Elbit Systems Ltd. (ESLT) Q2 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Second Quarter 2026 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, operator. Hello, everyone, and welcome to our second quarter 2026 earnings call. On the call with me today are Butzi Machlis, President and CEO; Kobi Kagan, CFO; and myself, Daniella Finn. 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. I would like to remind all listeners that the conference call today may contain forward-looking statements regarding the company and its subsidiaries' business. Actual future results may differ materially from those forward-looking statements. 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 transparency to better 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. Kobi will begin by discussing the financial results, followed by Butzi, who will elaborate on the main events during quarter and beyond. We will then turn the call over to a Q&A 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're pleased to report another strong quarter, delivering double-digit growth in revenues, backlog, operating profit and EPS. Our profitability margins, gross, operating and net continue to expand, surpassing our internal targets. Building on the strong momentum we have established over the past several quarters, we continue to win important new business and expand our backlog to a record of $32 billion. Taking a closer look into the second quarter results. Second quarter revenues increased by 15.9% to $2,287 million compared to $1,973 million in the second quarter of 2025. We note the sequential revenue growth continues. For the second quarter of 2026, Europe contributed 25% of revenues; North America, 20%; Asia-Pacific, 14%; and Israel contributed 37% of revenues following inventory replenishments on the back of the recent conflict with Iran that ended at the beginning of April. Europe and Asia continue to be meaningful growth engines. In terms of quarterly revenues by segment, C4I and Cyber revenues increased by 11% in the second quarter of 2026 as compared to the second quarter of 2025, mainly due to sales of radio systems and command and control systems sales in Europe. ISTAR and EW revenues increased by 22%, mainly due to increased sales of airborne and land High Power Laser, Electronic Warfare and Maritime systems in Asia-Pacific. Land revenues increased by 32%, mainly to ammunition and munition sales in Israel. Elbit Systems of America revenues increased by 17%, mainly due to one-time favorable project mix during the quarter, and the increase in sales of Night-Vision Systems, Maritime systems and Electronic systems. Aerospace revenues decreased by 8% in the second quarter of 2026, mainly to a one-time unfavorable project mix and lower sales of training and simulation systems in Europe, partially offset by the increase in UAV sales in Israel. GAAP gross margin in the second quarter of 2026 was 25.3% of revenues compared to 24% in the second quarter of 2025. Non-GAAP gross margin for the second quarter was 25.6% compared to the second quarter of 2025 at 24.4%. We are pleased with the continued expansion of gross margins. GAAP operating income in the second quarter was $218.8 million or 9.6% of revenues as compared to $157.8 million or 8% of revenues in the second quarter of 2025, a 1.6% increase. Non-GAAP operating income was $237.5 million or 10.4% of revenues in the second quarter of 2026 as compared to $175.1 million or 8.9% of revenues in the second quarter of 2025, a 1.5% increase. With this margin expansion, we have surpassed our internal targets for operating margins. On March 31, 2026, the Knesset, the Israeli Parliament, enacted the law for the encouragement of research and development. This newly introduced R&D Law applies to qualifying R&D expenditures incurred at the beginning of the tax year starting January 1, 2026. This law is meant to encourage R&D efforts in Israel. We increased our R&D spend in the first half of the year by about $70 million, of which about half was funded by the new incentive law and the other half from company resources to support the future growth of the company, at the same time, maintaining the margin expansion. The operating expense breakdown for the second quarter of 2026 was as follows: net R&D expenses were $159.1 million or 7% of revenues as compared to $129.7 million or 6.6% of revenues in 2025. We remain committed to investing in next-generation technologies and advanced AI capabilities that expand our solutions portfolio, support our customers' evolving mission requirements and reinforce Elbit leadership position in key markets for years to come. Marketing and selling expenses were $103.2 million or 4.5% of revenues in the second quarter of 2026 as compared to $91.5 million or 4.6% of revenues in 2025. G&A expenses were $97.9 million or 4.3% of revenues in the second quarter of 2026 as compared to $93.9 million or 4.8% of revenues in the same period last year. Financial expenses were $22 million in the second quarter of 2026, as compared to $31.2 million in the second quarter of 2025. The decrease in financial expenses, net in the second quarter of 2026 was mainly due to the reduction in the average debt during the quarter. Taxes on income were $32.7 million in the second quarter of 2026 as compared to $7.1 million in the second quarter of 2025. The higher tax expense in the second quarter of 2026 was mainly driven by the implementation of the OECD Pillar II global minimum tax rules. The effective tax rate in the second quarter of 2026 was 16.4%, compared to 5.6% in the second quarter of 2025. GAAP diluted EPS for the second quarter of 2026 was $3.61, up 34% as compared to $2.69 in the second quarter of 2025. Our non-GAAP diluted EPS was $4.14 in the second quarter of 2026, up 28% as compared to $3.23 in the second quarter of 2025. Our backlog of June 30, 2026, stood at $32 billion, with the increase during the quarter driven predominantly by orders from international customers, mainly from Europe. Approximately 70% of the current backlog was generated from outside of Israel. Approximately 42% of the backlog at the end of June is scheduled to be performed during the remainder of 2026 and in 2027, and while the rest is scheduled to be performed during 2028 and beyond. New business and the quarterly backlog increase provides us with good visibility into future sales growth. Cash provided by operating expense -- activities in the quarter ended 30th June 2026 was $237 million as compared to $120 million in the quarter ended June 30, 2025. The cash flow in the second quarter of 2026, was affected by the increase in net income and a strong increase in contract liabilities. At the end of the second quarter of 2026, we delivered $150 million of free cash flow as compared to the $71 million free cash flow generated at the end of the second quarter of 2025. Cash conversion remained strong at 86% for the quarter, reflecting the quality of our earnings and disciplined working capital management. I will now turn the call over to Mr. Machlis, Elbit's President and CEO. Butzi, please go ahead.

