Elbit Systems: how backlog turns into inventory, advances and supplier finance
This follow-up to the main article isolates the funding mechanics behind Elbit’s 2025 conversion story. Operating cash flow reached $778 million, but that still sat alongside a $389.4 million rise in receivables and contract assets, inventory of $3.13 billion and $269 million of supplier-finance obligations.
The main article already made the broader point: the debate on Elbit has moved from demand to conversion. This follow-up isolates the mechanism behind that shift. Not whether backlog exists, and not whether profit improved, but how backlog actually rolls through the balance sheet into inventory, contract assets, customer advances and supplier finance, and what is really left after the year’s cash uses.
That is the core issue: in 2025 Elbit showed both strength and dependence at the same time. Customers funded part of execution through a $651.3 million rise in contract liabilities. But the same backlog also required another $389.4 million of receivables and contract assets, another $356.1 million of inventory, and continued use of supplier finance at a $269 million year-end balance. In other words, backlog is partly self-funding, but not yet clean enough to run without a thicker balance-sheet layer.
Four less obvious conclusions emerge from the notes:
- First: this is not a credit-quality problem. The credit-loss allowance barely moved, and the company says there were no significant credit or impairment losses on contract assets. This is a funding-intensity issue, not a collectability issue.
- Second: inventory is no longer sitting mainly in pre-award costs. Those pre-contract costs fell to $118.2 million from $167.1 million, so most of the build is tied to work already running and materials already purchased for execution.
- Third: supplier finance is not a footnote. The year-end obligation rose to $269 million, but behind that balance the company entered into $280.8 million of new agreements during the year.
- Fourth: even after $778 million of operating cash flow, the company still did not cover the main cash uses outside that line without the equity issue.
Where backlog is sitting on the balance sheet
Trade receivables and contract assets, net, reached $3.332 billion at the end of 2025, up from $2.943 billion a year earlier. That is a $389.4 million increase. Within that amount, balances related to contracts with the Israeli Ministry of Defense totaled $1.03 billion, versus $761.5 million at the end of 2024. Nearly one-third of the receivable and contract-asset stack is therefore tied to IMOD, and the annual increase in that exposure alone was about $268 million.
That matters because it clarifies what actually happened in 2025. Elbit did not just sell more. It also recognized more revenue ahead of full billing and carried more open balances on the way to collection. That fits the mechanics of long-cycle defense contracts, but it also means growth did not flow directly into cash.
Customer funding did expand on the other side of the ledger. On a gross contract-accounting basis, contract assets rose to $2.749 billion from $2.406 billion, but contract liabilities rose faster, to $3.617 billion from $2.966 billion. The gap between them, net contract liabilities, widened to $868.7 million from $560.3 million. Customers are therefore providing more support to the execution machine, but that support is not stopping the asset side of working capital from moving higher as well.
The important nuance is what this does not mean. It does not look like a receivables-quality problem. The company states that trade receivables and contract assets are expected to be billed and collected during 2026, that there were no significant credit or impairment losses on contract assets in 2025 and 2024, and that the allowance for credit losses only edged up to $14.184 million from $14.006 million. The issue is therefore not whether the money will arrive, but how much balance-sheet weight and elapsed time the company has to carry before it does.
| Layer | 2024, $m | 2025, $m | Change | What it means |
|---|---|---|---|---|
| Trade receivables and contract assets, net | 2,942.9 | 3,332.2 | +389.4 | More revenue recognized ahead of full collection |
| IMOD balances inside that line | 761.5 | 1,029.5 | +268.0 | Meaningful concentration inside working capital |
| Gross contract liabilities | 2,966.1 | 3,617.4 | +651.3 | Customers are funding a larger share of the run-rate |
| Supplier finance obligations | 241.8 | 269.0 | +27.3 | Operating finance remained material at year-end |
| Lease cash payments | 98.3 | 116.2 | +17.9 | A real cash burden already embedded in operating cash flow |
Inventory is no longer background noise
Inventory, net of customer advances, rose to $3.130 billion from $2.774 billion. That is a $356.1 million increase. The composition matters. Most of the increase came from costs incurred on long-term contracts in progress, up $222.8 million, and raw materials, up $133.4 million. Advances to suppliers and subcontractors actually declined slightly, by $10.3 million.
That means the cash is getting stuck less at the promise stage and more at the production stage. This is inventory tied to work already moving and material already bought to meet delivery schedules. That is exactly the point where strong backlog stops being only a commercial advantage and starts becoming a balance-sheet load.
