Rafael Reports Strong Financial Results in Q2 2023, Bolstered by Revenues and Order Backlog

Rafael, one of Israel's leading defense companies managed by Yoav Har-Even, has posted a profit of NIS 62 million in the second quarter of 2023. This starkly contrasts with the NIS 75 million loss registered during the same period in 2022. The company's financial success is attributed to a robust growth of 29% in revenues during Q2 2023, amounting to NIS 3.1 billion.

Interestingly, despite the impressive surge in revenues, Rafael's order backlog saw a notable 25% increase, scaling from NIS 33 billion at the mid-point of 2022 to NIS 41 billion. This growth in orders is predicted to have been fueled by those received in 2021 and 2022, foreshadowing an even more substantial impact on the company's financial performance in the upcoming years.

The Defense sector's lengthy business cycles play a role in this phenomenon. The substantial rise in the second quarter of 2023 is thought to be indicative of orders originating in the preceding years. This suggests that the amplified order backlog will have a more pronounced effect on the company's financial health in 2024, and an even more substantial impact in 2025 and beyond.

Rafael's financial progress isn't without challenges. Despite a significant 29% revenue growth, the company, along with other major Israeli defense firms like Elbit Systems and the Aerospace Industry, reported a cash flow deficit of NIS 217 million from ongoing operations. This seemingly counterintuitive situation is primarily attributed to payment delays from the Ministry of Defense, which is holding back payments amounting to a billion shekels.

A closer examination of Rafael's revenue sources reveals a pronounced dependence on the Israeli Ministry of Defense, constituting 51.8% of the company's revenues. The revenues from Israel surged by 29% in the previous quarter compared to the same period in 2022, reaching NIS 1.6 billion.

Rafael's unique role as a technological development laboratory and a key security provider to the defense system sets it apart from its peers, Elbit Systems and the Aerospace Industry. This distinctiveness is reflected in its operating expenses and its gross and operating profit margins. In the second quarter of 2023, Rafael's gross profit jumped by 31% in comparison to the corresponding quarter in 2022, amounting to NIS 633 million or 20.1% of turnover. This growth surpassed the gross profitability of 25.6% at Elbit Systems and 17% at the Aerospace Industry.

However, Rafael's gross profitability is dampened by various factors, including project pricing for the Ministry of Defense and the disproportionately high percentage (51.8%) of revenue contributed by the Ministry, when compared to the Aerospace Industry (16.8%) and Elbit Systems (26.8%).

Export limitations on advanced products aimed at maintaining the IDF's security superiority contribute to Rafael's relatively lower gross profitability. However, the recent $350 million export deal for the David Sling Defense System stands out as an exception, potentially heralding similar transactions in the future.

Rafael's challenges also extend to its presence in the lucrative U.S. defense market, the world's largest. While Q2 2023 saw a 21% growth in U.S. sales compared to the same period in 2022, the sales amounted to only NIS 275 million, constituting 9% of total revenues. For context, Asia accounted for 40% of revenues. The growth in U.S. sales was partly due to the sale of weapon positions featuring 30 mm cannons for Oshkosh's Striker-type APCs. However, this growth was tempered by the cessation of supplies for windbreaker-type active defense systems and Iron Dome-type air defense systems in 2022.

Rafael's efforts to penetrate the U.S. market include strategic acquisitions such as the electro-optics company PVP and the RSGS company, which holds a security classification enabling participation in previously inaccessible tenders. Partnerships with Raytheon in the field of Iron Dome systems also aim to facilitate market entry. Nonetheless, these endeavors are progressing relatively slowly at present.

Comparatively, Rafael's operating profitability lags behind at 7.0% of turnover, as opposed to Elbit Systems and the Aerospace Industry. This is attributed to a 19% increase in research and development expenses, totaling NIS 250 million or 7.9% of turnover. This is in contrast to 6.4% at Elbit Systems and just 4.5% at the aerospace industry.

Rafael's impressive surge in net profit is partly attributed to a substantial 58% drop in net financing expenses during Q2 2023, amounting to NIS 34 million, attributed to gains from currency hedging transactions.

Maj. Gen. Yoav Har-Evan, Rafael's CEO, expressed his satisfaction with the company's achievements during the last quarter. Har-Evan emphasized Rafael's ongoing investments in research and development, effective marketing, and operational readiness as key drivers of its success. The CEO also highlighted significant deals, including the sale of the David Sling air defense system to Finland, as pivotal to Rafael's impressive financial performance.