IAI: Where the Cash Gets Stuck Between Receivables, Contract Assets, and Supplier Advances

The main article already argued that IAI's active bottleneck is not demand. It is cash conversion. This follow-up isolates the slow station inside that chain: the path in which work is performed, booked into contract assets, transferred into receivables, and only later turns into cash.

On a superficial read, the picture can even look comfortable. At December 31, 2025 the company shows a surplus of current assets over current liabilities of $709 million, and after 12-month operating-cycle adjustments that surplus rises to $1.159 billion. But that is exactly the trap. Positive working capital is not the same thing as liquid cash when the same surplus sits in balances that unwind slowly.

Four points organize the picture:

• The jam expanded across the whole route. Receivables, contract assets, deferred expenses and supplier advances, and inventory together rose to $5.573 billion from $4.156 billion, an increase of $1.417 billion in one year.
• This is mainly a duration problem, not a bad-debt problem. Net receivables rose to $2.34 billion, yet the year-end allowance stood at only $19 million, and the company explicitly says it is not materially exposed to Ministry of Defense debt balances.
• The work is moving one station forward, not into cash. During 2025, $854 million was transferred from opening contract assets into receivables, and yet both balances still ended the year higher.
• The supplier line is not a clean offset. The $602 million line is not pure supplier prepayments. It also includes deferred expenses and contract-acquisition costs, and $75 million was amortized out of it in 2025.

The Four Balance-Sheet Lines That Explain The Bottleneck

That means the 2025 jam was not driven mainly by heavier shelves. Most of the build came from the customer side. Receivables and contract assets together rose to $3.893 billion from $2.635 billion. In other words, the problem is not only cash committed to materials or to production. The bigger problem is cash tied up in work that is already far along in execution, but is still not spendable cash.

This is also why the adjusted working-capital surplus can mislead. It does not mean the company is sitting on a loose cash cushion. It means the operating cycle is long enough to justify reclassification adjustments while the cash itself is still circulating inside the balance sheet.

This Is A Timing Problem, Not A Credit-Quality Problem

The receivables note is probably the single most important page in this continuation. Gross receivables rose to $2.359 billion from $1.287 billion. Of that amount, $1.711 billion is tied to related parties and $648 million to unrelated customers. The year-end allowance for doubtful debts was only $19 million, leaving net receivables at $2.34 billion.

That sharpens the thesis. The company says that the two main debtors are the Ministry of Defense and another defense-sector body, and that it is not materially exposed to Ministry of Defense debt balances. It also states that it has not recorded material bad debts over 74 years. So the problem here is not classic collection risk. The problem is how long the cash stays uncollected.

The business review on working capital says the same thing more directly. In 2025, average customer credit stood at about 83 days, while average supplier credit stood at about 69 days. The gap is not dramatic, but it works in the same direction all year: the company gives customers more time than it gets back from suppliers.

And that is before looking at the pace of movement. The receivables note explains that the 2025 increase came both from higher revenue volume and from a larger transfer from contract assets into receivables. So part of the work did move forward along the chain, but it still did not leave the balance sheet. It simply moved from one pocket to the next.

Contract Assets Show That Execution Still Runs Ahead Of The Invoice

Note 7 explains why this line matters so much. The company defines contract assets as the right to consideration for goods or services already transferred to the customer, when that right is still conditional on something other than the passage of time. In 2025, gross contract assets rose to $1.963 billion from $1.742 billion. Customer advances rose only to $410 million from $378 million. After that offset, net contract assets stood at $1.553 billion.

The important point is not only the $189 million increase. The important point is that customer advances cover only a relatively small part of the work already performed but not yet turned into an unconditional invoice. That means the company is financing a large part of the route itself.

The same note adds that $854 million was transferred from opening contract assets into receivables during 2025. In 2024, the comparable transfer was $864 million. That proves the work is moving and milestones are being met. But it also sharpens the core problem: the move from contract asset to receivable is functioning, while the move from receivable to cash remains much slower.

