Elbit Systems Ltd. — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; it identifies certain acquisition-related expenses recorded in Q4 but does not provide a complete quarterly results comparison. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context
Elbit Systems develops and supplies defense, homeland security and commercial aviation systems, including airborne, C4ISR, land, electro-optic, munitions and cyber products. Most revenue is tied directly or indirectly to government customers. Exports were approximately $2.94 billion, or 80% of 2018 sales. The Israeli Ministry of Defense accounted for 13% of revenue, down from 19% in 2017.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3,683.7 million | $3,377.8 million |
| Gross profit / margin | $976.2 million / 26.5% | $1,003.1 million / 29.7% |
| Operating income / margin | $292.8 million / 7.9% | $324.4 million / 9.6% |
| Net income attributable to shareholders | $206.7 million | $239.1 million |
| Diluted EPS | $4.84 | $5.59 |
| Operating cash flow | $191.7 million | $100.9 million |
| Cash and cash equivalents at year-end | $208.5 million | $156.1 million |
| Working capital / current ratio | $369 million / 1.13 | $522 million / not stated here |
Revenue increased 9.1%, while shareholder net income fell 13.5%. The decline in gross and operating margins reflects, among other factors, $66.6 million of IMI-related costs charged to cost of revenue. The 2018 effective tax rate was 11.1%, compared with 19.5% in 2017; the company cited jurisdictional income mix, Israeli tax benefits and prior-year adjustments.
Cash flow from operations was $191.7 million. Investing activities used $592.9 million, including $504.4 million for acquisitions and $102.3 million for property and equipment. Financing activities provided $453.6 million in the audited cash flow statement; the MD&A narrative describes financing cash flow differently, so investors should check the statement and its classifications. The company paid $75.3 million in dividends.
At year-end, the company reported $676.4 million of short- and long-term bank/public-institution borrowings and separately $112.1 million of Series A Notes before current-maturity classification. Long-term loans were predominantly floating-rate and mainly mature in 2020; the Series A Notes have scheduled maturities through 2020. The company said it met its financial covenants and considered liquidity adequate for at least the next fiscal year.
Material changes versus the prior year
- Airborne revenue rose to $1,470.1 million from $1,272.1 million, mainly reflecting U.S. commercial avionics sales from Universal Avionics, acquired in April 2018.
- Land systems revenue rose to $649.1 million from $503.9 million, reflecting higher European sales and the November 2018 IMI acquisition. IMI’s results were consolidated only from the acquisition date and were described as immaterial to 2018 results.
- C4ISR revenue eased to $1,130.1 million from $1,144.8 million; electro-optic revenue was $333.9 million versus $341.2 million.
- North American revenue increased to $979.2 million from $827.6 million, while Europe declined to $737.1 million from $764.0 million. Asia-Pacific rose to $791.8 million from $670.5 million.
- Backlog increased to $9.399 billion from $7.561 billion. Approximately 64% of year-end backlog was scheduled for performance in 2019 and 2020; backlog is not a guarantee of future sales.
- Working capital fell to $369 million from $522 million. Total assets rose to $6.451 billion from $4.715 billion, substantially reflecting acquisitions and purchase accounting.
Outlook, commentary, risks and unusual items
- Outlook: No quantitative revenue or earnings guidance is provided. Management cited demand trends in airborne systems, C4ISR, unmanned systems, precision munitions, cyber defense and homeland security, and noted stronger budget indications in the U.S. and parts of Europe but constrained or declining budgets in some countries.
- Acquisitions and Q4 charges: Universal was acquired for approximately $123.6 million. IMI was acquired in November; the notes report nominal consideration of approximately $520 million, including cash, deferred and contingent components, while other filing discussion cites a different approximate purchase price. Q4 acquisition and reorganization expenses totaled $69.5 million, mainly inventory write-offs and employee-related costs. The IMI purchase-price allocation was preliminary. A premises-evacuation asset of approximately $365 million is expected to be received subject to relocation milestones.
- Accounting comparability: Elbit adopted ASC 606 in 2018 using the modified retrospective method; prior-year figures were not recast. For 2018, the filing says ASC 606 increased reported revenue by $115.8 million and shareholder net income by $30.1 million versus the previous standard. Comparisons with 2017 therefore include a material accounting-basis difference.
- Commitments and contingencies: The company disclosed $1.895 billion of bank and financial-institution guarantees, $1.775 billion of purchase commitments and $1.385 billion of buy-back/offset obligations extending through 2028. Employee benefit liabilities were $736.8 million. These amounts have differing triggers and timing and should not be treated as equivalent to funded debt.
- Other risks: Results depend on government budgets, export licenses and geopolitical conditions; most contracts are fixed-price and exposed to cost overruns and estimate changes. Other material exposures include currency and interest-rate movements, acquisition integration, cyber threats, supplier performance, tax audits and pension funding. A patent-infringement verdict in Elbit’s favor was under appeal; management said other legal claims were not expected to have a material adverse effect beyond recorded accruals.
- Controls and audit: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded 2018-acquired subsidiaries, which represented 24% of total assets, 9% of net assets, and 4% of revenue and net income.
Most important facts for investors to verify
- Reconcile the reported year-over-year earnings and margin decline with the $69.5 million of IMI-related charges, other one-time gains and the filing’s non-GAAP adjustments.
- Assess comparability after ASC 606 adoption, particularly the disclosed $115.8 million revenue and $30.1 million net-income impact versus the prior standard.
- Review IMI’s final purchase-price allocation, integration costs, performance and the timing/conditions of the premises-evacuation payments.
- Evaluate liquidity and refinancing exposure alongside working-capital decline, acquisition funding, floating-rate debt, customer advances and receivables; verify the financing cash-flow presentation against the audited statement.
- Examine conversion and cancellation risks in the $9.399 billion backlog and the scale, timing and potential costs of guarantees, purchase commitments and offset obligations.
- Monitor the company’s exposure to government spending, export approvals, Israeli and regional geopolitical developments, currency movements, tax matters and pension obligations.