Elbit Systems Ltd. — FY 2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. Although the request metadata says “2013 Q4,” this is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context and financial performance
Elbit Systems is an Israeli defense electronics, homeland security and commercial aviation company. Most revenue is generated directly or indirectly from government customers. The Israeli Ministry of Defense (IMOD) represented 22% of FY 2013 revenue, compared with 15% in 2012.
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Revenue | $2,925.2 million | $2,888.6 million | Up 1.3% |
| Gross profit / margin | $824.8 million / 28.2% | $815.9 million / 28.2% | Margin unchanged |
| Operating income / margin | $239.4 million / 8.2% | $203.1 million / 7.0% | Operating income up about 18% |
| Net income attributable to Elbit shareholders | $183.4 million | $167.9 million | Up about 9%; diluted EPS was $4.34 versus $3.97 |
| Operating cash flow | $167.0 million | $198.4 million | Down; receivables grew and customer advances declined |
| Cash, short-term deposits and marketable securities | $265.4 million | $264.8 million | Broadly unchanged |
| Working capital / current ratio | $561 million / 1.39 | $375 million | Working capital increased |
| Debt | $224.2 million long-term bank loans; approximately $440.7 million Series A Notes, including $62.9 million current maturities | — | Notes are NIS-denominated and hedged into floating-rate U.S.-dollar exposure |
Revenue growth reflected increases in airborne systems ($1,133.1 million) and C4ISR ($1,071.4 million), partly offset by lower land-systems revenue ($309.3 million). By geography, Israel revenue rose to $705.7 million from $519.9 million, while North America and Asia-Pacific revenue declined. Export sales were approximately $2.2 billion, or 76% of total sales.
Year-end backlog was $5.822 billion, up from $5.683 billion; 69% was for customers outside Israel, and approximately 69% was scheduled for performance in 2014–2015. Backlog is subject to delays, changes and cancellations and is not a guarantee of future revenue.
Material changes and notable items
- Operating income improved as operating expenses declined, while gross margin remained flat. Net R&D expense fell to $220.5 million from $233.4 million.
- Financial expenses, net, increased to $37.3 million from $26.1 million, which management attributed in part to currency movements, including the Australian dollar and Brazilian real.
- The effective tax rate rose to 12.5% from 9.7%; prior-year tax adjustments and the geographic mix of earnings affected the comparison. Israeli tax benefits reduced FY 2013 tax expense by approximately $27.2 million.
- FY 2013 included approximately $16 million of income from reversal of an acquired warranty reserve, a $7.6 million legal-settlement benefit net of expenses in G&A, and a $3.8 million gain on the sale of commercial aviation assets recorded in cost of revenues. These items affect comparability.
- Cash flow from operations declined to $167.0 million, principally reflecting a roughly $117 million increase in trade receivables and an approximately $86 million decrease in customer advances, as described by management.
- The company paid approximately $75.5 million in dividends during 2013. Dividends were $1.20 per share for the year; the filing states there is no declared dividend policy.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management described continuing demand for C4ISR, ISR, unmanned systems, cyber defense, homeland security, training and simulation, while noting that overall defense spending may remain constrained. Management said current cash, operating cash flow, credit lines and financing arrangements should support operational needs for at least the next fiscal year.
- Government spending and customer concentration: Results depend on government budgets and priorities; the filing cites U.S. defense-budget reductions and sequestration. IMOD accounted for 22% of 2013 revenue.
- Contract and export exposure: Most contracts are fixed-price, with risks from cost overruns, schedule changes and milestone timing. More than 50% of revenue was derived from exports subject to Israeli export regulation; export approvals can be denied or revoked.
- Currency and interest rates: A stronger NIS can increase U.S.-dollar labor costs. The NIS strengthened about 7% against the dollar in 2013. Debt and liquid assets also expose the company to interest-rate movements.
- Commitments and guarantees: Purchase commitments were approximately $1.166 billion, bank guarantees approximately $945 million, and outstanding buy-back/offset obligations approximately $1.014 billion through 2023. These are not equivalent to funded debt but may create performance, liquidity or penalty exposure.
- Program cancellation dispute: After Israel did not renew export authorization for a foreign-customer program, the company recorded a $72.8 million expense in 2011 and filed an approximately $74 million claim against the Israeli government. Proceedings were temporarily suspended pending discussions; the company was seeking to mitigate losses by reusing program assets.
- Other legal matters: A roughly $10 million Pinpoint claim remained in litigation. The Aminov claim was dismissed for non-payment of the court fee, with a motion for leave to appeal pending. The ImageSat proceedings against Elbit and Elop were dismissed under a 2013 settlement without payment by either party. Management did not expect other current proceedings to have a material adverse effect.
- Other risks: Israeli political and security conditions, supplier and subcontractor performance, cyber incidents, anti-bribery and procurement compliance, pension funding, and the risk of contract delays or cancellations could affect results and liquidity.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective as of December 31, 2013.
Investor verification checklist
- Check the audited financial statements and notes for the distinction between consolidated net income ($191.4 million) and net income attributable to Elbit shareholders ($183.4 million), and for the treatment of unusual gains and reserve reversals.
- Review receivables, unbilled receivables and customer-advance trends, including the concentration of receivables with the IMOD, and assess the cash-conversion implications.
- Confirm the amount, maturity schedule and effective interest cost of bank loans and Series A Notes, including the effects and counterparties of related currency and interest-rate swaps.
- Assess the recoverability and timing of backlog conversion, especially the concentration scheduled for 2014–2015 and exposure to export licenses and government funding.
- Track the Israeli-government export-license dispute, the Pinpoint matter, offset obligations, bank guarantees and purchase commitments for changes in status or potential cash impact.
- Verify future dividend decisions and the company’s ability to maintain liquidity while meeting debt repayments, pension obligations and contract-financing needs.