Elbit Systems Reports 2018 Results; Revenues at $3.68 Billion
“The fourth quarter of 2018 was an unusual and important strategic quarter for Elbit Systems with a few one-time events impacting our results, primarily due to the fact that we closed the acquisition of IMI,” said President and CEO Bezhalel Machlis
IsraelDefense
| 19/03/2019
Bezhalel (Butzi) Machlis, President and CEO of Elbit Systems (Photo: Meir Azulay)
Elbit Systems on Tuesday reported its consolidated results for the fourth quarter and full year ended December 31, 2018.
Bezhalel (Butzi) Machlis, President and CEO of Elbit Systems, commented: “I am pleased with our performance in 2018, in which we reported 9% revenue growth and positive cash flow of over $190 million. The fourth quarter of 2018 was an unusual and important strategic quarter for Elbit Systems with a few one-time events impacting our results, primarily due to the fact that we closed the acquisition of IMI.
“As we move into 2019, Elbit Systems is a much larger company with a revenue run rate of over $4 billion per year and backlog approaching the $10 billion mark. The integration of IMI into our organization is progressing, and we are excited about the potential it brings us. We have a long and successful track record of integrating acquisitions, and we look forward to an accelerated and fruitful process. We are confident that this acquisition will bring many synergies across the organization that will improve our position globally and will further increase value to our shareholders over the long term.”
Acquisition of IMI and Reorganization of Company Businesses
On November 25, 2018, the Company completed the acquisition of IMI Systems for a purchase price of approximately $495 million (NIS 1.8 billion), with an additional payment of up to approximately $27 million (NIS 100 million) contingent upon IMI meeting agreed performance goals. The financial results of IMI were included in the Company’s consolidated reports, commencing the date of the acquisition.
Following the completion of the acquisition of IMI and a reorganization in connection with the IMI acquisition, the Company recorded in the fourth quarter of 2018 expenses of $69.5 million, of which $66.6 million were recorded in Cost of Revenues and the rest in Other Expenses, net. The expenses include mainly inventory write-offs and employees related costs. Those expenses were eliminated in the non-GAAP results due to the non-recurring nature of the expense.
The Company reorganized a number of its activities, in connection with the IMI acquisition. This reorganization included, among other measures, the establishment of two business divisions: The Land Systems Division, focused on land-based systems, including military vehicle systems, artillery systems, and the IMI activities; and the C4I and Cyber Division, focused on command & control, radio, communication, homeland security, and cyber intelligence activities.
This reorganization is intended to improve the synergy within the Company with respect to the acquired activities and better address market requirements and customer support. The Company believes that the acquisition of IMI and the reorganization will positively affect the future business of Elbit Systems.
Main Q4 2018 Results
Revenues in the fourth quarter of 2018 were $1,077.8 million, as compared to $1,009.6 million in the fourth quarter of 2017.
Non-GAAP gross profit amounted to $306.7 million (28.5% of revenues) in the fourth quarter of 2018, as compared to $293.8 million (29.1% of revenues) in the fourth quarter of 2017. GAAP gross profit in the fourth quarter of 2018 was $234.9 million (21.8% of revenues), as compared to $288.6 million (28.6% of revenues) in the fourth quarter of 2017. The gross profit in the fourth quarter of 2018 reflects expenses of $66.6 million related to the IMI acquisition.
Research and development expenses, net were $73.0 million (6.8% of revenues) in the fourth quarter of 2018, as compared to $72.5 million (7.2% of revenues) in the fourth quarter of 2017.
Marketing and selling expenses, net were $73.5 million (6.8% of revenues) in the fourth quarter of 2018, as compared to $81.2 million (8.0% of revenues) in the fourth quarter of 2017.
General and administrative expenses, net were $49.8 million (4.6% of revenues) in the fourth quarter of 2018, as compared to $26.2 million (2.6% of revenues) in the fourth quarter of 2017. The lower level of general and administrative expenses in the fourth quarter of 2017 resulted mainly from revaluation of liabilities related to assets and activities acquired in prior years.
