Elbit Systems(ESLT) - 2020 Q4 - Annual Report

General Disclosure Standards Cautionary Statement with Respect to Forward-Looking Statements Forward-looking statements are subject to various risks, and actual results may differ materially, with no obligation to update unless legally required - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially due to factors such as governmental regulations, budget priorities, market conditions (including Covid-19), product development, foreign currency exchange rates, and acquisition integration challenges[17][18][20] - The company explicitly disclaims any obligation to update or review forward-looking statements, except as required by applicable law[21] Item 1. Identity of Directors, Senior Management and Advisers Item 2. Offer Statistics and Expected Timetable Item 3. Key Information Risk Factors This section details various operational, market, financial, legal, and Israeli-specific risks that could adversely affect the company's business Risks Related to Our Operations Operational risks include cyber attacks, pandemic disruptions, acquisition integration challenges, supply chain failures, and difficulties in retaining key employees - Cyber attacks and security incidents pose a significant threat to the company's digital environment, potentially leading to data breaches, intellectual property loss, and operational disruptions[27][28][29] - The COVID-19 pandemic has negatively impacted commercial aviation business and could further affect operations, supply chains, and governmental budgets[30] - Acquisitions involve risks such as failure to identify material risks during due diligence, negative financial impacts, goodwill impairment, unanticipated costs, integration difficulties, failure to achieve synergies, and potential retention issues for key employees[31][33][34] - Dependence on a limited number of suppliers for critical components and potential liabilities from subcontractor failures could lead to production delays and increased costs[35] Risks Related to Our Markets and Industry Market and industry risks stem from intense competition, the need for continuous technological innovation, reliance on government defense spending, and challenges in international operations - Success in a competitive industry requires continuous investment in R&D to develop new technologies and offerings, as failure to do so could result in market share loss and impact contract acquisition[41][42][44] - A significant portion of revenues is derived from government agencies, making the company vulnerable to reductions or eliminations in government defense and homeland security spending[45] - International operations expose the company to risks like trade sanctions, tariffs, political instability, and changes in diplomatic relations, which could significantly reduce revenues[46] Financial-Related Risks Financial risks include currency exchange rate fluctuations, potential cost overruns in fixed-price contracts, and volatility in revenues and profit margins - The company faces significant currency exchange risks due to revenues and expenses in multiple currencies, which can lead to adverse effects from exchange rate fluctuations[49] - Most contracts are fixed-price, meaning the company assumes the risk of increased or unexpected costs, which could reduce profits or lead to losses[51] - Fluctuations in revenues and profit margins can occur due to changes in pricing, sales volume, project mix, and adjustments in estimated project gross profits under percentage-of-completion accounting[53] - The company is subject to 'buy-back' or 'offset' obligations in international programs, and failure to meet these could result in contractual penalties and impair future business opportunities[58] Risks Related to Legal and Regulatory Requirements Legal and regulatory risks encompass compliance with government procurement and anti-bribery rules, dependence on export approvals, and protection of proprietary technology - Compliance with government contracting, anti-bribery/corruption, and export regulations is critical; non-compliance could lead to contract termination, penalties, or debarment[62][63] - The company's business relies on proprietary technology, and its ability to protect intellectual property may be limited by ineffective IP laws, difficulty in detecting infringements, and the risk of independent development by competitors[66][67] Other Risks Related to Our Business Other business risks include inadequate insurance coverage, share price volatility, and the significant influence of a major shareholder - The company's share price may be volatile due to factors beyond its control, including operating results, analyst recommendations, market perceptions, and geopolitical events[72][73] - Federmann Enterprises Ltd. (FEL) owns approximately 44.3% of the company's ordinary shares, granting it significant influence over certain shareholder-approved matters, such as director elections[74] Risks Related to Our Israeli Operations Risks specific to Israeli operations include the impact of regional political and military conditions, potential limitations on international sales, and changes in government spending or tax benefits - Political, economic, and military conditions in Israel and the Middle East directly affect operations and could have a material adverse effect on the business[75] - Israeli government approval is required for acquisitions of 'means of control' in Israeli defense companies, which could limit potential purchasers of the company's shares[82] - As a foreign private issuer, the company is exempt from certain SEC requirements, which may result in shareholders receiving less information and protection compared to a domestic U.S. company[83] Item 4. Information on the Company Business Overview Elbit Systems is an international high-technology company primarily engaged in defense and homeland security, offering a broad portfolio of airborne, land, and naval systems, products, and support services - Elbit Systems is an international high-technology company focused on defense and homeland security, providing airborne, land, and naval