One footnote on the page is especially useful. Pre-contract costs included in inventory fell to $118.2 million from $167.1 million. That makes it harder to argue that the build is mainly an aggressive accounting stance around future tenders. The 2025 inventory load looks much more like real execution on already-awarded work.
This is also why the question is not simply whether customer advances are large enough. Even when the customer prepays part of the contract, the company still has to hold material, work in progress, subcontractors, leases and the elapsed time between production and delivery. As backlog becomes larger and more industrial, the financing bill for that interim period rises with it.
Who is funding the interim period
Operating cash flow reached about $778 million in 2025. On the surface, that is a strong number. But the company itself explains what drove it: an approximately $651 million increase in customer advances and a $172 million increase in non-cash operating items, offset by an approximately $358 million increase in inventories and an approximately $660 million increase in trade receivables and contract assets. This is not a full reconciliation of every operating-cash line, but it is the set of forces the company itself identifies as the main drivers.
Put more simply, customers paid earlier, but Elbit also moved earlier on production and revenue recognition. So positive operating cash flow does not cancel the argument that growth has become more balance-sheet-intensive. It only shows that customers are helping carry part of the load.
Supplier finance adds another layer. Supplier-finance obligations ended the year at $269 million, versus $241.8 million a year earlier. The ending balance alone understates the role of the program. During 2025 the company entered into $280.8 million of new supplier-finance agreements and paid $253.6 million. This is not a static year-end line. It is an active funding layer running alongside the rise in customer advances.
There is also an added liquidity tool on the receivables side. Financial expenses related to transferred financial assets were $27.9 million in 2025, after $42.7 million in 2024. The note says such transfers typically consist of receivables factoring to Israeli and European financial institutions. The cost came down, but the existence of the line still matters. Elbit is not relying only on customers to bridge timing gaps. It is also using financial institutions on both sides of the working-capital cycle, through receivables monetization and supplier finance.
This is not a criticism of using those tools by itself. In a defense company with long-cycle programs, that can be entirely rational. The issue is the mix. When receivables, contract assets, inventory, customer advances and supplier finance all rise together, the honest conclusion is that backlog is not rolling into cash in a clean straight line. It is rolling through several financing layers at once.
The real cash picture
This is where framing discipline matters. On an operating-conversion basis, Elbit did generate cash. On an all-in flexibility basis, the picture is less clean.
First, lease cash payments rose to $116.2 million from $98.3 million. Those payments are already embedded in operating cash flow, so they should not be deducted again, but they do matter because they remind readers that operating cash flow is not the same thing as free cash. Total operating lease liabilities also rose to $575.2 million.
Second, outside operating cash flow the company quantified several clear cash uses: $226 million of property, plant and equipment purchases, $112 million of dividends, and $479 million of commercial-paper, loan and note repayments. Together that is $817 million versus $778 million of operating cash flow. Even before counting every other investing item, that leaves a shortfall of roughly $39 million.
And that is still a conservative bridge. The company itself says net cash used in investing activities was about $391 million, so the $226 million of PP&E is only the largest component it explicitly breaks out. In other words, even after a year of strong operating cash flow, overall flexibility did not really open up without the equity raise.
That is exactly where the roughly $573 million of cash proceeds from the share issuance comes in. It was not just a balance-sheet bonus. It was the extra buffer that allowed Elbit to carry heavy working capital, keep investing, pay the dividend and still repay debt.
What needs to happen next
If Elbit wants to show that backlog is becoming more internally funded, three things have to happen together. First, the growth rate of receivables and contract assets needs to fall below the growth rate of revenue, or those balances at least need to start closing through 2026 as the company says they should. Second, inventory, especially long-term contracts in progress and raw materials, needs to start moving into deliveries at a pace that reduces the relative burden on the balance sheet. Third, the support layers, customer advances, supplier finance and receivables monetization, should not become a permanent financing structure that has to expand with every additional step-up in backlog.
That is what the market is likely to test in the next reports. Not whether more awards are coming. That part is already clear. The question is whether more awards will now bring cleaner cash, or just another turn of inventory, receivables and bridge financing.
Conclusion
Elbit’s notes draw a much more precise picture than the headline “$778 million of operating cash flow”. Customers are indeed funding part of the run through advances, but at the same time the balance sheet is still carrying more inventory, more contract assets and more operating-finance layers. This is not a warning about weak credit quality. It is a warning that converting backlog into cash still consumes a lot of capital.
Bottom line: in 2025 Elbit proved demand is real. It did not yet prove that this demand can fund itself cleanly.
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