RADA Electronic Industries Ltd. (NASDAQ:RADA) Q2 2022 Earnings Conference Call August 17, 2022 9:00 AM ET
Company Participants
Dov Sella – Chief Executive Officer
Avi Israel – Chief Financial Officer
Ehud Helft – EK Global Investor Relations
Conference Call Participants
Ellen Page – Jefferies
Jeff Bernstein – Cowen
Austin Moeller – Canaccord
Scott Huntington – Brighton Securities
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the RADA Electronics Industries second quarter 2022 results conference call. All participants are 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 all received by now the company’s press release. If you have not received it, please contact RADA’s Investor Relations team at EK Global Investor Relations at 1-212-378-8040, 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 EK Global Investor Relations. Mr. Helft, would you like to begin, please?
Ehud Helft
Thank you Operator. I would like to welcome all of you to this conference call to discuss RADA’s second quarter 2022 results. I would like to thank RADA management for hosting this call.
With us today on the call are Mr. Dov Sella, Chief Executive Officer of RADA; Mr. Avi Israel, Chief Financial Officer of RADA, and Mr. Michael Dippold, Chief Financial Officer of Leonardo DRS. 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 whereby Mr. Dippold will address any questions related to DRS and the announced merger between DRS and RADA.
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.
With that, I would now like to introduce RADA’s CEO, Mr. Dov Sella. Dubi, go ahead please.
Dov Sella
Thank you Ehud, and good day to all our call participants. Let’s start with an overall summary.
As we announced in early July, we experienced another quarter in the United States where our revenues mainly remained paused. The lag in U.S. DoD spending of the fiscal year 2022 appropriation has been a material headwind for the entire U.S. defense sector, including ourselves by extension. While we had hoped that orders would resume fairly quickly once the CR – the continuing resolution was concluded by the end of March, it has taken time to restart, impacting spending across the entire industry and us as well.
The shortfall in revenues impacted our profitability. We have not reduced our expenses as we expected the orders and revenues will come to us eventually. Once we are back to our expected revenue level, our profitability will also be at the expected range. We are seeing orders from the U.S. starting to resume and we do expect the second half of the year to be better than the first.
While this short term bump in our road is frustrating and we do very much see it as a bump in our long term growth path, we remind that it has always been a risk we live with as part of the fast-growing package that comes with being a small defense player providing technology by short term orders, rather than via backlog.
Next topic is our merger with Leonardo DRS. The most important event for RADA, however, is our announced and pending merger with a leading mid-tier U.S. defense technology company, Leonardo DRS, which is a subsidiary of the Italian defense company, Leonardo. Just to remind and update any new listeners, DRS will acquire 100% of the shares of RADA in exchange of 19.5% equity ownership in the combined company allocated to RADA shareholders. Pending the shareholder vote in the coming months, we expect the merger to close in the fourth quarter. The combined company will maintain the name Leonardo DRS and will trade on NASDAQ and TASE, and the ticker symbol will change from RADA to DRS.
We are working closely with DRS for almost a decade now, and DRS has been a significant contributor to RADA’s successful penetration into the U.S. market over this period. This merger takes our collaboration with DRS to the next stage. Our advanced tactical radar strongly improved DRS’ position in air defense, counter-UAS, and vehicle protection market segments, accelerating its transformation into a provider of integrated sensor systems and leader in advanced sensing and force protection markets. It also increases RADA’s addressable markets on one hand and de-risks RADA’s position as a small player in our high growth but increasingly competitive market space where we are indeed seeing many of the major defense players starting to join this market and putting pressure on small players. Together with DRS, we are a leading mid-tier defense electronics company addressing high growth markets with a formidable competitive force.
Let’s have a view of our markets. I want to highlight a key point, that despite the short term U.S. slowdown, the fundamentals of our markets have not changed and, on the contrary, have only strengthened in the past half year or so. Following the invasion of Russia to Ukraine, western countries throughout the world realized they need to provide the best and most advanced active defense solutions for their maneuverable military assets and ultimately their troops. Our software-defined and mobile radars are in the heart of modern warfare protection needs, like short range air defense, counter-UAS, active protection on armored vehicles, counter-rocket artillery motors, and similar.
