TEL AVIV — Over the past few years, Avi Felder has worked to ready Israel Military Industries (IMI) for privatization through sweeping efficiency measures, a streamlined workforce, transparent reporting procedures and a new portfolio of advanced systems, many of them combat-proven in last summer's Gaza war.

Late last week, he and IMI's government owners got their first indication that the fruits of their labors might pay off as more than 10 groups of potential buyers registered interest in bidding on Israel's oldest defense firm. Plans call for formal, secured bids by autumn, with selection and transaction closing by January 2016.

A 33-year employee of IMI, Felder began serving as chief executive in 2005 when annual sales were some $350 million. By the end of this year, he projects $500 million in new orders, along with a firm backlog of $2 billion.

Q. After decades of talk, is it really going to happen? Is IMI past the point of no return toward privatization?

A. We are already in the process of establishing the new company — IMI Systems — that will be transferred from government to private ownership. Since April 2014, we've signed all the agreements with the labor union, the Finance Ministry and the Ministry of Defense.

By January 2016, our new owners will assume a company that is debt-free, cleansed of all claims from the past, and very strongly positioned to compete globally for decades to come.

Q. How so?

A. Core business activities and all assets of IMI and our subsidiaries get transferred to the new owners, but all the problematic issues — environmental liabilities and pension obligations that IMI took upon itself 25 years ago when we transitioned from a branch of the Israel MoD to a government company — will remain with the government.

In parallel, certain very high overhead, classified strategic activities will be spun off and retained by the state under an MoD-owned and operated company called Tomer.

Q. Is there any risk that this new MoD-owned firm — which deals primarily in heavy rocket motors — will compete with IMI Systems?

A. On the contrary, Tomer has a strong agreement in place to cooperate with IMI far into the future. The new privatized company will produce for Tomer and will be a market for some of its technologies.

Q. After decades of chronic cash-flow distress and low profitability, what have you been doing to promote future growth?

A. We've reorganized the company into three divisions instead of five and have established five business units more closely aligned with customer orientation. As part of our transformation strategy implemented by our chairman, Udi Adam, and heads of the labor union, we're reducing manpower by one third. At the same time, we're recruiting people with engineering, system design and other skills more relevant to future business.

When IMI got into this process, we were 3,700 employees with a productivity rate of about $100,000 per worker per year. More than 1,000 have already left the company and another 200 will soon join them. By 2016, we'll be down to a workforce of 2,500 with a productivity rate of some $250,000 per year.

Q. What about research and development [R&D] investments?

A. We've been reinvesting a considerable percentage of sales in research and development. This year, it comes to $115 million, $22 million of which includes independent R&D. About 50 percent of the $530 million in deliveries planned for 2015 are based on projects we developed in the last five years.

Q. What about capital investments?

A. We're investing dozens of millions of dollars in a total upgrade of our internal processes. Because of our cash flow crisis, we hadn't invested in our shop floor for many years. But now we're improving efficiencies through a three-year [Enterprise Resource Planning] system, which will be complete by the end of 2016.

A new position of chief operating officer was created to manage the IT, production lines, procurement and quality assurance of the company. At the same time, we've overhauled our supply chain and instituted centralized procurement.

Q. How do you expect all this to translate into future business?

A. Through internal efficiencies and improved research, development and design capabilities, we've been able to cut down time to market by less than half. If, in the past, it took us seven years from concept feasibility to production, now we're talking about a maximum of three years.

Q. Can you give us an example from your new systems portfolio?

A. A great example of time to market/design to cost efficiencies is Extra, our 306mm, very accurate GPS-guided artillery rocket for ranges up to 150 kilometers. It took just three years from the time of R&D to production, and it's now operational in several customer countries.

Q. IMI contributes some 25 percent of subsystems and components for Israel's Merkava main battle tank. But with customers worldwide looking for maneuvering capabilities more closely suited to urban battles, what does your revamped portfolio have to offer them?

A. One of the clear drivers of our business plan, which we reassess every two years against changing circumstances, is the need for affordable, multimission systems suitable for multiple combat scenarios. We'll have the same percentage on the Namer heavy troop carrier, which the Israeli MoD has elevated to a top procurement priority in the coming years.

We've also developed a second-generation active protection system for all kinds of ground vehicles; it's the only system in the world demonstrated as effective against 120mm rounds. But probably most indicative of our future direction is our ability to offer a family of rockets housed in a common launcher that can be installed on wheeled vehicles.

Q. Are you talking about Lynx, an interchangeable system for launching a variety of rockets ranging from 35 to 250 kilometers?

A. Yes. One of the main focus points of the company's new strategy is affordability and high added value for our customers. The rocket systems are a great example of how this strategy works. Instead of a tracked vehicle, we're installing pods on wheeled vehicles at half the life-cycle costs of other systems. We're talking about common launcher pods for all our rockets. If you want to change the rockets in the launcher, you just need to bring a truck with a lifter. The user can decide which warheads or which guidance systems he needs depending on the combat scenario.

Q. IMI traditionally forms joint ventures with local firms from practically all its customer nations. Do you expect that to change following privatization?

A. Once IMI is an independent, privately owned company unburdened by government restrictions, it will be in a much better position to achieve growth through mergers and acquisitions. But joint ventures [JVs] are likely to remain a critical part of our policy.

Teaming with local industry makes sense. They know the culture of the customer, they bring employment to the country, and they provide logistics support to the customer for the very long term. We have successful JVs all over the world; including partnerships with major companies in the US such as Raytheon, General Dynamics and DRS.

Q. What are your top export markets?

A. We enjoy a global customer base that spans Europe, Asia and the Americas, along with decades of close cooperation with the Israel Defense Forces, the US military and NATO forces.

Q. So what needs to happen between now and the government's actual closing on the sale?

A. My estimate is that there will be several serious groups who will remain in the process until the end. If any of them don't follow through, it's not necessarily a reflection on us, but rather a reflection of their own strategic interests. Over the six weeks or so, the regulator [the Israel Government Companies Authority] together with MoD will assess those groups that have registered initial interest. Those that are approved will then have to put up $1.5 million to get into the data room. It won't be a physical thing; they'll just get a password and gain access to all the information they need to perform due diligence.

By October, they'll need to put down another $10 million to secure their bid. By January we should find out who the new owners are.

Q. We understand the government is expected to net many billions of dollars just from the sale of the vast property IMI occupies in Ramat Hasharon, a suburb of Tel Aviv. When will the new owners have to complete their move down south?

A. We have years to plan for the move. But by 2020, we will no longer be here in Ramat Hasharon.

Email: bopallrome@defensenews.com

Twitter: @OpallRome

Opall-Rome is Israel bureau chief for Defense News. She has been covering U.S.-Israel strategic cooperation, Mideast security and missile defense since May 1988. She lives north of Tel Aviv. Visit her website at www.opall-rome.com.

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