Elbit Systems Ltd. ($ESLT)

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' First 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.

Hello, everyone, and welcome to our first quarter 2026 earnings call. On the call with me today are Butzi Machlis, President and CEO; and Kobi Kagan, CFO; and myself, Daniella Finn, Investor Relations. 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 these 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 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 are pleased to report another strong quarter delivering double-digit growth in revenues, operating profit and EPS. Our backlog reached a new record, surpassing $30 billion for the first time and we exceeded a 10% non-GAAP operating margin in line with our internal targets. These results reflect the strength of our execution and the outstanding performance of our global teams. . Taking a closer look into the first quarter results. First quarter revenues increased by 15.5% to $2.189 billion compared to $1.896 billion in the first quarter of 2025. This is the first quarter revenues were higher than those of the preceding fourth quarter, representing the strong demand we are witnessing from our key markets. For the first quarter of 2026, Europe contributed 23% of revenues, North America, 20%, Asia Pacific, 16%; and Israel contributed 37% of revenues. Europe continues to be a meaningful growth engine. The shift in Europe is profound, and we are seeing strengthening demand trends. In terms of quarterly revenues by segment, Spin fiber revenues increased by 17% in the first quarter of 2026 as compared to the first quarter of 2025 mainly due to sales of radio systems and command and control system sales in Europe. In EW revenues increased by 17% mainly due to increased sale of airborne high-power laser and electronic warfare systems. Land revenues increased by 27%, mainly to munition and munition sales in Israel and Europe. Elbit Systems South America revenues increased by 5%, mainly due to the increase in sales of night vision system, which were partially offset by a decrease in sales medical devices. Aerospace revenues increased by 2% in the first quarter of 2026 as compared to the first quarter of 2025, mainly due to project mix. GAAP gross margin in the first quarter was 25.2% of revenues compared to 24% in the first quarter of 2025. Non-GAAP gross margin for the first quarter was 25.5% compared to the first quarter of 2025 at 24.3%. Gross margins have expanded due to scale and product mix. GAAP operating income in the first quarter was $205.1 million or 9.4% of revenues as compared to $149.7 million or 7.9% of revenues in the first quarter of 2025. Non-GAAP operating income was $222 million or 10.1% of revenues in the first quarter of 2026 as compared to $165.1 million or 8.7% of revenues in the first quarter of 2025. The operating expense breakdown for the first quarter of 2026 was as follows: Net R&D expenses were $150.4 million or 6.9% of revenues as compared to $114.3 million or 6.1% of revenues in the first quarter of 2025. Elbit continues to prioritize investment in advanced R&D initiatives, including AI capabilities to support sustainable, profitable growth and strengthen our leadership position in the years ahead. Elbit is focusing its R&D on cutting-edge bottle feed technologies. Key initiatives include counter UAS solutions spearheaded by higher power laser, advanced autonomous airborne, naval and land platforms, multi-spectral sensing and advanced precision and standard munitions. Marketing and selling expenses were $100.9 million or 4.6% of revenues in the first quarter of 2026, similar to $100.9 million or 5.3% of revenues in the first quarter of 2025. G&A expenses were $95.7 million or 4.3% of revenues in the first quarter of 2026 as compared to $89.4 million or 4.7% of revenues in the same period last year. Financial expenses were $32.2 million in the first quarter of 2026 as compared to $39 million in the first quarter of 2025. The decrease in financial expenses in the first quarter of 2026 was mainly due to a reduction in the average debt. Excess on income were $22.8 million in the first quarter of 2026 as compared to $16.1 million in the first quarter of 2025. The effective tax rate in the first quarter of 2026 was 13% and compared to 13.9% in the first quarter of 2025. GAAP-diluted EPS for the first quarter of 2026 were $3.34, up 42% as compared to $2.35 in the first quarter of 2025. Our non-GAAP diluted EPS were $3.87 in the first quarter of 2026, up 51% as compared to $2.57 in the first quarter of 2025. Our backlog of orders as of March 31, 2026, was $30.2 billion, more than $7 billion higher than the backlog at the end of March 31, 2025. Approximately 71% of the current backlog was generated from outside of Israel. Approximately 49% of the backlog at the end of March 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. The increase in backlog during the quarter came mainly from Israel. Net cash provided by operating activities in the quarter was $281 million as compared to $184 million in the quarter ended March 31, 2025. Cash flow in the first quarter of was affected mainly by the strong increase in net income and an increase in contract liabilities. During the first quarter of 2026, we delivered $210 million of free cash flow up 30% from $161 million free cash flow generated in the first quarter of 2025. The Board of Directors has declared a dividend of per share to be paid on July 6, 2026. I will now turn the call over to Mr. Machlis, CEO. Butzi, please go ahead.

