IAI Publishes its Annual Financial Statements for 2015

News Release

March 27, 2016 – Israel Aerospace Industries (“the Company” or “IAI“), Israel’s largest defense company, issued its consolidated financial statements for the year ended December 31, 2015.

The Company reports a challenging year with sales in an aggregate of USD 3.7 billion and net income of USD 9 million (the decrease in income arises mainly from recording a non-recurring loss of USD 27 million following a settlement reached with a major customer in the aero-assembly area). IAI has an order backlog of about 2.3 years of operation and a positive cash flow from operating activities of USD 47 million. Record sales were noted in Q4, totaling USD 1.042 billion, among others, due to the successful completion of several critical tests on highly complicated and central development projects in Israel and abroad. The year also noted the signing of a series of significant engagements for aircraft conversion to cargo configuration after a long period of stalemate in this division.

Rafi Maor, IAI Chairman of the Board
Photo: IAI

Rafi Maor, Chairman of the Board:

“The financial statements for 2015 are a reflection of the major challenges facing the Company, arising, among others, from ongoing changes in the global markets in which it operates as well as from the Company’s long-lasting structural issues, mainly in the civilian segments. Now more than ever, these challenges reinforce the fact that in addition to being a global leader at the forefront of technology and its proven ability to provide its customers the best and most advanced solutions, IAI is required to act with determination to improve its competitiveness and adapt itself to changing market conditions. We are simultaneously exploring new operational strategies and continuing the preparations for issuing IAI’s minority interests, which is planned for 2017, to allow us to continue developing IAI and secure its sustained growth.”

IAI CEO Joseph Weiss.
Photo: IAI.

Joseph Weiss, Company President & CEO:

“The 2015 results reflect the Company’s challenging position in the backdrop of the business environment in which it operates and in view of the issues which it faces from within and from without. In the past year, the Company has recorded major achievements in several areas: successfully completing tests of advanced systems that represent significant growth engines, winning strategic space and air defense contracts, signing a set of material aircraft conversion contracts, penetrating new markets, improving collaborations with companies across the globe and more.

Having said that, and particularly in the backdrop of the challenges involving the Company’s civilian activities, the Company is forced to carry out a comprehensive process to significantly enhance its competitiveness and regain its growth streak to benefit the future of its thousands of employees. We are currently taking steps to implement an overall efficiency plan which is based on a clear business vision. The plan consists of executing new business strategies, consolidating operations and resources and restructuring and streamlining different processes, including human resources and payroll costs. We are currently in the midst of this process, with its different aspects, while maintaining an open dialog with the workers’ organization in an aim to reach the necessary understandings. This is an essential process that will provide us with the tools needed to secure the future of the Company and its employees, and should therefore be executed as soon as possible.”

Main results in 2015

The Company’s sales in 2015 amounted to USD 3,708 million compared with USD 3,827 million in 2014, a decrease of 3%. The decrease in sales in 2015 compared with last year is mainly a result of the deferral of several complicated projects in the Systems Missiles & Space Segment and the decrease in the revenues of the Commercial Aircraft Group. This decrease was partly offset by the increase in the UAV division and in the division of passenger aircraft conversion to cargo configuration in the Aircraft Maintenance and Overhaul Segment.

Sales for export in 2015 accounted for 78% of sales (22% to Israel), similarly to 2014.

Sales to the military market in 2015 accounted for 75% of sales (25% to the civilian market) compared with 73% (27% to the civilian market) in 2014.

Gross profit in 2015 amounted to USD 495 million (13.3% of sales) compared with USD 571 million (14.9% of sales) in 2014. The decrease in gross profit mainly stems from recording a non-recurring loss of approximately USD 27 million following a settlement reached with a major customer in the aero-assembly division.

Net research and development expenses (less R&D grants) in 2015 totaled approximately USD 179 million (reflecting a total of USD 193 million in gross R&D expenses) compared with approximately USD 165 million (reflecting a total of USD 190 million in gross R&D expenses) in 2014 (accounting for about 4.8% and about 4.3% of sales, respectively).

Expenses for early retirement of employees – as part of the efficiency measures undertaken by the Company, in 2015, 113 employees retired early from the Company at a cost of approximately USD 18 million, compared to 105 employees who retired early with a cost of approximately USD 20 million in 2014.

Operating income in 2015 amounted to USD 47 million (1.3% of sales) compared with USD 141 million (3.7% of sales) in 2014, a decrease of 67% resulting from the decrease in gross profit and the increase in R&D expenses.

EBITDA in 2015 amounted to USD 162 million compared with USD 253 million in 2014, a decrease of about 36%.

Net financial expenses in 2015 amounted to USD 24 million compared with net financial expenses of USD 34 million in 2014. The change is mainly attributed to the increase in financial derivative transactions which was partly offset by the increase in interest expenses on debentures issued in the second half of 2014.

Net tax expenses – in 2015, the Company recorded net income tax expenses of approximately USD 13 million compared with net income tax expenses of approximately USD 73 million last year. The main decrease is attributed to deferred taxes in respect of measurement basis differences arising from changes in the US Dollar-NIS exchange rate since in 2015 a minor increase was recorded in the US Dollar-NIS exchange rate whereas in 2014 the US Dollar was revalued by about 12%. Tax expenses in respect of measurement basis differences represent accounting expenses (mostly in respect of deferred taxes) that arise since the Company reports to the Israeli income tax authorities in NIS whereas the presentation currency of the financial statements is the dollar.

Net income in 2015 amounted to USD 9 million (0.2% of sales) compared with net income of USD 27 million (0.7% of sales) in 2014. The decrease in net income is mainly a result of recording a non-recurring loss of USD 27 million following a settlement reached with a major customer in the aero-assembly division.

