ISRAEL AEROSPACE INDUSTRIES' FINANCIAL FIGURES FOR Q2 2012

Aug 29, 2012
• A loss of $22 million, mainly attributed to currency-hedging transactions carried out in the past and the erosion of a tax asset in consequence of devaluation of the Shekel
• Positive cash flow from current activities of $58 million
• Profit from activities of $28 million, an increase of 16%, compared to Q2 2011
• Backlog of $ 9.2billion
• Sales of $808 million, a decrease an increase of 14% compared to Q2 2011

Israel Aerospace Industries Ltd. (“the Company”) the leading security company in Israel, active in the military / security market and in the civil market, announced the publication of its consolidated financial statements for Q2, ending June 30, 2012.

Management’s statements:

Yossi Weiss, Company’s CEO: “The results of Q2 are unsatisfactory. Delays in development projects and devaluation in the exchange rate were the main reasons for the decline in the Company’s business results. The Company will continue to invest in technologies and products with technological innovation in order to preserve its technological and competitive edge. I trust that together with the Company’s management we will implement the changes required to quickly return to growth and profitability”.

Dov Baharav, IAI Chairman of the Board: “I am pleased to see Yossi assuming his office in this quarter. I trust that Yossi’s talent and energies will enable him to examine the current situation thoroughly and to lead the changes required for the Company to cope successfully with the current challenges and to continue to flourish and grow.”

Company’s sales for Q2 2012 reached $808 million, compared to $938 million in Q2 2011. Export sales represent 80% of total sales and reached $645 million. Military market sales represent 75% of total sales and reached $603 million.
The decrease in sales is attributed to a reduction in the scope of activity, mainly in the civil market in the area of engine maintenance and aircraft conversions, as well as to delays in development projects which resulted in deferred recognition of income.

Gross profit for Q2 2012 reached $130 million (16.1% of sales), compared to $121 million (12.9% of sales) for Q2 2011, an increase of 8%. The improvement in gross profit is mainly attributed to the significant effect of the devaluation of the Shekel on profitability.

Profit from activities for Q2 2012 reached $28 million (3.4% of sales), compared to $ 24 million (2.5% of sales) for Q2 2011. Part of the effect of the growth in gross profit was offset by an increase in marketing expenses.

Research expenses for Q2 2012 reached $37 million (4.5% of sales), compared to $34 million for Q2 2011 (3.6% of sales), an increase at a rate of 9%. Investment in R&D expenses is of the utmost importance in maintaining the Company’s technological edge and securing its future and development.

Costs of employees’ early retirement. In Q2 2012, 52 employees went on early retirement at a cost of $8 million, compared to $10 million for Q2 2011. The employees’ early retirement program, which began in 2006 and is being implemented in stages, is part of the Company’s streamlining program.

Net financing expenses for Q2 2012 reached $36 million, compared to $11 million net financing expenses for Q2 2011. Expenses of $28 million are attributed to the effect of the Shekel devaluation on hedging transactions carried out in the past and in respect of which there is no accounting hedging. These expenses were offset by income recorded in Q1 2012, due to revaluation of the Shekel. The effect of the hedging transactions, for which there is no accounting hedging, will terminate at the end of 2012, in light of the change in the Company’s currency protection policy during the last year.

Net loss for Q2 2012 reached $22 million, compared to a net profit of $33 million for Q2 2011. The loss is attributed to the effect of the devaluation of the Shekel on financing expenses for the quarter and on the tax expenses recorded due to erosion of a tax asset.

Backlog of $9.2 billion ensures over two and a half years of activity. 86% of the backlog is earmarked for sales to overseas customers. The backlog consists of a wide variety of products across a broad geographical spread.

Cash flow from current activities reached $58 million, compared to a negative cash flow from current activities of $201 million for Q2 2011.

Results of H1 2012:

Company’s sales for H1 2012 reached $1.7 billion, compared to $1.8 billion in H1 2011. Export sales represent 80% of total sales and reached $1.4 billion. Military sales represent 75% of total sales and reached $1.3 billion.

Gross profit for H1 2012 reached $268 million (15.8% of sales), compared to $234 million (13.1% of sales) for H1 2011, an increase of 14%. Improvement in gross profit is attributed to the significant effect of devaluation of the Shekel compared to H1 2011. It should be noted that H1 2012 includes one-time losses consisting of, among others, a loss of $7 million due to the cancellation of an export permit to Turkey by the Ministry of Defense.

Profit from activities for H1 2012 reached $58 million (3.4% of sales), compared to $56 million (3.1% of sales) for H1 2011. It should be noted that profit for 2011 included a $24 million one-time income from the sale of holdings in an associate company.

Research expenses for H1 2012 reached $75 million (4.4% of sales), compared to $67 million for H1 2011 (3.7% of sales), an increase of 12%.

Costs of employees’ early retirement. In H1 2012, 119 employees went on early retirement at a cost of $22 million, compared to $31 million for H1 2011.

Net financing expenses for H1 2012 reached $4 million, compared to $12 million for H1 2011.

Net profit for H1 2012 reached $32 million (1.9% of sales), compared to $79 million (4.4% of sales) for H1 2011.

Cash flow from current activities reached $94 million compared to a negative cash flow from current activities of $127 million for H1 2011.

1. On June 24, 2012 the Company signed an agreement with Space-Communication Ltd., for $200 million, for the development and manufacture of the Amos 6 Satellite and the provision of operating services throughout the satellite’s lifetime. The satellite is planned for a lifetime in space of at least 16 years. Its launch is scheduled for Q1 2015.

2. On July 19, 2012 Israel Aerospace Industries signed two agreements as part of a letter of understanding entered into between the Israeli Ministry of Defense and the Italian Ministry of Defense:

A. A transaction of $750 million, pursuant to which the Company will manufacture and supply two early-warning and control aircraft, including ground stations and logistics support.

B. A transaction of $182 million, pursuant to which the Company will develop, manufacture and supply an observation satellite. The satellite’s planned lifetime in space is about 7 years, and its supply is expected in 2015.

The Company’s backlog will increase due to these transactions by some $1.1 billion.