IAI Publishes Financial Results for 2017: Order Backlog at $11.2B

The company reports a profit boost with net income of $81 million and a record scope of engagements with customers of approximately $5.8 billion

IAI Publishes Financial Results for 2017: Order Backlog at $11.2B

Yossi Weiss, CEO of IAI (Photo courtesy of the company)

Israel Aerospace Industries (IAI), Israel's largest national military and civilian security defense company, issues its consolidated financial statements for the year ended December 31, 2017.

The Company reports a notable growth in profits with net income of USD 81 million coupled with a record scope of engagements in new transactions with customers totaling approximately USD 5.8 billion in 2017 and a growth in order backlog to USD 11.2 billion. Sales in 2017 totaled USD 3.5 billion. The Company's cash balances and liquidity amounted to approximately USD 1.6 billion, with positive cash flows from operating activities of USD 301 million.

"2017 was a year of turning points and achievements in IAI's business operations," Says Yossi Weiss, IAI's CEO. "The net income reported by the Company is the highest in recent years, and is backed by a series of outstanding transactions and achievements that are likely to be reflected in the business results in years to come. The scope of new transactions signed in the past year totaling USD 5.8 billion is the highest in IAI history, and reinforces its position in the frontline of homeland defense and aerospace companies across the globe. The growth in engagements has led to a huge increase of some USD 2.2 billion in order backlog, which is also expected to be expressed in a major boost in sales in the coming years.

"Simultaneously, IAI is reaping the fruits of the growth plan signed in the Company about 18 months ago. The improvement in business operations, resulting from the major restructuring of the Company's marketing function and penetrating new markets in the backdrop of operational efficiency measures adopted by the Company, are all key factors in the Company's continued growth. The Company's recent decision to establish an aviation division by consolidating the operations of three existing divisions into a single one will represent a significant step in enhancing the Company's business focus and operations. The improved business results were also accomplished by facing the current economic challenges in a highly competitive environment, also in view of the weakening of the US Dollar in recent months.

"We have identified great potential in the different markets worldwide with a growing demand for providing advanced solutions that address changing global threats. We will continue to make extensive investments in performing R&D activities and globally expanding IAI's business development efforts, including M&As aimed at improving the Company's global technological and business foothold to secure its position in the world".

Main Results in 2017

The Company's sales in 2017 amounted to USD 3,520 million compared with USD 3,577 million in 2016, a decrease of about 1.6%. The decrease in sales is a result of the decrease in the sales of the Military Aircraft Segment, the Civilian Aircraft Segment and the Systems Missiles & Space Segment, which was partly offset by the increase in sales of the Bedek Aviation Segment in view of the increased activity in the field of aircraft conversion into cargo configuration.

The considerable increase in order backlog in the past year in a total of approximately USD 2.2 billion, including in respect of the mega deals signed in the period, is not reflected in the Company's financial statements but is expected to be felt in the increase in sales in the coming years. The decrease in sales compared with 2016 reflects a decrease in the Company's order backlog in previous years (2014-2016).

Sales for export in 2017 accounted for 76% of sales (24% to Israel) compared with 77% (23% to Israel) in 2016.

Sales to the military market in 2017 accounted for 70% of sales (30% to the civilian market) compared with 73% (27% to the civilian market) in 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 2017 amounted to USD 538 million (15.3% of sales) compared with USD 477 million (13.3% of sales) in 2016. The increase of USD 61 million in gross profit mainly stems from the increase in the profits of the Bedek Aviation division in view of increased operating scopes and the improvement in the profits of the Military Aircraft division and the ELTA Systems division, mainly due to adjustment of estimated project finishing costs following engineering progress made in those projects and/or their conclusion.

Research and development expenses in 2017 totaled approximately USD 182 million compared with approximately USD 165 million in 2016 (accounting for about 5.2% and about 4.6% of sales, respectively). The increase is mostly a result of the increase in corporate-wide R&D investments.

Expenses/income from early retirement of employees – in 2017 the Company recorded income from the update of the provision for early retirement of employees totaling approximately USD 9 million, compared with expenses totaling approximately USD 175 million in 2016. The expense recorded in 2016 was mainly 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. As of December 31, 2017, 753 employees retired in the context of the growth agreement.

Operating income in 2017 amounted to USD 121 million (3.4% of sales) compared with an operating loss of USD 105 million in 2016 which mainly resulted from recording early retirement expenses in respect of employees following the signing of the growth agreement as explained above.

Operating income less early retirement expenses ("adjusted operating income") in 2017 amounted to USD 112 million (3.2% of sales) compared with adjusted operating income of USD 70 million (2% of sales) in 2016, an increase of USD 42 million, mainly deriving from the Company's improved gross profit.

EBITDA in 2017 amounted to USD 257 million (7.3% of sales) compared with USD 50 million (1.4% of sales) in 2016.

EBITDA less early retirement expenses ("adjusted EBITDA") in 2017 amounted to USD 248 million (7% of sales) compared with adjusted EBITDA of USD 225 million (6.3% of sales) in 2016, an increase of USD 23 million.

