Elbit Systems Ltd. (ESLT) Q2 2025 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Second Quarter 2025 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand over the call to Daniella Finn, Elbit Systems VP, Investor Relations. Daniella, please go ahead.

Thank you, Ila. Good day, everyone, and welcome to our second quarter 2025 earnings call. On the call with me today are Butzi Machlis, President and CEO; and Kobi Kagan, 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 contents of this conference call. As usual, we will provide you with both GAAP financial data as well as certain supplement 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, Kobi will begin by providing a discussion of the financial results, followed by Butzi, who will talk about some of the significant developments during the quarter and beyond. We will then turn the call over to question-and-answer session. With that, I would like to now turn the call over to Kobi. Kobi, please go ahead.

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 expansion. Backlog increased 12% from the corresponding 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 billion compared to $1.626 billion 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 3 geographies as evident in the higher sales in all geographies this quarter. GAAP gross margin in the second quarter was 24% of revenues 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 expansion, 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 continues to invest in R&D to develop cutting-edge technological product and 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 onetime 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 sharp fluctuations of exchange rate by the strong free cash flow from the beginning of the year and from the offering proceeds 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 rate 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 Munition sales in Israel and Asia Pacific and UAS sales in Europe. C4I and Cyber revenues increased by 21% year-over-year, mainly due to radio systems and command and control system sales in Israel and in Europe. ISTAR and EW revenues increased by 15% 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 munition sales in Israel and in Europe. Elbit Systems of America revenues increased by 4% due to the increase in maritime and warfighters 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 6 quarter (sic) [ months ] ended June 30, 2025, was $304 million as compared to $26 million in the 6 months ended June 30, 2024. The cash flow in the 6 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, 50% higher than the dividend distributed last year and the second dividend raised this year. I will now turn the call over to Mr. Machlis, Elbit's CEO. Butzi, please go ahead.

Thank you, Kobi. Hello, everyone, and thank you again for joining us today. As Kobi just described, there are indeed expectational 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 3x the initial amount. These proceeds will help support and grow Elbit future businesses, enabling 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 has escalated and resulted in a 12-day campaign against Iran. Since the October 7 war, the Middle East has gone through significant changes in many aspects, thanks to the technological superiority of the IDF. Elbit played a key role in supplying the IDF with our advanced technologies and solutions. These included the Hermes 900 drones armed with various payloads flying over the sky of Tehran as shown on social media. ISR system provided crucial and continuous information, which were a key factor in defending our posts. EW self-protection tools played a virtual role in protecting the IDF aircrafts. Our trainers made sure pilots and other fighters were professionally trained for one of the most complicated missions ever carried out. I am extremely proud of all Elbit employees who took part in this important mission and of all who contributed to the development of solutions that supported the IDF during the conflict and since October 7. For all of this, I am truly grateful. During the quarter and up until the announcement today, Elbit won additional significant new contracts. This morning, we announced we were awarded a contract worth $1.625 billion to deliver a range of defense solutions to European country over the next 5 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 Torch-X C4ISR suit of command-and-control applications, advanced working capabilities and [indiscernible] a range of unmanned aerial systems such as the Hermes 900, Skylark 3, loitering munitions and the luminous soldier level tactical drones among others. The contract includes -- also included a range of ISTAR capabilities, including electric warfare and SIGINT systems. This contract, among others in Europe, marks another important milestone in Elbit expanding footprint in Europe and it's growing operational across the continent -- it's growing operations across the continent. A couple of weeks ago, Elbit was awarded a contract worth approximately $260 million by Airbus to supply its J-MUSIC Directed Infrared Counter Measures, self-protection system, for installation on the German A400 transport aircraft. We continue to gain traction with the PULS rocket launcher in Europe, winning yet another contract to European country for USD 130 million. In May, we received a delivery order value of $110 million for SBNVG from the Marine Corps as part of the multiyear ID/IQ 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 ASCOD armored fighting vehicles and supplied to a NATO European country. These systems will enhance the firepower and survivability of the ASCOD vehicles. During the quarter, we were awarded several contracts valued approximately $330 million by international customers, including NATO member countries to supply a broad range of advanced naval technological and solutions, including electrical warfare and anti-submarine warfare systems, modernizing and upgrade programs, combat management systems and more. And last but not least, 2 days ago, we announced 2 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 conflict in our region, we are progressing well with the Ramat Beka site. Construction is continuing and initial production are expected towards the end of this year. This production site will be a state-of-the-art and will include automated AI and robotic solutions and platforms to enable utmost facility efficiencies. I'm truly inspired 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. And with that, we will be happy to answer your questions. Operator?

[Operator Instructions] The first question is from Jordan Lyonnais of Bank of America.

