Formula Systems (1985) Ltd. — FY2020 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter filing. Filed May 17, 2021. Financial statements are prepared under IFRS in U.S. dollars. Formula is an IT holding company whose results consolidate controlled subsidiaries, including Matrix, Sapiens and Magic Software; TSG is accounted for using the equity method.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1,933.9 million | $1,701.1 million | +13.7% |
| Gross profit / margin | $447.4 million / 23% | $386.0 million / 23% | +15.9% profit |
| Operating income / margin | $170.6 million / 8.8% | $138.5 million / 8.1% | +23.2% income |
| Net income | $114.0 million | $94.4 million | +20.8% |
| Net income attributable to Formula shareholders | $46.8 million | $38.8 million | +20.5% |
| Basic / diluted EPS | $3.05 / $3.01 | $2.56 / $2.44 | Higher year over year |
| Operating cash flow | $286.9 million | $196.1 million | +46.3% |
| Cash and cash equivalents | $501.7 million | $368.7 million | +$133.0 million |
| Current assets / current liabilities | $1,160.9 million / $779.9 million | $965.5 million / $671.4 million | Current ratio about 1.49x vs. 1.44x |
| Total assets / total equity | $2,520.1 million / $1,108.5 million | $2,089.3 million / $896.3 million | Both increased |
Amounts are U.S. dollars. Gross margin was broadly stable; the improvement in operating margin reflected operating income rising faster than revenue while selling, marketing, general and administrative expenses declined as a share of revenue. Net income includes $67.2 million attributable to non-controlling interests in 2020.
Cash flow, debt and liquidity
- Cash provided by operations was $286.9 million. Investing activities used $177.0 million, including $141.4 million net of cash acquired for acquisitions, $16.7 million for property and equipment, and $9.3 million for capitalized software development and other costs.
- Financing activities provided $9.7 million. Major sources included Sapiens’ $108.7 million net equity offering and approximately $60.3 million of additional debentures; uses included loan and debenture repayments, lease payments and dividends. Cash increased by $133.0 million during the year.
- Indebtedness to banks and others, including debentures, was reported at $545.3 million at year-end, of which $161.9 million was current and $383.4 million long-term. Separately, the balance sheet reported $123.3 million of lease liabilities. Cash, short-term deposits and marketable securities totaled approximately $533.2 million.
- Management said available cash, operating cash generation and existing credit availability should cover working-capital needs for at least 12 months at the then-current operating level. Formula repaid the final installment of its institutional investor loan in January 2020.
- Formula’s Series A and C debentures are secured by shares in Matrix, Sapiens and Magic Software and contain dividend and financial covenants. Formula, Matrix, Sapiens and Magic Software were reported in compliance with their financial covenants at December 31, 2020.
Material changes and business developments
- Growth was broad-based but acquisition-supported. Software services revenue rose 13.2% to $1,420.0 million; proprietary software products and related services rose 15.1% to $514.0 million. The acquired businesses contributed to growth, alongside organic expansion, particularly at Sapiens.
- 2020 acquisitions included Sapiens’ sum.cumo, Delphi, Tia Technology and Tiful Gemel; Matrix’s Gestetnertec and RightStar, and its purchase of the remaining NIT interest; Magic Software’s Aptonet, Stockell, Mobisoft and Magic Hands; Michpal’s Liram; and Formula’s Ofek. Net acquisition cash outflow was $141.4 million. Goodwill increased to $872.4 million from $724.2 million; no goodwill impairment was recorded.
- Performance varied by subsidiary and service line. Matrix revenue increased 7.2% in NIS, with strong growth in infrastructure and integration, while its U.S. IT services and training businesses declined. Sapiens revenue rose 17.6%, reflecting core growth and acquisitions. Michpal revenue rose 70.7%, substantially reflecting acquired businesses. Magic Software’s software-services revenue increased, while proprietary software products and related-services revenue declined 3.4%.
- Revenue mix by customer location: Israel $1,203.1 million; United States $501.8 million; Europe $189.2 million; and other regions $39.9 million combined. Approximately 38% of revenue came from outside Israel.
Outlook, risks and unusual items
- No consolidated numerical revenue or earnings guidance is provided. Management described 2020 as a growth year despite COVID-19 and said the pandemic had not materially harmed the Group overall to date. Impacts were uneven: training was affected by closures, North American sales cycles lengthened, while demand for areas such as cloud, cybersecurity, health and digital solutions supported some activities. Management cautioned that the future economic impact remained uncertain.
- Key risks include prolonged COVID-19 disruption; acquisition integration and execution; long and complex sales and implementation cycles, including fixed-price project overruns or cancellations; intense technology competition and cloud-related margin pressure; cybersecurity, privacy and intellectual-property exposures; customer concentration in certain subsidiaries; foreign-exchange movements; and political, economic, regulatory and security risks in Israel and other operating markets.
- Financial expenses, net, increased to $26.9 million from $18.7 million, reflecting higher interest and acquisition-related fair-value expenses, among other factors. A $2.2 million one-time loss contingency related to a newly leased Sapiens facility in India was cited in SG&A. Magic Software reversed approximately $2.0 million of contingent consideration for PowWow after concluding revenue targets were unlikely to be met.
- A derivative action filed in Israel challenges, among other matters, the approval of 611,771 CEO restricted share units. The grant was valued at approximately $50.1 million, with $1.2 million compensation expense recorded for 2020; a portion is performance-based, and dividend-equivalent payments apply. The company disputes the claims and said the outcome could not be predicted. A separate Magic Software arbitration-related lawsuit seeks NIS 34.1 million; the company said it could not reliably estimate its prospects of successfully defending it. Other ordinary-course legal provisions were described as not material.
- Subsequent events include Formula’s April 2021 acquisition of Zap Group for approximately NIS 244.2 million upfront, with up to NIS 60 million additional contingent consideration, and an April 2021 private placement of NIS 160 million in Series C debentures. Formula also declared and paid a $0.66-per-share dividend in March 2021.
Investor verification priorities
- Confirm acquisition contributions to organic growth, cash returns and integration progress, and assess the substantial goodwill balance and provisional acquisition valuations.
- Review the debt and lease obligations, maturity schedule, pledged subsidiary shares, covenant headroom and liquidity after the 2021 Zap acquisition and debenture issuance.
- Track project cancellations, customer concentration, COVID-19-related demand and cost trends, especially in training and North American operations.
- Monitor the CEO RSU litigation, grant terms and resulting dilution or compensation expense, as well as the unresolved Magic Software claim.
- Assess foreign-exchange exposure: management estimated a hypothetical 10% currency movement could change 2020 reported sales by approximately $127 million to $151 million, depending on direction.
- Note the auditor issued unqualified opinions on the financial statements and internal controls. Internal-control testing excluded certain 2020 acquisitions, which represented 2% of assets, 3% of revenue and 5% of net income.