Non-GAAP operating income was $112.5 million (10.4% of revenues) in the fourth quarter of 2018, as compared to $115.6 million (11.5% of revenues) in the fourth quarter of 2017. GAAP operating income in the fourth quarter of 2018 was $38.6 million (3.6% of revenues), as compared to $108.7 million (10.8% of revenues) in the fourth quarter of 2017. GAAP operating income in the fourth quarter of 2018 was reduced by $66.6 million in expenses related to the acquisition of IMI.
Financial expenses, net were $14.9 million in the fourth quarter of 2018, as compared to $9.7 million in the fourth quarter of 2017. The increase in financial expenses in the fourth quarter of 2018 was mainly a result of higher debt and interest rates.
Other expenses, net were $6.4 million in the fourth quarter of 2018, as compared to $5.1 million in the fourth quarter of 2017. Other expenses includes mainly non-service cost components of pension plans that were reclassified from operating income in accordance with ASU 2017-07, "Compensation – Retirement benefits" that was adopted on January 1, 2018, retrospectively.
Main Full Year 2018 Results
Revenues for the year ended December 31, 2018, were $3,683.7 million, as compared to $3,377.8 million in the year ended December 31, 2017.
According to the Company, the leading contributors to its revenues were the airborne systems and C4ISR systems areas of operation. The increase in revenues in the airborne systems area of operation was primarily due to increased sales of commercial avionics equipment in the US of a new subsidiary that was acquired in the second quarter of 2018. Revenues from land systems increased primarily due to an increase in sales of land electronic warfare systems and armored vehicle systems in Europe and the revenues of IMI that was acquired in November 2018.
On a geographic basis, the increase in North America was mainly a result of higher sales of airborne systems and revenues of a new US subsidiary acquired in April 2018 in the area of commercial avionics. The increase in Asia-Pacific was mainly a result of higher sales of tank fire control systems and UAS. The increase in the “Other” geographical region was mainly due to an increase in sales of UAS, artillery and command and control systems.
Cost of revenues for the year ended December 31, 2018, was $2,707.5 million (73.5% of revenues), as compared to $2,374.8 million (70.3% of revenues) in the year ended December 31, 2017. Cost of revenues in 2018 included $66.6 million in expenses related to the acquisition of IMI.
Non-GAAP gross profit for the year ended December 31, 2018, was $1,061.9 million (28.8% of revenues), as compared to $1,025.3 million (30.4% of revenues) in the year ended December 31, 2017. GAAP gross profit in 2018 was $976.2 million (26.5% of revenues), as compared to $1,003.1 million (29.7% of revenues) in 2017. The gross profit in 2018 reflects expenses of $66.6 million related to the IMI acquisition.
Research and development expenses, net for the year ended December 31, 2018, were $287.4 million (7.8% of revenues), as compared to $265.1 million (7.8% of revenues) in the year ended December 31, 2017.
Marketing and selling expenses, net for the year ended December 31, 2018, were $281.0 million (7.6% of revenues), as compared to $280.2 million (8.3% of revenues) in the year ended December 31, 2017.
General and administrative expenses, net for the year ended December 31, 2018, were $160.3 million (4.4% of revenues), as compared to $133.3 million (3.9% of revenues) in the year ended December 31, 2017. The lower level of general and administrative expenses in 2017 was mainly a result of revaluation of liabilities related to assets and activities acquired in prior years.
Other operating income, net for the year ended December 31, 2018, amounted to $45.4 million. This was the result of net gains related to deconsolidation of two of Elbit’s Israeli subsidiaries in the commercial cyber and medical instrumentation areas, due to third-party investments.
Non-GAAP operating income for the year ended December 31, 2018, was $340.7 million (9.2% of revenues), as compared to $353.0 million (10.5% of revenues) in the year ended December 31, 2017.
GAAP operating income in 2018 was $292.8 million (7.9% of revenues), as compared to $324.4 million (9.6% of revenues) in 2017.
GAAP operating income in 2018 was reduced by expenses of $66.6 million related to the acquisition of IMI.
Financial expenses, net for the year ended December 31, 2018, were $44.1 million, as compared to $34.5 million in the year ended December 31, 2017. The increase in financial expenses in 2018 was mainly a result of higher debt and higher interest rates.