The order backlog at the end of 2015 totaled USD 8.5 billion compared with USD 9.1 billion at the end of 2014. 81% 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 Company’s positive cash flows from operating activities in 2015 amounted to USD 47 million compared with negative cash flows from operating activities of USD 193 million in 2014. The transition to positive cash flows from operating activities is mainly a result of changes in the Company’s working capital items.

Main results in Q4 2015

The Company’s sales in Q4 2015 amounted to USD 1,042 million compared with USD 975 million in the corresponding quarter of 2014, an increase of 6.8%, arising, among others, from sales of the Systems Missiles & Space Segment and the Aircraft Maintenance and Overhaul Segment following the successful completion of several tests in major projects.

Sales for export in Q4 2015 accounted for 77% of sales (23% to Israel) compared with 79% (21% to Israel) in the corresponding quarter of 2014.

Sales to the military market in Q4 2015 accounted for 76% of sales (24% to the civilian market) compared with 74% (26% to the civilian market) in the corresponding quarter of 2014.

Gross profit in Q4 2015 amounted to USD 158 million (15% of sales) compared with USD 146 million (15% of sales) in the corresponding quarter of 2014.

Operating income in Q4 2015 amounted to USD 21 million (2% of sales) compared with USD 45 million (5% of sales) in the corresponding quarter of 2014.

Net research and development expenses (less R&D grants) in Q4 2015 totaled USD 62 million (6% of sales), reflecting a total of USD 67 million in gross R&D expenses, compared with approximately USD 37 million (4% of sales), reflecting a total of USD 57 million in gross R&D expenses in the corresponding quarter of 2014.

Expenses for early retirement of employees – in Q4 2015, 21 employees retired early from the Company at a cost of approximately USD 4 million, compared to 5 employees who retired early with an immaterial cost.

Net financial expenses in Q4 2015 amounted to USD 6 million compared with net financial expenses of USD 12 million in the corresponding quarter of 2014.

Net tax income in Q4 2015 totaled USD 3 million compared with net tax expenses of USD 30 million in the corresponding quarter of 2014.

Net income in Q4 2015 amounted to USD 18 million compared with net income of USD 2 million in the corresponding quarter of 2014.

The positive cash flows from operating activities in Q4 2015 amounted to USD 214 million compared with positive cash flows from operating activities of USD 398 million in Q4 2014.

Material events in 2015

On May 1, 2015, the Company repaid to holders of debentures (series B) the first installment (of three installments) of the debenture principal in a total of approximately USD 38 million.
In December 2015, the Company successfully completed two more test interceptions of air defense weapon systems representing major projects in the Company.
In December 2015, the Company completed a successful first engagement of a ballistic missile target with the Arrow-3 interceptor.
In the course of 2015, the Company entered into transactions for converting 14 767-300 passenger aircraft to cargo configuration and a transaction for converting four 767-700 (NG) passenger aircraft to cargo configuration.

Material events after the reporting date

In January 2016, an agreement was signed for the acquisition of the TSG Division, the military division of Ness Technologies in collaboration with Formula Systems.
In January 2016, the Company launched a civil aviation maintenance center in China in collaboration with a local company.
In January 2016, a long-term strategic agreement was signed with Boeing.

Condensed balance sheet data (USD in millions)

	December 31, 2015		December 31, 2014
	Amount	% of total balance sheet	Amount	% of total balance sheet

The Group’s total assets	4,707	100%	4,782	100%

Current assets	3,755	80%	3,751	78%
Of which:
Cash and current investments in financial assets	1,399	30%	1,532	32%
Income receivable from work in progress, net	815	17%	764	16%

Current liabilities	3,055	65%	3,101	65%
Of which:
Payables for work in progress	1,807	38%	1,797	38%

Equity	1,006	21%	939	20%

Current ratio	1.23		1.21
Quick ratio	1.02		1.00

Condensed profit and loss data (USD in millions)

	Year ended December 31,		Increase (decrease) compared to	Year ended December 31,		Increase (decrease) compared to
	2015	2014	last year	2015	2014	last year

Sales	3,708	3,827	(3.1%)	1,042	975	6.9%

Gross profit	495	571	(13.3%)	157	146	8.2%
% of gross profit from sales	13.3%	14.9%		15.1%	14.9%

Research and development expenses	179	165	8.5%	62	37	67.9%
Costs of early retirement	18	20	(10.2%)	4	(1)	(418.7%)

Net income	9	27	(67.1%)	18	2	922.9%
% of net income from sales	0.2%	0.7%		1.7%	0.2%

EBITDA (*)	162	253	(36.2%)	37	29	28.0%
% of EBITDA from sales	4.4%	6.6%		3.6%	3.0%

(*) Operating income before financial expenses (income), net and tax expenses (income), with the addition of depreciation and amortization.

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Israel Aerospace Industries:

IAI Ltd. is Israel’s largest aerospace and defense company and a globally recognized technology and innovation leader, specializing in developing and manufacturing advanced, state-of-the-art systems for air, space, sea, land, cyber and homeland security. Since 1953, the company has provided advanced technology solutions to government and commercial customers worldwide including: satellites, missiles, weapon systems and munitions, unmanned and robotic systems, radars, C4ISR and more. IAI also designs and manufactures business jets and aerostructures, performs overhaul and maintenance on commercial aircraft and converts passenger aircraft to refueling and cargo configurations.

In the picture:

Rafi Maor- Chairman of the Board

Joseph Weiss- President and CEO

Eliana Fishler

Senior VP Communications

Tel: + 972-3-935-8509

efishler@iai.co.il

www.iai.co.il