Showing an all-time record engagements with customers in excess of USD 4.5B
IAI issued its consolidated financial statements for the quarter ended September 30, 2017.
IAI reports a record scope of engagements in new transactions with customers totaling approximately USD 4.5 billion from the beginning of 2017, and a growth in order backlog to USD 10.8 billion.
IAI also reports sales totaling USD 840 million in the third quarter of the year, as well as net income of USD 10 million and operating income of USD 20 million. IAI’s cash balances and liquidity amounted to approximately USD 1.7 billion, with positive cash flows from operating activities of USD 41 million.
Joseph Weiss, president and CEO of IAI: “In the third quarter of 2017 we reached new heights in the scope of engagements signed by IAI and consequently in its order backlog, which are indicative of its business stability and of the horizon of continued growth and expansion into global markets in which IAI operates experienced this year. These achievements are mainly significant in view of the fierce competition in the markets and in the backdrop of the growing trend of prioritizing domestic production in many of IAI’s target countries. The large scope of engagements with customers signed in the course of the year are expected to be reflected also in the sales turnovers of the coming years, as more progress is achieved in mega projects that represent some of the most substantial transactions in the history of Israel’s homeland defence industries. We are simultaneously experiencing the results of the growth agreement signed in IAI, with a significant drop in salary expenses in the past quarter. IAI’s Management is constantly acting to optimize and leverage IAI’s outstanding technological capabilities and human capital while exploring potential steps aimed at improving its business focus and enhancing the synergies between IAI’s diverse and versatile operations.”
Main results in Q3 2017
IAI’s sales in Q3 2017 amounted to USD 840 million compared with USD 893 million in Q3 2016, a decrease of about 5.9%.
The decrease in sales in Q3 2017 compared with Q3 2016 is a result of the decrease in the revenues of most of IAI’s divisions, which was partly offset by the increase in the sales of the Aircraft Maintenance and Overhaul (Bedek Aviation) division owing to increased scopes of activity in this division.
The considerable increase in order backlog in the past year in a total of approximately USD 2.6 billion, including in respect of the mega deals signed in the period, is not reflected in IAI’s financial statements but is expected to be felt in the increase in sales in the coming years. The decrease in sales compared with the corresponding quarter of last year reflects a decrease in IAI’s order backlog in previous years (2014-2016).
Sales for export in Q3 2017 accounted for 77% of sales (23% to Israel) compared with 76% (24% to Israel) in Q3 2016.
Sales to the military market in Q3 2017 accounted for 67% of sales (33% to the civilian market) compared with 69% (31% to the civilian market) in Q3 2016. The increase in the sales volume to the civilian market reflects the decrease in the revenues of the military divisions as opposed to the increase in the operating scope of the Bedek Aviation division, mainly in the aircraft conversion segment.
Gross profit in Q3 2017 amounted to USD 116 million (13.8% of sales) compared with USD 135 million (15.1% of sales) in Q3 2016. The decrease in gross profit compared with the corresponding quarter of 2016 arises from recording a non-recurring income in Q2 2016 (decrease in salary costs of USD 18 million) in respect of adjustment of employee accruals following the signing of the growth agreement with the Workers’ Union in August 2016.
After neutralizing the non-recurring income mentioned above, IAI recorded a decrease in salary expenses as a result of the implementation of the growth agreement, despite the decline in the US Dollar average exchange rate compared with the corresponding quarter of 2016.
Research and development expenses in Q3 2017 totaled approximately USD 39 million, compared with approximately USD 44 million in Q3 2016 (accounting for about 4.6% and about 4.9% of sales, respectively).
Expenses for early retirement of employees – early retirement expenses in respect of employees in Q3 2017 amounted to a negligible amount, compared with USD 162 million in Q3 2016. The expense recorded in Q3 2016 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 September 30, 2017, 603 employees retired in the context of the growth agreement.