Our U.S. market is now moving from the JUON phase, meaning joint urgent needs statement, into the program of record phase. The switch to programs of record is another contributing factor the current short term U.S. orders resumption. This trend will enable us as part of DRS to build many more products over a longer period based on an order backlog generating long term revenue visibility and long term stable and profitable growth.
In the early years of our penetration and growth into the U.S. market, to capitalize on our market position we produced radars to stock and applied a book-and-ship commercial approach. This unique approach not only made us attractive to our U.S. customers but because it relied on high levels of inventory and components, it 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 continued supply chain constraints that everybody faces.
Globally, the Europe and NATO countries are typically following the doctrine and solutions of the U.S. military and the need for short range air defense or point defense is becoming widely recognized. We have already had initial engagements with prominent European weapons systems providers and our radars are integrated and continuously being tested as part of their solutions. The Near East and India markets are both waking up around the need to mitigate the UAS threat with counter-UAS solutions. This is even more prominent given the multiple armed drone attacks, for instance last Monday against U.S.-led coalition forces in Syria.
In summary, obviously we are not thrilled with our results in the last two quarters, which were impacted by external factors that are beyond our control and have impacted the entire U.S.-related defense sector, not just us. I can say, though, that we have not lost any opportunity and expect all business to come through eventually, either in the second half of this year or next year. We are looking ahead to the merger with DRS that will put us in a stronger position to continue our long term growth path.
At this point, I’d like to hand over the discussion to Avi, our CFO. Avi, please go ahead.
Avi Israel
Thank you Dubi. Good day to all of our participants. You can find our results in the press release we issued earlier today, and I’ll provide a short summary of the second quarter results.
Second quarter revenues were $23 million versus $28.3 million in the second quarter of last year. Our gross margin in the quarter was 35%. I note that our gross margins have a level of fixed costs within them, so they were impacted by the lower level of revenues. Operating loss was $3 million versus $4.5 million of income in the second quarter of 2021. I note that we had about $2.6 million of merger-related expenses. Net loss was $4.4 million versus $10.4 million of net income in the second quarter of last year, which included a one-time tax income of $6 million. We reported an adjusted EBITDA for the quarter of $1.8 million versus EBITDA of $6.3 million in the second quarter of last year.
I’d also like to summarize and point out some highlights from our balance sheet. As of June 30, 2022, we had $55.6 million in net cash and no financial debt at all. I note that as of Q2 end, all of our need for cash investments in working capital and inventories have been made and are all behind us. We expect the cash level to increase as revenues ramp up again.
As of quarter end, our shareholders equity stood at $152.8 million, financing 78% of our balance sheet.
In summary, as Dov indicated, we’re looking ahead to the second half of this year and expect to show an increase in revenues, and as a result an improvement in profitability.
That ends my summary. We should now open the call for questions. Operator, please?
Question-and-Answer Session
Operator
[Operator instructions]
The first question is from Ellen Page of Jefferies. Please go ahead.
Ellen Page
–about the revenue outlook and the order environment, what’s improved in the past few months and how much visibility do you have to a return to growth for the top line?
Dov Sella
We start to see the momentum. We are still in the book-and-ship mode of operations, but based on our estimations, we can return to the levels that we had last year, end of last year, even in the coming quarter or so, so we are optimistic about the continuation of the growth of our business, except the last two, three quarters that kind of paused us from this.
Ellen Page
Great, and can you talk about some of the larger opportunities that you called out, such as IM-SHORAD, CV-90, or Eitan or ABAD. How are you thinking about those opportunities and any timing you can share?
Dov Sella
Yes, the growth that we expect is coming from these programs. We have four major programs and some still urgent needs that pop up, by the way, also around Ukraine. But the airbase air defense and [indiscernible] are producing inputs of orders, SHORAD is always there, we may expect even things to come forward around SHORAD, and the Marine Corps GBAD is in the background progressing as planned and we expect that it will affect our revenues mainly next year and onwards.
Ellen Page
Great, thanks. That’s it for me.
Dov Sella
Sure.
Operator
The next question is from Jeff Bernstein of Cowen. Please go ahead.
Jeff Bernstein
Hey guys. Just a real quick question. Just reading about this U.K. SERPENS program that’s ultra compact multi-mission radar, and I was just wondering, does that compare at all with any of your products or is that a different class of radar?