systems, products, and support services[89] - Key activities include military aircraft and helicopter systems, commercial aviation systems, unmanned aircraft systems, electro-optic systems, naval systems, land vehicle systems, munitions, C4ISR and cyber systems, and electronic warfare systems[90] - The market environment shows increasing demand for technological solutions incorporating AI, Big Data, robotics, automation, and information assurance in defense and homeland security, despite the impact of Covid-19 on commercial aviation[92] Revenues The company's consolidated revenues for 2020 reached $4,663 million, with airborne systems and land systems being the largest contributors, and North America and Israel as major geographic sources Consolidated Revenues by Major Areas of Operations (2018-2020) | Major Areas of Operations | 2018 (U.S. dollars in millions) | 2019 (U.S. dollars in millions) | 2020 (U.S. dollars in millions) | |:--------------------------|:--------------------------------|:--------------------------------|:--------------------------------| | Airborne systems | $1,470 | $1,617 | $1,650 | | C4ISR systems | $1,130 | $1,162 | $1,146 | | Land systems | $649 | $1,228 | $1,259 | | Electro-optic systems | $334 | $374 | $476 | | Other | $101 | $127 | $132 | | Total | $3,684 | $4,508 | $4,663 | Consolidated Revenues by Geographic Region (2018-2020) | Geographic Region | 2018 (%) | 2019 (%) | 2020 (%) | |:------------------|:---------|:---------|:---------| | Israel | 20% | 24% | 24% | | North America | 27% | 28% | 32% | | Europe | 20% | 18% | 17% | | Asia-Pacific | 21% | 23% | 21% | | Latin America | 5% | 4% | 3% | | Others | 7% | 3% | 3% | Subsidiary Organizational Structure The company's major wholly-owned subsidiaries, including Elbit Systems of America, operate across various defense and homeland security activities, with ESA operating under a Special Security Agreement for classified U.S. programs - Elbit Systems of America (ESA) provides products and systems for U.S. military, homeland security, medical instrumentation, and commercial aviation, operating under a Special Security Agreement (SSA) with the DoD to handle classified U.S. government programs[103][104] - Other major Israeli subsidiaries include C4I and Cyber (C4ISR, cyber intelligence), Elisra (EW, SIGINT, C4ISR), Elop (electro-optic systems), and ELS (land-based systems, munitions, vehicle protection)[105][106][107] Mergers, Acquisitions and Divestitures Mergers, acquisitions, and joint ventures are a key part of the company's growth strategy, focusing on expanding product offerings, technical capabilities, and customer base, while also divesting non-core businesses - The company's growth strategy includes mergers, acquisitions, and joint ventures to expand product/service offerings, technical capabilities, and customer base, with investments primarily in Israel and North America[109][110] - Divestiture of non-core businesses is also pursued to optimize holdings[111] Current Business Operations The company's operations are project-oriented and inter-related, involving development, production, service, and support across various defense, homeland security, and commercial applications - Operations are project-oriented, often involving multiple subsidiaries to leverage diverse skills and resources for development, production, service, and support activities[112][113] - Product solutions span military aircraft, commercial aviation, UAS, electro-optics, naval, land vehicle systems, munitions, C4I, cyber, and EW/SIGINT, with services including logistic support and training[114][115][116][118][119][120][121][122][123][124] Property, Plant and Equipment The company operates manufacturing and assembly facilities globally, with recent annual net investment in facilities averaging approximately $135 million Facilities Owned or Leased by the Company (Square Feet) | Location | Owned (sq ft) | Leased (sq ft) | |:--------------|:--------------|:---------------| | Israel | 2,770,000 | 6,561,000 | | U.S. | 581,000 | 1,145,000 | | Other Countries | 1,093,000 | 591,000 | - Average annual net investment in facilities over the last two years was approximately $135 million, and current facilities are deemed adequate for operations[130] Governmental Regulation The company is subject to extensive governmental regulations across its operations, including defense contracting, export controls, foreign investment reviews, and environmental standards - Operations are governed by strict defense and government contract regulations in Israel and the U.S., including cost accounting, cyber protection, and anti-bribery rules, with non-compliance carrying severe penalties[131][140][142] - International sales and procurement depend on export license approvals from various governments (Israel, U.S., etc.), which can be denied or revoked due to political conditions or sanctions[132][133] - The Israeli Defense Entities Law may require government approval for acquisitions of 'means of control' in the company and its Israeli subsidiaries, potentially imposing restrictions on foreign ownership[135][136] - The company is subject to environmental, health, and safety laws, as well as civil aviation and FDA regulations for its commercial and medical products[146][147][148] Buy-Back The company is subject to 'buy-back' or 'offset' obligations in many international defense contracts, requiring it to facilitate economic flow-back or technology transfer to the customer's country - International defense programs often include 'buy-back' or 'offset' provisions, obligating the company to make or facilitate transactions (e.g., procurement, investment, technology transfer) in the customer's country[149] Financing Terms The company utilizes various financing terms for its contracts, including progress payments, customer advances, milestone payments, and extending credit, while also participating in Private Finance Initiatives - Financing terms include progress payments, customer advances, milestone payments, and extending credit, sometimes requiring guarantees from financial institutions or the company itself[151][152][153] - The