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26-04-10, 12:16 PM
From Pauper to Powerhouse
Israeli Firm Profits From Successful Transformation
By BARBARA OPALL-ROME
Published: 26 April 2010
Israel's Rafael Advanced Defense Systems, it apparently is possible to have one's cake and eat it, too, with peak levels of profit, sales, backlog and independent research and development (IR&D) recorded in 2009.
Recently released year-end financial data shows the once heavily subsidized state-owned company with a net profit of $112 million, up from $46 million in 2008.
It was only a decade ago that Rafael managed to eke out a modest $1.5 million profit after foundering in tens of millions of dollars of annual red ink. Since 2002, however, after-tax profit has been on the rise, along with sales, backlog, work force and the percentage of sales that Rafael reinvests in research and development.
Ilan Biran, Rafael's chairman of the board, said the company reinvested 7 percent of sales last year in IR&D and aims to spend closer to 9 percent in 2010. In a January 2008 interview, Biran, a retired Israeli Army major general, said he wanted to increase R&D investment from 4.6 percent to 6 percent of annual sales.
However, better-than-projected earnings over the past two years have prompted a reassessment, with Rafael now committed to investing at least 7 percent to maintain its edge in advanced air, land and sea systems.
"We need to secure our lead position as an advanced system supplier for the long run, so we're not maximizing profit in the immediate term," Biran said in a late March interview.
Imri Tov, a former economic adviser to Israel's Ministry of Defense (MoD), credited Rafael for its "extraordinarily rapid" transition from a state-subsidized research and development arm of the MoD to a profitable business returning annual dividends to its shareholder, the Israeli Treasury. The transition began in 2002.
"Very early on, Rafael understood that its competitive edge depended on research and development, and it structured itself, its portfolio and its investment strategy accordingly," Tov said. "But at the same time, we have to recognize that the government ... helped by clearing their debt and starting on stable footing, something they have not done until now with IMI" - state-owned Israel Military Industries.
Tov, now an adjunct senior research fellow at Tel Aviv University's Institute for National Security Studies, estimated that on top of Rafael's high level of IR&D, it continues to receive regular R&D funding from the MoD. In an April 21 interview, Tov said that when MoD funding and foreign investment are taken into account, he "wouldn't be surprised ... if reinvestment in R&D reached 14 percent."
Rafael, Tov said, is "proving that state-owned firms don't have to be privatized to be competitive and profitable."
Rafael's management is concluding a strategic review of its business portfolio, aimed at positioning the company with the systems and technologies that military forces will need in the next 10 years, Biran said. He declined to share details of Rafael's R&D plans, yet noted they range from value-added applications of existing capabilities to new "game-changing" systems.
As an example of the latter, executives cited Iron Dome and Trophy, both first-of-kind protection systems. The Israeli Army has fielded brigades of tanks equipped with the Trophy active protection system. And by midyear, after just 2.5 years of development, Israel plans to deploy its first Iron Dome missile defense batteries.
At a conference earlier this year on missile defense, Israeli Defense Minister Ehud Barak praised Rafael for developing "in lightning speed ... this unprecedented defense against short-range rockets."
Becoming Younger
In parallel, Rafael is repositioning and expanding its work force, recruiting younger, niche-oriented engineers, technologists and programmers. In less than three years, the company's roster has grown from 5,000 to 6,000 employees, more than half of them scientists and engineers below age 40.
"It's taken some time, but a new, performance-based corporate culture has taken root," Biran said. "Our people, in general, because of age, job satisfaction, etc., are looking forward to future challenges, not to retirement, and we're seeing evidence that validates this trend."
Rafael's 2009 year-end financial data shows the company has doubled sales in five years, from $800 million in 2004 to slightly more than $1.6 billion last year. The company entered 2010 with a backlog of nearly $3.47 billion, enough to sustain more than two years of work.
Rafael President Yedidya Ya'ari, a former naval commando who retired in 2004 as the Israel Navy's top officer, attributed 2009 peak revenues and after-tax profits to an investment strategy adopted in 2005.
Also, in recent years Rafael has transitioned to outsourcing, creating an indirect work force of another 8,000 or so in Israel and partner countries. According to Biran, outsourcing of assembly, select component production and other nondevelopment functions allows the company to meet offset obligations with foreign customers and partners while focusing on core capabilities.
Company executives said Rafael's exports are becoming an ever-larger share of production, from about 65 percent in 2007 to 76 percent by the end of 2009. India and other parts of Asia, Europe and the United States are Rafael's largest export markets, company sources say.
Growing With Acquisitions
Last year, Rafael acquired 25 percent of M-Prest, an Israeli software and C4I specialty company. M-Prest provides command-and-control capabilities for Iron Dome and other military, dual-use and commercial systems.
In recent years, Rafael also has forged partnerships with key U.S. and European suppliers, such as through EuroSpike, a venture with Germany's Diehl BGT Defense and Rheinmetall Defense Electronics.
The company also is negotiating with India's Bharat Electronics Ltd. (BEL) to establish an Indian-based production company focusing on seekers for a set of air-, ground- and sea-launched missiles. Under the proposed deal, which Biran said Rafael expects to conclude in coming months, both companies will invest an initial $10 million to kick off production for the Indian market.
"But later on, the sky is the limit," Biran said.
