Elbit Systems - Earnings Call - Q2 2025

Transcript

Speaker 7

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' second quarter 2025 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. I would now like to hand over the call to Daniella Finn, Elbit Systems' Vice President of Investor Relations. Daniella, please go ahead.

Speaker 3

Thank you, Daniella. Good day, everyone, and welcome to our second quarter 2025 earnings call. On the call with me today, Elbit Systems' Yaacov Kagan, President and CEO, and Rami Myerson, CFO. Before we begin, I would like to point out that the safe harbor statement in the company's press release issued earlier today also refers to the content of this conference call. As usual, we will provide you with both GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today's press release.

As usual, Rami will begin by providing a discussion of the financial results, followed by Yaacov, who will talk about some of the significant developments during the quarter and beyond. We will then turn the call over to the question and answer session. With that, I would like to now turn the call over to Rami. Rami, please go ahead.

Speaker 6

Thank you, Daniella. Hello, everyone, and thank you for joining us today. We are very pleased to announce another set of quarterly results with strong double-digit year-over-year growth across all parameters. We recorded growth across all business segments and geographies, especially in Europe, as well as margin expenses. Backlog increased 12% from the current quarter in 2024, and free cash flow generated this quarter totaled $71 million. I will now highlight and discuss some of the key figures and trends in our financial results this quarter. Second quarter 2025 revenues were $1,973 million compared to $1,626 million in the second quarter of 2024. In the second quarter of 2025, Europe contributed 29%, North America 21%, Asia-Pacific 13%, and Israel was 34% of revenues. Demand continued to be robust in all three geographies, as evidenced in the higher sales in all geographies this quarter.

GAAP gross margin in the second quarter was 24% of revenue, compared to 24% in the second quarter of 2024. The non-GAAP margin for the second quarter was 24.4% of revenues, compared to 24.4% in the second quarter of 2024. GAAP operating income for the second quarter was $157.8 million, or 8% of revenues, versus $116.5 million, or 7.2% of revenues in the second quarter of 2024. Non-GAAP operating income was $175.1 million, or 8.9% of revenues, compared with $130.5 million, or 8% of revenues in the second quarter of last year. We are very pleased with this margin expense, which is a result of the company's joint effort to improve profitability. The operating expense breakdown in the second quarter was as follows: Net R&D expenses were $129.7 million, or 6.6% of revenues, compared to $116.8 million, or 7.2% of revenues in the second quarter of 2024. Elbit Systems Ltd.

continues to invest in R&D to develop cutting-edge technological products and systems solutions, which will maintain Elbit's position as a market leader. Marketing and selling expenses were $91.5 million, or 4.6% of revenues, versus $87.7 million, or 5.4% in the second quarter of 2024. G&A expenses were $93.9 million, or 4.8% of revenues, compared to $68.7 million, or 4.2% of revenues in the second quarter of 2024. The increase in G&A expenses for the second quarter of 2025 was mainly due to one-time expenses incurred during the current quarter. G&A expenses during the second quarter of 2024 were lower than average. Financial expenses were $31.2 million in the second quarter, compared to $29.1 million in the second quarter of 2024.

Financial expenses during the quarter were impacted by the relatively soft fluctuations of exchange rates, by the strong free cash flow from the beginning of the year, and from the offering for fees that, in the short term, decreased the company's loan portfolio. We recorded a tax expense of $7.1 million in the second quarter, compared to $11.3 million in the second quarter of 2024. The effective tax rate in the second quarter of 2025 was 5.6%, compared to 13.2% in the second quarter of 2024. The decrease in effective tax rates for the second quarter of 2025 was mainly due to the increase in deferred tax assets and the settlement of tax assessments. GAAP diluted EPS was $2.69 for the second quarter of 2025, compared to $1.76 in the second quarter of 2024.

Our non-GAAP diluted EPS was $3.23 for the second quarter of 2025, compared to $2.08 in the second quarter of 2024. Quarterly segment revenue for the second quarter of 2025: Aerospace revenue increased by 12% year-over-year, mainly due to increase in precision-guided munitions sales in Israel and Asia-Pacific, and UAS sales in Europe. Chief Orion fiber revenues increased by 21% year-over-year, mainly due to radio systems and command and control system sales in Israel and in Europe. ISAR and EW revenues increased by 16% in the second quarter of 2025, mainly due to electro-optical system sales in Israel and electronic warfare system sales in Europe. Land revenues increased by 45% in the second quarter of 2025 due to ammunition and munitions sales in Israel and in Europe. Elbit Systems of America revenues increased by 4% due to the increase in maritime and war fighter systems sales.

