Elbit Systems Ltd. — FY2021 Form 20-F Summary
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2021, filed April 7, 2022—not a standalone fourth-quarter report. Elbit Systems is an Israel-based defense, homeland security and commercial aviation technology company. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $5.279 billion | $4.663 billion |
| Gross profit / margin | $1.358 billion / 25.7% | $1.165 billion / 25.0% |
| Operating income / margin | $418.5 million / 7.9% | $325.7 million / 7.0% |
| Net income attributable to shareholders | $274.4 million | $237.7 million |
| Diluted EPS | $6.20 | $5.38 |
| Operating cash flow | $416.9 million | $278.8 million |
| Cash and cash equivalents, year-end | $259.0 million | $278.8 million |
| Working capital / current ratio, year-end | $956 million / 1.24 | Not stated here |
Revenue grew approximately 13.2% year over year. Airborne systems revenue rose to $2.006 billion, principally on Asia-Pacific precision-guided munitions sales; C4ISR revenue increased to $1.372 billion, partly reflecting Sparton, acquired in April 2021. Land systems revenue was broadly flat at $1.255 billion, while electro-optic revenue declined to $453 million.
Research and development expense was $447.9 million gross and $395.1 million net of participation. FY2021 net income included an approximately $80 million tax charge associated with electing to release certain Israeli exempt earnings. The effective tax rate was 34.3%, versus 13.9% in 2020. FY2020 operating results included approximately $60 million of non-cash COVID-related impairment and inventory write-offs.
Debt, liquidity and cash flow
- Year-end borrowings included approximately $391 million of bank loans and $600 million of Series B, C and D notes; cash was $259 million. These figures imply approximate net borrowings of $732 million, before considering other financial items.
- FY2021 operating cash flow was $416.9 million. Investing cash outflow was $587.7 million, including $188.6 million for property and equipment and acquisition-related cash outflows. Financing cash inflow was $151.0 million; dividends paid were $79.2 million.
- Operating cash flow benefited from a $617.7 million increase in customer contract liabilities/advances, partly offset by increases in receivables of $430.3 million and inventories of $336.2 million.
- The company reported that it met all applicable financial covenants and expected cash, operating cash generation and available financing to cover operating needs for at least the next fiscal year.
Material changes and business developments
- Backlog rose to $13.661 billion at year-end from $11.024 billion, with 72% outside Israel. Approximately 60% was scheduled for performance in 2022 and 2023; backlog is not a guarantee of future revenue.
- Sparton was acquired for approximately $350 million, net of cash assumed, and Rokar was acquired for approximately $31.4 million. Acquisition activity contributed to higher goodwill and intangible assets.
- Asia-Pacific increased to 27.3% of revenue from 20.6%; North America contributed 30.5%. The Israeli Ministry of Defense represented 18% of revenue and the U.S. government 21%.
- FY2021 included a $14.7 million gain on the sale of an Israeli subsidiary’s building. Net financial expense fell to $40.4 million from $71.3 million, including a gain from changes in fair value of financial assets and lower lease-liability revaluation and foreign-exchange expenses.
Outlook, risks and unusual items
- Management described stable defense and homeland-security demand in most markets and noted that the Russia-Ukraine conflict could contribute to increased defense budgets, while emphasizing that its effects remained uncertain. No numerical revenue or earnings guidance is provided.
- Management reported improvement in commercial aviation activity, but the pandemic continued to weigh on that market. Supply-chain disruption, component shortages, higher costs and longer lead times remain risks.
- Major risks include reliance on government budgets and export approvals, geopolitical developments, cyberattacks, competition for technical employees, currency movements and cost overruns on fixed-price contracts. Contract estimates are judgment-sensitive; FY2021 estimate-at-completion changes reduced net income by approximately $7.2 million.
- At year-end, purchase commitments were approximately $3.180 billion, financial-institution guarantees approximately $3.018 billion, and offset/industrial participation obligations approximately $1.79 billion through 2028. These are commitments and contingent exposures, not all immediate cash debt.
- Defined-benefit pension obligations were $918 million against plan assets of $349 million, leaving an unfunded amount of approximately $569 million. The auditor identified revenue recognition, pension obligations and Sparton acquisition accounting as critical audit matters. The audit opinion on the financial statements was unqualified; internal-control testing excluded Sparton and Rokar, acquired in 2021.
- Management reported no significant legal proceedings at December 31, 2021. The filing also identifies tax audits, export-control and procurement compliance, guarantee, product-liability and customer termination risks.
Important facts for investors to verify
- How much of backlog converts to revenue and cash on schedule, and whether customer advances remain sufficient relative to receivables and inventory growth.
- Whether Sparton and Rokar meet acquisition assumptions, including expected returns on the substantial goodwill and acquired intangible assets.
- The sustainability of FY2021 margins and earnings after separating the one-time Israeli tax charge, disposal gains, investment revaluations and prior-year COVID-related charges.
- Exposure to fixed-price contract losses, offset obligations, customer guarantees and the unfunded pension position.
- Execution of the ERP rollout and integration of acquired subsidiaries into internal controls, given that the acquired entities were excluded from the FY2021 control assessment.