Formula Systems (1985) Ltd. — FY 2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022, compared with FY 2021. This is an annual report, not a standalone fourth-quarter filing. Financial statements are in U.S. dollars and prepared under IFRS.
Business context
Formula is an IT and software holdings company. It consolidates Matrix, Sapiens, Magic Software, Michpal, Zap Group, InSync, Ofek and Shamrad; its 50%-owned TSG is accounted for under the equity method. Principal activities include IT services, insurance software, low-code and integration platforms, staffing, and digital advertising.
Financial performance and position
| Metric | FY 2022 | FY 2021 | Change / context |
|---|---|---|---|
| Revenue | $2,572.4 million | $2,404.4 million | Up 7.0% |
| Gross profit / margin | $622.5 million / 24.2% | $563.9 million / 23.5% | Margin improved about 0.7 percentage point |
| Operating income | $276.6 million | $208.0 million | Includes a $44.3 million gain on sale of Matrix’s Infinity Labs interest |
| Operating income excluding Infinity Labs gain | Approximately $232.4 million; about 9.0% of revenue | About 8.7% of revenue | Underlying margin improved modestly |
| Net income | $199.7 million | $141.9 million | Up 40.7% |
| Net income attributable to Formula shareholders | $81.4 million | $54.6 million | Up 49.1%; diluted EPS was $5.21 versus $3.50 |
| Operating cash flow | $239.1 million | $209.1 million | Up 14.4% |
| Investing cash flow | $(74.3) million | $(110.2) million | Primarily acquisitions and capital spending |
| Financing cash flow | $(71.0) million | $(114.1) million | Debt issuance partly offset repayments, dividends and lease payments |
Revenue mix: Software services were $1,912.9 million, up 8.0%, and represented 74.4% of revenue. Proprietary software products and related services were $659.5 million, up 4.2%, and represented 25.6%. Israel generated $1,571.0 million (about 61%); the United States generated $680.3 million.
Liquidity and debt: At year-end, cash and cash equivalents were $544.3 million; short-term deposits and investments brought the combined balance to approximately $569.1 million. Current assets were $1,371.5 million versus current liabilities of $1,001.0 million. Borrowings from banks and others and debentures totaled approximately $647.7 million, including $226.2 million current and $421.5 million long-term; this excludes lease liabilities. The implied net debt against cash, deposits and short-term investments was approximately $78.6 million. Lease liabilities totaled approximately $124.5 million.
Material changes versus FY 2021
- Revenue growth reflected expansion across software services and product-related revenue, acquisitions, and a full-year contribution from Zap Group. Foreign-exchange movements reduced the U.S.-dollar value of some overseas revenue.
- Operating income included the $44.3 million Infinity Labs disposal gain. Matrix sold 45.2% of Infinity Labs in April 2022, retained 4.9%, and ceased consolidating the business.
- Operating cash flow rose despite higher receivables, which used $51.4 million of cash in 2022; the 2021 comparison had a larger receivables cash use.
- Formula completed or consolidated multiple acquisitions, including Formally, RDT, Appush, The Goodkind Group, Intrabases, Shamrad and Bear Staffing. Acquisition spending, net of acquired cash, was $52.3 million, down from $77.2 million in 2021.
- Formula’s reported cash and cash equivalents plus short-term investments/deposits increased from approximately $512.5 million to $569.1 million. Total borrowings and debentures cited by management rose from $586.4 million to $647.7 million, reflecting new issuance as well as repayments.
Outlook, risks and unusual items
- Outlook: The filing provides no specific company revenue or earnings guidance. Management described uncertainty from inflation, higher interest rates, currency movements and weaker global IT spending; it cited external estimates of modest global IT-spending growth in 2023. Management said current cash, expected subsidiary distributions and available credit should cover working-capital needs for at least 12 months at the current operating level.
- Operating risks: Key exposures include acquisition integration, competition and cloud transition, lengthy sales and implementation cycles, fixed-price project overruns or cancellations, talent retention and wage inflation, customer concentration, cybersecurity, privacy regulation and potential impairment of acquisition-related goodwill and intangibles.
- Currency and Israel exposure: Approximately 61% of revenue came from Israel. The filing says the 2022 weakening of the euro and pound against the U.S. dollar adversely affected results; Israeli inflation was 5.3%. A hypothetical 10% foreign-currency depreciation or appreciation against the dollar was estimated to change 2022 revenue by approximately $(172) million or $203 million, respectively, all else equal.
- Debt and covenants: Formula and key subsidiaries were reported in compliance with financial covenants at December 31, 2022. Formula’s secured debentures are collateralized by shares in Matrix, Sapiens and Magic Software and restrict, among other things, dividends, additional debt and asset transactions. A breach or ratings downgrade could trigger higher interest or accelerated repayment.
- Legal matters: A shareholder derivative action challenges CEO compensation, including an eight-year RSU award; Formula said it believes certification is unlikely. Zap Group faces two claims concerning its price-comparison business, including a class-action motion reduced to NIS 63 million and a separate NIS 24.5 million claim. The filing says potential liability in both Zap matters is covered by former-owner indemnities.
- Controls and audit: Management and the auditor concluded consolidated internal control over financial reporting was effective, and the financial statements received an unqualified audit opinion. Magic Software identified a material weakness in documentation and evidence supporting certain controls; management committed to remediation. Certain 2022 acquisitions were excluded from the internal-control assessment.
- Other unusual items: A $44.3 million divestiture gain lifted reported operating income. TSG recorded a loss in 2022, contributing to Formula’s $1.8 million equity-method loss. Formula recognized $15.0 million of consolidated share-based compensation expense.
Most important facts for investors to verify
- Reconcile reported operating-income growth with the $44.3 million Infinity Labs gain and assess recurring margins by subsidiary.
- Review cash conversion, receivables growth, acquisition-related payments, and the difference between cash generation and cash available at the Formula parent level.
- Confirm debt balances, current maturities, subsidiary borrowings, lease obligations, collateral and covenant headroom; distinguish consolidated liquidity from parent-company liquidity.
- Track acquisition integration and performance, including contingent consideration, put options and the sizeable goodwill balance ($926.2 million at year-end).
- Monitor the Magic Software control weakness and remediation, the status and potential exposure of the CEO RSU litigation and Zap Group claims, and currency and Israeli-market risks.