Israel Aerospace Industries (IAI), Israel’s largest national military and civilian security defence company, issues its consolidated financial statements for the quarter ended June 30, 2016.
IAI reports sales of USD 877 million in the second quarter of the year, with net income of USD 6 million and operating income of USD 22 million. IAI holds an order backlog of USD 8.5 billion, representing about 2.3 years of operation. The Company’s cash balances amount to approximately USD 1.1 billion against negative cash flows from operating activities in the amount of USD 69 million, most of which arising from changes in the Company’s working capital, among others due to the prolongation of the presale process and delays in the closing of several “mega contracts”.
Rafi Maor, Chairman of the Board
“The results of the second quarter of 2016 continue to reflect the challenges facing IAI from within and from without. We are undergoing a continuous process of improving the Company’s competitive edge and adapting it to changes in market terms in order to secure the Company’s sustained growth. We are constantly exploring new and existing strategic segments as well as collaborations focusing on economies of scale that will allow us to pursue the Company’s development.”
Joseph Weiss, Company President & CEO:
“The results of the second quarter reflect IAI’s complicated position and accordingly, we are currently focusing on implementing an overall business continuity plan based on a clear business vision. In addition to improving our NOI and EBITDA parameters in the second quarter of 2016, the Company’s Management has decided to adopt the necessary strategic steps to retain the Company’s market leadership and adapt to changing market terms. These steps involve efficiency and cost-reduction measures as well as business and strategic restructuring and enhancement of investments in potential growth engines to strengthen the Company’s leading global market position in its fields.”
Main results in Q2 2016
The Company’s sales in Q2 2016 amounted to USD 877 million compared with USD 928 million in Q2 2015, a decrease of 5.5%.
The decrease in sales in Q2 2016 compared with Q2 2015 is mainly a result of the decrease in the revenues of the Military Electronics Segment (ELTA) and the Commercial Aircraft Segment, which was partly offset by the increase in the revenues of the Aircraft Maintenance and Overhaul Segment and the Systems Missiles & Space Segment
Sales for export in Q2 2016 accounted for 78% of sales (22% to Israel) compared with 79% in Q2 2015 (21% to Israel).
Sales to the military market in Q2 2016 accounted for 73% of sales (27% to the civilian market) compared with 74% (26% to the civilian market) in Q2 2015.
Gross profit in Q2 2016 amounted to USD 119 million (13.6% of sales) compared with USD 125 million (13.4% of sales) in Q2 2015.
Research and development expenses in Q2 2016 totaled approximately USD 34 million compared with approximately USD 44 million in Q2 2015 (accounting for about 3.9% and about 4.7% of sales, respectively).
Expenses for early retirement of employees – as part of the efficiency measures undertaken by the Company, in Q2 2016, 15 employees retired early from the Company at a cost of approximately USD 4 million, compared to 66 employees who retired early with a cost of approximately USD 11 million in Q2 2015. The payment is carried over the years until the employees reach retirement age.
Operating income in Q2 2016 amounted to USD 22 million (2.5% of sales) compared with USD 11 million (1.2% of sales) in Q2 2015. The increase in operating income is mainly due to the decrease in research and development expenses and the decrease in expenses for early retirement of employees compared with Q2 2015.
EBITDA in Q2 2016 amounted to USD 52 million compared with USD 38 million in Q2 2015.
Net financial expenses in Q2 2016 amounted to approximately USD 5 million compared with approximately USD 10 million in Q2 2015.
The Company’s share of losses of associates – in Q2 2016, income of approximately USD 2 million was recorded in respect of the Company’s share of earnings of associates as opposed to a negligible amount recorded in Q2 2015. The increase in the associates’ earnings mainly derives from investees which operate in the aircraft conversion market.
Net tax income – in Q2 2016, the Company recorded net tax expenses of approximately USD 13 million compared with net tax income of approximately USD 19 million in Q2 2015. The main gap is attributed to recording tax expenses of approximately USD 8 million due to an increase of about 2.1% in the US Dollar exchange rate in Q2 2016, as opposed to a decrease of about 5.3% in the US Dollar exchange rate in Q2 2015, which led to recording deferred tax income on exchange rate differences in a total of USD 23 million. Such tax expenses/tax income represent accounting expenses (mostly for deferred taxes) that result 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 on exchange rate differences in Q2 2016 were partly offset against deferred tax expenses in respect of changes in tax rate.
Net income in Q2 2016 amounted to approximately USD 6 million (0.7% of sales) compared with net income of approximately USD 20 million (2.1% of sales) in Q2 2015. The decrease in net income is mainly a result of the increase in tax expenses, as explained above.
The order backlog at the end of Q2 2016 totaled approximately USD 8.5 billion compared with approximately USD 8.6 billion at the end of 2015. 78% 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 2.3 years of operation.
The book to bill ratio in Q2 2016 is 0.93.
The Company’s negative cash flows from operating activities in Q2 2016 amounted to USD 69 million compared with negative cash flows from operating activities of USD 105 million in Q2 2015. The negative cash flows from operating activities mainly derive from changes in the Company’s working capital items – mainly a decrease in payables from work in progress, a decrease in trade receivables and an increase in inventories and inventory in process, among others, due to delays in signing mega contracts. It should be noted that based on the nature of the Company’s operations, a substantial portion of its engagements consist of mega contracts involving complicated development and production projects that span several years. The presale process leading up to these engagements is also lengthy. In this type of projects, once the contract is signed, the Company receives material advances from the customer for setting the project into motion. This type of activity causes fluctuations in the Company’s cash flows from operating activities. Moreover, as of the date of the financial statements, the MOD’s debt to the Company totals approximately USD 170 million.
Material events in Q2 2016
In May 2016, the TSG acquisition transaction by IAI and Formula Systems was completed. TSG operates, among others, in the command and control and crisis management, intelligence and knowledge management and homeland security systems markets.
In April 2016, after the necessary regulatory approvals had been obtained, the foundation of a joint venture in China created in order to establish a local Chinese maintenance, repair and overhaul (MRO) enterprise was completed.
On May 1, 2016, the Company repaid an amount of approximately USD 40 million representing the second installment (of three installments) of the principal of the debentures (series B) to the holders of the debentures.
