Business context and reporting period
Elbit Systems Ltd. filed this Form 20-F for the fiscal year ended December 31, 2019, not a standalone fourth-quarter report. The filing does not provide a clear set of Q4-only financial results. The company is an Israeli defense, homeland-security and commercial-aviation technology supplier; it reports under U.S. GAAP in U.S. dollars. Most revenue is generated directly or indirectly from government customers.
Key financial metrics
Amounts are in U.S. dollars, millions, except per-share data and ratios. FY2019 compared with FY2018:
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $4,508.4 | $3,683.7 |
| Gross profit / margin | $1,136.5 / 25.2% | $976.2 / 26.5% |
| Operating income / margin | $321.6 / 7.1% | $292.8 / 7.9% |
| Net income attributable to shareholders | $227.9 | $206.7 |
| Diluted EPS | $5.20 | $4.83 |
| Operating cash flow | $(53.3) | $191.7 |
| Cash and cash equivalents at year-end | $221.1 | $208.5 |
| Working capital / current ratio | $499 / 1.16 | $369 / not stated |
| Total assets / total equity | $7,335.4 / $2,159.8 | $6,450.8 / $1,854.4 |
Revenue increased 22.4%. The company reported $786.4 million of short- and long-term bank borrowings and approximately $61 million outstanding on Series A Notes, all due in 2020. It met its financial covenants. Dividends paid were $1.76 per ordinary share for 2019, unchanged from 2018.
Material changes versus the prior comparable period
- Growth was led by land systems revenue, up to $1,228.3 million from $649.1 million, largely reflecting IMI, acquired in November 2018, and higher land electronic-warfare and armored-vehicle sales. Airborne revenue rose to $1,617.2 million from $1,470.1 million.
- Gross margin declined 1.3 percentage points; management cited less favorable sales mix and lower gross profit at IMI. Operating margin fell 0.8 percentage points despite higher operating income.
- Net financing expense increased to $69.1 million from $44.1 million, including about $23.1 million of exchange-rate differences related to lease liabilities following adoption of ASC 842.
- Operating cash flow swung to an outflow of $53.3 million, mainly due to higher receivables and inventory and a decline in customer advances. Investing cash outflow was $106.8 million; financing cash inflow was $172.7 million, including new loans and the sale of treasury shares.
- Reported net income benefited from a low 7.9% effective tax rate, including prior-year tax adjustments and tax benefits. The company recorded a $20.7 million benefit from prior-year tax adjustments.
Outlook, commentary, risks and unusual items
- Backlog was $10.029 billion at year-end, up from $9.399 billion; 65% was expected to be recognized as revenue in 2020 and 2021. Backlog is not a guarantee of future sales and may be delayed, reduced or cancelled. The filing provides no specific revenue or earnings guidance.
- Management cited demand for airborne systems, C4ISR, unmanned systems, cyber defense, precision munitions and homeland security solutions, alongside increased defense allocations in the U.S. and some European and Asia-Pacific markets. Budgets were reduced in certain Latin American and other countries.
- The September 2019 Night Vision Business acquisition cost approximately $351.5 million. The company recorded $55.0 million of related fourth-quarter charges, primarily inventory write-offs, and excluded these charges from its non-GAAP results. The acquired business’s purchase-price allocation remained preliminary at year-end.
- Non-GAAP diluted EPS was $6.79 versus GAAP diluted EPS of $5.20; the company’s adjustments included acquisition costs, intangible amortization, currency losses and other items. Non-GAAP measures are not substitutes for GAAP results.
- COVID-19 was identified as a potential risk; management said it could not yet estimate the impact. Other key risks include government spending and procurement, export licenses, fixed-price contract cost overruns, political and geopolitical conditions, cybersecurity, foreign exchange, acquisitions and pension funding.
- Outstanding buy-back/offset obligations were approximately $1.345 billion through 2028; bank and financial-institution guarantees were approximately $1.983 billion. Purchase commitments were $2.248 billion. Legal proceedings are described as ordinary-course matters; management did not expect significant claims beyond recorded accruals to materially harm results or financial position.
- The auditor gave an unqualified opinion on the financial statements and internal controls. The 2019 Night Vision subsidiary was excluded from management’s and the auditor’s internal-control assessment; it represented 6% of assets and 1% of revenue at the stated dates/period.
Important facts for investors to verify
- Review the quality and timing of backlog conversion, particularly the expected 2020–2021 deliveries, and monitor cancellations, funding and export approvals.
- Assess the drivers of weaker gross and operating margins, including IMI profitability, project estimates and the impact of acquisition-related charges.
- Track working-capital needs and cash conversion given the operating cash outflow, receivables growth and lower customer advances.
- Reconcile debt and liquidity, including the 2020 Series A Notes maturity, bank borrowings, guarantees, covenants and contingent acquisition obligations.
- Verify the final Night Vision purchase-price allocation, integration costs and acquired-business performance; note the subsidiary’s exclusion from the 2019 control assessment.
- Evaluate the sustainability of the low effective tax rate and the status of tax audits and uncertain tax positions; compare GAAP results with management’s non-GAAP adjustments.