IAI, Israel’s largest national military and civilian security defence company, issues its consolidated financial statements for the quarter ended September 30, 2016.
IAI reports sales of USD 893 million in the quarter compared with USD 828 million in the corresponding quarter of last year (a 7.9% increase) and a net loss of USD 94 million. The loss arises from a provision of USD 162 million for early retirement expenses for about 800 employees in the context of the growth agreement signed with the employee union on August 25, 2016. Gross profit in the quarter totaled USD 135 million compared with USD 86 million in the corresponding quarter of 2015. Operating income less early retirement expenses (adjusted operating income) in the quarter amounted to USD 30 million compared with a loss of USD 5 million in the third quarter of 2015. EBITDA less early retirement expenses (adjusted) totaled USD 58 million compared with USD 22 million in the corresponding quarter of last year. Net income less early retirement expenses in respect of the growth agreement signed by the Company (adjusted net income) amounted to USD 28 million. IAI holds an order backlog of USD 8.2 billion, representing about 2.3 years of operation. The Company’s cash balances amount to approximately USD 1.2 billion, alongside positive cash flows from operating activities in the third quarter amounting to USD 72 million.
Joseph Weiss, Company President & CEO
“IAI is concluding an eventful quarter whose results express the first positive effects of the growth agreement signed in the Company about three months ago. The improvement presented in gross profits mainly results from the reduction of various salary benefits, as defined in the growth agreement. We expect to feel the full effect of the agreement in the course of 2017 with the completion of the agreement’s implementation process. Another impact is expressed in the growth in the Company’s investment in R&D activity, which is a fundamental cornerstone in IAI’s operation and growth. This growth is made possible by redirecting the funds accrued in the growth program to R&D investments. In addition to positive cash flows, we have also witnessed increased sales (compared to the corresponding quarter of 2015), mainly arising from the increase in the revenues of the Military Aircraft Division and the increase in the operations of the Bedek Aviation Group, mainly in the field of aircraft conversion to cargo configuration.
Nevertheless, IAI continues to face many and significant challenges in its various areas of operation. In contrast to the ongoing delay in signing mega projects, we have also experienced a continuing increase in the number of medium-sized engagements entered, which creates a certain balance. Extensive efforts are invested in concluding complicated engagement processes and reinforcing the Company’s order backlog. We are also pursuing restructuring processes, strategic plans and increased investments in areas that will allow us to strengthen the Company’s position as a global leader in its fields of operation.”
Main results in Q3 2016
The Company’s sales in Q3 2016 amounted to USD 893 million compared with USD 828 million in Q3 2015, an increase of about 7.9%.
The increase in sales in Q3 2016 compared with Q3 2015 is mainly a result of the increase in the revenues of the Military Aircraft Segment and of the Aircraft Maintenance and Overhaul Segment in view of the increase in the segment’s operations, mainly in the field of aircraft conversion into cargo configuration.
Sales for export in Q3 2016 accounted for 76% of sales (24% to Israel) compared with 78% in Q3 2015 (22% to Israel).
Sales to the military market in Q3 2016 accounted for 69% of sales (31% to the civilian market) compared with 74% (26% to the civilian market) in Q3 2015.
Gross profit in Q3 2016 amounted to USD 135 million (15.1% of sales) compared with USD 86 million (10.4% of sales) in Q3 2015. The improvement in gross profit compared with the corresponding quarter of 2015 is mainly a result of recording salary income from the reduction of various benefits in the context of signing the growth agreement and of a non-recurring loss provision of USD 27 million recorded in the corresponding quarter of last year in the Commercial Aircraft Segment owing to the Boeing 787 project.
Research and development expenses in Q3 2016 totaled approximately USD 44 million compared with approximately USD 33 million in Q3 2015 (accounting for about 4.9% and about 3.9% of sales, respectively), among others, in view of redirecting accrued funds according to the growth agreement to investments in research and development.