This also connects directly to the funding framework management describes. In the financing section, the company says activity is funded through working capital, including customer advances, together with bank credit used mainly for guarantees and external credit. That is not background color. It is a structural statement: working capital is part of the funding engine, so when the cycle gets longer, funding gets tighter.

The Supplier And Inventory Lines Show That Cash Leaves Before Collection

This is where precision matters. The $602 million line is not the same thing as $602 million of supplier prepayments. Note 8 calls it "deferred expenses and supplier advances," and it also contains incremental costs of obtaining customer contracts. In 2025 the company recognized $75 million of amortization out of that line, versus $69 million in 2024.

That is a key forensic point. Anyone reading this line as pure supplier funding misses that part of it is really deferred contract-acquisition economics. So it is not a clean offset against receivables or contract assets. It is another place where cash sits before it comes back.

Inventory tells the same story even if its annual increase was smaller. Inventory rose to $1.078 billion from $1.032 billion. But Note 9 says something more important than the headline number: inventory includes execution costs on signed contracts for which revenue has not yet been recognized, and in some cases even work performed before a contract with the customer was signed. That means part of the cash leaves not only before collection, but even before the revenue line catches up.

That is exactly what makes the 83-day versus 69-day gap more important than it first looks. Suppliers provide partial funding, but execution starts early, the invoice comes late, and collection comes later still.

The Cash-Flow Statement Shows Who Held The Picture Together

The cash-flow statement is the final test because it shows whether all of this movement remains inside the balance sheet or is already pressuring cash. In 2025, operating cash flow before the appendix fell to $832 million from $2.322 billion in 2024. That is not a minor move. It is a decline of $1.49 billion in one year.

Inside the operating asset-and-liability changes, the picture is very sharp. Receivables alone absorbed $824 million. On the other side, net contract liabilities added $626 million, and suppliers and service providers added $149 million. So even in a year of very strong demand, cash flow was supported from below by earlier customer funding in part of the contracts, not by fast release of receivable balances.

In an all-in cash flexibility frame, meaning after the period's real cash uses, the year still stayed positive. Operating cash flow of $832 million, less $103 million used in investing activities and less $469 million used in financing activities, left a $260 million cash increase before FX. Together with a $9 million translation effect, cash and cash equivalents rose to $486 million from $217 million.

That says two things at the same time:

• This is not an immediate liquidity event. The company still ended the year with more cash, even after paying a $447 million dividend.
• This is also not clean cash conversion. Receivables alone absorbed almost the entire operating cash figure, and the offset came from contract liabilities, suppliers, and other payables, not from a release of customer balances.

That is the core difference between strong reported execution and truly accessible cash. IAI is clearly executing at a high level, but the stretch from milestone to invoice to collection is still too long.

What Has To Change From Here

• Receivables have to stop growing faster than actual cash collection. It is not enough for contract assets to roll into receivables. They also need to be collected.
• Contract assets have to flatten or start declining. If both contract assets and receivables rise together, the jam is only moving forward, not clearing.
• The deferred-expense and supplier-advance line has to stabilize. Otherwise the supplier side is still demanding more upfront funding.
• Operating cash flow has to remain strong without another large boost from contract liabilities. That is the real test of conversion quality.

Conclusion

Cash at IAI is not getting stuck in one line item. It is getting stuck across a chain: first in execution costs and inventory, then in contract assets, then in receivables, and only later in cash. That is why the 2026 debate will not be decided only by whether demand stays strong. It will be decided by whether the distance between execution, billing, and collection begins to shorten.

The good news is that credit quality still looks strong, and the company is still generating positive operating cash even after a heavy execution year. The less comfortable news is that the cash balance is not yet benefiting at the same speed as the execution engine. So the next test is not whether there is work. The next test is how long that work takes to become cash.