Other expenses, net were $11.5 million in 2018 as compared to $5.1 million in 2017. Other expenses in 2018 included write-off impairment of $7.8 million in investments in two affiliated Israeli companies. Other expenses also included expenses of $3.8 million in 2018 as compared to $5.1 million in 2017, related to non-service cost components of pension plans that were reclassified from operating income, according to ASU 2017-07, "Compensation – Retirement benefits" that was adopted on January 1, 2018, retrospectively.
Backlog of orders for the year ended December 31, 2018, totaled $9,399 million, as compared to $7,561 million as of December 31, 2017. Approximately 61% of the current backlog is attributable to orders from outside Israel. Approximately 64% of the current backlog is scheduled to be performed during 2019 and 2020.
Operating cash flow for the year ended December 31, 2018, was $191.7 million, as compared to $100.9 million in the year ended December 31, 2017. The higher level of operating cash flow in 2018 was mainly a result of higher collection of receipts and advances received from customers.
Recent Events
On November 25, 2018, the Company announced that it completed the acquisition of IMI Systems Ltd. (IMI) for a purchase price of approximately $495 million (NIS 1.8 billion), with an additional payment of up to approximately $27 million (NIS 100 million) contingent upon IMI meeting agreed performance goals.
On December 3, 2018, the Company announced that it was awarded a $112 million contract to supply a country in Asia-Pacific with advanced airborne intelligence systems. The contract will be performed over a six-year period.
On January 3, 2019, the Company announced that its subsidiary, Elbit Systems of America, LLC, was awarded a contract by Raytheon Company to provide the Two-Color Laser System for the Multi-Spectral Targeting System. The initial contract is in an amount not material to Elbit Systems and will be performed during 2019.
On January 6, 2019, the Company announced that it was awarded a contract by the Directorate of Production and Procurement of the Israeli Ministry of Defense (IMOD) valued at approximately $333 million (NIS 1.25 billion) for the supply of ammunition to the Israeli Defense Forces. This five-year contract, the work on which will commence in 2026, will be a continuation of a multi-year contract entered into with the IMOD.
On January 6, 2019, the Company announced that following the closing of the transaction for the acquisition of IMI by the Company, Midroog Ltd., an Israeli rating agency (Midroog), issued its monitoring report regarding the Series "A" Notes issued by the Company in 2010 and in 2012 (the Notes) and reaffirmed the Notes' "Aa1.il" (on a local scale) rating, while changing the rating outlook to negative.
On January 7, 2019, the Company announced that it was awarded a $15 million contract from Energean Israel Ltd., a subsidiary of Energean Oil and Gas plc, to supply a comprehensive solution for the Floating Production Storage and Offloading platform of the offshore Karish-Tanin gas fields. The contract will be performed over an approximately two-year period, with warranty and logistic support continuing for an additional ten years.
On 29 January 2019, the Company announced that, following the completion of the acquisition of IMI's shares on November 25, 2018, and a reorganization in connection with the IMI acquisition, the Company expects to record in the fourth quarter of 2018 expenses estimated in the range of $65 - $75 million. These costs will be recorded mainly in the Cost of Revenues line item in the Consolidated Statement of Income and will be eliminated in the non-GAAP results due to the non-recurring nature of the expense.
On February 4, 2019, the Company announced that its subsidiary, Elbit Systems of America, LLC, was awarded an initial $5 million contract from Support Systems Associates, Inc. to provide an avionics refresh for the US Air National Guard’s fixed-wing aircraft used for Intelligence, Surveillance and Reconnaissance operations - the RC-26B. If all options are exercised, the total contract would be valued at $22 million. The program will be performed by 2021 in San Antonio, Texas.
On March 5, 2019, the Company announced that its subsidiary, Elbit Systems of America, LLC, was awarded a five-year Indefinite Delivery/Indefinite Quantity contract by the United States Army to provide a wide field-of-view Common Helmet Mounted Display system. The contract, which is in an amount that is not material to Elbit Systems, will be performed in Fort Worth, Texas, with deliveries starting within 15 months.
On March 5, 2019, the Company announced that it was awarded a contract from Cantiere Navale Vittoria SpA to supply combat suites and perform systems integration for three new patrol vessels of the Hellenic Coast Guard. The contract, which is in an amount that is not material to Elbit Systems, will be performed over a two-year period with warranty and logistic support continuing for an additional five-year period.
