Business context and reporting period
Elbit Systems Ltd. filed this annual report on Form 20-F for the fiscal year ended December 31, 2017. The audited consolidated financial statements use U.S. GAAP and U.S. dollars. The company develops and supplies defense, homeland-security, aviation and related technology systems; most revenue is generated directly or indirectly from government customers. This is a full-year report, not a standalone fourth-quarter filing.
Key financial metrics
Amounts in U.S. dollars unless stated otherwise.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $3,377.8 million | $3,260.2 million | +3.6% |
| Gross profit / margin | $997.9 million / 29.5% | $959.6 million / 29.4% | Margin +0.1 percentage point |
| Operating income / margin | $319.3 million / 9.5% | $299.0 million / 9.2% | +6.8% |
| Net income attributable to shareholders | $239.1 million | $236.9 million | +0.9% |
| Diluted EPS | $5.59 | $5.54 | +0.9% |
| Cash from operating activities | $100.9 million | $208.0 million | Down $107.1 million |
| Cash used in investing activities | $115.6 million | $117.8 million | Outflow roughly stable |
| Cash used in financing activities | $52.1 million | $166.7 million | Lower outflow |
At year-end, cash and cash equivalents were $156.1 million; cash, short-term deposits and marketable securities totaled about $172.6 million. Working capital was $522 million and the current ratio was 1.25. Total assets were $4.715 billion and total equity was $1.718 billion. Bank and public-institution borrowings were approximately $253 million, alongside $181.7 million principal outstanding on Series A Notes; the company reported compliance with all financial covenants. Dividends paid per share for 2017 were $1.76.
Material changes versus the prior comparable period
- Revenue rose 3.6%, with growth in land systems ($503.9 million, up from $408.0 million) and electro-optic systems ($341.2 million, up from $276.0 million). C4ISR revenue declined to $1.145 billion from $1.221 billion, mainly reflecting lower command-and-control and unmanned-aircraft sales in Latin America. Airborne systems grew modestly to $1.272 billion.
- Europe revenue increased to $764.0 million from $640.8 million, while Asia-Pacific fell to $670.5 million from $801.6 million. The company attributed these movements primarily to product and program mix.
- Operating income improved, supported by gross-profit growth and lower general and administrative expenses. G&A fell to $133.3 million from $151.4 million; the company cited revaluation of liabilities related to prior acquisitions, including a $31.2 million reduction in contingent consideration associated with an acquired business.
- Net financing expense increased to $34.5 million from $23.7 million. The effective tax rate rose to 19.5% from 16.3%; 2017 tax expense included a $10.9 million deferred-tax adjustment related to U.S. tax reform. Prior-year tax adjustments also affected both periods.
- Operating cash flow decreased substantially, mainly because receivables rose by about $315 million and inventories by about $60 million, partly offset by higher payables and customer advances. Cash and cash equivalents declined by $66.7 million during 2017.
- Backlog increased to $7.647 billion from $6.909 billion; 73% was for customers outside Israel, and approximately 65% was scheduled for performance in 2018 and 2019.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no numerical earnings or revenue guidance. Management stated that cash, operating cash generation, credit lines and financing arrangements should be sufficient for operating needs and commitments for at least the next fiscal year. Management sees demand opportunities in airborne systems, C4ISR, unmanned vehicles, cyber defense, intelligence and homeland security, while noting defense-budget pressure and increased competition in some markets.
- Revenue estimates: Most long-term contracts are fixed-price and use percentage-of-completion accounting. Cost and margin estimates can change, with cumulative catch-up effects. Net estimated-at-completion adjustments increased 2017 income by about $34.4 million, or $0.80 per diluted share; management reported no material net adjustments to cost of revenue.
- Customer and export exposure: The Israeli Ministry of Defense accounted for 19% of 2017 revenue, up from 18%. About 78% of sales were exports, many subject to Israeli, U.S. or other government export approvals. Government spending, contract termination, export restrictions and geopolitical developments could affect results.
- Commitments: Outstanding buy-back/offset obligations were approximately $1.309 billion through 2028. Purchase commitments were $1.592 billion and bank and financial-institution guarantees were about $1.399 billion, primarily for customer advances and performance bonds. The company also disclosed $413 million of employee benefit liabilities and $55.1 million of unrecognized tax benefits.
- Legal matter: A U.S. jury found Hughes Network Systems infringed Elbit patents and awarded $21.075 million in damages in 2017. Elbit sought additional damages, interest and fees; Hughes filed post-trial motions, which were pending at the filing date. Management said other claims were not expected to have a material adverse effect beyond recorded accruals.
- Acquisitions and subsequent events: 2017 acquisitions in Canada and Brazil included contingent consideration; their reported effects on consolidated revenue and income were immaterial. In March 2018, the Israeli government approved the sale of IMI Systems to Elbit, but discussions over transaction conditions were continuing. The company adopted the new revenue standard on January 1, 2018; transition adjustments increased opening retained earnings by $1.7 million, reduced inventory by $81.9 million and increased contract assets by $80.5 million.
- Other risks: Management identifies currency exposure, particularly NIS appreciation against the U.S. dollar affecting Israeli labor costs; fixed-price cost overruns; supplier and program execution risks; cyber threats; pension funding; tax uncertainty; and political and military conditions in Israel and other markets. The NIS strengthened 9.8% against the U.S. dollar in 2017. The filing reports effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether operating cash flow recovers as receivables and inventory convert to cash, and whether collections from major government customers remain timely.
- Backlog conversion, cancellations or delays, export-license status, and concentration in the Israeli Ministry of Defense and other government programs.
- Fixed-price contract estimates, cumulative catch-up adjustments, and any changes in loss provisions or project margins.
- Liquidity and refinancing needs, including debt maturities, guarantees, purchase commitments and the ability to meet covenant requirements.
- Resolution and collectability of the Hughes patent award, status and terms of the proposed IMI Systems acquisition, and any related liabilities or financing requirements.
- Final tax effects of U.S. tax reform, Israeli tax benefits and ongoing tax audits; also monitor exchange-rate effects on costs and reported earnings.