Net financial expenses in 2017 amounted to USD 29 million compared with USD 41 million in 2016. The decrease in financial expenses is mainly a result of exchange rate valuation gains in view of the weakening of the US Dollar in 2017. Moreover, in view of the increase in the Company's FCF as a result of the significant scope of engagements signed in 2017 and the related receipts, the Company recorded an increase in financial income from the yield on deposits which was offset by the increase in customer guarantee commissions.

The Company's share of earnings of associates - in 2017, a loss of approximately USD 3 million was recorded in respect of the Company's share of losses of associates as opposed to a gain of approximately USD 8 million in 2016. The loss arises from recognizing an impairment loss in respect of an investment in an associate in Q2 2017, which was partly offset by the increase in the operating scopes of associates in the aircraft conversion segment.

Net tax expenses - in 2017, the Company recorded net tax expenses of approximately USD 8 million compared with net tax income of approximately USD 28 million last year. The increase in tax expenses in 2017 mainly arises from recording tax expenses in view of the Company's improved pre-tax income in 2017, which was partly offset by tax income in respect of the measurement basis differences arising from the decrease in the US Dollar in relation to the NIS in 2017 at a rate which exceeded the decrease in 2016.

Net income less early retirement expenses ("adjusted net income") in 2017 totaled approximately USD 74 million (about 2.1% of sales) compared with adjusted net income of approximately USD 22 million in 2016, an increase of USD 52 million.

The order backlog at the end of 2017 amounted to approximately USD 11.2 billion compared with approximately USD 9 billion at the end of 2016, an increase of approximately USD 2.2 billion. 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 3.2 years of operation.

The book to bill ratio in 2017 is 1.62, reflecting the growth in the Company's engagement scopes.

The Company's positive cash flows from operating activities in 2017 amounted to USD 301 million compared with positive cash flows from operating activities of USD 156 million in 2016.

Main Results in Q4 2017

The Company's sales in Q4 2017 amounted to USD 984 million compared with USD 948 million in the corresponding quarter of 2016, an increase of 4%, mainly arising from the increase in sales of the Bedek Aviation Segment, Systems Missiles & Space Segment and ELTA Systems Segment. The increase was partly offset by the decrease in sales of the Military Aircraft Segment and Civilian Aircraft Segment.

Sales for export in Q4 2017 accounted for 77% of sales (23% to Israel), similarly to Q4 2016.

Sales to the military market in Q4 2017 accounted for 70% of sales (30% to the civilian market) compared with 75% (25% to the civilian market) in the corresponding quarter of 2016.

Gross profit in Q4 2017 amounted to USD 161 million (16.4% of sales) compared with USD 108 million (11.4% of sales) in the corresponding quarter of 2016.

Operating income in Q4 2017 amounted to USD 41 million (4.2% of sales) compared with operating loss of approximately USD 6 million in the corresponding quarter of 2016.

Net research and development expenses in Q4 2017 totaled USD 63 million (6.4% of sales) compared with approximately USD 51 million (5.4% of sales) in the corresponding quarter of 2016.

Net financial expenses in Q4 2017 amounted to USD 15 million compared with USD 24 million in the corresponding quarter of 2016, a decrease which mainly arises from recording exchange rate valuation gains as opposed to exchange rate valuation losses recorded in Q4 2016.

Net tax expense in Q4 2017 totaled USD 20 million compared with net tax expense of USD 7 million in the corresponding quarter of 2016.

Net income in Q4 2017 amounted to USD 4 million (0.4% of sales) compared with a net loss of USD 33 million in the corresponding quarter of 2016. The change is mainly due to the increase in gross profits.

The negative cash flows from operating activities in Q4 2017 amounted to USD 87 million compared with positive cash flows from operating activities of USD 225 million in Q4 2016.

Material Events in 2017

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.

Signing an agreement for the investment of the FIMI Fund in the Company's subsidiary - in December 2017, the transaction signed between the Company and its subsidiary, ImageSat International N.V. ("ISI"), with the FIMI Fund, a private investment fund ("FIMI"), according to which FIMI will invest USD 40 million in ISI in return for Preferred shares accounting for 53.6% of ISI's share capital was completed. Following the completion of the transaction, the Company's interests in ISI account for about 46.4% of ISI's share capital and the Company recognized a gain of approximately USD 7 million in other income.

On December 28, 2017, IAI's CEO announced his retirement from the Company after reaching legal retirement age. The Company began the process of appointing a new CEO.

In December 2017, IAI announced a business restructuring process for consolidating three business groups - the Bedek Aviation, Engineering and Civilian Aircraft Divisions - into a single aviation group. The Company began preparing for the restructuring.

In February 2018, the Company was notified by the New General Federation of Workers in Israel (the Histadrut) of a labor dispute and strike beginning on March 5, 2018, in the Company and in ELTA. As of the report date and following a cooling-off period as agreed between the parties, the Company has not yet received any notice of cancellation of the labor dispute or of the initiation or deferral of the strike or any other reference regarding this issue.