company engages in Private Finance Initiatives (PFI) for long-term project financing, which can involve pledging equity, providing guarantees, and increasing financial leverage[154] Intellectual Property The company relies on formally and non-formally protected intellectual property, safeguarding it through various measures, while governmental customers often retain rights to technologies developed under contracts - The company protects its proprietary technology through patents, trade secrets, copyrights, trademarks, and non-disclosure agreements[155] - Governmental customers, particularly the IMOD, typically retain specific rights to technologies and inventions developed under funded contracts, including the right to disclose to third parties and receive royalties on export sales[157] Research and Development The company strategically invests in R&D to anticipate customer needs, improve existing systems, and develop new technologies, with over 50% of its workforce dedicated to technology-related functions - R&D efforts focus on anticipating customer operational needs, reducing time to market, and increasing affordability, with an emphasis on improving existing systems and developing new ones using emerging technologies[159][160] - Over 50% of the total workforce is engaged in technology-related functions, including research, development, and engineering[160] R&D Investment (2018-2020) | Category | 2018 (U.S. dollars in millions) | 2019 (U.S. dollars in millions) | 2020 (U.S. dollars in millions) | |:------------------|:--------------------------------|:--------------------------------|:--------------------------------| | Total Investment | $317.7 | $368.7 | $428.2 | | Less Participation | $(30.3) | $(36.9) | $(68.5) | | Net Investment| $287.4 | $331.8 | $359.7 | Manufacturing The company manufactures and assembles systems and products across its global facilities, integrating new manufacturing execution systems, emphasizing environmentally friendly practices, and maintaining continuity during the Covid-19 pandemic - Manufacturing and assembly occur in Israel, the U.S., Europe, Brazil, and Australia, with ongoing integration of new manufacturing execution systems for optimization[165] - The company conducts environmentally friendly manufacturing activities and maintained continuity during the Covid-19 pandemic through extensive monitoring[166] - Specialized facilities include a high-technology semiconductor manufacturing facility and U.S. FAA/FDA registered facilities for commercial avionics, aircraft components, and medical equipment[167][168] Seasonality The company's business is not considered materially seasonal, although revenues may sometimes increase towards the end of a fiscal year - No material portion of the company's business is considered seasonal, though revenues may sometimes increase towards the end of a fiscal year[169] Supply Chain The company manages its supply chain through a hybrid operating model, combining global commodity management with local subsidiary management to leverage economies of scale and reduce risks - A 'hybrid' operating model is used for supply chain activities, combining global commodity management with business line and subsidiary management to optimize efficiency and reduce risks[170] - The company is generally not dependent on single sources of supply and requires its supply chain to comply with a Supplier Code of Conduct, including standards on human trafficking, counterfeit parts, and conflict minerals[170] Customer Satisfaction and Quality Assurance The company is committed to continuous improvement in processes and quality assurance, from pre-contract to post-acceptance, utilizing project management methods and holding various quality certifications globally - The company emphasizes continuous improvement, defect prevention, and customer satisfaction throughout all operational stages, from development to after-sales support[171] - Operational sites hold numerous quality certifications, including ISO-9001, AS9100, ISO-14001, ISO-45001, ISO-27001, FAA Part 145, EASA Part 145/21G, and FDA GMP for medical equipment[174][175] Service and Warranty The company provides comprehensive support services, including training, performance-based logistics, and flight school operations, typically offering a one or two-year warranty for its products - The company offers training, equipment, local support, and specialists for product maintenance, along with performance-based logistics and flight school operations[176] - Standard warranty periods are one to two years, with accruals for warranty obligations based on project-specific experience and engineering estimates[177] Marketing and Sales The company actively identifies customer needs globally, marketing its systems as a prime or subcontractor, supported by subsidiaries, joint ventures, and representatives, with strategic cooperation agreements common for joint projects - Marketing and sales involve identifying customer needs, demonstrating prototypes, and selling as a prime or subcontractor to governments and companies worldwide[178][179] - Elbit Systems of America leads U.S. sales and marketing, operating under a Special Security Agreement for classified programs[180] - Cooperation agreements with defense contractors and platform manufacturers are utilized for joint marketing and project performance globally[181] Competition The company operates in a highly competitive environment, competing on product performance, price, reputation, and technological expertise, with industry consolidation increasing the size and resources of competitors - Competition is based on product/program performance, price, reputation, reliability, life cycle costs, and responsiveness to customer requirements[182] - Industry consolidation has led to fewer but larger and more resource-rich competitors, including major international defense contractors like Boeing, Lockheed Martin, and Raytheon[184][185] - The company competes through its systems development, technological expertise, operationally-proven performance, and ability to offer overall solutions, sometimes engaging in strategic cooperation