Our order backlog as of June 30, 2025, was $23.8 billion, $2.6 billion higher than the backlog at the end of the second quarter of 2024, and $626 million higher than the backlog in the first quarter of 2025. The increase in backlog during the quarter came mainly from new international orders. Approximately 68% of current backlog is delivered from orders outside of Israel. Approximately 46% of the current backlog is scheduled to be performed during the remainder of 2025 and during 2026, and the rest is scheduled for 2027 and beyond. Cash flow provided by operating activities in the second quarter ended June 30, 2025, was $304 million, as compared to $26 million in the six months ended June 30, 2024. The cash flow in the six months ended June 30, 2025, was affected mainly by the strong increase in net income.

On the back of the continued strong financial performance of the company, the Board of Directors has decided to increase the dividend and declare a dividend of $0.75 per share, 60% higher than the dividend distributed last year and the second dividend raised this year. I will now turn the call over to Mr. Yaacov Kagan, Elbit Systems CEO. Yaacov, please go ahead.

Speaker 4

Thank you, Cody. Hello, everyone, and thank you again for joining us today. As Cody just described, there are indeed exceptional results with double-digit growth in all parameters of revenue and profitability growth across all our segments and geographies. I'm very pleased with these results. During the quarter, we carried out a successful share offering, raising $573 million net, with demand for the shares offered reaching three times the initial amount. These proceeds will help support and grow Elbit Systems Ltd. future businesses and enable us to increase our production capacity and deliver on the growing demand of our products. Additionally, these proceeds will potentially enable us to further expand via M&A activity, acquiring either new technologies or expanding our global reach. During the quarter, the conflict between Israel and Iran had escalated and resulted in a 12-day campaign against Iran.

Since the October 7th war, the Middle East has gone through significant changes. In many aspects, Israel Defense Forces stands to the technological superiority of Elbit Systems Ltd. Elbit played a key role in supplying Israel Defense Forces with our advanced technologies and solutions. These included the Hermes 900 drones armed with various payloads flying over the skies of Tehran, and shown on social media. Elbit Systems Ltd. provided crucial and continuous information, which was a key factor in defending our port. Electronic warfare self-protection suites played a vital role in protecting Israel Defense Forces aircraft. Our trainers made sure pilots and other fighters were professionally trained for one of the most complicated missions ever carried out. I'm extremely proud of all Elbit Systems Ltd.

employees who took part in this important mission and of all who contributed to the development of solutions that supported Israel Defense Forces during the conflict and since October 7th. For all of this, I am truly grateful. During the quarter and up until the announcement today, Elbit Systems Ltd. won additional significant deal contracts. This morning, we announced we were awarded a contract worth $1.625 billion to deliver a range of defense solutions to European countries over the next five years. Under the contract, Elbit will deliver a variety of its products and solutions, including a comprehensive military digitization and network combat solution, as well as tall-ship, super ICR suite of command and control applications, advanced hopping capabilities, and Poon's Lancer, a range of unmanned aerial systems such as the Hermes 900, Type III Lightning munition, and the Luminous Charger-level tactical drones, among others.

The contract also included a range of SIGINT capabilities, including electronic warfare and shield systems. This contract, among others in Europe, marks another important milestone in Elbit's expanding footprint in Europe and its growing operational efforts across the continent. A couple of weeks ago, Elbit was awarded a contract worth approximately $260 million by Airbus to supply its J-Music DIRCM self-protection systems for installation on the German A400M transport aircraft. We continue to gain traction with the Pulse Orbit Lancer in Europe, winning yet another contract to European countries for $130 million. In May, we received a delivery order valued at $110 million for SBMVG from the U.S. Marine Corps as part of the multi-year IDIQ contract previously secured. These systems will support the U.S. Marine Corps missions in operation with low light and no light conditions worldwide.

Elbit was also awarded a contract worth approximately $100 million to supply the advanced UT30 unmanned turret system to General Dynamics European Land Systems. The systems will be installed on the AXOS armed fighting vehicles and supplied for NATO and European countries. These systems will enhance the firepower and survivability of the AXOS vehicles. During the quarter, we were awarded several contracts valued at approximately $330 million by international customers, including NATO member countries, to supply a broad range of advanced naval technologies and solutions, including electronic warfare and anti-submarine warfare systems, modernizing and upgrading floor guns, combat management systems, and more. Last but not least, two days ago, we announced two contract wins for about $250 million for the supply of airborne munitions to the Israeli Ministry of Defense. Despite some delays due to the ongoing conflicts in our region, we are progressing well with the Ramat Beka site.

