Israel Aerospace Industries (IAI) publishes its financial statements for Q2 2014.

Israel Aerospace Industries (IAI) publishes its financial statements for Q2 2014.

5% increase in scope of sales in Q2 of USD 939 million, compared to USD 896 million in the corresponding quarter of 2013
Decrease in net income: USD 12 million, compared to USD 18 million in the corresponding quarter of 2013. The decrease mainly arises from the weakening of the U.S. exchange rate in relation to the NIS and the slowdown in the commercial aviation market
Order backlog of USD 9.7 billion

August 11, 2014 -Israel Aerospace Industries Ltd. (“the Company” or “IAI”), Israel’s largest commercial and defense company, issues its consolidated interim financial statements for the quarter ended June 30, 2014.

Rafi Maor, IAI Chairman of the Board
Photo: IAI

Rafi Maor, Chairman of the Board:

“IAI continues to face challenging and complex markets, particularly with the continued security budget cutbacks in Israel and around the world. This, coupled with the low U.S. dollar exchange rate, greatly affects the Company, being an export-oriented with some 80% of sales made outside Israel. Despite these challenges, IAI presents a strong balance sheet and impressive liquidity which have been reflected lately in S&P Maalot’s reaffirmation of the Company’s credit ratings. Consequently, the capital market is expressing its vote of confidence in the Company. The issuance of debentures for an amount of NIS 463 million, which was successfully completed at the end of July in the context of the fighting in the south of Israel, was received 3.5 times larger demands and a lower, attractive closing interest rate, which reflects investors’ confidence in IAI’s performances and business. We will continue to focus our efforts on developing and expanding the Company’s business affairs and capabilities.”

Joseph Weiss, IAI Piesident and CEO
Photo: IAI

Joseph Weiss, Company President & CEO:

“The past few months, against the backdrop of the tensions and fighting in the south of Israel, reemphasized IAI’s central position at the core of Israel’s security and strength. The Company is working closely with the State’s military systems to find the best, quickest and most creative solutions for the country’s military operational needs. Looking forward, there is no doubt that we will need to continue making extensive investments in our R&D activity in order to keep providing our

customers with the most advanced solutions. Meanwhile, the business challenges we are facing make our business reality more complex than ever. Among other things, we are dealing with

delayed payments by the Ministry of Defense and the delay of new contracts with customers which have led to negative cash flows in the second quarter. The commercial aviation market is still experiencing a period of slowdown, which leads to increasing impairment of operating results in this area. Despite these challenges, we conclude the second quarter with a stable level of order backlog, an increase in revenues and continued investment in R&D from our own resources.”

Results of Q2 2014

The Company’s sales in Q2 2014 amounted to USD 939 million compared to USD 896 million in the corresponding quarter of 2013, a 5% increase. The increase in sales in the first quarter is mainly a result of the growth in the activities of the Bedek Aviation division, the Elta division and the Space and Commercial Aircraft divisions.

Sales for export in Q2 2014 accounted for 78% of sales (22% to Israel) which is similar to the corresponding quarter of 2013.

Gross profit in Q2 2014 amounted to approximately USD 131 million (gross profit margin of 14%) compared with approximately USD 148 million (gross profit margin of 16.5%) in the corresponding quarter of 2013, a decrease of 11%. The decrease in the gross profit margin resulted from the weakening of the U.S. dollar exchange rate in relation to the NIS, the transition to gross loss in the Bedek Aviation division as a result of the suspended aircraft conversion activity and the slowdown in the MRO subdivision.

Research and development expenses, net in Q2 2014 totaled approximately USD 41 million compared with approximately USD 47 million in the corresponding quarter of 2013 (accounting for 4.4% and 5.2% of sales, respectively). This represents a decrease of approximately USD 6 million, 13%. The decrease is a result of the short utilization of the annual budget in this specific quarter and does not point to a reduction in the level of annual resources which the Company invests in R&D activity from its own resources.

Expenses for early retirement of employees – in Q2 2014, 44 employees retired early from the Company at a cost of approximately USD 8 million. The employees’ early retirement is part of the Company’s ongoing streamlining plan and is financed using its independent resources.

Operating income in Q2 2014 amounted to approximately USD 18 million (1.9% of sales) compared with approximately USD 31 million (3.4% of sales) in the corresponding quarter of 2013, a decrease of approximately USD 13 million,42%, arising mainly from the decrease in the gross profit margin.

EBITDA in Q2 2014 amounted to approximately USD 49 million compared with EBITDA of approximately USD 58 million in the corresponding quarter of 2013, a decrease of USD 9 million, 15%.

Financial expenses, net in Q2 2014 amounted to approximately USD 9 million, similarly to the corresponding quarter of 2013. The financial expenses mainly arose from the Company’s debentures.

The Company’s share of losses of associates in Q2 2014 totaled USD 2 million, compared to approximately USD 1 million in the corresponding quarter of 2013.