with competitors[186] Major Customers The Israeli Ministry of Defense (IMOD) and the U.S. government are the company's major customers, each accounting for over 10% of total revenues in recent years Major Customer Revenue Contribution (2018-2020) | Customer | 2018 (%) | 2019 (%) | 2020 (%) | |:----------------|:---------|:---------|:---------| | IMOD | 13% | 15% | 21% | | U.S. Government | 17% | 18% | 22% | Environmental, Social and Governance (ESG) Practices The company prioritizes ESG practices, including EHS compliance, strong corporate governance, ethics, anti-corruption, fair labor, human rights, supply chain compliance, and community engagement, overseen by the board - The company emphasizes ESG practices, including EHS, corporate governance, ethics, anti-corruption, fair labor, human rights, supply chain compliance, and social responsibility[188] - EHS compliance includes ISO-14001 and ISO-45001 standards, with measures to reduce consumption and incorporate environmental protection in manufacturing[189] - A strong ethics compliance program, including a Code of Business Conduct and Ethics and anti-bribery/corruption policies, is in place, with zero tolerance for corruption[190] - Fair labor practices, human rights, non-discriminatory hiring, gender diversity, and supply chain compliance (including avoiding human trafficking and conflict minerals) are key aspects of the ESG policy[192][193] Conditions in Israel The company's Israeli operations are influenced by trade agreements, government funding for R&D, and Israeli labor laws, with enforcement of foreign judgments subject to specific legal conditions - The company benefits from Israeli government programs like the Israel Innovation Authority and Investment Center, which provide funding and tax benefits for R&D and industrial investments, subject to specific conditions and royalty payments on future sales[196] - Israeli employees are subject to Israeli labor laws and collective bargaining agreements, which cover aspects like work hours, wages, insurance, and severance pay[197][199][200] - Enforcement of non-Israeli judgments in Israel is possible under specific conditions, including due process, non-conflict with Israeli law/public policy, and finality of judgment[201] Item 4A. Unresolved Staff Comments Item 5. Operating and Financial Review and Prospects General This section outlines critical accounting policies, long-term commitments, acquisitions, backlog, and industry trends, providing context for the company's financial performance Critical Accounting Policies and Estimates The company's financial reporting relies on critical accounting policies and estimates, particularly for revenue recognition, business combinations, impairment testing, income taxes, and post-employment benefits, all involving significant management judgment - Revenue from most long-term fixed-price contracts is recognized over time using an input method (cost-to-cost measure of progress), requiring significant judgment in estimating total contract revenues and costs[207][213][214][823] - Business combinations involve allocating purchase price to acquired assets and liabilities at fair value, requiring significant estimates for intangible assets and goodwill, which are subject to impairment testing[217][218][222] - The company records income taxes using the asset and liability approach, establishing reserves for uncertain tax positions and making judgments on entitlement to tax benefits[229][230][231] - Post-employment benefit plans (defined contribution and defined benefit) require actuarial valuations based on key assumptions like discount rates, expected return on assets, and mortality rates, which impact benefit obligations and costs[233][234][236] Long-Term Arrangements and Commitments The company has various long-term financial commitments, including royalty-bearing government funding for R&D, significant lease obligations, bank covenants, and substantial guarantees for customer advances and performance bonds - R&D expenditures are partially financed by the Israel Innovation Authority, requiring royalty payments on future sales of developed products[239] Future Minimum Lease Commitments (as of Dec 31, 2020) | Year | Amount (U.S. dollars in millions) | |:-----------------|:----------------------------------| | 2021 | $78.3 | | 2022 | $67.0 | | 2023 | $55.4 | | 2024 | $42.2 | | 2025 | $40.3 | | 2026 and thereafter | $291.9 | | Total | $575.1 | - The company is obligated to meet financial covenants for bank credits and loans, including requirements for shareholders' equity, current ratio, and operating profit margin, which were met as of December 31, 2020 and 2019[241] Guarantees Issued by Financial Institutions | Year | Amount (U.S. dollars in millions) | |:-----|:----------------------------------| | 2020 | $2,471 | | 2019 | $1,983 | Purchase Commitments | Year | Amount (U.S. dollars in millions) | |:-----|:----------------------------------| | 2020 | $2,626 | | 2019 | $2,248 | Backlog of Orders The company's backlog of firm customer commitments was $11,024 million as of December 31, 2020, with 65% for orders outside Israel and a majority scheduled for performance in 2021-2022 Backlog of Orders (as of Dec 31) | Year | Amount (U.S. dollars in millions) | % for orders outside Israel | |:-----|:----------------------------------|:----------------------------| | 2020 | $11,024 | 65% | | 2019 | $10,029 | 61% | - Approximately 61% of the 2020 backlog is scheduled for performance in 2021 and 2022, with the remaining 35% in 2023 and 2024[248] Trends Key industry trends include increased focus on low-intensity conflicts, homeland security, and cyber warfare, driving demand for advanced technological solutions, despite a slowdown in commercial aviation due to Covid-19 - Defense and homeland security trends show increasing demand for technological solutions incorporating artificial intelligence, Big Data analytics, automation, robotics, and information assurance[249] - The COVID-19 pandemic caused a slowdown in commercial aviation markets, leading to approximately $60 million in non-cash expenses in Q3 2020 related to