IAI in the first quarter: advances solved the cash test, now execution has to catch up
The first quarter answered part of the concern left after 2025: operating cash flow jumped to $932 million and backlog rose to $32.8 billion. But most of the cash improvement came from customer advances, so the test has shifted from early funding to execution, collection and margin quality.
IAI reported a first quarter that fixes part of the open issue from the end of 2025, but it does not make the story simpler. Revenue rose 29.6%, operating profit rose 44.8%, and operating cash flow reached $932 million, more than the company's entire operating cash flow in 2025. That is a real improvement, because the company did not merely expand backlog, it also received meaningful early cash from customers. Still, the source of cash matters more than the headline number: contract liabilities, meaning customer advances, increased by $1.395 billion during the quarter, while customers, contract assets and inventory absorbed a combined $737 million. The concern has therefore moved from cash shortage to execution risk: the company needs to turn advances and backlog into revenue, protect margins, and show that the increase in customer balances does not become the bottleneck again. A $32.827 billion backlog gives unusual visibility, but it also raises the execution burden for the coming years. The next quarters should therefore be judged less by another demand headline and more by three items: revenue conversion, margin quality in the growing segments, and whether early cash avoids being absorbed again into working capital.
Advances answered part of the 2025 cash test
Deep TASE's previous annual coverage marked cash as the key test after a record operating year. In the annual analysis and the follow-up on working capital, the issue was not demand, but the distance between work performed and cash actually received. The first quarter gives a stronger first answer: net profit was $220 million, while operating cash flow was $932 million.
That cash flow was not only better collection. The largest working-capital movement came from contract liabilities, which rose by $1.395 billion in the quarter, mainly customer advances in missile and space systems and in the aviation segment. At the same time, customers increased by $540 million, mainly because of a higher Ministry of Defense balance, contract assets increased by $115 million, and inventory increased by $82 million. The company received more money upfront, but part of the work still runs through customers, contract assets and inventory before it becomes clean cash.
| Key cash and working-capital item | Q1 2026 | Q1 2025 | Economic meaning |
|---|---|---|---|
| Net profit | 220 | 164 | Profit rose, but does not explain cash flow by itself |
| Increase in customers | (540) | (416) | Collection still did not catch up with all billing activity |
| Increase in contract assets | (115) | (52) | Some work was recognized as revenue before full billing |
| Increase in inventory | (82) | (51) | Execution requires more resources before delivery |
| Increase in contract liabilities | 1,395 | 857 | Customer advances are the main cash-flow engine |
| Operating cash flow | 932 | 495 | The improvement is sharp, but funded largely by customers |
This is the quarter's all-in cash picture, not a normalized maintenance cash-flow estimate. After $74 million of property, plant and equipment investment, $8 million of intangible asset purchases, $13 million of lease liability repayments and a large use of cash in deposits and securities, cash and cash equivalents increased by only $259 million. Operating cash flow is strong, but a large part of it was routed into liquidity management and continued investment.
A $32.8 billion backlog now demands faster execution
Backlog rose to $32.827 billion at the end of March 2026, compared with $28.750 billion at the end of 2025. A $4.077 billion increase in one quarter is not background information. It explains why customers are willing to pay advances, but it also means the company has to lift execution without eroding margins.
The sales mix points in the same direction. The defense market accounted for 88.9% of first-quarter sales, up from 86.1% in the parallel quarter, and exports and overseas sales accounted for 64.6% of sales. That is a strong demand base, but it also makes the company a project-driven industrial platform exposed to defense budgets, currencies, labor availability, supply pace and collection from government customers. The Ministry of Defense is a material customer, and the company does not flag a specific collection risk there, but the increase in customer balances during the quarter is a reminder that even a strong customer can delay cash inside the balance sheet.
The comparison base also prevents overstatement. Compared with the first quarter of 2025, revenue rose 29.6% and operating profit rose 44.8%. Compared with the fourth quarter of 2025, revenue declined from $2.247 billion to $2.086 billion, and gross margin declined from 21.3% to 17.9%. The first quarter is strong, but it does not by itself prove a new run-rate in profitability. It mainly proves that backlog continues to build and that customers are willing to fund a large part of it upfront.
