolutely. We have hedging policy. We are protecting our exchange -- our budget exchange rate, strong dollar for exporters as we are is good news.

Unknown speaker

Probably, we should expect in the second quarter like additional gains from foreign exchange differences.

Dov Sella -- Chief Executive Officer

Yes, it's throughout our income statement.

Unknown speaker

OK. Thank you very much.

Dov Sella -- Chief Executive Officer

Thank you.

Operator

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 all of our investors for your continuing interest in our business and support. We look forward to speaking to you again soon.

Stay well and healthy and good day to all.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Ehud Helft -- Investor Relations

Dov Sella -- Chief Executive Officer

Avi Israel -- Chief Financial Officer

Peter Arment -- Baird -- Analyst

Scott Forbes -- Jefferies -- Analyst

Austin Moeller -- Canaccord Genuity -- Analyst

Brian Kinstlinger -- Alliance Global Partners -- Analyst

Arnold Ursaner -- CJS Securities -- Analyst

Unknown speaker

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