Thank you, Kobi. Following our strong financial performance, as Kobi just highlighted, the quarter was also characterized by a high level of new business and contract award from it for totaling over USD 4 billion, almost double the quarterly revenues. Hence, our backlog reached a record level, exceeding the $30 million -- $30 billion mark for the first time. This morning, we announced that Elbit was awarded a new contract valued approximately $1.4 billion for a European customer for extensive military modernization programs. The modernize programs will provide improved renewability and favorability spanning the entire battle domain. The state of the art solutions to be delivered include a variety of uncrude autonomous solutions, enhanced network land, electric warfare, preceding guided munition artillery and Elton coupled with retro opticoptical designating and reconnaissance systems, all network by software-defined radios. This solution will improve the nation's operational effectiveness towards becoming an advanced and modern on. The contract will be performed over a period of 5 years. This contract reflects the breadth and attractiveness of Elbit Systems defense portfolio as well as our ability to deliver both highly capital, best-in-class systems and comprehensive integrated solutions tailored to evolving operational needs. With demand driving well above historical levels. We continue to focus on execution by expanding our production capabilities. We are scaling production capacity and investing in innovation to convert the strong demand into sustained revenue growth. As previously mentioned, we are increasing our CapEx investment as we continue to build additional capacity, mainly in Israel and in Europe. The increase in CapEx is driven by a disciplined and careful ROI analysis. The production facility in Southern Israel is advancing well. We recently announced the launch of new unmanned aerial system facility in Romania, marking another milestone in the company ongoing expansion across Europe and its long-standing partnership with the Romanian defense industry. We also completed the acquisition of tax, the U.S. facility in the U.K. We are further expanding our production facilities in other locations across Europe. Operating growing line has highlighted rising demand for advanced defense solutions across Elbit portfolio, including proceeding guided munition, unmanned aerial systems, ISR solutions, electric warfare and protection system. It is also creating a growing pipeline of opportunities as customers accelerate procurement and modernization effort. Elbit started the year with Nomo announcement. This includes 2 important contracts for APS solution with the Avantis. The first contract was an order for the U.S. broadly owned vehicle, this tranche for a sum of over $200 million. The second APS contract was for the CP9 combat vehicle to a mature country. In January, we secured a contract to equip an Asian customer with an advanced EW and Decomprotect solution for Helicopters worth $275 million. Additionally, an award of $277 million was received for 30-millimeter target ammunition by international customers. In April, we were awarded a $1,750 million contract for post ore launches to the Hellenic and force. Order environment in Europe continued to be especially strong followed by Asia. Our backlog provides increased visibility to a continued strong revenue growth momentum. During the quarter, we continued to receive new orders from Israeli and Moody. This includes integrated advanced command control systems of Vionic, EW systems and advanced antimissile Delconsystem for the 12 CH53new helicopters valued at $130 million. An additional multiyear order was received for supplying air munition to the IDS for $183 million. strengthening the IDS capabilities during challenging times. We also secured over $100 million in contract for the next generation of digital Army program. and border defense capabilities for the Israeli and Multi. Elbit was also awarded a contract to supply helmet displays and tracking system for the Israeli Air Force Blackhawk helicopter fleet to enhance operational capabilities and flight safety. In May, we signed a contract for the Moody for the development of an extended range capability for the F-35 fighter jet manufactured by Lockheed Martin. The new capability is expecting to extend the aircraft operational range, reduced reliance on aerial refueling and enhanced operational flexibility across long-range missions. This contract could create additional opportunities for in the area of F-35 range extension worldwide. Elbit Systems America continued to win significant contracts. In March, the Umar a contract to establish a new class of further capabilities, the Soldier Borne Mission Command or SBMC. This is a crushing night vision system for the modern battlefield, which we be won by warfighters who are able to decide and act in milliseconds. The contract valued at $120 million will enable Elbit Systems of America to develop the SBMC that will redefine how soldiers operate, connect and dominant in complex battery environment. We believe this could be a revolution in metality built for the speed and complexity of modern compact. In May, we received a delivery order value approximately $212 million for the continued production of enhanced night vision global manacular ENVG systems for the U.S. Army. -- which delivers expected through 2028. While the Army has historically split MVTP production among multiple vendors, Ebitsystems of America was selected as a sole prime supplier for this award. Elbit has always prided itself on its strong partnership. I was honored to take part recently in 2 significant signing ceremonies in Germany. The first for our new JV with CBS, which will enable the 2 companies to deliver the advanced Europol pocket launch, not only to Germany but across Europe. The second signing ceremony was with TMS. We have now announced 2 separate cooperation with DMS, a German-based of Marine shipyard, which will further expand our reach across Europe. In this recent agreement with TKMS Elbit was once again chosen due to strong EW capabilities across platforms and for its maritime resource in particular. During the quarter, Elbit Systems has continued to advance its innovation agenda, following investment in next generation R&D initiatives with a growing focus on AI-driven capabilities. This effort supported through a combination of internal funding and strategic partnerships are driving the development of advanced solutions and strengthening our ability to address evolving operational requirements. Elbit employees are driving for our fleet riding force behind the innovation and the results, shaping the company's future with passion and commitment as we day. And for this, I'm very grateful. Elbit enters 2026 with strong momentum and solid foundation for the future. with a record backlog, ongoing technology progress, expanding capacity and highly committed global team. We are well positioned to sustain our growth trajectory and create lasting value for our shareholders. And with that, I will be happy to take your questions.