Operating income in Q3 2017 totaled USD 20 million (2.4% of sales) compared with an operating loss of USD 132 million in Q3 2016, deriving mainly from recognizing early retirement expenses of employees following the signing of the growth agreement as explained above.
The operating income after neutralizing early retirement expenses (“adjusted operating income”) in Q3 2016 amounted to USD 30 million (3.4% of sales).
EBITDA in Q3 2017 amounted to USD 49 million (5.8% of sales) compared with a negative EBITDA of USD 104 million in Q3 2016, mainly arising from recognizing early retirement expenses of employees following the signing of the growth agreement.
The EBITDA after neutralizing early retirement expenses (“adjusted EBITDA”) in Q3 2016 amounted to USD 58 million (6.49% of sales).
Net financial expenses in Q3 2017 amounted to USD 7 million compared to USD 5 million in Q3 2016. The increase in financial expenses is mainly a result of exchange rate differences.
IAI’s share of earnings of associates – in Q3 2017, IAI recorded its share of earnings of associates in the amount of approximately USD 2 million as opposed to its share of earnings of approximately USD 1 million in Q3 2016.
Net income tax – in Q3 2017, IAI recorded net tax expenses of USD 5 million compared with net tax income of approximately USD 42 million in Q3 2016. The gap is mainly attributable to the transition to pre-tax losses in Q3 2016, mainly due to recognizing early retirement expenses of employees and differences in the measurement basis arising from the appreciation of the US Dollar in relation to the NIS in Q3 2017 in respect of which tax expenses were recognized, as opposed to the devaluation of the US Dollar in relation to the NIS in Q3 2016 in respect of which IAI recognized tax income. 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 Q3 2017 amounted to USD 10 million (1.2% of sales) compared with a net loss of approximately USD 94 million in Q3 2016, mainly resulting from recognizing early retirement expenses of employees following the signing of the growth agreement as explained above.
Net income after neutralizing early retirement expenses (“adjusted net income”) in Q3 2016 amounted to USD 28 million (about 3% of sales). The decrease in adjusted net income is mostly a result of recording tax expenses in respect of exchange rate differences in Q3 2017 as opposed to recording tax income in Q3 2016.
The order backlog at the end of Q3 2017 reached approximately USD 10.8 billion compared with approximately USD 9 billion at the end of 2016. 76% 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 years of operation.
The book to bill ratio for the period of 12 months ending on September 30, 2017 is 1.76, reflecting the growth in the scope of IAI’s engagements.
IAI’s positive cash flows from operating activities in Q3 2017 amounted to USD 41 million compared with positive cash flows from operating activities of USD 72 million in Q3 2016.
Material events in Q3 2017 and through the date of publication of the financial statements
• Signing an agreement for the investment of the FIMI Fund in IAI’s subsidiary – in November 2017, IAI and its subsidiary, ImageSat International N.V. (“ISI”), signed an agreement with the FIMI Fund, a private investment fund, according to which the FIMI Fund will invest USD 40 million in ISI in return for Preferred shares accounting for 53.6% of ISI’s share capital. Among others, consummation of the transaction is contingent on obtaining the approval of the Israel Antitrust Authority and of the Ministry of defence. If the conditions underlying the consummation of the transaction are not met within 150 days from the closing date, both the FIMI Fund and ISI may cancel the agreement. Once the transaction is consummated, IAI’s interests in ISI will drop to about 46.4% and it is expected to recognize a gain of between USD 7 million and USD 13 million. As of the date of the financial statements, the transaction has not yet been completed.
• In September 2017, IAI received a letter of claim from Spacecom Ltd. (“Spacecom”) in the context of an arbitration procedure on the grounds of the alleged damages and expenses in a total of USD 138 million (plus interest) incurred to Spacecom by IAI’s alleged violation of its undertakings to deliver the Amos 6 Communication Satellite on the predetermined date. IAI categorically dismisses Spacecom’s arguments and, based on its legal counsel, is of the opinion that it is more likely than not that the above claim will be dismissed.
