Elbit Systems: Record Backlog and a New Era of Customer-Funded Capacity

A Quarter of Surpasses

Elbit Systems delivered another quarter of strong execution in Q2 2026, with revenue up 15.9% to $2.29B, a record backlog of $32B, and operating margin expansion to 9.6% GAAP (10.4% non-GAAP). CFO Kobi Kagan opened with a fitting summary: “We're pleased to report another strong quarter, delivering double-digit growth in revenues, backlog, operating profit and EPS.” — Yaacov Kagan, CFO · 2026-08-11 The numbers are impressive, but the more intriguing shift lies beneath them—a new model of customer-financed expansion that could alter how the company converts its Maritime domain and other growth engines into revenue.

Customers Foot the Bill for Capacity

The clearest change is in how Elbit is funding growth. Management disclosed that CapEx investment is rising from $220M to $300M, but perhaps more importantly, customers are now willing to co-fund or fully fund facilities. Kagan explained the evolving dynamic:

There is matching where customers are willing to match our investments, and we see that now in the market, which we didn't see in the past. And even we see now for customers who wants to bring technology and to transfer technology to their own territory, they're willing to finance the whole capacity, the whole factory that we need to bring up.

This is a fundamental change in the defense procurement landscape. Previously, Elbit funded its own plants; now international customers are effectively paying for local production lines to secure supply. CEO Bezhalel Machlis noted the funnel is "very big" and that the company is "able to support the local economies"—a model that is gaining traction in Europe and the U.S. On the prior quarter's call, Kagan had already flagged the intent: “Having--investing around $300 million will go specifically to invest in Israel and out of Israel.” — Yaacov Kagan, Chief Financial Officer · 2026-03-17 The difference now is that customers are sharing the burden, a shift that could accelerate capacity expansion without diluting Elbit's balance sheet.

Growth Engines: Maritime, High Power Laser, and U.S. Market

Two themes stand out as catalysts. First, the Naval EW and broader Maritime domain are clearly emerging as a growth engine. Machlis detailed the breadth—naval electronic warfare, sonobuoys, USVs, and sonars—and noted that demand is global. He said: “Omri, with regards to the Maritime domain, that's for sure a growth engine for the company.” — Bezhalel Machlis, President and CEO · 2026-08-11 This is not new chatter; Elbit has been building this franchise for years, but the recent wins (e.g., the U.K. future Naval EW contract) are making it material.

Second, High Power Laser continues to attract outsized interest. The company is already delivering laser sources for the Israeli ground program and is advancing the airborne variant. On the prior call, Machlis stressed the potential: “we are developing the prime and airborne high-power solution for the Israeli Air Force, and there is a lot of interest for this solution for other customers--international customers as well globally.” — Bezhalel Machlis, President and CEO · 2026-03-17 In the current quarter, he added that the airborne pod is being showcased in Europe and is "a huge potential for us in this domain." The combination of maritime and directed energy positions Elbit as a leader in two of the most sought-after defense niches.

Meanwhile, the U.S. market remains a priority, with Elbit Systems of America winning ~$370M in CBP awards and a sole-source $212M order for ENVG-B night-vision systems. That sole-source designation—historically split—is a notable validation of Elbit's U.S. strategy. Butzi highlighted the broader intent: "We are expanding in the U.S. ... We are bringing more technologies from Israel to the U.S."

Backlog Conversion and Margin Expansion

The elephant in the room is whether the $32B backlog—up 34% year-over-year—can be converted into revenue at a faster cadence. Kagan pointed to a consistent pattern: "we look back from 2022 each year, we see that the backlog increased by over--sometimes even double the cadence of the growth in revenues." That suggests visibility is improving, and management believes mid-teens revenue growth is sustainable. The company also introduced a new Israeli R&D law that funded half of a ~$70M increase in R&D spend, which allowed Elbit to invest more without hurting margins.

The margin story is equally compelling. Gross margin expanded to 25.3% (GAAP), operating margin to 9.6%, and net income is being reinvested. The tax hit from OECD Pillar II (16.4% effective tax rate vs. 5.6% a year ago) is a headwind, but operating leverage is more than offsetting it. As Kagan noted, "we are paying a lot of attention and a lot of effort into expanding our margins." That trend has persisted for four years, and the customer-funded CapEx model could provide an extra tailwind.

In sum, Elbit's quarter was not just another beat—it signaled a structural shift in how defense capacity gets built. With Maritime domain and High Power Laser as dual engines, and customers writing checks for factories, the company is positioning itself to convert the record backlog into sustained double-digit growth and margin expansion. The question now is execution: can Elbit deliver on the promises without diluting its returns? For now, the momentum is on its side.