[Operator Instructions] The first question is from Seth Seifman from JPMorgan.

And nice results. wanted to start off asking about how your expectations for orders have changed for the year, especially perhaps as a result of the current conflict. We saw a lot of growth out of Israel in the quarter. and perhaps the outlook for that segment has changed. So if you could speak to that, that would be great.

Thank you. Our funnel of orders has never been so strong. We see growing potential for us in many regions. Of course, we see growing potential for us in the U.S. market. And we also saw a growing strong momentum of new opportunities for us in Europe, mainly in Germany, in Scandinavia, in the Baltics, but also in other places all over the continent. And of course, we also see growing potential for Asian as well as well as in the Gulf countries and also in countries in the Far East around China. Each region is different with these requirements. We have a very wide portfolio. Our strategy is based on 2 main pillars: 1 where we have a very wide portfolio, and we are very vertical. The second element is we are local. We have dozens of subsidiaries in many countries, and we are part of the ecosystem in each country. And we are willing to share our technology in IP from Israel between the subsidiaries and to create jobs and to be part of the local ecosystem in each country. So to try to sum it up, we see growing potential for the company, and I believe that backlog will continue to grow.

Okay. Excellent. Excellent. And then maybe just as a follow-up, if we think about the balance sheet and capital deployment, a very healthy net cash position at this time, even with a conservative amount of leverage that would still leave a fair amount of cash for the company to deploy. How are you thinking about the opportunities to use the balance sheet a bit more?

Thank you, Seth. As you mentioned, we have a very strong balance sheet, but we maintained very strict capital deployment. We first prioritizing R&D as we are doing almost 7% of our revenue in R&D of self-funded R&D, which is, as you know, almost -- or more than double than the average peers. Secondly, we are increasing our CapEx investment to meet the high demand that we see in the market. And we announced recently that we almost -- we doubled the dividend payout to investors from around -- from $0.50 to $1 a share. On that, we are very keen to do acquisitions. We are looking actively in markets. In the first quarter, we announced an acquisition of tax, which is a USD company, in the U.K. We will have further announcements on acquisitions as we are dynamically looking for new acquisitions to enhance our portfolio.

The next question is from Kristine Liwag of Morgan Stanley.

I was wondering, you talked about with this conflict, we're seeing anti-UAS systems is even more critical. I was wondering, in addition to the developments you're making in directed energy. Can you talk about what else is in your anti-UAS portfolio? And also in this kind of conflict that we're seeing, how relevant our cost competitive are your platforms versus what's available -- and as demand materializes for something like this, when can you start delivering incremental ones, if you were to get sovereign orders?

Thank you. We are investing quite a lot in hyper in energy weapons, Hyperlite is just 1 of them. We are we are progressing very well on developing the high power laser. Actually, we already delivered power rate source to the ground solution and in parallel, we are leading a development of an airborne hit powers. We do it many hundreds of engineers are working on the development of the systems currently and sell. And we are -- you will start seeing deliveries of subelements partial deliveries quite soon from this new development. And I believe that such a system can change the entire way countries will defeat rooms and UAVs and cosmesis and even additional seats. . This is only 1 part of our counter-drone solution. We have many sensors which are helping us to build an NMA picture to understand exactly where the threat is where it's coming from and where it is heading to based on radar that we are developing and manufacturing based on signing capabilities vest on electro-optics, all managed by a strong AI algorithms, and we have several factors. High power energy is just one of them. We have different genres. We have kinetic solutions and others. And actually, all once again all managed by AI, it's part of our control solution. We are already deploying content solutions in Israel as well as in Europe, and we believe that this segment will continue to grow for us in the future.

