Israel Aerospace Industries (IAI), Israel's largest national military and civilian security defense company, has issued its consolidated financial statements for the quarter ended September 30, 2018.
IAI presents yet another increase in order backlog, reaching a record USD 12.5 billion at the end of the third quarter of 2018 (the order backlog is currently approximately USD 13.6 billion). The Company also reports an increase of 5% in sales compared to the corresponding quarter of last year, totaling USD 882 million, as well as a net loss of USD 21 million. The Company has cash balances in an aggregate of USD 1.5 billion and negative cash flows from operating activities totaling USD 56 million.
“The first sign of IAI's substantial order backlog, further boosted by the signing of two mega deals in India in the past quarter, is beginning to be reflected in increased sales, a trend which is expected to continue into the coming quarters,” said CEO Nimrod Sheffer. “The loss recorded in this quarter despite the growth in sales arises from provisions recorded in respect of the materialization of various risks, mainly relating to existing development projects, and non-recurring provisions.
“In the months since coming into office as CEO of IAI, I, along with the Company's management, have led the process of designing a final revised business strategy simultaneously with a series of material business restructurings in the Company, headed by the consolidation of three business groups and an additional enterprise into a single business group which is in full swing. The restructured aviation group is expected to begin operating in early 2019. The Company will continue to face major challenges in the coming years, internally and externally. We are committed towards our employees, customers and partners to take every step necessary to ascertain that IAI is best equipped for providing the optimal solutions to them as well as pursuing continued growth and improved results."
Main Results in Q3 2018
The Company's sales in Q3 2018 amounted to USD 882 million compared with USD 840 million in Q3 2017, an increase of 5%.
The increase in sales in Q3 2018 compared to the corresponding quarter of last year is mostly a result of the increase in the revenues of the Systems Missiles & Space Group.
Sales for export in Q3 2018 accounted for 76% of sales (24% to Israel) compared with 77% (23% to Israel) in Q3 2017.
Sales to the military market in Q3 2018 accounted for 72% of sales (28% to the civilian market), compared with 67% (33% to the civilian market) in Q3 2017.
Gross profit in Q3 2018 amounted to USD 85 million (9.6% of sales) compared with USD 116 million (13.8% of sales) in Q3 2017. The decrease in the gross profit margin mainly arises from recording a loss from the derecognition of an intangible asset in the Bedek Aviation Group and from the operating results of ELTA.
Research and development expenses in Q3 2018 totaled approximately USD 31 million compared with approximately USD 39 million in Q3 2017 (about 3.5% and about 4.6% of sales, respectively).
Expenses for early retirement of employees: in Q3 2018, the Company recorded income from the adjustment to the provision for early retirement of employees in a negligible amount, similarly to Q3 2017. The effects of the continued retirement of employees in the context of the growth plan, including the early retirement agreement signed with the Workers' Committee in 2016, were not reflected in the financial statements as they had been recognized in full as a provision on the date of signing the agreement. As of September 30, 2018, some 866 employees retired in the context of the agreement.
Operating loss in Q3 2018 amounted to USD 19 million compared with operating income of USD 20 million in Q3 2017 (2.3% of sales). The decrease in operating income is mainly a result of recognizing a provision for the understandings reached with Boeing in the Aircraft Overhaul and Maintenance Services Group and the allowance for doubtful accounts recorded in the Systems Missiles & Space Group.
EBITDA in Q3 2018 amounted to USD 31 million compared with USD 49 million in Q3 2017.
Net financial expenses in Q3 2018 amounted to approximately USD 4 million compared with net financial expenses of USD 7 million in Q3 2017.
The Company's share of results of associates: in Q3 2018, the Company recognized income in a negligible amount in respect of its share of earnings of associates as opposed to income of approximately USD 2 million carried in Q3 2017.
Net tax expenses: In Q3 2018, the Company recorded net tax income of approximately USD 2 million compared with net tax expenses of approximately USD 5 million in the corresponding quarter of last year. The change in tax expenses arises from the initial adoption of legislative amendments effective from 2018 and thereafter which allow the Company to calculate its taxable income for tax purposes in USD (its functional currency), which significantly mitigates the sensitivity of tax expenses to changes in the USD-NIS exchange rate.
Net loss in Q3 2018 totaled USD 21 million compared with net income of USD 10 million in Q3 2017 (1.2% of sales). The decrease in net income mainly arises from the decrease in operating income.
The order backlog at the end of Q3 2018 amounted to approximately USD 12.5 billion compared to approximately USD 11.2 billion at the end of 2017. 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 3.4 years of operation. The order backlog currently amounts to approximately USD 13.6 billion.
Negative cash flows from operating activities in Q3 2018 amounted to USD 56 million compared with positive cash flows from operating activities of USD 41 million in Q3 2017. The negative cash flows from operating activities mainly arise from changes in the Company's working capital items - mainly a decrease in trade and other payables, an increase in trade receivables and an increase in contract assets, partly offset by an increase in contract liabilities and a decrease in inventories process.
Material Events in Q3 2018
Spacecom's claim against the Company for the loss of Amos 6 Satellite: In keeping with Spacecom's claims in the context of the arbitration proceeding based on Spacecom's arguments of the alleged damages and expenses incurred to it in a total of approximately USD 138 million as a result of the loss of Amos 6 Satellite, the Company received Spacecom's notice in May 2018 whereby the latter is asking to withdraw the claim for compensation for damages and retain the limited amount of compensation prescribed in the contract at USD 10 million only. In November 2018, an arbitration award was received according to which the Company is ordered to pay Spacecom compensation of USD 10 million plus legal expenses (in an immaterial amount).
Memorandum of understandings ("MOU") signed with Boeing in the aircraft conversion segment: On November 22, 2018, IAI and Boeing signed a nonbinding MOU whose adoption is subject to signing a final agreement. In the MOU, among others, the parties agreed on a fee mechanism whereby IAI will pay Boeing USD 17.5 million in return for the latter's waiver of any arguments in connection with the use of its IP by the Company and Boeing's undertaking to assign future contracts to the Company under the predetermined circumstances and terms, all subject to signing a binding agreement.
Financial covenants: As of the financial statement date, the Company is meeting its entire financial covenants. Also, as of the financial statement publication date, the Company is negotiating an amendment to the financial covenants. The Company estimates that it will be able to reach understandings with the banks and financial institutions on the amendment or waiver by the end of 2018 and therefore will not be in violation of the financial covenants as of December 31, 2018.
Engagements with a major customer's country: On October 24, 2018, the Company entered into an agreement with a government company in a major customer's country for joint manufacturing and supply of air defense weapons systems at an aggregate scope of USD 777 million over a period of nine years.
On October 29, 2018, the Company entered into an agreement with a major customer for the supply of advanced fire control air defense systems totaling about USD 550 million for a period of about four years.
Appointment of a CEO: In keeping with the Company's Board's decision of June 21, 2018 to appoint Mr. Nimrod Sheffer as CEO of IAI, on September 5, 2018, the appointment was approved by the relevant ministers as required in the Israeli Companies Law.