Elbit Systems Ltd. — FY2015 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2015. Although the request metadata says “2015 Q4,” this is an annual report, not a standalone quarterly filing. Financial statements are audited and prepared under U.S. GAAP; amounts below are U.S. dollars unless stated otherwise.
Business context and results
Elbit Systems develops and supplies defense, homeland security and commercial aviation systems, with most revenue derived directly or indirectly from government customers. The company reports one operating segment. Exports represented approximately 80% of 2015 sales; the Israeli Ministry of Defense was its largest customer at 17% of revenue, down from 18% in 2014.
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Revenue | $3,107.6 million | $2,958.2 million | Up 5.0% |
| Gross profit / margin | $897.1 million / 28.9% | $825.1 million / 27.9% | Margin improved; management cited program mix |
| Operating income / margin | $268.6 million / 8.6% | $246.9 million / 8.3% | Up 8.8% |
| Net income attributable to Elbit shareholders | $202.5 million | $171.0 million | Up 18.4%; diluted EPS rose to $4.74 from $4.01 |
| Net financing expense | $20.2 million | $47.5 million | Lower, following elevated 2014 currency-related costs |
| Net R&D expense | $243.4 million | $228.0 million | Up 6.8%; 7.8% of revenue |
| Operating cash flow | $434.8 million | $177.8 million | Higher, supported by working-capital movements and customer advances |
| Cash and cash equivalents | $299.3 million | $200.4 million | Cash, short-term deposits and marketable securities totaled about $332 million |
| Working capital / current ratio | $645 million / 1.39 | $626 million | Liquidity increased |
| Debt | $214.0 million long-term loans before current maturities; $269.0 million Series A Notes principal | Higher balances | Notes include $55.5 million principal scheduled for 2016 |
Material changes versus FY2014
- Revenue growth was led by land systems, which rose to $558.7 million from $274.9 million, largely from tank fire-control and electro-optic night-vision sales in Asia-Pacific. Asia-Pacific revenue increased to $800.3 million from $528.8 million.
- C4ISR revenue declined to $995.2 million from $1,118.5 million, and electro-optic revenue declined to $231.9 million from $265.1 million. Latin American revenue fell to $325.4 million from $454.5 million, mainly reflecting lower homeland-security command-and-control sales.
- Operating cash flow rose substantially as inventories decreased by about $39.8 million and customer advances increased by about $71.3 million; these were partly offset by a $74.3 million decline in payables and accrued expenses.
- Cash used in investing activities was $181.6 million, including $141.4 million for acquisitions and $99.2 million for property and equipment, partly offset by net proceeds from short-term deposits and securities. Financing activities used $154.4 million, including $69.8 million of dividends and $55.5 million of Series A Note repayments.
- The effective tax rate increased to 18.6% from 12.8%. Management cited jurisdictional income mix and prior-year tax adjustments; Israeli tax benefits continued to reduce the rate.
Backlog, outlook, risks and unusual items
- Year-end backlog was $6.564 billion, up from $6.265 billion; 68% was scheduled for performance in 2016–2017. Management cautioned that backlog is not necessarily indicative of future sales and can be delayed, reduced or canceled.
- Management said cash, operating cash flow and available financing should be sufficient for operational needs for at least the next fiscal year. The filing provides no specific revenue, earnings or margin guidance.
- Management sees demand in airborne systems, C4ISR, unmanned vehicles, intelligence, cyber defense, training and homeland security, while also citing defense-budget pressures and stronger, larger competitors.
- Key risks include reliance on government programs and appropriations; export-license and regulatory approvals; geopolitical and Israeli operating conditions; fixed-price contract cost overruns and estimate changes; project delays or cancellations; foreign-exchange exposure; supplier constraints; cybersecurity threats; and pension, guarantee and financing obligations.
- In 2015 the company acquired an Israeli business and the Cyber and Intelligence division of NICE Systems. NICE consideration was approximately $154 million, including up to $40 million contingent consideration; acquisition accounting included $111.1 million of goodwill. Acquired operations had an immaterial effect on consolidated revenue and net income in 2015.
- Purchase commitments were approximately $1.292 billion, and bank and financial-institution guarantees outstanding were approximately $1.211 billion. These are largely related to normal contract purchases, customer advances and performance bonds; they are not equivalent to funded debt. The company reported compliance with financial covenants.
- The company reported no material goodwill or long-lived-asset impairment in 2015. Legal proceedings arise in the ordinary course; management, based on counsel, did not expect amounts above recorded accruals to materially harm financial position or results.
Important facts for investors to verify
- Whether 2015 cash generation and the working-capital benefits—especially customer advances and receivables and inventory movements—are sustainable.
- Execution, margins and cash conversion for the enlarged land-systems business and the $6.564 billion backlog, including the timing and funding of scheduled work.
- Acquisition performance and contingent consideration for the NICE business, and the assumptions supporting goodwill and acquired intangible values.
- Exposure to export approvals, customer concentration, fixed-price contract estimates, foreign currencies, and the large guarantee and purchase-commitment balances.
- Tax-audit outcomes and the durability of Israeli tax benefits; the filing reports approximately $49.8 million of unrecognized tax benefits at year-end.