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

Thank you, Jordan, for the question. We are paying a lot of attention and a lot of effort into expanding our margins as demonstrated in the last 3 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 means.

Got it. And then if I could to -- could you guys give any updates on R&D or what you're seeing in the supply chain, specifically for SRM?

On IRON BEAM -- yes, we are developing and delivering the high-power laser source for the IRON BEAM solution. And the IRON BEAM solution is led by Rafael, who are the main integrator of the system. However, the laser part is coming from us. And we are starting the delivery -- we are starting to deliver the first unit to Rafael 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 Israeli Air Force, and there is a lot of interest for this solution for other customers -- international customers as well globally.

The next question is from Sheila Kahyaoglu of Jefferies.

Maybe just if we could start on the top line. Year-to-date growth of 22% is pretty phenomenal, derisks even the mid-teens growth guidance for the year. How do we think about the deceleration in the second half and outlook for '26 as you think about capacity utilization and all these new orders coming in?

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

Maybe any detail you could give on the segments. Obviously, land 45% growth in Q2, pretty spectacular, tracking ahead of your soft commentary on the $2.25 billion for the year. How long is that sustainable and aerospace is also doing quite well. And when we think about the new artillery award, it comes into -- just confirming, it would be in the land segment?

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

Great. And one last one, if I may. Great job on turning around ESA. How could we think about what's left to do there, whether it's restructuring or legacy dilutive contracts?

As we mentioned, we have turned around ESA. ESA was recording a loss in 2023. And we see expansion in the margins with -- as you mentioned, with flushing out losing contracts. We -- this next quarter, Q3 will be the last quarter of Sparton, 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 next year continued expansion in margin.

[Operator Instructions].

Ila, it's Daniella and I have a couple of questions from an investor who sent it to me over e-mail. The first question is what -- given the strong demand for UAS counterdrone measures, what are the company's plans for future development? And could you also address the issue of potential exports of these solutions to Europe and to the U.S.

We -- thank you, Daniella. We have a system by the name of ReDrone, and this system is actually a combination of several technologies from the company, several technology for detections and several technologies for effectors. And talking about detection, there are radar technologies, EO technologies, SIGINT technologies and others and talking about effectors, there are soft-kill technologies like jamming, energy weapon solutions and hard-kill solutions as well. All of these are combined together into a coherent solution. The name of this system is ReDrone. This system was delivered and heavily used successfully by the IDF in Israel. And 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. And there are additional country in NATO, which acquired this system from us, and there are other customers around the globe for this system as well. This is actually -- this system is a combination of many good technologies from the company and all fueled together with AI, and we believe that this is one of the most advanced solutions, which is available in the market right now.

Thank you,. And the second question from [indiscernible]. Thank you very much for your questions today. It's with regards to CapEx investments. So 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?

Thank you, Daniella, and thank you, [indiscernible]. As mentioned in the first quarter, we enjoyed the governmental evacuation funds from the Israeli Land Authority. And 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.

Thank you, Kobi. And the final question from [indiscernible] regarding the 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?

Yes. So I would like to say is that, Daniella, as you mentioned, there is a growing demand for defense solution right now worldwide. And Israel -- Elbit is in a unique position to offer a very advanced portfolio. And 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 to help him to shape transformation for his forces. And this is based on the operational experience we have and the very wide portfolio we have, connecting all the dots together into one coherent very advanced solution, which enable the country to leapfrog with its operational capabilities. Such kind of partnership, that Elbit is able to offer, is very unique, and we are in a very unique position here. And 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. And we have very good -- there is -- 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. So actually, what we are offering to our customer is not buying directly from Elbit Israel. We are also enabling our customer to work via the subsidiaries and which helps them to speak their own language and to do development locally, to do production locally, to create jobs, to boost their economies. And this is also a very unique position that we are in, and that's also a big advantage that we have. And on top of this, we are working also with many partners abroad. And just to give you an example, in Germany, as was just mentioned, we are working with Airbus to promote our DIRCM system model, A400. We are working with this and with KNDS to promote the PULS and the rocket solutions, not just for Germany, also for Europe. So actually, 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. Now I believe that it's true that in some cases, for example, in France, which is not a customer of Elbit in general, there are some resistance to buy from Israeli companies. But altogether, I can tell you that the potential that we are seeing is huge. It was never -- we never faced so many opportunities like we face today, and I believe that we are in a unique position to continue the growth of the company in the near future.

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 in 2 hours after the conference ends. In the U.S., please call 1 (888) 782-4291. In Israel, please call (03) 925-5900. And internationally, please call (972) 3925-5900. A replay of the call will also be available at the company's website at www.elbitsystems. Mr. Machlis, would you like to make a concluding statement?

Thank you. I'd 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.

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.