impairment and inventory write-offs[249] - Industry consolidation has increased the size and resources of competitors, and there's a growing trend for defense customers to require local work through buy-back/offset arrangements[250] Summary of Operating Results This section provides a detailed comparison of the company's operating results for 2020 vs. 2019 and 2019 vs. 2018, covering revenues, costs, profits, and net income Consolidated Statements of Income Summary (2018-2020) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | 2018 ($ thousands) | |:------------------------------------------------------|:-------------------|:-------------------|:-------------------| | Revenues | 4,662,572 | 4,508,400 | 3,683,684 | | Cost of revenues | 3,497,465 | 3,371,933 | 2,707,505 | | Gross profit | 1,165,107 | 1,136,467 | 976,179 | | R&D expenses, net | 359,745 | 331,757 | 287,352 | | Marketing and selling expenses | 290,703 | 301,400 | 281,014 | | General and administrative expenses | 223,935 | 214,749 | 160,348 | | Other operating income, net | (34,963) | (33,049) | (45,367) | | Operating income | 325,687 | 321,610 | 292,832 | | Financial expenses, net | (71,270) | (69,072) | (44,061) | | Other expenses, net | 7,408 | (6,243) | (11,449) | | Income before taxes on income | 261,825 | 246,295 | 237,322 | | Taxes on income | (36,443) | (19,414) | (26,445) | | Equity in net earnings of affiliated companies | 12,604 | 1,774 | (2,222) | | Net income attributable to the Company's shareholders | 237,658 | 227,857 | 206,738 | | Diluted net earnings per share | $5.38 | $5.20 | $4.83 | 2020 Compared to 2019 In 2020, revenues increased to $4,662.6 million, driven by growth in airborne systems and electro-optics, with net income attributable to shareholders growing to $237.7 million Revenue Distribution by Areas of Operation (2019 vs. 2020) | Area of Operation | 2020 ($ millions) | 2020 (%) | 2019 ($ millions) | 2019 (%) | |:------------------|:------------------|:---------|:------------------|:---------| | Airborne systems | 1,650.4 | 35.4 | 1,617.2 | 35.9 | | C4ISR systems | 1,145.7 | 24.6 | 1,161.5 | 25.8 | | Land systems | 1,258.9 | 27.0 | 1,228.3 | 27.2 | | Electro-optic systems | 475.9 | 10.2 | 374.4 | 8.3 | | Other | 131.7 | 2.8 | 127.0 | 2.8 | | Total | 4,662.6 | 100.0| 4,508.4 | 100.0| Revenue Distribution by Geographical Regions (2019 vs. 2020) | Geographic Region | 2020 ($ millions) | 2020 (%) | 2019 ($ millions) | 2019 (%) | |:------------------|:------------------|:---------|:------------------|:---------| | Israel | 1,106.3 | 23.7 | 1,064.8 | 23.7 | | North America | 1,500.6 | 32.2 | 1,260.5 | 28.0 | | Europe | 819.0 | 17.6 | 853.7 | 18.9 | | Asia-Pacific | 961.8 | 20.6 | 1,029.6 | 22.8 | | Latin America | 140.1 | 3.0 | 158.1 | 3.5 | | Other | 134.8 | 2.9 | 141.7 | 3.1 | | Total | 4,662.6 | 100.0| 4,508.4 | 100.0| - Gross profit margin slightly decreased from 25.2% in 2019 to 25.0% in 2020, with cost of revenues in 2020 including approximately $60 million in non-cash expenses for asset impairment and inventory write-offs due to COVID-19's impact on commercial aviation[264][266] - Net R&D expenses increased from $331.8 million (7.4% of revenues) in 2019 to $359.7 million (7.7% of revenues) in 2020[268] - Net income attributable to shareholders increased to $237.7 million in 2020 from $227.9 million in 2019, with diluted EPS rising from $5.20 to $5.38[281] 2019 Compared to 2018 In 2019, consolidated revenues significantly increased to $4,508.4 million from $3,683.7 million in 2018, primarily due to acquisitions and increased sales in airborne and land systems Revenue Distribution by Areas of Operation (2018 vs. 2019) | Area of Operation | 2019 ($ millions) | 2019 (%) | 2018 ($ millions) | 2018 (%) | |:------------------|:------------------|:---------|:------------------|:---------| | Airborne systems | 1,617.2 | 35.9 | 1,470.1 | 39.9 | | C4ISR systems | 1,161.5 | 25.8 | 1,130.1 | 30.7 | | Land systems | 1,228.3 | 27.2 | 649.1 | 17.6 | | Electro-optic systems | 374.4 | 8.3 | 333.9 | 9.1 | | Other | 127.0 | 2.8 | 100.5 | 2.7 | | Total | 4,508.4 | 100.0| 3,683.7 | 100.0| Revenue Distribution by Geographical Regions (2018 vs. 2019) | Geographic Region | 2019 ($ millions) | 2019 (%) | 2018 ($ millions) | 2018 (%) | |:------------------|:------------------|:---------|:------------------|:---------| | Israel | 1,064.8 | 23.6 | 740.2 | 20.1 | | North America | 1,260.5 | 28.0 | 979.2 | 26.6 | | Europe | 853.7 | 18.9 | 737.1 | 20.0 | | Asia-Pacific | 1,029.6 | 22.8 | 791.8 | 21.5 | | Latin America | 158.1 | 3.5 | 192.4 | 5.2 | | Other | 141.8 | 3.2 | 243.0 | 6.6 | | Total | 4,508.5 | 100.0| 3,683.7 | 100.0| - Gross profit margin declined from 26.5% in 2018 to 25.2% in 2019, attributed to a less favorable sales mix and lower gross profit from the IMI acquisition[291] - Net R&D expenses increased from $287.4 million (7.8% of revenues) in 2018 to $331.8 million (7.4% of revenues) in 2019[292] - Net income attributable to shareholders increased to $227.9 million in 2019 from $206.7 million in 2018, with diluted EPS rising from $4.83 to $5.20[304] Cash Flow The company's cash flow is influenced by project-specific timing of payments and expenses, with net cash from operating activities at $279 million in 2020 and $(53) million used in 2019 - Operating cash flow is affected by the timing of customer advances and accounts receivable collection versus project payments, leading to period-to-period variations[306] - In 2020, net cash provided by operating activities was approximately $279 million, primarily from increased customer advances, offset by increases in trade receivables and inventories[308] - In 2019, net cash used for operating activities was approximately $53 million, mainly due to increases in trade receivables and inventories, and a decrease in customer advances[311] - Net cash used in investing activities was $23 million in 2020 and $107 million in 2019, primarily for property, plant, and equipment purchases and acquisitions[309][313] - Net cash used in financing activities was $198 million in 2020 (repayment of loans and dividends) and provided $173 million in 2019 (new