IAI Posts Record Q2 Results With $35 Billion Backlog, But Defense Ministry Payment Dispute Casts a Shadow

Israel Aerospace Industries (IAI) closed the second quarter of 2026 with the strongest financial results in its history, reporting a record order backlog of $35 billion and a 47% jump in net profit to $229 million - even as its biggest client, the Defense Ministry, holds back payments amid a budget dispute with the Treasury. Sales climbed 35% to $2.189 billion, with exports accounting for 67% of quarterly revenue, up about 40% from a year earlier.

IAI Posts Record Results as Defense Ministry Payment Dispute Grows

Jerusalem, Israel - Israel Aerospace Industries, the state-owned manufacturer behind the Arrow missile defense system, the Heron drones, and the Ofek satellites, is navigating a paradox: record demand on one side, and an increasingly delicate financial standoff with the government on the other. The company's leadership says the numbers reflect confidence in Israeli technology, but warns that unpaid state bills are becoming a growing burden.

A Banner Quarter on Paper

The numbers reflect a company operating at full throttle amid ongoing regional conflict. Every division - aviation, missiles, and space systems - posted growth in sales and profit, with exports accounting for 67% of quarterly sales, a 40% increase year-over-year.

The backlog, which has grown by more than 35% within a single year, positions IAI as one of the world's most sought-after defense manufacturers, with demand for its air defense, drone, and satellite systems heightened by their operational performance in recent conflicts. Yet beneath the surface of these record figures lies a growing financial strain that threatens to complicate the company's path to privatization.

The Elephant in the Room: Unpaid Defense Ministry Bills

For all the celebratory headlines, IAI's quarterly report contains a troubling anomaly: negative cash flow of $795 million, a stark reversal from the positive $170 million recorded in the same period last year. The cause, according to company officials, is straightforward-the Defense Ministry, IAI's largest client, is not paying its bills due to an ongoing budget dispute between the ministry and the Finance Ministry in Jerusalem.

IAI refuses to disclose the exact size of the debt, but the negative cash flow of NIS 2.4 billion hints at its accelerated growth. The company maintains cash reserves of $4 billion, providing a temporary buffer, but officials warn that this situation cannot persist indefinitely. "The country is not in a trivial situation, and we support it with all our ability," said Guy Bar-Lev, IAI's acting CEO. "Our cash reserves are limited. The time will come when we will have to take a loan if we are not paid. Someone will have to fund this loan, so it is better that they pay."

A Dispute Rooted in Wartime Budget Pressures

The payment freeze stems from a broader confrontation between the Defense Ministry and the Treasury over the size and sources of the defense budget. With Israel still engaged in multi-front operations, the Defense Ministry has demanded supplementary funding to cover operational costs, procurement, and production acceleration. The Finance Ministry, concerned about fiscal stability and the growing deficit, has pushed back, leaving contractors like IAI caught in the crossfire.

For IAI, the timing could not be worse. The company is preparing for an initial public offering, and the unpaid debts complicate its financial narrative. "Perhaps when you are a publicly traded company your biggest client won't be able not to pay," Bar-Lev remarked, acknowledging the irony that privatization might resolve what government-to-government negotiations have failed to settle.

Privatization Timeline Remains Fluid

IAI Chairman Boaz Levy addressed the delayed IPO directly, insisting that the process remains on track despite the financial friction. "IAI will go public, and it will go public in Israel," Levy said. "The Government Companies Authority and the Securities Authority are with us, and the Defense Ministry is doing what is necessary to protect everything that is required. The government decision was made and the privatization will happen. It could be at the end of the year and it could be later, but the government decision was made and will be implemented."

The IPO has been a subject of intense speculation in Tel Aviv financial circles for years, with the government viewing it as a way to inject capital into state coffers while maintaining strategic oversight. The delay, however, raises questions about whether the unresolved payment dispute could further postpone the listing or affect its valuation.

Arrow Test Success and Expanding Capabilities

Amid the financial turbulence, IAI continues to advance its technological edge. The company recently conducted a successful test of the Arrow missile defense system, expanding its capabilities in ways that Levy said will be essential for any nation operating the system. "We expanded the capabilities of the Arrow, which anyone who uses it will need," he said, without disclosing specific technical details.

The test comes at a time of surging global interest in Israeli air defense systems. Greece recently approved a $4 billion deal to purchase air defense systems from IAI and Rafael, though the agreement has not yet been signed. Levy framed such deals as more than commercial transactions. "Beyond selling to another country, there is an alliance being forged here between two countries, which these same systems will defend," he explained.

European and Global Demand on the Rise

Germany remains a key customer, with Levy expressing confidence that Berlin will place additional orders. "We continue to supply Germany, and I have no doubt there will be more orders from there," he said. Other countries have also expressed interest in the Arrow system, though any sale requires approval from both the Israeli Defense Ministry and the US government, given the system's co-development history with Washington.

"Everywhere I go, they ask me about the Arrow following its performance in the war," Levy noted, referring to the system's successful intercepts during recent missile and drone attacks on Israeli territory. The operational proof provided by combat use has proven to be the most effective marketing tool, driving demand that shows no signs of abating.

Competition Heats Up: Ondas and the American Challenge

IAI's dominance in the Israeli defense market is facing new challenges from American company Ondas, which has been aggressively recruiting senior officials in Israel, acquiring Israeli defense-tech companies, and beginning to win Defense Ministry contracts. Levy acknowledged the competitive pressure but struck a measured tone.

"We live in a competitive world. We compete in tenders, sometimes win and sometimes do not," he said. "We operate in a given situation. Those who need to must always remember that in a country like Israel, defense industries must be preserved and their stability ensured over the years. Industries that on October 7 knew how to give support even to systems whose production ended long ago. I hope the Finance and Defense ministries are aware of this."

The reference to October 7 underscores why domestic defense manufacturing matters in an emergency, when foreign suppliers may not respond with the same speed or commitment.

Space: The Next Frontier

Defense Minister Israel Katz has presented an ambitious and expensive vision for expanding the IDF's space capabilities, including activities that even the United States does not currently possess. IAI, as Israel's primary space contractor, stands to be a central beneficiary of this push.

"The defense minister marked the issue as one of the defense establishment's biggest growth engines," Levy said. "IAI is the home of space for the State of Israel, a field that is growing globally as well following what was done from space in the wars in Iran and Ukraine."

The company has several space projects in approval processes both in Israel and abroad, covering observation, communication, and space warfare capabilities. "We know how to launch satellites, build them, and control them throughout their entire lifespan," Levy added. "We will be able to enter any domain in space."

Looking Ahead: Growth vs. Fiscal Reality

IAI's record results demonstrate the strength of Israeli defense technology and the company's ability to capitalize on global demand. The receipt of three additional Israel Defense Prizes during the quarter, alongside the successful Arrow test, underscores the company's central role in national security.

Yet the unresolved payment dispute casts a long shadow over these achievements. As the debt grows, IAI faces a delicate balancing act between supporting the state in wartime and protecting its own financial stability. Leadership remains confident the situation will resolve, but the longer it persists, the more it threatens the very capabilities that make IAI indispensable.

For now, IAI continues to deliver record results, expand its global footprint, and push the boundaries of defense technology. The question of who will ultimately pay for it remains open-and the answer will shape not only IAI's future but also the broader health of Israel's defense industrial base.

This article was produced with AI-assisted research and editorial support. Sources: The Jerusalem Post.

By Hannah Berg, Staff Writer