Dov Sella
It depends. The SERPENS program, first of all, it’s a long term program and it’s in the probation phase. It will take a few years until it becomes a program. It is an end-to-end comprehensive solution the U.K. military or army, and it includes a variety of radars. We are tracking it, we are cooperating with additional companies, and while currently we cannot address the high end or–not high end, but the bigger radars, we do believe that what we have is very relevant, and also teaming with the right partners, we can come as part of an end-to-end solution.
Jeff Bernstein
That’s great, thank you.
Dov Sella
Thank you.
Operator
The next question is from Austin Moeller from Canaccord. Please go ahead.
Austin Moeller
Morning Dubi and Avi. My first question here, last week I had heard DRS management discuss using your radars which we traditionally think about in air defense applications for inseminating comms and also being used as [indiscernible] in electronic warfare systems, so can you just expand on this a little bit?
Dov Sella
I would like to defer these questions to later stages. This is really in the heart of our strategy going forward, and I don’t think it’s mature enough to give further details as of now.
Austin Moeller
Okay. Then as far as the AtoN program goes, are we expecting work for that to start ramping in the second half of this year, or will we not see that until 2023?
Dov Sella
We will see initial sales towards the end of this year, but mainly it’s 2023 and onwards.
Austin Moeller
Okay, and then what do we think about timing for the army making a decision on the directed energy SHORAD and who might be the radar supplier for that?
Dov Sella
To our best knowledge as of now, it should be completed on the laser next year, so probably it will become a program in 2024. Currently, there are four prototypes that are being delivered to Europe that were developed by the RCCTO arm of the Army Rapid Capabilities Force, and we are already engaged in that to a certain extent but it should be completed probably next year. We do hope and believe that our radars will stay the incumbent radars because we are kind of effector agnostic.
Austin Moeller
Okay, fantastic. Thanks for all the color there.
Dov Sella
Thank you.
Operator
The next question is from Scott Huntington of Brighton Securities. Please go ahead.
Scott Huntington
Good morning. I have a couple questions. First of all, was there bookings announced for the second quarter or did I miss it? Hello?
Dov Sella
I’m sorry, you were not clear. Can you repeat your question?
Scott Huntington
Yes, was there bookings announced for the second quarter?
Dov Sella
No, we did not announce bookings for the second quarter as of now.
Scott Huntington
Okay, well just–you know, it’s kind of a sad moment to miss a dynamic independent growing company that had been anticipating $250 million in sales in the next three, four year, possible expansions in India and Europe, and last we heard was looking at making some small accretive acquisitions. June 21, we get this announcement at a supposed 20% premium, a merger with a much larger Leonardo, and the next day the shares close below where they had announced the prior day before the announcement.
The valuation is quite a concern. I know that Mr. Lynn has stated that they used a conservative valuation that represented a 20% premium, and I think Mr. Lynn’s thinking might be a little off because back in March of 2021 when they were looking to do an IPO, they said that the street inadequately valued Leonardo and they pulled their acquisition, and I contend that this same type of valuation disconnect is right in the middle of RADA’s growth plans. I don’t know what the board can do at this particular time, but I would consider this valuation coming off a continuing resolution, looking for substantial growth going out the next three, four years, I think it’s just unacceptable and if you have any comments that might opine, that you were shopping the company and this was the best offer you could get, I don’t understand this but my ears are open.
Dov Sella
I don’t think is the time and moment to comment on the merger. This is an earnings call. The merger was announced. We do believe this is the right strategic move for both companies going into the future, and we are confident that also the shareholders, given reasonable time, will realize this. Thank you.
Scott Huntington
So Dubi, that would be at any price you would agree to the merger?
Dov Sella
The terms of the merger are already agreed and we are not going to change them.
Scott Huntington
Thank you.
Operator
Thank you. If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions.
There are no further questions at this time. Mr. Sella, would you like to make your concluding statement?
Dov Sella
Yes, thank you Operator. On behalf of RADA and DRS management, I would like to thank all investors for your continuing interest in our business. We look forward to speaking with you soon again. Stay well and good day to all. Thank you.
Operator
Thank you. This concludes the RADA Electronic Industries second quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.
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