Construction is continuing, and initial production is expected towards the end of this year. This production site will be state-of-the-art and will include automated AI and robotics solutions and platforms to enable automotive facility efficiency. I'm truly inspired by our employees, by our employees' dedication and commitment to the company, and would like to personally thank each and every one of our employees for contributing immensely to the success of the company. It wouldn't be possible without you. With that, we'll be happy to answer your questions. Operator?

Speaker 7

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly lift the handset before pressing the number. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Jordan Lames of Bank of America. Please go ahead.

Hey, good morning. Thanks for taking your question.

Good morning.

Going into the back half of the year, how should we think about the margin expansion and what's going to drive it?

Speaker 2

Thank you, Jordan, for the question, and good morning, guys. We are paying a lot of attention and a lot of efforts into expanding our margins, as demonstrated in the last three years, where we enjoyed around 3% margin expansion. As we demonstrated in the past, we are committed to continue improving the margin by our new ERP, one ERP system, for instance, by operational leverage that is playing an important factor in the margin expansion and by other needs.

Got it. If I could, too, could you guys give any updates on Iron Beam or what you're seeing in the supply chain, specifically for FRMs?

Speaker 4

On Iron Beam? Yeah, we are developing and delivering the high-power laser tools for the Iron Beam solution. The Iron Beam solution is led by Rafael, who are the main integrator of the system. However, the laser part is coming from us. We are starting the delivery. We are starting to deliver the first unit through our plan for integration quite soon, and we expect to deploy the system by the end of this year. In parallel, we are developing the prime and airborne high-power solution for the Israel Defense Forces, and there is a lot of interest for this solution for our customers, international customers as well globally. Thank you so much.

Speaker 7

Okay, Jordan, next question is from Sheila Teigel of JetWings. Please go ahead.

Good morning, guys, and thank you so much for the time. Can you hear me okay?

Speaker 4

Yes.

Yes, good morning, Sheila.

Hi, how are you?

Okay. Let me go. Maybe just if we could start on the top line, you know year-to-date growth of 22% is pretty phenomenal. DRIP is even the mid-teen growth guidance for the year. You know, how do we think about the deceleration in the second half and how it looked for 2026 as you think about capacity utilization and all these new orders coming in?

Speaker 2

Hi, Sheila. As you know, we mentioned that we are looking at 2025 as mid-teams, and this is our internal targets. Looking forward, of course, to 2026, again, our internal targets are double-digit growth also for next year. I believe that the announcement this morning, of course, will support the backlog required to facilitate double-digit growth. Beyond that, as you know, our policy is not to give guidance. This is actually our internal targets and what we can provide.

No, thanks, Cody. Maybe any detail you could give on the segments. Obviously, LAND, 45% growth, is pretty spectacular, tracking ahead of your soft commentary on the $2.25 billion for the year. How long is that sustainable? Aerospace is also doing quite well. When we think about the new artillery award, it comes into just confirming it'll be in the LAND segment?

Sure. As you mentioned, Sheila, all segments actually did very well, and we had growth across all segments. As you mentioned, LAND especially became the biggest segment now in Elbit, with 45% increase year-over-year, almost more than $550 million. That will drive, we believe, additional growth in this segment, which enjoys very, very high demand for all the leading products. As we mentioned, it's not just ammunition, but also Iron Fist. We have the Sigma, which is the new Hovishar, which we're starting supplying now to the IDF. Also, the Rampage missile, which was heavily used during the 12-day Iran war, enjoys domestic and international demand. We believe that this segment is going to continue to grow in revenue and also further expand the margins.

Great. One last one, as I know, great job on turning around Elbit Systems America. How can we think about what's left to do there, whether it's restructuring or legacy loss-making contracts?

As we mentioned, we have turned around ESA. ESA was recording a loss in 2023, and we see an expansion in the margins, with, as you mentioned, flashing out losing contracts. Next quarter, Q3, will be the last quarter of Spartan, the maritime company, with the last quarter losing contracts. That will allow us to further increase, to further expand the margins in Elbit Systems America. This year and always will secure our next year's continued expansion in margin.

Great. Thank you so much. I appreciate the call.

Thank you, Sheila.

Speaker 3

Thanks, Sheila.

Speaker 7

If there are any additional questions, please press one. If you wish to cancel your request, please press star two. Please stand by while we poll for your questions.

