Israel Aerospace Industries has issued its consolidated financial statements for the quarter ended June 30, 2017.
In Q2 2017, IAI reported a record growth in order backlog to USD 11.1 billion. Another record was noted in the scope of engagements in new transactions entered into by IAI in Q2 2017 in a total of USD 2.9 billion.
IAI reported sales totaling USD 859 million in the second quarter of the year, as well as net income of USD 21 million and operating income of USD 16 million. IAI’s cash balances amounted to approximately USD 1.7 billion, with positive cash flows from operating activities of USD 208 million.
Yossi Weiss, President and CEO of IAI:
“The second quarter of 2017 was characterized by the significant growth in the scopes of operations and the achievement of new records in IAI’s order backlog and scope of engagements, results which bear witness to the major acceleration and expansion of IAI’s business and marketing ventures. These accomplishments stand out particularly in the aftermath of a period of having to face several challenges from within and without.
In the second quarter, among others, IAI signed mega deals for the sale of air defence systems to India, totaling some USD 2.4 billion, including the largest transaction in the history of Israel’s defence industries, which resulted in a record order backlog in the history of IAI. This accelerated business activity, combined with solid and material cash balances and positive cash flows, are an expression of the IAI’s business, corporate and technological growth and strength which I believe will continue to bear fruit. These accomplishments are first and foremost credited to the male and female employees of IAI whose dedication and professionalism allow us to pursue the path of achievements and growth.
We are continuing to experience the global trend of increasing homeland security budgets and the demand for advanced technological solutions that are tailored to the customer’s needs. Accordingly, in order to be able to provide the optimal and most professional response to our customers, we continue to make sizeable investments in R&D and innovation.
In the internal corporate front, the adoption of the growth plan in IAI has shown progress and has already led to a significant decrease in employee headcount, a reduction in costs and considerable operational improvement. Nonetheless, IAI continues to face major business challenges, including enhanced competition in the target markets, mainly in the civilian market, and the effects of the sharp devaluation of the US Dollar exchange rate. IAI will continue to cope with the demands of the competitive market and the need for growing improvement procedures while constantly exploring new markets and groundbreaking solutions along with the adoption of structural and organizational processes and changes that will secure IAI’s ongoing growth.”
Main results in Q2 2017
IAI’s sales in Q2 2017 amounted to USD 859 million compared with USD 877 million in Q2 2016, a decrease of 2.1%.
The decrease in sales in Q2 2017 compared with Q2 2016 is mostly a result of the decrease in the revenues of the Military Aircraft division, which was partly offset by the increase in the sales of the Systems Missiles & Space division.
Sales for export in Q2 2017 accounted for 77% of sales (23% to Israel) compared with 78% (22% to Israel) in Q2 2016.
Sales to the military market in Q2 2017 accounted for 71% of sales (29% to the civilian market) compared with 73% (27% to the civilian market) in Q2 2016.
Gross profit in Q2 2017 amounted to USD 121 million (14.1% of sales) compared with USD 119 million (13.6% of sales) in Q2 2016. The improvement in the gross profit margin mainly stems from the adoption of the growth agreement, which was partly offset by recording an impairment loss of an intangible asset for accounting purposes.
Research and development expenses in Q2 2017 totaled approximately USD 44 million, compared with approximately USD 34 million in Q2 2016 (accounting for about 5.1% and about 3.9% of sales, respectively).
Expenses for early retirement of employees – early retirement expenses in respect of employees in Q2 2017 amounted to a negligible amount, compared with USD 4 million in Q2 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 IAI expected to retire according to the agreement. As of June 30, 2017, 563 employees retired in the context of the growth agreement.
Operating income in Q2 2017 totaled USD 16 million (1.9% of sales) compared with USD 22 million (2.5% of sales) in Q2 2016. The decrease in operating income is mainly a result of recording an impairment loss of an intangible asset and of the increase in research and development expenses compared with the corresponding quarter of 2016.
EBITDA in Q2 2017 amounted to USD 62 million compared with USD 52 million in Q2 2016.
Net financial expenses in Q2 2017 amounted to a negligible amount compared to financial expenses of approximately USD 5 million in the corresponding quarter of 2016. The decrease in financial expenses is mainly a result of exchange rate differences due to the devaluation of the US Dollar exchange rate in relation to the NIS.
IAI’s share of losses of associates – in Q2 2017, IAI recorded its share of losses of associates in the amount of approximately USD 3 million as opposed to its share of earnings of approximately USD 2 million in Q2 2016. The loss mainly arises from recording an impairment loss of an investment in an associate.
Net income tax – in Q2 2017, net income from taxes amounted to approximately USD 8 million compared with net tax expenses of approximately USD 13 million in Q2 2016. The gap is mainly attributable to recording income from taxes totaling approximately USD 13 million arising from a decline of about 3.7% in the US Dollar exchange rate in the second quarter of 2017, as opposed to an increase of about 2.1% in the US Dollar exchange rate in the corresponding quarter of last year, which resulted in recording tax expenses totaling USD 8 million in Q2 2016. Tax income/expenses in respect of exchange rate fluctuations represent accounting expenses (mostly for deferred taxes) that result from the fact that IAI reports to the Israeli income tax authorities in NIS whereas the functional currency of the financial statements is the dollar.
Net income in Q2 2017 amounted to approximately USD 21 million (4% of sales) compared with net income of approximately USD 6 million (0.7% of sales) in Q2 2016. The increase in net income is mostly a result of the increase in income from taxes, as explained above.
The order backlog at the end of Q2 2017 reached USD 11.2 billion compared with approximately USD 9 billion at the end of 2016. 77% 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 3.1 years of operation.
The book to bill ratio in Q2 2017 is 3.19.
IAI’s positive cash flows from operating activities in Q2 2017 amounted to USD 208 million compared with negative cash flows from operating activities of USD 69 million in Q2 2016. The positive cash flows from operating activities in the second quarter of 2017 mainly derive from the changes in IAI’s working capital items – mainly a decrease in trade receivables and an increase in payables for work in progress. It should be noted that based on the nature of IAI’s operations, the majority of its engagements are in mega intricate development and production projects which last several years. Moreover, the presale process also lasts several years. In this type of projects, IAI receives considerable advances from the customer for setting the project in motion once the engagement is signed. This type of activity often causes fluctuations in IAI’s cash flows from operating activities.
Material events in Q2 2017 and through the date of publication of the financial statements
• Dividend distribution – on April 20, 2017, IAI paid the State an interim dividend of approximately NIS 15.6 million (approximately USD 5M)
• Engagement with a material customer – in April 2017, IAI 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. IAI 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, IAI 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 IAI – in March 2017, IAI learned that the Israeli Police launched an investigation in IAI. In May 2017, IAI received official information from the Israeli Police of suspicions raised against several employees (including a senior officer) in IAI regarding alleged illegal acts committed in the context of signing certain engagements with suppliers and alleged blackmail under threats of political extortion. Following its examination of this information, IAI estimates that the investigation will not have a material impact on its activity or business.
• In keeping with the labor dispute declared on May 14, 2017 and additional deliberations held between IAI and the representatives of the workers’ union and the Histadrut at the Labor Court, on August 9, 2017, a notice of a labor dispute was issued, also in the backdrop of the workers’ union’s demands for holding negotiations and granting bonuses to employees. As of the date of this release, IAI’s operations are unaffected.
• On May 19, 2017, IAI 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.