Profitability improved, but not evenly across segments
At the consolidated level, gross profit rose to $374 million from $305 million, but gross margin declined to 17.9% from 18.9%. Operating profit rose faster, to $239 million from $165 million, partly because of a temporary decline in research and development expenses and other income from an investee company. The operating improvement is good, but not all of it came from stronger gross margin.
The segment breakdown shows where the strength was created and where pressure remains. Missile and space systems were the main profit engine in the quarter: sales rose to $1.025 billion and operating profit rose to $144 million. ELTA increased sales to $603 million, mainly from radar systems, but its gross margin declined to 19.4% from 22.0% and its operating margin declined to 10.6% from 11.7%. In the aviation segment, sales rose to $415 million, but operating profit declined to $13 million and operating margin fell to 3.1%.
| Segment | Q1 2026 sales | Change vs Q1 2025 | Q1 2026 operating profit | What matters |
|---|---|---|---|---|
| Missile and space systems | 1,025 | +298 | 144 | The main profit engine of the quarter |
| Military aircraft | 197 | +40 | 16 | More moderate improvement, with relatively stable margin |
| ELTA | 603 | +98 | 64 | Sales rose, but margins declined |
| Aviation | 415 | +43 | 13 | Top-line growth did not reach operating profit |
This is the growth-quality test. If the new backlog sits mainly in high-margin segments with good collection, the first quarter will look like the start of a deeper improvement. If growth continues with margin erosion in ELTA or aviation, the company will show impressive volume but less operating leverage. The planned merger of ELTA into the parent company can simplify the legal and managerial structure, but it still requires government approvals and does not replace the margin test inside ELTA itself.
The balance sheet is comfortable, but value still runs through the state
The balance sheet is stronger than the usual public discussion around privatization or a future equity offering. Cash, cash equivalents and short-term financial assets totaled $4.782 billion at the end of the quarter, compared with gross financial debt of only $220 million. Net of financial debt, the company had $4.562 billion of financial assets. Financial covenants were also far from stress: tangible equity was $2.530 billion versus a $600 million requirement, tangible equity to balance sheet was 29% versus a 16% threshold, and the solo equity-to-balance-sheet ratio was 37% versus a 20% threshold.
The external rating signal supports the same view. In April 2026, S&P Maalot affirmed the local ILAAA rating with a stable outlook, and global S&P affirmed an A- rating with a stable outlook. These ratings do not remove the execution test, but they explain why the debt market can keep treating the company as a strong issuer even when working capital is volatile.
The less simple part is access to value for public equity investors. Based on local market data, the company has no active traded share. The filing again refers to the minority share offering process already approved at the ministerial privatization committee level, but it does not provide a binding timetable. At the same time, the $242 million dividend approved at the end of 2025 still appears as a payable, and remains subject to the rules of a government company, approvals and covenant compliance. This is not an urgent liquidity issue in the quarter, but it does explain why strong operating progress does not immediately become an accessible equity story.
Governance adds another state-linked layer. Former chairman and CEO Boaz Levy ended his term as CEO, and the board appointed Moshe Levy as interim CEO for up to three months, after ministerial approvals. In a company with more than $32 billion of backlog, an interim CEO is not an operating risk by itself, but it is another friction point while the ELTA merger, minority offering process, dividend and growth agenda all remain on the table.
Conclusions
The first quarter improves the picture for IAI, but not simply because it was another strong quarter. The important point is that the 2025 cash test received a first answer: customers funded the company upfront on a large scale, and operating cash flow jumped accordingly. That is a positive development because it lowers the concern that growth remains trapped only in backlog, customers and contract assets.
Still, the same mechanism creates the 2026 test. Advances are not profit and are not final collection for already completed work. They are an obligation to deliver. The next report therefore needs to show that the company is not only receiving early cash, but also protecting margins in missile and space systems, stopping margin erosion in ELTA and aviation, and preventing customers and contract assets from absorbing operating cash flow again. If that happens, the first quarter will look like a turning point in working-capital quality. If not, it will look more like early cash pulled into a heavy project cycle.
In the short term, the debt market is likely to take support from the cash balance, ratings and wide covenant headroom. The equity market, if and when a minority offering advances, will have to ask a different question: whether the enormous backlog creates recurring profit and cash flow, or mainly requires the company to manage a larger project cycle under state control. Demand is no longer the central question. Execution, margins and access to value are.
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