loans and share issuance)[310][314] Financial Resources The company's financial resources include profits, receivables, customer advances, government grants, and access to bank credit lines, maintaining compliance with financial covenants - Financial resources include profits, accounts receivable, customer advances, government funding, and access to bank credit lines and capital markets[315][317] - The company met all financial covenants as of December 31, 2020 and 2019[316] Key Financial Resources (as of Dec 31, 2020) | Metric | Amount (U.S. dollars in millions) | |:------------------------|:----------------------------------| | Total borrowings | $740 | | Guarantees issued | $2,471 | | Cash balance | $279 | | Working capital | $651 | | Current ratio | 1.18 | Pensions and Other Post-Retirement Benefits The company accounts for pensions and other post-employment benefits based on ASC 715, involving judgments about uncertain events and actuarial assumptions, with employee benefit liabilities at $914 million as of December 31, 2020 - Accounting for pensions and post-retirement benefits involves significant judgment on actuarial assumptions (e.g., retirement dates, salary levels, mortality rates, discount rates, return on assets)[321] Employee Benefit Liabilities (as of Dec 31, 2020) | Metric | Amount (U.S. dollars in millions) | |:---------------------------|:----------------------------------| | Employee benefit liabilities | $914 | | Severance funds | $294 | Material Commitments for Capital Expenditures Anticipated capital expenditures for 2020 and the subsequent fiscal year are higher than in 2019, mainly due to increased spending on buildings and ERP enhancements, which the company plans to fund from cash operations - Anticipated capital expenditures for 2020 and the subsequent fiscal year are higher than in 2019, driven by investments in buildings, ERP system enhancements, and other expenses[323] - These capital expenditures are planned to be paid using cash generated from operations[323] Impact of Inflation and Exchange Rates The company's functional currency is the U.S. dollar, but it faces market risks from changes in interest rates and exchange rates, particularly the NIS/U.S. dollar rate, using derivative instruments to hedge these fluctuations - The U.S. dollar is the functional currency, but operations are exposed to market risks from interest rate and exchange rate changes, particularly the NIS/U.S. dollar rate[324][329] - Derivative instruments (e.g., forward contracts) are used to limit exposure to exchange rate fluctuations, especially for NIS-denominated payroll expenses and long-term contracts, not for trading purposes[325][326][329][334] - Inflation in Israel not offset by NIS devaluation against the U.S. dollar can negatively impact profitability of contracts paid in U.S. dollars or other foreign currencies but with NIS expenses[331] NIS/U.S. Dollar Exchange Rate and Inflation (2018-2020) | Year | Inflation Rate (%) | NIS vs. U.S. Dollar Change (%) | |:-----|:-------------------|:-------------------------------| | 2018 | +0.8% | -8.1% (depreciated) | | 2019 | +0.6% | +7.8% (strengthened) | | 2020 | -0.7% | +7.0% (strengthened) | Outstanding Foreign Exchange Forward Contracts (as of Dec 31, 2020) | Currency | Notional Amount (U.S. dollars in millions) | |:---------|:-------------------------------------------| | Euro | $500 | | GBP | $114 | | Other | $248 | | Total| $863 | Off-Balance Sheet Transactions The company has significant off-balance sheet 'buy-back' or 'offset' obligations totaling approximately $1.68 billion as of December 31, 2020, extending through 2028, with potential penalties for non-fulfillment - The company has outstanding 'buy-back' or 'offset' obligations totaling approximately $1.68 billion as of December 31, 2020, extending through 2028[344] - These commitments, common in the defense industry, involve placing direct work, vendor orders, technology transfer, investments, or other assistance in the customer's country[339][340] - Failure to meet buy-back obligations can result in contractual penalties, drawing upon guarantees, and reduced chances for future business[342] Non-GAAP Financial Data The company presents non-GAAP financial data to provide additional insights into business performance and facilitate comparisons, excluding non-recurring items, non-cash items, and significant exchange rate differences - Non-GAAP financial data is presented to offer additional information on business performance and trends, facilitating more meaningful comparisons over time[345] - Adjustments typically exclude non-recurring impacts, various non-cash items (e.g., amortization of intangibles, significant exchange rate differences), and items not considered part of regular ongoing business[346] Reconciliation of GAAP to Non-GAAP Financial Data (2018-2020) | Metric | 2020 (U.S. dollars in millions) | 2019 (U.S. dollars in millions) | 2018 (U.S. dollars in millions) | |:------------------------------------------------------|:--------------------------------|:--------------------------------|:--------------------------------| | GAAP gross profit | 1,165.1 | 1,136.5 | 976.2 | | Non-GAAP gross profit | 1,247.2 | 1,213.5 | 1,061.9 | | GAAP operating income | 325.7 | 321.6 | 292.8 | | Non-GAAP operating income | 390.1 | 379.7 | 340.7 | | GAAP net income attributable to Elbit Systems' shareholders | 237.7 | 227.9 | 206.7 | | Non-GAAP net income attributable to Elbit Systems' shareholders | 318.5 | 297.8 | 267.5 | | GAAP diluted net EPS | 5.38 | 5.20 | 4.83 | | Non-GAAP diluted net EPS | 7.20 | 6.79 | 6.25 | Item 6. Directors, Senior Management and Employees Directors and Executive Officers This section lists the Board of Directors and Executive Officers as of March 15, 2021, highlighting key roles, qualifications, and affiliations - Michael Federmann serves as Chair of the Board since 2000 and also as Chair and CEO of Federmann Enterprises Ltd. (FEL), which owns approximately 44.3% of the company's shares[353] - Noaz Bar Nir and Bilha (Billy) Shapira serve as External Directors, with Mr. Bar Nir also chairing the Audit and Financial