---
E-mail: bopallrome @defensenews.com.
Israeli Firm Profits From Successful Transformation
By BARBARA OPALL-ROME
Published: 26 April 2010
Israel's Rafael Advanced Defense Systems, it apparently is possible to have one's cake and eat it, too, with peak levels of profit, sales, backlog and independent research and development (IR&D) recorded in 2009.
Recently released year-end financial data shows the once heavily subsidized state-owned company with a net profit of $112 million, up from $46 million in 2008.
It was only a decade ago that Rafael managed to eke out a modest $1.5 million profit after foundering in tens of millions of dollars of annual red ink. Since 2002, however, after-tax profit has been on the rise, along with sales, backlog, work force and the percentage of sales that Rafael reinvests in research and development.
Ilan Biran, Rafael's chairman of the board, said the company reinvested 7 percent of sales last year in IR&D and aims to spend closer to 9 percent in 2010. In a January 2008 interview, Biran, a retired Israeli Army major general, said he wanted to increase R&D investment from 4.6 percent to 6 percent of annual sales.
However, better-than-projected earnings over the past two years have prompted a reassessment, with Rafael now committed to investing at least 7 percent to maintain its edge in advanced air, land and sea systems.
"We need to secure our lead position as an advanced system supplier for the long run, so we're not maximizing profit in the immediate term," Biran said in a late March interview.
Imri Tov, a former economic adviser to Israel's Ministry of Defense (MoD), credited Rafael for its "extraordinarily rapid" transition from a state-subsidized research and development arm of the MoD to a profitable business returning annual dividends to its shareholder, the Israeli Treasury. The transition began in 2002.
"Very early on, Rafael understood that its competitive edge depended on research and development, and it structured itself, its portfolio and its investment strategy accordingly," Tov said. "But at the same time, we have to recognize that the government ... helped by clearing their debt and starting on stable footing, something they have not done until now with IMI" - state-owned Israel Military Industries.
Tov, now an adjunct senior research fellow at Tel Aviv University's Institute for National Security Studies, estimated that on top of Rafael's high level of IR&D, it continues to receive regular R&D funding from the MoD. In an April 21 interview, Tov said that when MoD funding and foreign investment are taken into account, he "wouldn't be surprised ... if reinvestment in R&D reached 14 percent."
Rafael, Tov said, is "proving that state-owned firms don't have to be privatized to be competitive and profitable."
Rafael's management is concluding a strategic review of its business portfolio, aimed at positioning the company with the systems and technologies that military forces will need in the next 10 years, Biran said. He declined to share details of Rafael's R&D plans, yet noted they range from value-added applications of existing capabilities to new "game-changing" systems.
As an example of the latter, executives cited Iron Dome and Trophy, both first-of-kind protection systems. The Israeli Army has fielded brigades of tanks equipped with the Trophy active protection system. And by midyear, after just 2.5 years of development, Israel plans to deploy its first Iron Dome missile defense batteries.
At a conference earlier this year on missile defense, Israeli Defense Minister Ehud Barak praised Rafael for developing "in lightning speed ... this unprecedented defense against short-range rockets."
Becoming Younger
In parallel, Rafael is repositioning and expanding its work force, recruiting younger, niche-oriented engineers, technologists and programmers. In less than three years, the company's roster has grown from 5,000 to 6,000 employees, more than half of them scientists and engineers below age 40.
"It's taken some time, but a new, performance-based corporate culture has taken root," Biran said. "Our people, in general, because of age, job satisfaction, etc., are looking forward to future challenges, not to retirement, and we're seeing evidence that validates this trend."
Rafael's 2009 year-end financial data shows the company has doubled sales in five years, from $800 million in 2004 to slightly more than $1.6 billion last year. The company entered 2010 with a backlog of nearly $3.47 billion, enough to sustain more than two years of work.
Rafael President Yedidya Ya'ari, a former naval commando who retired in 2004 as the Israel Navy's top officer, attributed 2009 peak revenues and after-tax profits to an investment strategy adopted in 2005.
Also, in recent years Rafael has transitioned to outsourcing, creating an indirect work force of another 8,000 or so in Israel and partner countries. According to Biran, outsourcing of assembly, select component production and other nondevelopment functions allows the company to meet offset obligations with foreign customers and partners while focusing on core capabilities.
Company executives said Rafael's exports are becoming an ever-larger share of production, from about 65 percent in 2007 to 76 percent by the end of 2009. India and other parts of Asia, Europe and the United States are Rafael's largest export markets, company sources say.
Growing With Acquisitions
Last year, Rafael acquired 25 percent of M-Prest, an Israeli software and C4I specialty company. M-Prest provides command-and-control capabilities for Iron Dome and other military, dual-use and commercial systems.
In recent years, Rafael also has forged partnerships with key U.S. and European suppliers, such as through EuroSpike, a venture with Germany's Diehl BGT Defense and Rheinmetall Defense Electronics.
The company also is negotiating with India's Bharat Electronics Ltd. (BEL) to establish an Indian-based production company focusing on seekers for a set of air-, ground- and sea-launched missiles. Under the proposed deal, which Biran said Rafael expects to conclude in coming months, both companies will invest an initial $10 million to kick off production for the Indian market.
"But later on, the sky is the limit," Biran said.
---
E-mail: bopallrome @defensenews.com.