As to the other questions, we are determined to be cost competitive and cost effective to meet our customers' expectations. This is a major issue in the company. to maintain cost effectiveness. And as to the capacity increase, we meet now huge demand, a flash of demand that we see from different markets as Butzi mentioned and this is why we decided on the CapEx increase in the company to meet this very high demand. .

Great. Super helpful. And I think following up on Seth's question on the significant orders that you received and also you've got a record backlog now. When we look at the growth profile of Elbit, you guys have been very consistent about having a reasonable growth that's sustainable, but as we look at geopolitical trends today, it seems like the cost of sovereignty globally is going up. Like how do you think about what the company size of revenue could be 3 to 5 years from now, especially as you look to deliver on this record backlog, you increased your capacity in 3 years or in 5 years, could we see revenue potentially double. I mean that's kind of what you did over the past 5 years, revenue almost doubled there. So I just want to see if those are possible based on what you have in the pipeline in front of you?

As you know, Kristine, we don't give guidance. We maintain what we told you and the market that our internal target is to have around mid-teens revenue growth this year, and we also with the high demand that we see in our for market and our conversion effectiveness, we see the same for next year. Other than that, it would be hard for us to predict.

But I would like to add to that saying that we see a huge funnel ahead of us of new opportunities. and we are working hard to make this funnel part of our backlog, future -- and I believe that the company will continue to bring new orders, significant new orders like the 1 we brought today, and we will continue to grow its revenues also in the future. And we continue to work also on our bottom line. We hope to continue to improve the open numbers as well.

Expanding margins is a key priority to the company, and we are committed internally to do that. .

The next question is from Sheila Kahyaoglu of Jefferies.

Thank you so much for the time and great quarter. Maybe just on Q1 off to a great start, up 16% on revenues between land ISR and VW all up double digits. I guess how do you think about the demand environment evolving for the rest of the year? Where are you seeing trends better than your expectations?

We expect the segment to perform in the rest of the year with land, leading the segments in revenue expansion as we see the strong demand predominantly for land projects and programs. We see also very strong ISR and C4 demand. And also, we are very pleased where Albesystems America performance, both on top line and more than that on the bottom line. of increasing and expanding margins consistently. So this is for our projection for the rest of the year.

Got it. And maybe just on the -- continuing on the backlog and CapEx comments a little bit. Kobi, I don't know if you could elaborate a bit more on the capacity but has been investing a decade plus in advance -- can you talk about the capacity investments today and how we should think about the medium-term outlook for CapEx and just what your facilitized for at the moment? .

We have invested a lot in the new 1 ERP systems, which we inaugurated 4 years ago, and it's now company-wide ERP system. Without this system, we cannot reach any of these performance numbers, and this is done. This investment is behind us. We also invest heavily in AI performance and solutions. This is a key priority for investment. And then we are increasing our investment in -- mostly in the land domain facilities, which we heavily invest in we heavily invest in. On top of that, we are highly investing in robotics and automation to be more efficient and to deliver better cost results to our customers. Trying to sum it up. We are keen to do around 3% of revenues in CapEx investment in the near future.

The next question is from Ron Epstein of Bank of America.

If you could talk to maybe the supply chain, as you ramp, you've got a pretty aggressive ramp ahead of you. Where are you seeing any to point shortages? Can you get enough energetics, materials, labor, I mean, how is that all going as you ramp?

Thank you, Ron. I believe that we were able to resolve supply chain issues and we had supply chain issues until a year ago or even less than that. I don't see currently any bottlenecks in supply chain. We have enough material, including Inergetics. We are also very vertically important to mention that all of our strategy is to be very vertical try to control our destiny as much as we can. And we have several suppliers for each element which we are buying outside from the company. So -- and we have also invested also in inventories in some cases. So mainly energetics. So I don't see currently the supply chain as a bottleneck for the company growth. .

Got it. Got it. Got it. And then how about on the labor front?

Also on labor, also on labor, I must say that we have recruited about 2 to people last scale and we are about to recruit the same amount of it also this year in Israel as well as abroad. Currently, we have about 24,000 employees out of the 40,000 in Israel and about 10,000 broad out of them, about 7,000 engineers. And we are able to offer to our employees, very challenging work and with a lot of mining and there's a lot of meaning and also an ability to change positions between the different domains in the company, which increased the opportunities -- and currently, we don't face major issues in the coating people, not in Israel as well as Notobroat.

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Machlis to go ahead with the closing statement, I would like to remind participants that a replay of this call will be available 2 hours after the conference ends. [Operator Instructions] A replay of the webcast will also be available on the company's website, www.elbitsystem.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. .

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