Israel Aerospace Industries, Israel’s largest national military and civilian security defence company, issues its consolidated financial statements for the three months ended March 31, 2017.
In Q1 2017, IAI recorded a significant increase in net income to a total of USD 46 million, coupled with sales of USD 837 million and an increase in order backlog to USD 9.3 billion, representing about 2.5 years of operation. IAI’s cash balances amounted to approximately USD 1.6 billion, with positive cash flows from operating activities of USD 139 million. IAI also recognized an increase in gross profit to USD 140 million (compared with USD 115 million in Q1 2016), mainly arising from the decrease in payroll expenses following the adoption of the growth agreement signed in IAI.
Joseph Weiss IAI’s President and CEO
“IAI is concluding the first quarter of 2017 in the backdrop of major achievements both at the business level and at the corporate and technological levels. The Company shows a significant growth in net income and order backlog which bears witness to its accelerated business activity and fast growing business and marketing capabilities. In recent weeks, after the date of preparation of the financial statements, IAI reported the signing of mega deals for the sale of about USD 2.5 billion worth of air defence systems to India, including the largest deal in the history of Israel’s defence industries. These giant contracts are a clear expression of the Company’s growth and strength, bringing its order backlog to date to over USD 11 billion – the largest order backlog in its history.
At the same time, we have been witnessing changes in our markets of operation evidenced by growing homeland defence budgets in many countries and an intensifying demand for state-of-the-art technologies. Accordingly, we continue to make considerable R&D investments in order to offer our customers the most professional solutions tailored to their needs. This investment is also reflected in the series of technological achievements and successful tests of various systems completed in the past quarter throughout the company.
Alongside these technological and business achievements, the Company has made progress in adopting the growth plan signed last year between management and the workers’ union. The results of this move are directly reflected in the increase in the gross profit and net income line items in the first quarter, and also represent a significant component in promoting the Company’s growth.
We will continue to focus our management, marketing and technological efforts on ensuring that IAI pursues the growth path.”
Main results in Q1 2017
The Company’s sales in Q1 2017 amounted to USD 837 million compared with USD 859 million in Q1 2015, a decrease of 2.6%.
The decrease in sales in Q1 2017 compared with Q1 2016 is mostly a result of the decrease in the revenues of the military divisions, which was partly offset by the increase in the revenues of the Bedek Aviation division.
Sales for export in Q1 2017 accounted for 74% of sales (26% to Israel) compared with 77% (24% to Israel) in Q1 2016.
Sales to the military market in Q1 2017 accounted for 73% of sales (27% to the civilian market) compared with 75% (25% to the civilian market) in Q1 2016.
Gross profit in Q1 2017 amounted to USD 140 million (16.7% of sales) compared with USD 115 million (13.4% of sales) in Q1 2016. The increase mainly stems from the decrease in cost of sales due to the reduction in payroll expenses as a result of the adoption of the growth agreement.
Research and development expenses in Q1 2017 totaled approximately USD 36 million, similarly to the corresponding quarter of 2016 (accounting for about 4.3% and about 4.2% of sales, respectively).
Expenses for early retirement of employees – early retirement expenses in respect of employees in Q1 2017 amounted to a negligible amount, as opposed expenses amounting to USD 7 million in Q1 2016. The decrease was a result of recognizing a provision for early retirement expenses on the date of signing the growth agreement in 2016 for the total number of employees which the Company expected to retire according to the agreement.
Operating income in Q1 2017 totaled USD 44 million (5.3% of sales) compared with USD 11 million (1.3% of sales) in Q1 2016. This growth is the result of the increase in gross profit owing to the decrease in the Company’s NIS payroll expenses and the reduction of early retirement expenses in respect of employees compared with the corresponding quarter of 2016.
EBITDA in Q1 2017 amounted to USD 72 million compared with USD 38 million in Q1 2016.
Net financial expenses in Q1 2017 amounted to approximately USD 7 million, similarly to the corresponding quarter of 2016.
IAI’s share of losses of associates – in Q1 2017, a negligible amount was recognized in respect of the Company’s share of the results of associates, as opposed to earnings of approximately USD 1 million in Q1 2016.
Net tax income in Q1 2017 amounted to USD 9 million compared with net tax income of USD 6 million in Q1 2016. The gap is mainly attributable to tax accounting income in respect of exchange rate differences totaling USD 24 million arising from a decline of about 5.5% in the USD exchange rate in the first quarter of 2017, as opposed to a decline of about 3% in the USD exchange rate in the corresponding quarter of last year, which resulted in recording tax income from exchange rate differences totaling USD 15 million in Q1 2016. Tax income/expense in respect of exchange rate fluctuations represents accounting income (mostly for deferred taxes) that results from the fact that the Company reports to the Israeli income tax authorities in NIS whereas the functional currency of the financial statements is the dollar. Tax income in respect of USD exchange rate differences in Q1 2017 were partly offset by deferred tax expenses in respect of the change in tax rate.
Net income in Q1 2017 amounted to USD 46 million (5.5% of sales) compared with net income of USD 11 million (1.3% of sales) in Q1 2016. The increase in net income is mostly a result of the increase in gross profit and the increase in tax income, as explained above.
The order backlog at the end of Q1 2017 totaled USD 9.3 billion compared with USD 9 billion at the end of 2016. 71% of the order backlog is held for sale to foreign customers with wide geographical dispersion. The order backlog is comprised of a wide variety of products and secures 2.5 years of operation. With the addition of the mega engagements signed and reported after the date of preparation of the financial statements, the order backlog currently amounts to USD 11 billion.
The book to bill ratio in Q1 2017 is 1.33.
IAI’s positive cash flows from operating activities in Q1 2017 amounted to USD 139 million compared with negative cash flows from operating activities of USD 72 million in Q1 2016. The positive cash flows from operating activities in the first quarter of 2017 mainly derive from the Company’s net income in the quarter and the changes in its working capital items – mainly an increase in payables for work in progress, which was partly offset by the increase in trade receivables and the increase in inventories and inventories in process.
Material events after the date of preparation of the financial statements
• On April 20, 2017, the Company paid the State an interim dividend of approximately NIS 15.6 million (approximately USD 4 million).
• Engagement with a material customer – in April 2017, the Company and the Indian Government signed an agreement for the development, manufacture and supply of air defence systems in an aggregate of USD 1.6 billion. The Company will receive the payments according to the contract based on compliance with certain milestones over a period of about six years.
• On May 1, 2017, the Company repaid to holders of debentures (series B) the third installment (of three installments) of the debenture principal in a total of approximately USD 40 million.
• Police investigation on matters pertaining to the Company – in March 2017, the Company learned that the Israeli Police launched an investigation in IAI. In May 2017, the Company received official information from the Israeli Police of suspicions raised against several employees (including a senior officer) in the Company regarding alleged signing of certain engagements with suppliers and alleged blackmail under threats of political extortion. Following its examination of this information, the Company estimates that the investigation will not have a material impact on its activity or business.
• Declaring a labor dispute – on May 14, 2017, the Histadrut’s trade union department informed the Company of a labor dispute and strike scheduled to take place on May 29, 2017 in the Company and the subsidiary, ELTA Systems Ltd., due to the workers’ union’s demand to postpone the adoption of the second chapter of the growth agreement (employee termination) and in view of alleged disruption and impairment of the efforts of the workers’ union and workers’ association.
• On May 19, 2017, the Company signed an agreement with an Indian Government company for the joint manufacture and supply of approximately USD 630 million worth of air defence weapon systems based on meeting the milestones defined in the agreement over a period of about seven years.
