Elbit Systems Ltd. (ESLT) 2026 Q2 法說會逐字稿

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 contents 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 into today's press release.

Kobi will begin by discussing the financial results, followed by Butzi, who will elaborate on the main events during the 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 billion compared to $1.973 billion 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 urban and land high-power laser, electronic warfare, and maritime systems in Asia Pacific. Land revenues increased by 32%, mainly due to ammunition and munition sales in Israel.

Elbit Systems of America revenues increased by 17%, mainly due to a 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 due 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 new -- next-generation technologies and advanced AI capabilities that expand our solutions portfolio, support our customers' evolving mission requirements, and reinforce Elbit's 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 as 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, while the rest is scheduled to be performed during 2028 and beyond. New business and the quarterly backlog increase provide us with good visibility into future sales growth.

Cash provided by operating activities in the quarter ended June 30, 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 our organization.

In the US, Elbit Systems of America received multiple awards from the US Customs and Border Protection valued at approximately $370 million. These awards reflect the continued confidence in our ability to deliver advanced operationally proven solutions that enhance situational awareness and support critical national security missions.

Additionally, in the US, we secured a $212 million order for continued production of ENVG-B systems for the US Army. Notably, the Army has historically split production for ENVG-B systems 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 US, with the Army selecting our THOR Group 2 unmanned aerial system. THOR provides tactical units with rapidly deployable autonomous capability for reconnaissance (inaudible) target exploration, and other mission-critical operations.

As I mentioned in the last call, during the quarter, we were awarded a landmark of USD1.4 billion contracts for European customers for a comprehensive military utilization program. Spanning multiple domains, the program includes advanced airborne, land, communication, electronic warfare, and autonomous capabilities, further validating the strength and breadth of our portfolios.

We also announced the formal award of approximately $760 million for PULS in Greece. This significant program further strengthens PULS' position as a leading rocket artillery solution in Europe and reflects the growing international demand for advanced precision fires capabilities.

In Sweden, we successfully completed one of Europe's largest live demonstrations of a digitalized land force network. Over a two-week field exercise, our solution seamlessly connected soldiers, vehicles, and command posts 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 interoperable 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 Adir F-35. This program is expected to enhance the aircraft operational capabilities. During the quarter, we received approximately $200 million in contracts from the Israeli Ministry of Defense for advanced air launch munitions. These awards reflect the continued demand for precision strike capabilities and our role in supporting the operational needs of the Israeli Air Force.

Elbit secured a $350 million contract to modernize a fleet of main battle tanks for international customers. The program includes upgrades to the fire control system, to the communication system, situation awareness, and other mission-critical systems, extending platform life and enhancing operational effectiveness. This award further reinforces our leadership in technological modernization and our ability to deliver integrated solutions that enhance platform effectiveness, survivability, and operational capability.

Through the beginning of the year, Elbit has made three bolt-on acquisitions. The recent one published in May was the acquisition of Bluewhite Robotics, an Israeli developer of AI-powered autonomous ground solutions, strengthening Elbit's autonomy capabilities. The acquisition expands our multi-domain autonomy portfolio and enhances our ability to deliver advanced robotics and manned-unmanned teaming solutions.

As we reported last quarter, 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' 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 type solutions while supporting sovereign defense capabilities and local industrial participation in Germany.

Recently, we participated in three major European exhibitions, Eurosatory, Farnborough, and ILA Berlin. We showcased our latest operationally proven solutions. Interest from customers, partners, and investors alike was especially strong, particularly around local defense capabilities, advanced running 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's 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 solutions for our customers.

Behind every milestone we achieve 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) Sheila Kahyaoglu, Jefferies.

Good morning, guys, and thank you so much for the time. Lots of good 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 cycle discussing a potential ceasefire between the US and Iran. How do you think about just the medium-term growth profile of the company as you see continued demand in Europe and demand in the US as well?

We see a growing demand for our portfolio in Europe as well as in the US. And actually, we have grown, and 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 US, 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 in talking about the 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 ammunition and many, many more, simulation and many, many more. And we have many and we are very advanced with this portfolio.

