Business context and reporting period
Formula Systems (1985) Ltd. filed this annual report on Form 20-F for the fiscal year ended December 31, 2021. The Israel-based holding company consolidates its IT services and software businesses, including Matrix, Sapiens, Magic Software, Michpal, Zap Group, InSync and Ofek; its 50%-owned TSG is accounted for under the equity method. Financial statements are in U.S. dollars and prepared under IFRS. This is a full-year report, not a standalone fourth-quarter filing.
Financial performance and position
| Metric (US$ unless stated) | 2020 | 2021 | Change |
|---|---|---|---|
| Revenue | $1,933.9 million | $2,404.4 million | +24.3% |
| Gross profit / margin | $447.4 million / 23.1% | $563.9 million / 23.5% | +26.0%; margin modestly higher |
| Operating income / margin | $170.6 million / 8.8% | $208.0 million / 8.7% | +21.9%; margin slightly lower |
| Net income | $114.0 million | $141.9 million | +24.5% |
| Net income attributable to Formula shareholders | $46.8 million | $54.6 million | +16.7% |
| Basic / diluted EPS | $3.05 / $3.01 | $3.57 / $3.50 | Higher year over year |
| Cash from operating activities | $286.9 million | $208.5 million | Down $78.5 million |
| Cash used in investing activities | $177.0 million | $110.2 million | Lower cash use |
| Cash from / (used in) financing activities | $9.7 million | ($114.1 million) | Shifted to cash use |
Revenue growth was broadly split between software services, up 24.3% to $1,771.4 million, and proprietary software products and related services, up 24.3% to $633.0 million. Israel generated $1,506.6 million, approximately 63% of revenue; the United States contributed $591.8 million and Europe $255.7 million. Sapiens revenue rose 20.4% to $461.0 million; Matrix’s overall revenue grew about 13% in NIS, while Magic Software revenue increased across services and software offerings.
At year-end, cash and cash equivalents were $485.4 million, short-term deposits $25.9 million and marketable securities $1.1 million, totaling approximately $512.5 million. Current assets were $1,302.1 million against current liabilities of $947.6 million. Bank and other borrowings plus debentures totaled approximately $586.4 million, comprising $175.7 million of current bank and other credit, $157.2 million of long-term loans, $48.5 million of current debentures and $205.0 million of long-term debentures. Lease liabilities were a further $126.5 million. Operating cash flow fell in part because trade receivables increased by $150.8 million.
Material changes versus 2020
- Net income increased, while operating margin was broadly stable and slightly lower; gross margin improved modestly.
- Operating cash flow declined materially, primarily reflecting working-capital demands, including the increase in trade receivables and lower Matrix operating cash generation.
- Cash used for acquisitions fell to $77.2 million, net of acquired cash, from $141.4 million. The 2021 total includes Formula’s April acquisition of Zap Group for approximately NIS 244.2 million in cash, plus contingent consideration of up to NIS 60 million.
- Financing cash flow turned negative, reflecting dividends, debt and lease repayments, partly offset by new borrowing and Formula’s April 2021 Series C debenture issuance.
- Revenue and reported costs grew partly because acquisitions completed in 2020 contributed for a full year in 2021 and several businesses acquired during 2021 were consolidated. Goodwill reached $932.9 million, from $872.4 million, and goodwill plus identifiable intangible assets were substantial.
Outlook, commentary, risks and unusual items
Management said existing cash, expected subsidiary distributions and available credit should be sufficient for working capital needs for at least 12 months at current operating levels. The filing provides no specific company-wide revenue or earnings guidance. Management cited industry forecasts of continued IT spending growth, but these are external estimates, not Formula guidance. Matrix described demand recovery in 2021 and a hybrid-work model; Sapiens reported double-digit growth and investment in expansion. The company expects to continue acquisitions and product development.
- Key risks include acquisition integration and contingent consideration; talent shortages and wage inflation; lengthy sales and implementation cycles and fixed-price project cost overruns; migration to cloud offerings potentially reducing demand or margins; cybersecurity, privacy and software defects; foreign-exchange and Israeli inflation exposure; and economic, political and security risks in Israel and other markets.
- The company reported that it and its principal subsidiaries were in compliance with financial covenants at December 31, 2021. Formula debentures are secured by shares in Matrix, Sapiens and Magic Software and carry restrictive covenants, including limits on dividends and additional debt.
- Unusual legal matters include a $1.6 million arbitration award against Magic Software, recognized in 2021 expenses; a derivative action challenging executive compensation and the CEO’s 611,771-RSU award, with outcome not predictable; and a Zap Group class-action claim reduced from NIS 793.8 million to NIS 63 million. Formula stated the Zap claim is covered by former-owner indemnification obligations.
- The company recorded a $3.5 million deferred tax liability after Sapiens elected a temporary Israeli tax treatment for accumulated tax-exempt earnings. Management reported no material direct COVID-19 impact on consolidated results at the reporting date. The audit opinion on the IFRS financial statements was unqualified; management and the auditor concluded internal controls were effective, although controls at certain 2021 acquisitions were excluded from the assessment.
Important facts for investors to verify
- Review the audited financial statements and notes for cash conversion, receivables collection, debt and lease maturities, and subsidiary-level liquidity.
- Confirm acquisition performance, contingent payments, and integration progress—particularly Zap Group and the 2021 Matrix and Magic Software acquisitions.
- Assess the $932.9 million goodwill balance and acquired intangible assets for impairment sensitivity.
- Track the outcome and potential exposure of the CEO compensation derivative action, Zap Group class action, and other litigation.
- Check covenant headroom, dividend restrictions, foreign-exchange sensitivity, Israeli tax-benefit eligibility, and the impact of NIS appreciation and inflation on margins.