“The fourth quarter of 2018 was an unusual and important strategic quarter for Elbit Systems with a few one-time events impacting our results, primarily due to the fact that we closed the acquisition of IMI,” said President and CEO Bezhalel Machlis
Bezhalel (Butzi) Machlis, President and CEO of Elbit Systems (Photo: Meir Azulay)
Elbit Systems on Tuesday reported its consolidated results for the fourth quarter and full year ended December 31, 2018.
Bezhalel (Butzi) Machlis, President and CEO of Elbit Systems, commented: “I am pleased with our performance in 2018, in which we reported 9% revenue growth and positive cash flow of over $190 million. The fourth quarter of 2018 was an unusual and important strategic quarter for Elbit Systems with a few one-time events impacting our results, primarily due to the fact that we closed the acquisition of IMI.
“As we move into 2019, Elbit Systems is a much larger company with a revenue run rate of over $4 billion per year and backlog approaching the $10 billion mark. The integration of IMI into our organization is progressing, and we are excited about the potential it brings us. We have a long and successful track record of integrating acquisitions, and we look forward to an accelerated and fruitful process. We are confident that this acquisition will bring many synergies across the organization that will improve our position globally and will further increase value to our shareholders over the long term.”
Acquisition of IMI and Reorganization of Company Businesses
On November 25, 2018, the Company completed the acquisition of IMI Systems for a purchase price of approximately $495 million (NIS 1.8 billion), with an additional payment of up to approximately $27 million (NIS 100 million) contingent upon IMI meeting agreed performance goals. The financial results of IMI were included in the Company’s consolidated reports, commencing the date of the acquisition.
Following the completion of the acquisition of IMI and a reorganization in connection with the IMI acquisition, the Company recorded in the fourth quarter of 2018 expenses of $69.5 million, of which $66.6 million were recorded in Cost of Revenues and the rest in Other Expenses, net. The expenses include mainly inventory write-offs and employees related costs. Those expenses were eliminated in the non-GAAP results due to the non-recurring nature of the expense.
The Company reorganized a number of its activities, in connection with the IMI acquisition. This reorganization included, among other measures, the establishment of two business divisions: The Land Systems Division, focused on land-based systems, including military vehicle systems, artillery systems, and the IMI activities; and the C4I and Cyber Division, focused on command & control, radio, communication, homeland security, and cyber intelligence activities.
This reorganization is intended to improve the synergy within the Company with respect to the acquired activities and better address market requirements and customer support. The Company believes that the acquisition of IMI and the reorganization will positively affect the future business of Elbit Systems.
Main Q4 2018 Results
Revenues in the fourth quarter of 2018 were $1,077.8 million, as compared to $1,009.6 million in the fourth quarter of 2017.
Non-GAAP gross profit amounted to $306.7 million (28.5% of revenues) in the fourth quarter of 2018, as compared to $293.8 million (29.1% of revenues) in the fourth quarter of 2017. GAAP gross profit in the fourth quarter of 2018 was $234.9 million (21.8% of revenues), as compared to $288.6 million (28.6% of revenues) in the fourth quarter of 2017. The gross profit in the fourth quarter of 2018 reflects expenses of $66.6 million related to the IMI acquisition.
Research and development expenses, net were $73.0 million (6.8% of revenues) in the fourth quarter of 2018, as compared to $72.5 million (7.2% of revenues) in the fourth quarter of 2017.
Marketing and selling expenses, net were $73.5 million (6.8% of revenues) in the fourth quarter of 2018, as compared to $81.2 million (8.0% of revenues) in the fourth quarter of 2017.
General and administrative expenses, net were $49.8 million (4.6% of revenues) in the fourth quarter of 2018, as compared to $26.2 million (2.6% of revenues) in the fourth quarter of 2017. The lower level of general and administrative expenses in the fourth quarter of 2017 resulted mainly from revaluation of liabilities related to assets and activities acquired in prior years.
