Israel Aerospace Industries Ltd. (“the Company” or “IAI”), Israel’s largest aerospace and civilian aviation company, has issued its consolidated interim financial statements for the period of nine months ended September 30, 2015.
The Company reports a challenging quarter with sales totaling USD 828 million and a net loss of USD 31 million as a result of deferred taxes (USD 21 million) and a non-recurring provision arising from an agreement signed with a major customer due to a past penalty (USD 27 million). The Company manages to enjoy a stable order backlog of some 2.3 years of operation, and records a transition to a positive cash flow. In the quarter, and following the date of closure of the balance sheet, the Company completed several critical tests in major development projects and anticipates ongoing serial supply in these projects.
Rafi Maor, Chairman of the Board
“The financial statements for the third quarter reflect the significant challenges which the Company is facing, resulting from ongoing changes in the global markets in which it operates. These challenges make it all the more clear that in addition to being at the forefront of technology and having proven capabilities of providing our customers with the best, fastest and most suitable solutions that are tailored to their needs, we must take decisive action towards improving the Company’s competitiveness so as to adapt to changing market conditions.
The Company is, therefore, gearing up to a reorganization plan based on an enterprise-wide business vision accompanied by a series of significant actions in all areas, which will be implemented in full coordination with the workers’ organization. We are also continuing to prepare for the offering of IAI’s minority interests planned for 2017 which will allow us to further develop the Company and guarantee its continued growth.”
Joseph Weiss, Company President & CEO
“Apart from the fact that the business results in the past quarter were affected by a large non-recurring expense and the recording of deferred taxes in a substantial amount due to the increase in the US Dollar-NIS exchange rate, the business results also reflect the Company’s challenges in the business environment in which it operates. There is no question that IAI’s capabilities, the wide variety of its products and its human capital all form a solid foundation for its operations, but this is not sufficient. The Company is in need of a comprehensive process that will help position it as a growing company in both the medium and the long term and enhance its competitiveness. Among other things, this process consists of executing new business strategies, consolidating operations and resources, and introducing a series of efficiency measures in different areas.
We believe that the workers’ organization and the Company see eye to eye regarding the importance of coping with challenges for the benefit of the Company’s future and that of its employees. Nevertheless, these measures are essential and it is the Company’s Management’s uncompromising duty to act with determination so as to deal with the issues on the agenda, ensure IAI’s continued growth and strengthen its position as a leading player in global markets.”
Main results in Q3 2015
The Company’s sales in Q3 2015 amounted to USD 828 million compared with USD 934 million in the corresponding quarter of 2014, a decrease of 11%.
The decrease in sales in the third quarter of 2015 compared with the corresponding quarter of last year is mainly a result of the decrease in the revenues of the ELTA Systems Ltd., the Systems Missiles & Space Group and the Commercial Aircraft Group in the area of business jets.
Sales for export in Q3 2015 accounted for 79% of sales (21% to Israel) compared with 78% (22% to Israel) in the corresponding quarter of 2014.
Sales to the military market in Q3 2015 accounted for 74% of sales (26% to the commercial market) compared with 72% (28% to the commercial market) in the corresponding quarter of 2014.
Gross profit in Q3 2015 amounted to USD 86 million (10.4% of sales) compared with USD 163 million (17.5% of sales) in the corresponding quarter of 2014, a decrease of about 47% arising mainly from the decrease in the scope of sales and from recording a non-recurring expense of approximately USD 27 million for adjustment of the provision for a loss in a significant project.
Research and development expenses in Q3 2015 totaled approximately USD 33 million compared with approximately USD 46 million in the corresponding quarter of 2014 (representing about 4.0% and about 4.9% of sales, respectively).
Operating loss in Q3 2015 amounted to USD 5 million compared with an operating income of USD 63 million in the corresponding quarter of 2014.
EBITDA in Q3 2015 amounted to USD 21 million compared with USD 87 million in Q3 2014, a decrease of some 76%.
Net financial expenses in Q3 2015 amounted to USD 8 million compared with net financial expenses of USD 14 million in the corresponding quarter of 2014, a decrease of about 43%.
Net tax expenses in Q3 2015 totaled USD 17 million compared with net tax expenses of USD 43 million in the corresponding quarter of 2014. The main factor is attributed to differences in the measurement basis arising from changes in the US Dollar exchange rate in relation to the NIS.
In Q3 2015, the US Dollar-NIS exchange rate increased by 4%, causing the Company to record tax expenses due to the differences in the measurement basis totaling USD 21 million compared with USD 47 million in Q3 2014 in which the US Dollar-NIS exchange rate increased by 7.5%.
The Company’s net loss in Q3 2015 amounted to USD 31 million compared with a net income of USD 4 million in the corresponding quarter of 2014.
The order backlog at the end of the third quarter of 2015 totaled USD 8.5 billion compared with USD 9.1 billion at the end of 2014. The decrease is mainly a result of the delay in new business contracts for “mega projects”.
82% of the order backlog is for sales to foreign customers having a wide geographical dispersion. The order backlog comprises a wide variety of products and ensures 2.3 years of operation.
The book to bill ratio in the third quarter of 2015 is 0.85, mainly as a result of the delay in new business contracts for “mega projects”.
The Company’s positive cash flows from operating activities in Q3 2015 amounted to USD 99 million compared with negative cash flows from operating activities of USD 253 million in the corresponding quarter of 2014. The positive cash flows from operating activities mainly arise from changes in items regarding the Company’s working capital. It should be noted that the nature of the Company’s operations requires entering into contracts most of which involve complex “mega projects” involving development and manufacturing, which span several years. The pre-sale process preceding these contracts may also last several years. In this type of projects, once the contract is secured, the Company typically receives significant advances from customers to initiate the project. This aspect of the nature of the Company’s operations can cause fluctuations in cash flow from ongoing operating activities.