Thank you, Kobi. Following another quarter of strong financial performance, as Kobi just outlined, we continue to convert market demand into growth, booking substantial new orders and increasing our backlog to a record of $32 billion. I'm very proud of the consistent execution and business momentum demonstrated across the organization. In the U.S., Elbit Systems of America received multiple awards from the U.S. Customs and Border Protection valued at approximately $370 million. These awards reflects the continued confidence in our ability to deliver advanced operationally proven solutions that enhance situation awareness and support critical national security missions. Additionally, in the U.S., we secured a $212 million order for continuous production of ENVG-B system for the U.S. Army. Notably, the Army had historically split production for ENVG-B system among multiple vendors. However, Elbit Systems of America was selected as the sole prime supplier under this award, reflecting the Army's confidence in our advanced Night-Vision capabilities. We also expanded our UAS footprint in the U.S. with Army selecting our THOR Group 2 unmanned aerial system. THOR provide tactical units with rapidly deployable autonomous capability for reconnaissance, surveillance, and target acquisition and other mission-critical operations. As I mentioned in the last call, during the quarter, we were awarded a landmark of USD 1.4 billion contract for European customer for a comprehensive military modernization program, spanning multiple domains. The program includes advanced airborne, land communication, electronic warfare and autonomous capabilities, further validating the strength and breadth of our portfolio. We also announced the formal award of approximately $750 million for PULS in Greece. This significant program further strengthen PULS's position as the leading rocket artillery solution in Europe and reflects the growing international demand for advanced precision fire capabilities. In Sweden, we successfully completed one of Europe's largest live demonstration of the digitalized land force network over a 2-week field exercise. Our solution seamlessly connected soldiers, vehicles and command post in a unified network, enabling real-time situation awareness and decision-making across all levels of command. The demonstration highlighted the strength of our NATO interoperability for our communication portfolio and its ability to support modern network battlefield operations. In Israel, Elbit was awarded a contract by the Israeli Ministry of Defense to develop an extended range capability for the IDF F-35s. This program is expected to enhance the aircraft operational capabilities. During the quarter, we received approximately $200 million in contract from the Israeli Ministry of Defense for advanced airborne munitions, this awards reflects the continued demand for our precision strike capabilities and our role in supporting the operational needs for the Israeli Air Force. Elbit secured a $350 million contract to modernize the fleet of the Main Battle Tanks for an international customers. The program includes upgrades to the fire control system to the communication system and situational awareness and other mission-critical systems, extending platform life and enhancing operational effectiveness. This award further reinforce our leadership in tank modernization and our ability to deliver integrated solutions that enhance platform effectiveness through mobility and operational advantages. Since the beginning of the year, Elbit has made 3 bolt-on acquisitions. The recent one published in May was the acquisition of Blue White Robotics, an Israeli developer of AI-powered autonomous ground solutions, strengthening Elbit's autonomy capabilities. The acquisition expand our multi-domain autonomy portfolio and enhanced our ability to deliver advanced robotics and manned-unmanned teaming solutions. And we reported last quarter's Elbit and KNDS partnered to establish EuroPULS in Germany, a joint venture that will market the PULS rocket artillery system to European customers. The venture combines Elbit battle-proven launcher technology with KNDS's strong European footprint and advanced fire control capabilities. We further expanded our partnership with Diehl Defence through a new agreement to offer the SkyStriker loitering munition system to the German Armed Forces, combining combat-proven precision strike capabilities, advanced autonomy and flexible deployment across multiple platforms, SkyStriker addresses growing demand for next-generation strike solutions, while supporting sovereign defense capabilities and local industrial participation in Germany. Recently, we participated in 3 major European exhibitions, Eurosatory, Farnborough and ILA?Berlin. We showcased our latest operational proven solution. Interest from customers, partners and investors alike was especially strong, particularly around local defense capabilities, advanced training solutions, electronic warfare autonomy and next-generation air and land systems, reflecting continued demand for advanced defense technology across multiple domains. Elbit Systems ranked first in the defense integrator category in the recent survey carried out by Dun & Bradstreet, ranking of Israeli defense industry. We are honored to be recognized as the leading defense integrator in Israel. This recognition reflects the strength of our ability to combine advanced technologies across multiple domains into comprehensive operationally proven solution for our customers. Behind every milestone we achieved and every innovation we deliver, stands an exceptional team of employees whose talent, dedication and sense of purpose continue to shape Elbit's future. I am deeply grateful for the commitment and contribution every day. Following an outstanding first half of the year, Elbit is operating from a position of strength, supported by record demand and robust backlog, continued innovation and the dedication of our global team, we remain focused on executing our growth strategy and creating long-term value for our customers, shareholders and other stakeholders. And with that, I will be happy to take your questions.