Statements Review Committee and possessing accounting and financial expertise[354][356][363] - Bezhalel Machlis has served as the company's President and CEO since 2013, having held various management positions in the company since 1991[366] - The executive officer team includes key roles such as Chief Legal Officer, Chief Compliance Officer, Chief Financial Officer, Executive Vice Presidents for Marketing, Business Development, Human Resources, Operations, Mergers and Acquisitions, and General Managers for various systems divisions[367][369][370][371][372][373][374][375][377][378][379][380][381][382] Compensation of Directors and Executive Officers The company's compensation policy for Office Holders is governed by Israeli Companies Law, requiring periodic review and shareholder approval, with compensation including salaries, bonuses, and equity-based awards - The compensation policy for Office Holders (directors and executive officers) is subject to the Israeli Companies Law, requiring review by the compensation committee and board, and re-approval by shareholders every three years[384][386] Aggregate Compensation Costs for Directors and Executive Officers (2020) | Group | Salaries, Fees and Commissions ($ thousands) | Bonuses ($ thousands) | Pension, and Similar Retirement Benefits ($ thousands) | |:----------------------|:---------------------------------------------|:----------------------|:-------------------------------------------------------| | All directors (11 persons) | $575 | — | — | | All executive officers (15 persons) | $10,089 | $1,290 | — | - The 2012 Phantom Bonus Retention Plan provides cash payments linked to stock price performance, with no compensation costs recorded in 2020 for executive officers[395][400] - The 2018 Equity Incentive Plan grants options to executive officers, with compensation costs of approximately $4.1 million recorded in both 2019 and 2020[401] - The five most highly compensated Office Holders in 2020 included the President and CEO, General Manager Land, Chief Financial Officer, former General Manager ISTAR, and General Manager Aerospace, with their compensation comprising salary, bonus, and stock option costs[410][412][413] Board Practices The company's board practices are governed by Israeli Companies Law and Nasdaq rules, requiring a majority of independent directors and specific compositions for committees, detailing director appointments and committee functions - Directors (excluding External Directors) are elected annually by shareholders, with the Board authorized to appoint new directors for vacancies[415] - The Board includes a minimum of two directors with 'financial and accounting expertise' and complies with Nasdaq rules requiring a majority of independent directors and independent committees[416][421] - External Directors, required by Israeli law, serve three-year terms and must meet strict independence criteria, with at least one having financial/accounting expertise or professional competence[422][427][429][434] - The Audit and Financial Statements Review Committee, Compensation Committee, and Corporate Governance and Nominating Committee are composed exclusively of independent directors, fulfilling both Israeli and Nasdaq requirements[437][445][451] Employees As of 2020, the company had 16,676 employees globally, with 2,703 in the U.S., and a significant portion of Israeli and U.S. employees covered by collective bargaining agreements Total Employees (2018-2020) | Year | Total Employees | U.S. Employees | |:-----|:----------------|:---------------| | 2020 | 16,676 | 2,703 | | 2019 | 16,575 | 2,580 | | 2018 | 16,149 | 2,001 | - Approximately 5,290 employees in Israel and 500 in U.S. operations are covered by collective bargaining agreements, with terms extending through various periods up to July 2024[456] Share Ownership As of March 15, 2021, Federmann Enterprises Ltd. (FEL) controlled approximately 44.3% of the company's outstanding ordinary shares, with no individual director or executive officer beneficially owning 1% or more, excluding Michael Federmann's indirect control - Federmann Enterprises Ltd. (FEL) controls approximately 44.3% of the company's outstanding ordinary shares as of March 15, 2021, with Michael Federmann being the controlling shareholder of FEL[471] - No individual director or executive officer beneficially owned 1% or more of outstanding ordinary shares, excluding the FEL position[457] - The 2018 Equity Incentive Plan for Executive Officers had 905,000 options outstanding as of December 31, 2020, with a weighted average exercise price of $128.45[1080] Item 7. Major Shareholders and Related Party Transactions Major Shareholders As of March 15, 2021, Federmann Enterprises Ltd. (FEL) was the major shareholder, controlling approximately 44.3% of the company's ordinary shares, with no other individual director or executive officer holding 1% or more Beneficial Ownership of Ordinary Shares (as of March 15, 2021) | Name of Beneficial Owner | Amount Owned | Percent of Ordinary Shares | |:-------------------------------------------------------|:-------------|:---------------------------| | Federmann Enterprises Ltd. | 19,580,342 | 44.3% | | All executive officers and directors as a group (24 persons) | 31,367 | 0.07% | - Michael Federmann, through entities he controls, is the controlling shareholder of FEL, which holds approximately 44.3% of the company's outstanding shares[471] - Approximately 11% of outstanding ordinary shares were held in the United States by about 132 shareholders of record[475] Related Party Transactions The company engages in routine transactions with related parties, including FEL-affiliated companies, for goods and services, which are not considered material or unusual and are approved in accordance with the Companies Law - The company conducts transactions with related parties, including FEL-affiliated companies, for goods and services (e.g., materials, hotel, catering)[480] - These related party transactions are not considered material or unusual and are approved according to the Companies Law[480] Item 8. Financial Information Export Sales International