Expenses for early retirement of employees – on August 25, 2016, a collective agreement was signed between the employee union, in collaboration with the Histadrut – General Organization of Workers in the Land of Israel, and with the approval of the Commissioner of Salary at the Ministry of Finance and the Government Companies Authority. Among others, the agreement provides for the early retirement of employees under optimal retirement terms and the partial reduction of certain salary components for the duration of the agreement term (three years)
In the context of the growth agreement, some 830 employees are expected to retire, of whom 730 permanent employees. Accordingly, in Q3 2016, the Company recognized an expense of USD 162 million for early retirement of employees.
Operating income less early retirement expenses (adjusted operating income) in Q3 2016 amounted to USD 30 million (3.4% of sales) compared with operating loss without early retirement expenses of USD 5 million in Q3 2015. The improvement in adjusted operating income is mainly explained by the effect of the reduction of salary benefits following the signing of the growth agreement in the current quarter and by the provision for loss of USD 27 million recorded in the corresponding quarter of last year due to the Boeing 787 project.
Operating loss in Q3 2016 amounted to USD 132 million compared with USD 5 million in Q3 2015. The increase in operating loss is mainly a result of recording early retirement expenses of employees following the singing of the growth agreement, which was partly offset by the improvement in gross profits, as explained above.
EBITDA less early retirement expenses (adjusted EBITDA) in Q3 2016 amounted to USD 58 million compared with USD 22 million in Q3 2015.
EBITDA in Q3 2016 amounted to a negative EBITDA of approximately USD 104 million, mainly arising from recording early retirement expenses of employees due to signing the growth agreement, compared with approximately USD 22 million in Q3 2015.
Net financial expenses in Q3 2016 amounted to approximately USD 5 million compared with approximately USD 8 million in Q3 2015.
The Company’s share of losses of associates – in Q3 2016, income of approximately USD 1 million was recorded in respect of the Company’s share of earnings of associates as opposed to a loss of approximately USD 1 million in Q3 2015. The improvement in the earnings of associates is mainly owing to revenues of investees in the field of aircraft conversion.
Net tax income – in Q3 2016, the Company recorded net tax income of approximately USD 42 million compared with net tax expenses of approximately USD 17 million in Q3 2015. The main gap is attributed to the transition to pre-tax loss in the third quarter, mainly as a result of recording employee early retirement expenses and differences in the measurement basis deriving from the decrease in the US Dollar exchange rate in relation to the NIS in the third quarter in respect of which tax income was recorded, as opposed to an increase in the US Dollar exchange rate in Q3 2015 in respect of which the Company recorded tax expenses. Tax expenses/income in respect of exchange rate fluctuations 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.
Net income less early retirement expenses (adjusted net income) in Q3 2016 amounted to approximately USD 28 million (3.1% of sales) compared with an adjusted net loss of approximately USD 31 million in Q3 2015. The change in net income is mainly a result of the improvement in the Company’s gross profit and operating income and of recording tax income in the current quarter from the decrease in the US Dollar-NIS exchange rate in Q3 2016.
Net loss in Q3 2016 amounted to approximately USD 94 million compared approximately USD 31 million in Q3 2015. The decrease in net income is mainly a result of signing the growth agreement and recognizing employee early retirement expenses in respect of the agreement, which were partly offset by the increase in tax income, as explained above.
The order backlog at the end of Q3 2016 totaled approximately USD 8.2 billion compared with approximately USD 8.5 billion at the end of 2015. 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 2.3 years of operation.
The book to bill ratio in Q3 2016 is 0.85.
The positive cash flows from operating activities in Q3 2016 amounted to USD 72 million compared with positive cash flows from operating activities of USD 99 million in Q3 2015. The positive cash flows from operating activities mainly derive from changes in the Company’s working capital items.
Material events in Q3 2016
- On August 25, 2016, a special collective agreement was signed as part of the Company’s growth and restructuring process. The agreement is in effect for 36 months from the date of signing between the Company and ELTA Systems Ltd. and the Histadrut and the IAI National Employee Organization (“the growth agreement”).
- On September 3, 2016, Amos 6, the satellite manufactured by IAI, was lost during the refueling of the launcher made by SpaceX as a result of an explosion of the launcher which led to the total loss of the satellite. The Company estimates that it is fully covered by the insurance policy for this event.