[Operator Instructions] The first question is from Sheila Kahyaoglu of Jefferies.

A lot of stuff going on, maybe if you could just talk about -- just to start off, how do you think about your revenue growth profile given the backlog growth up 6% another sequentially? And just everything you're seeing in terms of the growth, but also the news discussing a potential ceasefire between the U.S. and Iran, how do you think about the medium-term growth profile of the company as you see continued demand in Europe and demand in the U.S. as well.

We see a growing demand for our portfolio in Europe as well as in the U.S. And actually, as you see, our backlog has grown quite drastically during the last quarter, and it is mainly outside of Israel, mainly in Europe and in Israel. And what we are looking into our funnel, I see many more opportunities for the company in Europe as well as in the U.S., but also in Asia-Pacific and in our region. The funnel is very big, and I believe that you will continue to see growth backlog -- growth in our backlog in the coming quarters. We are making a lot of effort. And talking about opportunities, one of the big advantages that we have, is that we have a very wide portfolio. We do EW, we do UAVs, we do command and control, we do guided-munition and many, many simulations, and many, many more. And we have many -- and we are very advanced with this portfolio. On the other hand, we are local. And we are in a position to transfer the IP and the technology to our partners and to our subsidiaries in Europe, in U.S. and elsewhere. And by doing so, we are able to support the local economies. We are part of the local ecosystem in each country. And that's a very unique business model that we have. We are making right now a big effort to convert the huge backlog, which will continue to grow into revenues and profit. In order to do so, we have increased our capital investment to about $300 million. We are building new production facilities. We are investing in robotics, in AI, and we are improving our productivity and our ability to deliver the backlog and to convert the backlog into revenue growth and into profit and cash. And I believe that this momentum will yield in the near future. Our new production facility in the South part of Israel is operational already. We have inaugurated several facilities abroad as well. So I believe that we are in a very good position to meet the growing demand that we see in the market, backlog-wise and revenue-wise.

Sheila, this is Kobi. And to add on Butzi's answer, in terms of numbers, we see 34% year-over-year growth in our backlog, while revenue increased 16%. That speaks to our extended visibility to the future and our resilience of resilient growth in our revenue and of course, of transformation of converging those revenues to earnings and cash, as Butzi mentioned.

The next question is from Omri Efroni of Oppenheimer.