sales constitute a significant portion of the company's total revenues, amounting to approximately $3.56 billion in 2020, representing 76% of total sales - International sales (outside Israel) were approximately $3.56 billion in 2020, accounting for about 76% of total sales[483] Legal Proceedings The company is involved in various legal claims in the ordinary course of business, but management believes any financial impact beyond current accruals will not be materially adverse - The company is involved in legal claims in the ordinary course of business, but management believes the financial impact will not be materially adverse beyond existing accruals[484][1062] Dividend Distributions The company does not have an established dividend policy but has consistently paid a quarterly dividend, with the Board approving payments from surplus earnings subject to legal limitations - The company does not have an established dividend policy but has consistently paid a quarterly dividend[486] - The Board may approve dividends from surplus earnings, subject to legal limitations and a policy not to declare dividends from tax-exempt income[486][1097] Aggregate Quarterly Dividend Payments (2018-2020) | Year | Dividend per share | |:-----|:-------------------| | 2018 | $1.76 | | 2019 | $1.76 | | 2020 | $1.67 | Item 9. The Offer and Listing Share Listings and Trading Prices The company's ordinary shares are listed and traded on both the Nasdaq Global Select Market and the Tel-Aviv Stock Exchange (TASE) under the symbol "ESLT" - Ordinary shares are listed on the Nasdaq Global Select Market and the Tel-Aviv Stock Exchange (TASE) under the symbol "ESLT"[488] Item 10. Additional Information General Provisions of Israeli Law and Related Provisions of Articles of Association This section outlines the company's adherence to Israeli Companies Law and its Restated Articles of Association, covering registration, purpose, director procedures, and fiduciary duties of Office Holders - The company is registered with the Israeli Companies Registrar (registration number 52-004302-7) and operates under the Israeli Companies Law and its Restated Articles of Association[489][490] - An 'Office Holder' includes directors, general managers, and other senior managers, who owe fiduciary duties of care and loyalty to the company[495][496] - Directors affiliated with major shareholders (like FEL) are excluded from decisions involving transactions between the company and those affiliates, requiring special authorization under the Companies Law[497] Approval of Certain Transactions The Israeli Companies Law mandates specific approval procedures for certain transactions, especially those involving related parties, Office Holders, or controlling shareholders, often requiring multiple committee and shareholder approvals - The Companies Law requires specific approval procedures for transactions with related parties, including Office Holders and controlling shareholders, often involving the audit committee, compensation committee, board, and shareholders[500][501] - An 'Extraordinary Transaction' is defined as one outside the ordinary course of business, not on market terms, or likely to have a material impact on the company's financials[504] - Employment terms for Office Holders, especially the CEO, directors, or controlling shareholders, require approval from both the compensation committee and the board, and often shareholder approval by a 'Special Uninterested Majority'[510] Exemption, Insurance and Indemnification of Directors and Officers The company's Articles of Association permit the exemption, insurance, and indemnification of directors and officers for liabilities arising from their roles, including D&O liability insurance with a $100 million limit - The company's Articles of Association permit exemption, insurance, and indemnification of directors and officers for liabilities related to their duties, in accordance with Israeli Companies Law and Securities Law[524][525][526] - D&O liability insurance is in place, with a limit of $100 million and an annual premium of approximately $2.1 million as of March 15, 2021[537] - Indemnification letters have been approved for Board members and other Office Holders, with those for controlling shareholders requiring re-approval every three years[532][533] Rights, Preferences and Restrictions of Shares Elbit Systems has one type of share: ordinary shares, with a nominal value of NIS 1 each, with 44,200,164 shares issued and outstanding as of March 15, 2021, conferring voting and dividend rights - The company has 44,200,164 ordinary shares issued and outstanding as of March 15, 2021, each with a nominal value of NIS 1, conferring voting and dividend rights[539] Taxation This section details the tax laws applicable to the company in Israel and the U.S., including corporate tax rates, benefits under the Investment Law, the 'Innovation Box Regime' for IP-based income, and capital gains and dividend taxation - Israeli corporate tax rate is generally 23% since January 1, 2018[550] - The company and its Israeli subsidiaries qualify for tax benefits under the Investment Law (e.g., 'Approved Enterprise' status with reduced rates and exemptions), offering reduced tax rates (e.g., 6% or 12% for IP-based income) and exemptions[551][553][554][1004][1012][1013] - Tax-exempt income from 'Approved Enterprises' is subject to tax upon dividend distribution or liquidation, but the company's policy is not to declare dividends from such income[1001][1002] - U.S. tax reform (2017 Tax Act) reduced the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, impacting the company's U.S. subsidiaries[1020] - Capital gains on shares traded on TASE and Nasdaq are generally exempt from Israeli capital gains tax for non-Israeli residents, subject to certain conditions and tax treaty provisions[557][562] - Dividends paid to non-residents of Israel are subject to withholding tax (e.g., 25% or 30%, or reduced rates like 15% or 20% for 'Preferred Income' and 4% for 'Special Preferred Technological Enterprise')[559][560][561] [United States Federal Income Tax Considerations](index=88&type=sec