Speaker 3

Hi, Ylla. It's Daniella. I have a couple of questions from an investor who sent it to me over email. The first question is, given the strong demand for UAS counter-drone measures, what are the company's plans for future development? Could you also address the issue of potential exports of these solutions to Europe and to the U.S.?

Speaker 4

Thank you, Daniella. We have a system by the name of Ridgemon. This system is actually a combination of several technologies from the company, several technologies for detection and several technologies for effects. Talking about detections, there are radar technologies, EO technologies, seeking technologies, and others. Talking about effects, there are soft kill technologies, like jamming, energy weapon solutions, and healthy solutions as well. All of these are combined together into a coherent solution. The name of this system is Ridgemon. This system was delivered and heavily used successfully by the Israel Defense Forces in Israel. I'm happy to say that it was also exported to other countries. We have a handful of customers abroad. One of them is the Dutch Army, who have chosen this system. There are additional countries in NATO which acquired this system from us.

There are other customers around the globe for this system as well. This system is a combination of many good technologies from the company and all fused together with AI. We believe that this is one of the most advanced solutions which is available in the market right now.

Speaker 3

Thank you, Butsi. The second question from Hen Carrick from Excellence. Hen, thank you very much for your questions today. It's with regards to your CapEx investments. We saw during the quarter a total amount of $72 million, which is lower than the figure in the corresponding quarter last year. What can we expect in terms of the pace of capital investments during the year, and what is the total expenditure expected for 2025?

Speaker 2

Thank you, Daniella, and thank you, Hen. As mentioned in the first quarter, we enjoyed the governmental evacuation fund from the Israeli land authorities. That drove Q1 CapEx investment down. The running rate of the CapEx investment is around $250 million, and we are currently looking at expanding the investment based on the follow-on offering, that money that was received during May.

Speaker 3

Thank you, Cody. The final question from Hen, regarding Israel's geopolitical positioning. On one hand, we are seeing a lot of demand for defense security applications. On the other hand, Israel is in a tough geopolitical predicament. How is the company experiencing these difficulties? Obviously, apart from the big announcement that we saw this morning.

Speaker 4

Yeah. All I'd like to say is that, Daniella, as you mentioned, there is a growing demand for the current solution right now worldwide. Elbit is in a unique position to offer a very advanced portfolio. Like you saw this morning in our announcement, actually, what we are able to provide is an integrated solution for customers. We are able to sit with the customer and help him to shape a transformation in resources. This is based on the operational experience we have and the very wide portfolio we have, connecting all of those together into one coherent payment solution, which enables a country to live with its operational capabilities. That kind of partnership that Elbit is able to offer is very unique. We are in a very unique position here.

I can say that there is a lot of interest from many, many customers worldwide to understand the breadth of the portfolio we have, the operational experience we have. We have very good, there are many, many discussions every day with many customers in Europe as well as in other places to try to understand how we are doing, what we did in Iran, for example, and to understand also what is exportable and how we can help these countries to get such capabilities for themselves as well. On top of this, I would like to mention that we are working abroad mainly via our subsidiaries. We have about 40 subsidiaries worldwide, quite a lot in Europe as well, almost all over the continent. What we are offering to our customers is not buying directly from Elbit Israel.

We are also enabling our customers to work via the subsidiaries, which helps them to speak their own language and to do development locally, to do production locally, to create jobs, to boost their economy. This is also a very unique position that we are in, and that's also a big advantage that we have. We are working also with many partners abroad. Just to give an example, in Germany, as was just mentioned, we are working with Airbus to promote our J-Music DIRCM system on the A400M. We are working with DIN and with CANDS to promote the pulse and the rocket solutions, not just for Germany, but also for Europe. We are in a unique position to offer very advanced solutions, based on our wide portfolio, operational experience, and local jobs to support the local economies.

I believe that it's true that in some cases, for example, in France, which is not a customer of Elbit Systems Ltd. in general, there is some resistance to buying from Israeli companies. Altogether, I can tell you that the potential that we are seeing is huge. We've never faced so many opportunities like we face today. I believe that we are in a unique position to continue the growth of the company in the near future.

Speaker 7

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5900. In the Netherlands, please call 9720-9723-925-5900. A replay of the call will also be available at the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make a concluding statement?

Speaker 2

Thank you. I would like to thank everyone on the call for joining us today and for your continued trust and support of Elbit. Have a good day and goodbye.

Speaker 7

Thank you. This concludes the Elbit Systems Ltd. second quarter 2025 results conference call. Thank you for your participation. You may now go ahead and disconnect.