Tax income, net in Q2 2014 totaled USD 5 million compared to tax expenses, net of USD 3 million in the corresponding quarter of 2013. The increase in tax income in the first quarter compared to the corresponding quarter of last year is mainly attributed to differences in the measurement basis arising from fluctuations in the U.S. dollar-NIS exchange rate.

The Company’s net income in Q2 2014 amounted to USD 12 million (1.3% of sales) compared with USD 18 million (2% of sales) in the corresponding quarter of 2013, a decrease of USD 6 million, reflecting a decrease of 33%, arising mostly from the decrease in the gross profit margin compared to the corresponding quarter of 2013.

At the end of the current quarter, the order backlog totaled USD 9.7 billion (of which USD 1.8 billion for sale in 2014) compared with USD 10 billion at the end of 2013, a decrease of 3%. The order backlog represents about 2.6 years of activity and about 83% of the order backlog is designed for sales to foreign customers. The order backlog is comprised of a variety of products in the military and commercial markets.

The book to bill ratio in the last four quarters is about 1.

The Company’s negative cash flows from operating activities in Q2 2014 amounted to USD 132 million compared with positive cash flows from operating activities of USD 286 million in the corresponding quarter of 2013. The decrease in cash flows mainly stems from changes in the Company’s working capital items resulting from delayed payments by the Ministry of Defense and the delay of new contracts with customers.

The balance of cash and cash equivalents and investments in short-term securities (liquid means) amounted to approximately USD 1.4 billion compared with approximately USD 2 billion as of December 31, 2013. As of June 30, 2014, the Company’s total liquid means are higher than the financial debt by USD 946 million. The decrease in cash balances arises from a second (and final) installment of principal on the debentures totaling approximately USD 144 million, the delay in payments by the Ministry of Defense and the delay of new contracts with customers.

Material events in the reporting period and after the balance sheet date:

On April 9, 2014, the Ofek 10 TECSAR observation satellite was successfully launched into orbit by a three-stage satellite launcher, both made by the Company.

On May 18, 2014, the Company signed an agreement with a foreign customer for the passenger-to-freighter conversion of four Boeing 767-300 aircraft into a cargo configuration.

In May 2014, S&P Maalot reaffirmed the Company’s local credit rating at AA-/stable.

On June 1, 2014, the Company repaid holders of debentures (series A) the second (and final) installment of principal on the debentures to a total of approximately USD 144 million.

On July 29, 2014, the Company issued to the public NIS 463 million (approximately USD 135 million) of par value of debentures (series D).

Condensed balance sheet data (USD in millions)

	June 30, 2014		December 31, 2013
	Amount	% of total balance sheet	Amount	% of total balance sheet

The Group’s total assets	4,785	100%	5,006	100%

Current assets	3,756	79%	4,012	80%
Of which:
Cash and current investments in financial assets	1,386	29%	1,957	39%
Income receivable from works in progress, net	850	18%	696	14%

Current liabilities	3,100	65%	3,288	66%
Of which:
Payables for works in progress	1,771	37%	1,885	38%

Equity	1,039	22%	1,022	20%

Current ratio	1.21		1.22
Quick ratio	1.01		1.04

Condensed profit and loss data (USD in millions)

			Increase (decrease) compared to			Increase (decrease) compared to
	Six months ended June 30,		corresponding quarter	Three months ended June 30,		corresponding quarter
	2014	2013	last year	2014	2013	last year

Sales	1,918	1,745	9.9%	939	896	4.8%

Gross profit	262	270	-2.9%	131	148	-11.3%

% of gross profit from sales	13.7%	15.5%		14.0%	16.5%

Research and development expenses	82	76	8.6%	41	47	-11.5%
Costs of early retirement	18	24	-23.9%	8	11	-25.0%

Net income (loss)	21	37	-44.0%	12	18	-35.4%

% of net income from sales	1.1%	2.1%		1.3%	2.0%

EBITDA (*)	92	108	-14.4%	49	58	-15.4%

% of EBITDA from sales	4.8%	6.2%		5.2%	6.5%

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

About Israel Aerospace Industries

Israel Aerospace Industries, Ltd. (IAI) is Israel’s largest defense industry and a globally recognized leader for the defense and commercial markets. IAI provides unique and cost-effective technological solutions for a broad spectrum of needs in space, air, land, sea and homeland defense, including: maintenance and conversion of commercial aircraft, unmanned air and ground vehicles, radars, secure communications, AEW, EW, ELINT/ESM, SIGINT and COMINT/COMJAM, air-to-air refueling, upgrading of military aircraft and helicopters, Anti-Tactical Ballistic Missiles (ATBM), optronic payloads, navigation, smart weapons, missiles, commercial satellites and launchers, mine detection, clearing and breaching systems and many other core technologies, products and services.

In the pictures:

Rafi Maor, IAI’s Chairman of the Board

Joseph Weiss, IAI’s CEO & President

For further information, please contact:

Eliana Fishler;

Senior VP Communications;

972-3-935-8509, 972-54-434-2040;

efishler@iai.co.il