Non-GAAP operating income was $112.5 million (10.4% of revenues) in the fourth quarter of 2018, as compared to $115.6 million (11.5% of revenues) in the fourth quarter of 2017. GAAP operating income in the fourth quarter of 2018 was $38.6 million (3.6% of revenues), as compared to $108.7 million (10.8% of revenues) in the fourth quarter of 2017. GAAP operating income in the fourth quarter of 2018 was reduced by $66.6 million in expenses related to the acquisition of IMI.
Financial expenses, net were $14.9 million in the fourth quarter of 2018, as compared to $9.7 million in the fourth quarter of 2017. The increase in financial expenses in the fourth quarter of 2018 was mainly a result of higher debt and interest rates.
Other expenses, net were $6.4 million in the fourth quarter of 2018, as compared to $5.1 million in the fourth quarter of 2017. Other expenses includes mainly non-service cost components of pension plans that were reclassified from operating income in accordance with ASU 2017-07, "Compensation – Retirement benefits" that was adopted on January 1, 2018, retrospectively.
Main Full Year 2018 Results
Revenues for the year ended December 31, 2018, were $3,683.7 million, as compared to $3,377.8 million in the year ended December 31, 2017.
According to the Company, the leading contributors to its revenues were the airborne systems and C4ISR systems areas of operation. The increase in revenues in the airborne systems area of operation was primarily due to increased sales of commercial avionics equipment in the US of a new subsidiary that was acquired in the second quarter of 2018. Revenues from land systems increased primarily due to an increase in sales of land electronic warfare systems and armored vehicle systems in Europe and the revenues of IMI that was acquired in November 2018.
On a geographic basis, the increase in North America was mainly a result of higher sales of airborne systems and revenues of a new US subsidiary acquired in April 2018 in the area of commercial avionics. The increase in Asia-Pacific was mainly a result of higher sales of tank fire control systems and UAS. The increase in the “Other” geographical region was mainly due to an increase in sales of UAS, artillery and command and control systems.
Cost of revenues for the year ended December 31, 2018, was $2,707.5 million (73.5% of revenues), as compared to $2,374.8 million (70.3% of revenues) in the year ended December 31, 2017. Cost of revenues in 2018 included $66.6 million in expenses related to the acquisition of IMI.
Non-GAAP gross profit for the year ended December 31, 2018, was $1,061.9 million (28.8% of revenues), as compared to $1,025.3 million (30.4% of revenues) in the year ended December 31, 2017. GAAP gross profit in 2018 was $976.2 million (26.5% of revenues), as compared to $1,003.1 million (29.7% of revenues) in 2017. The gross profit in 2018 reflects expenses of $66.6 million related to the IMI acquisition.
Research and development expenses, net for the year ended December 31, 2018, were $287.4 million (7.8% of revenues), as compared to $265.1 million (7.8% of revenues) in the year ended December 31, 2017.
Marketing and selling expenses, net for the year ended December 31, 2018, were $281.0 million (7.6% of revenues), as compared to $280.2 million (8.3% of revenues) in the year ended December 31, 2017.
General and administrative expenses, net for the year ended December 31, 2018, were $160.3 million (4.4% of revenues), as compared to $133.3 million (3.9% of revenues) in the year ended December 31, 2017. The lower level of general and administrative expenses in 2017 was mainly a result of revaluation of liabilities related to assets and activities acquired in prior years.
Other operating income, net for the year ended December 31, 2018, amounted to $45.4 million. This was the result of net gains related to deconsolidation of two of Elbit’s Israeli subsidiaries in the commercial cyber and medical instrumentation areas, due to third-party investments.
Non-GAAP operating income for the year ended December 31, 2018, was $340.7 million (9.2% of revenues), as compared to $353.0 million (10.5% of revenues) in the year ended December 31, 2017.
GAAP operating income in 2018 was $292.8 million (7.9% of revenues), as compared to $324.4 million (9.6% of revenues) in 2017.
GAAP operating income in 2018 was reduced by expenses of $66.6 million related to the acquisition of IMI.
Financial expenses, net for the year ended December 31, 2018, were $44.1 million, as compared to $34.5 million in the year ended December 31, 2017. The increase in financial expenses in 2018 was mainly a result of higher debt and higher interest rates.