On the other hand, we are in a position to transfer the IP and the technology to our partners and to our subsidiaries in Europe, in the US, and elsewhere. And by doing so, we are able to support the local economy. 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 profits. 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, good morning, and 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 converting those revenues to earnings and cash, as Butzi mentioned.

Omri Efroni, Oppenheimer.

Hey, guys. Thanks for taking my call, and congratulations on your 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 US, but other nations as well. I was wondering how do you see the sector of the Philippines worldwide and for Elbit specifically? 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 US, Israel, or other parts of the world? Thanks.

Hi, 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 UK, and we are in the process of delivering the systems to the UK Navy.

And this is true not just for the UK; 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 US, Sparton, who is an Elbit Systems of America subsidiary. They are one out of two suppliers of sonobuoys to the US Navy as well as to other international customers. And this activity is growing for the company. There is a growing demand for sonobuoys all over the world and especially in the US.

We have unmanned ships, unmanned 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 a USV can include also weapons, different type of weapons. And we have short-range and long-range missiles, which can be launched from unmanned or from manned ships, which are already operational by several nations.

We have GTI in Canada. They are very famous with the 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 one 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 high-power -- 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 types of solutions. And we are very advanced with the development, and the helicopter solution will be operational in a relatively short period of time, in the middle of the development of the airborne high-power laser ports 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 UK 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. There is a huge interest for our high-power laser technology and especially for available solution, and it is coming from all different continents, not just from 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 is a huge position for us in this domain. And the high-power laser is just part of it. We invest quite a lot in other technologies in the domain of energy weapons.

Okay. Thank you very much.

(Operator Instructions) Shiela Kahyaoglu, Jefferies.

Back for more. I wanted to ask on 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 order and any update on the Howitzer program?

Thank you, Sheila, and thank you for your visit. We are expanding in the US. And also in the US, we have many activities. We are quite famous with our avionics activities in the US. I'm sure we all remember that many US platforms are having our avionics and our helmets for the US market as well as for the international market.

We are expanding also our night vision capabilities in the US, as everyone mentioned here. We are the sole supplier of ENVG-B, and that's a decision to be taken by the Army recently. Our sonobuoys maritime activity is growing as well. We are also providing active protection systems under GD to the US Bradley fleet and to other platforms as well.

And we won this quarter a very prestigious position with the border protection to bring our technologies, our sensors, our integrated system to the US market, different type of technologies which are already operational here and other countries as well.

And we continue to invest also in other areas in the US to expand our position. We are enhancing our footprint in the US. We are recruiting more people. We are bringing more technologies from Israel to the US, and we are improving and enhancing our position in the US market as the local provider of advanced solutions to the US users.

The US market is very important for us. I'm very proud of the US 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.

Kristine Liwag, Morgan Stanley.

Hey, good morning. Good to see Kobi and Daniella, I guess good afternoon for you, guys. I want to dive a little bit deeper on the backlog again and 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 focused 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 and supply. Have you seen a change in their willingness to fund CapEx directly in order to add capacity to shorten the 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 backlogs to revenue sooner, and still maintain your discipline on CapEx?

Thank you, Kristine. Good morning to you. It was lovely seeing you in London. So to the question, we decided to increase our CapEx investment from $220 million to $300 million. You see that in our CapEx investment the first half of the year, which was above $150 million. And this is also from our own dime.

As to customers willing to participate in CapEx investment, we have two different types of that. There is matching, where customers are willing to match our investment, and we see that now in the market, which we didn't see in the past. And even we see now for customers who want 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 line, there are 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 two, three years.

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 again meetings again of revenue growth for the three years in a row, which gives us a lot of confidence in our ability to do this in the future.

Great, super helpful. And if I could switch topics to autonomous systems, looking at your portfolio, historically, you've got your three layers. You've got your autonomous platform, 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?

Hi, Kristine. It's Butzi. One of the uniqueness of Elbit is that we are very vertical. We own the technology from the product level to a system level to a system (inaudible) solution. And we are open to discuss with our customer 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 system, and other customers are buying system 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 that, they are willing to invest, supporting us, building local facilities, production and development facilities in many countries to support their economies. 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 product to our customers.

Great. Super helpful. Well, thank you very much.

Thank you.

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 call ends. In the US, 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, 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.