Congrats on the good results. I have one question and one follow-up. The first one, I was wondering what are you seeing from the Maritime domain that has a lot of investments from especially the U.S., but other nations as well. And I was wondering how do you see the sector developing worldwide and for Elbit specifically? And that's the first one. And the follow-up is what is the High Power Laser specifically that is sold, not specifically, but what is the demand that is going to Asia-Pacific? And from which region you think the demand is going to be the highest, the U.S., Israel or other part of the world?

Omri, with regards to the Maritime domain, that's for sure a growth engine for the company. We have several activities in the Maritime domain, and we are growing our portfolio. First, we have EW and our Naval EW is very famous and very advanced. Just to remind all of us, we won the Naval EW -- the future Naval EW in the U.K., and we are in the process of delivering systems to the U.K. Navy. And this is true not just for the U.K. It is true also for many customers in Europe as well as in other continents. So you can see our Naval EW actually, I believe that the most advanced Naval EW is available right now in the market. Talking about sonobuoys, we have in the U.S., Spartan, who is an Elbit Systems of America subsidiary. They do the 1 -- they are 1 out of 2 suppliers of sonobuoys to the U.S. Navy as well as to other international customers. This activity is growing for the company. There is a growing demand for sonobuoys all over the world and especially in the U.S. We have unmanned ships, USVs, which are operational already here in Israel as well as by other customers, which are being used to eliminate -- to allocate and to eliminate mines and also to allocate submarines. And such USVs can include also weapons, different type of weapons. And we have short-range and long-range missiles, which can be launched from unmanned or manned ships, which are already operational by several nations. We have GTI in Canada. They are very famous with their sonars. They are selling sonars to many customers in Europe, in the Far East, in other places as well. And this company is growing fast. They have a unique and very effective solution for this market. We are also dealing with upgrading ships. We have Maritime radar, electro-optics, remote weapon stations, communication and many more. So altogether, we are growing our position in the Maritime domain. It's a growing segment for Elbit. It is growing rapidly, and it will continue to grow in the future. Talking about high power lasers, first, we are delivering already high power laser sources for the Israeli program. We are meeting our schedule, and we expect additional orders to come for Israel. And we see together with Rafael, we see a growing partner for that in the international market. We continue our development of airborne solutions. Just to remind again all of us, Elbit was selected as the prime contractor for airborne high power lasers. And it was recently announced that we are under a contract to develop high power lasers for the Israeli Air Force helicopters as well as for our jet aircraft, different type of solutions. And we are very advanced with the development and the helicopter solution will be operational in relatively a short period of time, and we are in the middle of the development of the airborne high power laser pods for fighter aircraft. This solution was exposed in the exhibitions, which took place in Europe last month in Germany -- in ILA, Germany, also in Farnborough in the U.K. and in Paris. And there is a huge interest for that, I'm not aware of any solution like this, which is available in the market. So there's a huge interest for our high power laser technology and especially for airborne solution, it is coming from all different continents, not just for Europe. Also, other nations are looking to integrate these solutions into the platform. So I believe it's a growth engine for the company, and there's a huge potential for us in this domain. And high power laser is just part of it. We invest quite a lot in other technologies in the domain of energy weapons.

[Operator Instructions] The next question is from Sheila Kahyaoglu of Jefferies.

Back for more. I wanted to ask Elbit Systems of America, it was great seeing them down in Texas. And specifically, good growth in the quarter, up 17%. Can you talk about the one-time favorable project mix there? And maybe as a follow-up to that, can you talk about how we should see the Night-Vision Systems business grow given your recent quarter? And any update on the Howitzer program?

Thank you, Sheila, and thank you for your visit. We are expanding in the U.S. And also in the U.S., we have many activities. We are quite famous with our avionics activities in the U.S. I'm sure we all remember that many U.S. platforms are having our avionics and our helmet for the U.S. market as well as for the international market. We are expanding also our night-vision capabilities in the U.S., as we mentioned here, we are the sole supplier of ENVG-B, and that's a decision was taken by the Army recently. Our sonobuoys maritime activity is growing as well. We are also providing Active Protection System under GD to the U.S. Bradley fleet and to other partners as well. And we won this quarter, a very prestigious position with a Border Protection to bring our technologies, our sensors, our integrated system to the U.S. market, different type of technologies, which are already operational here, in other countries as well. And we continue to invest also in other areas in the U.S. to expand our position. We are enhancing our footprint in the U.S. We are recruiting more people. We are bringing more technologies from Israel to the U.S., and we are improving and enhancing our position in the U.S. market as the local provider of advanced solutions to the U.S. users. The U.S. market is very important for us. I'm very proud of our activity in the U.S. market, and I believe it will continue to grow. I cannot say that it will continue to grow at the same pace as it grew this quarter, but it will continue to grow for sure.

