Elbit Systems Ltd. — FY2012 Form 20-F
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; the provided text does not give separate Q4 results. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Business context
Elbit Systems is an international defense-electronics company serving defense, homeland-security, and commercial-aviation markets. Its principal activities include airborne systems, land systems, C4ISR, and electro-optics. Government customers and government-funded programs are central to its business; the Israeli Ministry of Defense (IMOD) accounted for 15% of 2012 revenue, down from 23% in 2011. Exports represented approximately 82% of 2012 sales.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $2,888.6 million | $2,817.5 million |
| Gross profit / margin | $815.9 million / 28.2% | $732.0 million / 26.0% |
| Operating income / margin | $203.1 million / 7.0% | $115.7 million / 4.1% |
| Net income attributable to Elbit Systems shareholders | $167.9 million | $90.3 million |
| Diluted EPS | $3.97 | $2.09 |
| Operating cash flow | $198.4 million | $190.9 million |
| Cash, cash equivalents, short-term deposits and marketable securities | $264.8 million | $224.3 million |
| Working capital / current ratio | $375 million / 1.25 | $236 million / value not stated here |
| Total assets / total equity | $3,810.7 million / $1,050.6 million | $3,720.5 million / $927.7 million |
2012 net cash used in investing activities was $117.6 million, including $81.6 million of property, plant, and equipment purchases. Net cash used in financing activities was $84.1 million, including share repurchases, Series A Note repayments, and dividends. The company paid $1.20 per share in dividends for 2012, versus $1.44 in 2011.
At year-end, bank borrowings were approximately $206 million, including $174 million of long-term loans; outstanding Series A Notes were approximately $467 million, including $58 million due in 2013. The notes are denominated in NIS and bear a 4.84% fixed coupon, but cross-currency swaps convert the exposure largely to floating U.S.-dollar LIBOR plus a spread. Banks had issued approximately $1.07 billion of guarantees on the company’s behalf, primarily for customer advances and performance bonds. The company met all financial covenants at December 31, 2012; it had failed one covenant at year-end 2011, which banks waived.
Material changes versus prior year
- Revenue increased 2.5%. Airborne systems revenue rose to $1,054.5 million from $969.4 million, while land systems revenue declined to $374.5 million from $405.3 million. C4ISR remained the other largest activity at $1,017.6 million.
- Revenue mix shifted geographically: Israel revenue fell to $519.9 million from $697.2 million, while Latin America rose to $258.8 million from $165.5 million and Asia-Pacific to $568.4 million from $460.0 million. Management attributed the increases primarily to UAS and command-and-control systems in Latin America, and electro-optics and communications equipment in Asia-Pacific.
- Gross margin and operating margin recovered from 2011. That year included a $72.8 million expense after Israel did not renew an export authorization for a foreign-customer program; the filing says the net effect on 2011 net income was $62.2 million. The foreign customer drew approximately $33.6 million on advance and performance guarantees in May 2012.
- Net financing expense increased to $26.1 million from $13.6 million, primarily reflecting interest on additional Series A Notes issued in 2012. Net R&D expense declined to $233.4 million from $241.1 million.
- Backlog increased to $5.683 billion from $5.528 billion. Approximately 68% was scheduled for performance in 2013–2014; backlog is subject to delay, reduction, and cancellation.
Outlook, management commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management said overall defense spending was unlikely to increase in the coming years and noted recent budget reductions, while emphasizing opportunities in C4ISR, intelligence and surveillance, unmanned systems, cyber, training, space, and homeland security.
- Management stated that cash, operating cash flow, credit lines, and financing arrangements were expected to support operational needs for at least the next fiscal year. This assessment is subject to financing availability and business risks.
- In 2012, Tor received an approximately $603 million contract for the Israeli Air Force’s future trainer-aircraft program. Elbit’s stated share was approximately $420 million: about $110 million for establishment over three years and $310 million for operations over 20 years.
- Key risks include reliance on government appropriations; export-license approvals and changing political relationships; fixed-price contract cost overruns and milestone timing; program cancellations; foreign-exchange movements; competition and technological change; and customer collection and supplier performance. U.S. sequestration took effect in March 2013, after the reporting period.
- Outstanding buy-back/offset commitments totaled approximately $748 million through 2020. Purchase commitments were approximately $949 million. These obligations may involve penalties or affect future awards if not fulfilled.
- Elbit and its subsidiary Elop sued the Government of Israel for approximately $74 million over the cancelled export authorization and related costs. The company also disclosed a $40 million commercial claim against it, which management said it believed lacked merit. Other disclosed matters include ImageSat-related proceedings and a company claim seeking approximately $16 million from Credit Suisse; the latter proceeded to discovery after a January 2013 ruling in Elbit’s favor on a motion to dismiss.
- CEO Joseph Ackerman announced retirement effective March 31, 2013; Bezhalel Machlis was designated to succeed him effective April 1, 2013. The filing reports effective disclosure controls and an unqualified audit opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Review the audited statements and notes for the composition, maturity, and currency exposure of bank debt, Series A Notes, swaps, and guarantees.
- Assess the quality and timing of backlog conversion, particularly the long-duration trainer-aircraft program and the 68% scheduled for 2013–2014.
- Track outcomes and any recoveries or further guarantee draws related to the cancelled export-authorization program and the company’s approximately $74 million claim against the Israeli government.
- Evaluate working-capital and collection exposure: year-end trade and unbilled receivables were $688.1 million current plus $229.7 million long-term, including substantial IMOD receivables.
- Monitor defense-budget developments, export approvals, foreign-exchange movements, and progress in meeting offset commitments; these could materially affect results and cash flow.
- Confirm the CEO succession and subsequent performance against the filing’s nonbinding outlook commentary; no numerical FY2013 guidance is provided.