Israel Ministry of Defense Owes IAI Billions Amid Record Business Growth and Cash Flow Challenges

Israel Aerospace Industries (IAI) is facing increasing cash flow pressures despite achieving record business performance, primarily due to the Ministry of Defense's growing debt to the company, which now exceeds 5 billion shekels. In the second quarter, IAI's cash flow turned negative by $795 million (2.38 billion shekels), a sharp decline from a positive cash flow of $170 million (510 million shekels) in the same quarter of 2025. The Ministry of Defense's payment difficulties also affect other defense manufacturers like Rafael and Elbit Systems, stemming from ongoing budget disputes between the Defense Ministry and the Finance Ministry. Overall, the Ministry of Defense's debt to defense industries is estimated at 15.5 billion shekels.

Boaz Levy, IAI's chairman, acknowledged the financial strain but emphasized confidence that the government will settle its debts, noting the disputes relate to defense budget allocations. Despite the cash flow issues, IAI reported a record order backlog of $35 billion at the end of Q2, up $6 billion since the start of the year. Sales rose 35% to $2.18 billion compared to the previous year, driven by expanded operations across all divisions. Net profit increased nearly 47% to 229 million shekels.

A significant portion of IAI's revenue came from the Israeli market, totaling $724 million, reflecting its key role in supplying combat systems to the IDF amid ongoing Middle East conflicts. Last week, IAI successfully completed a major Arrow missile system test with the Defense Ministry and IDF, demonstrating performance improvements. The Israeli market accounted for 35% of IAI's Q2 sales, with Asia contributing $680 million, North America $260 million, and Europe $470 million amid the continent's arms buildup related to the Russia-Ukraine war.

IAI described the first half of 2026 as its most profitable period ever, coinciding with accelerated preparations for the company's upcoming public offering. Chairman Levy stated the IPO will enable investments in infrastructure and production lines, strengthening both national security and the economy. The financial report is the first signed by incoming CEO Guy Bar Lev, recently appointed and set to replace Levy, who will remain chairman. Bar Lev highlighted increased R&D investments in advanced technologies to meet current and future defense operational needs across all theaters.