The next question is from Kristine Liwag of Morgan Stanley.

I want to dive a little bit deeper on the backlog again on the conversion to revenue. I mean, with your backlog at record levels, some customers have to wait several years to receive their products. And historically, you guys have been very disciplined about CapEx and focus on making sure capacity investments are supported by long-term demand. But I guess with the current environment, with geopolitical risk elevated, customers really want to focus on security supply, have you seen a change in their willingness to fund CapEx directly in order to add capacity to shorten delivery times? And the rationale for this question is, we're seeing this in other constrained parts of the aerospace and defense supply chain, like castings and forgings, where customers are willing to fund capacity to secure access and this capacity spend is different from pricing. And to be clear, this is really more on the customer-funded CapEx. I guess, is this something you're discussing with customers? Could it allow Elbit to accelerate capacity expansion, convert backlog to revenue sooner and still maintain your discipline on CapEx?

Thank you, Kristine. It was lovely seeing you in London. So to the question, we are -- we decided to increase our CapEx investment from $220 million to $300 million. You see that in our CapEx investment in the first half of the year, which was above $150 million. And this is out of our own dime. As to customer willing to participate in CapEx investment, we have 2 different types of that. There is matching where customers are willing to match our investments, and we see that now in the market, which we didn't see in the past. And even we see now for customers who wants to bring technology and to transfer technology to their own territory, they're willing to finance the whole capacity, the whole factory that we need to bring up. And this is a new trend in the market where customers are actually paying for the CapEx. And that means that beyond the $300 million that we put from our own dime, there is additional amounts of money that are funded by our customers. And this is a predominant, very significant change in the market that happened in the last 2, 3 years.

Great. And Kobi, would you quantify if these were to materialize, how much of that revenue could you convert faster -- so how much of that backlog could you convert faster to revenue?

What we see now is with 34% increase in backlog, while revenue increased 16%. And actually, we went back -- and we looked back from 2022 each year, we see that each year from 2022, we see that the backlog increased by over -- sometimes even double the cadence of the growth in revenues. That means that our visibility now is dramatically better, and you see also the accelerated pace of revenue growth, where we have been in '24, 14%; '25, 15%. And we see now this year is again, mid-teens again, of revenue growth for the 3 years in a row, which gives us a lot of confidence in our ability to do this in the future.

Okay. Great. Super helpful. And if I could switch topics to autonomous systems. Looking at your portfolio, historically, you've got your 3 layers, you've got your autonomous platforms, the autonomy software layer and the sensors network that let these pieces work together. As autonomy becomes more important in the battlefield, how do you envision your role in that system? Do you aim to continue to provide more of that integrated approach? Or are you also willing to sell that autonomous software platform and be able to input more third parties into your system and be more of the integrator? And how do you think about where you want to be in that ecosystem, especially as this becomes more relevant in today's battlefield?

Kristine, it's Butzi. We are -- one of the uniqueness of Elbit is that we are vertical. We own the technology from the product level to a system level to a system of system solutions. And we are open to discuss with our customers the right offering for their specific needs. Some customers are buying products from us, and some customers are buying infrastructure from us. Some other customers are buying systems solutions. We are open for everything. And to continue what Kobi just mentioned, again, we are very unique by our willingness to share our technologies and our IP from Israel to our partners and to our subsidiaries worldwide. And this gives us a huge advantage because we are able to support local economies and customers because of it are willing to invest, supporting us building local facilities, production and development facilities in many countries to support their economy. That's a huge advantage. And many, many customers are willing to pay and to finance this investment. And it's also important for us from security of supply. We are trying to have several production lines for each product and for each system in order to make sure that we will always be able to deliver the solution and the products to our customers.

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available 2 hours after the conference end. In the U.S., please call 1 (888) 782-4291, in Israel, please call (03) 925-5900, and internationally, please call 972-3-925-5900. 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?

Thank you to everyone who joined us today for your continued interest and support. Have a good day, and goodbye.

Thank you. This concludes the Elbit Systems Ltd. Second Quarter 2026 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.