Other expenses, net were $11.5 million in 2018 as compared to $5.1 million in 2017. Other expenses in 2018 included write-off impairment of $7.8 million in investments in two affiliated Israeli companies. Other expenses also included expenses of $3.8 million in 2018 as compared to $5.1 million in 2017, related to non-service cost components of pension plans that were reclassified from operating income, according to ASU 2017-07, "Compensation – Retirement benefits" that was adopted on January 1, 2018, retrospectively.
Backlog of orders for the year ended December 31, 2018, totaled $9,399 million, as compared to $7,561 million as of December 31, 2017. Approximately 61% of the current backlog is attributable to orders from outside Israel. Approximately 64% of the current backlog is scheduled to be performed during 2019 and 2020.
Operating cash flow for the year ended December 31, 2018, was $191.7 million, as compared to $100.9 million in the year ended December 31, 2017. The higher level of operating cash flow in 2018 was mainly a result of higher collection of receipts and advances received from customers.
Recent Events
On November 25, 2018, the Company announced that it completed the acquisition of IMI Systems Ltd. (IMI) for a purchase price of approximately $495 million (NIS 1.8 billion), with an additional payment of up to approximately $27 million (NIS 100 million) contingent upon IMI meeting agreed performance goals.
On December 3, 2018, the Company announced that it was awarded a $112 million contract to supply a country in Asia-Pacific with advanced airborne intelligence systems. The contract will be performed over a six-year period.
On January 3, 2019, the Company announced that its subsidiary, Elbit Systems of America, LLC, was awarded a contract by Raytheon Company to provide the Two-Color Laser System for the Multi-Spectral Targeting System. The initial contract is in an amount not material to Elbit Systems and will be performed during 2019.
On January 6, 2019, the Company announced that it was awarded a contract by the Directorate of Production and Procurement of the Israeli Ministry of Defense (IMOD) valued at approximately $333 million (NIS 1.25 billion) for the supply of ammunition to the Israeli Defense Forces. This five-year contract, the work on which will commence in 2026, will be a continuation of a multi-year contract entered into with the IMOD.
On January 6, 2019, the Company announced that following the closing of the transaction for the acquisition of IMI by the Company, Midroog Ltd., an Israeli rating agency (Midroog), issued its monitoring report regarding the Series "A" Notes issued by the Company in 2010 and in 2012 (the Notes) and reaffirmed the Notes' "Aa1.il" (on a local scale) rating, while changing the rating outlook to negative.
On January 7, 2019, the Company announced that it was awarded a $15 million contract from Energean Israel Ltd., a subsidiary of Energean Oil and Gas plc, to supply a comprehensive solution for the Floating Production Storage and Offloading platform of the offshore Karish-Tanin gas fields. The contract will be performed over an approximately two-year period, with warranty and logistic support continuing for an additional ten years.
On 29 January 2019, the Company announced that, following the completion of the acquisition of IMI's shares on November 25, 2018, and a reorganization in connection with the IMI acquisition, the Company expects to record in the fourth quarter of 2018 expenses estimated in the range of $65 - $75 million. These costs will be recorded mainly in the Cost of Revenues line item in the Consolidated Statement of Income and will be eliminated in the non-GAAP results due to the non-recurring nature of the expense.
On February 4, 2019, the Company announced that its subsidiary, Elbit Systems of America, LLC, was awarded an initial $5 million contract from Support Systems Associates, Inc. to provide an avionics refresh for the US Air National Guard’s fixed-wing aircraft used for Intelligence, Surveillance and Reconnaissance operations - the RC-26B. If all options are exercised, the total contract would be valued at $22 million. The program will be performed by 2021 in San Antonio, Texas.
On March 5, 2019, the Company announced that its subsidiary, Elbit Systems of America, LLC, was awarded a five-year Indefinite Delivery/Indefinite Quantity contract by the United States Army to provide a wide field-of-view Common Helmet Mounted Display system. The contract, which is in an amount that is not material to Elbit Systems, will be performed in Fort Worth, Texas, with deliveries starting within 15 months.
On March 5, 2019, the Company announced that it was awarded a contract from Cantiere Navale Vittoria SpA to supply combat suites and perform systems integration for three new patrol vessels of the Hellenic Coast Guard. The contract, which is in an amount that is not material to Elbit Systems, will be performed over a two-year period with warranty and logistic support continuing for an additional five-year period.
