Elbit Systems(ESLT) - 2021 Q4 - Annual Report

Executive Summary & Management Commentary Elbit Systems reported a solid 2021 with significant revenue growth and a record backlog, despite a Q4 GAAP net income decrease due to a one-time tax expense Key Financial Highlights (Q4 & FY 2021) Elbit Systems achieved significant revenue growth and a record backlog in 2021, despite a Q4 GAAP net income decrease due to a one-time tax expense Key Financial Highlights | Metric | Q4 2021 | FY 2021 | FY 2020 | | :-------------------------- | :------ | :-------- | :-------- | | Backlog of orders (USD billions) | - | $13.7 | $11.0 | | Revenues (USD millions) | $1,494.3 | $5,300.0 | $4,660.0 | | Non-GAAP Net Income (USD millions) | $94.9 | $368.0 | - | | GAAP Net Income (USD millions) | $8.2 | $274.0 | - | | Non-GAAP Diluted EPS | $2.14 | $8.30 | - | | GAAP Diluted EPS | $0.18 | $6.20 | - | Management Commentary CEO Bezhalel Machlis highlighted 2021 as a solid year, driven by sustained demand and strategic investments in technology and global defense markets, positioning the company for future growth - 2021 was a solid year for Elbit Systems, with sustained demand for products and systems globally[3] - Revenues increased by 13% year over year to $5.3 billion, and a record backlog of $13.7 billion provides good visibility[3] - Significant investments in technological capabilities and expansion in key global defense markets underpin sustained growth, positioning the company to benefit from the defense sector's growth[4][5] Fourth Quarter 2021 Financial Results Elbit Systems reported increased Q4 2021 revenues and operating income, but GAAP net income and EPS declined significantly due to a one-time tax expense Revenues and Gross Profit Q4 2021 revenues increased by 8.5% year-over-year to $1,494.3 million, with GAAP gross profit rising to $374.3 million, though gross margin slightly decreased Revenues and Gross Profit | Metric | Q4 2021 (USD millions) | Q4 2020 (USD millions) | YoY Change | | :---------------- | :--------------------- | :--------------------- | :--------- | | Revenues | 1,494.3 | 1,377.7 | +8.5% | | GAAP Gross Profit | 374.3 | 357.8 | +4.6% | | GAAP Gross Margin | 25.1% | 26.0% | -0.9 pp | Operating Expenses R&D expenses slightly increased in Q4 2021 but decreased as a percentage of revenues, while G&A expenses rose due to the Sparton Corporation consolidation Operating Expenses | Expense Category | Q4 2021 (USD millions) | % of Revenues (Q4 2021) | Q4 2020 (USD millions) | % of Revenues (Q4 2020) | | :----------------------- | :--------------------- | :---------------------- | :--------------------- | :---------------------- | | Research and development, net | 114.0 | 7.6% | 109.1 | 7.9% | | Marketing and selling, net | 80.8 | 5.4% | 81.2 | 5.9% | | General and administrative, net | 72.4 | 4.8% | 62.9 | 4.6% | - Higher general and administrative expenses in Q4 2021 included the expenses of Sparton Corporation, acquired and consolidated commencing the second quarter of 2021[9] Operating Income GAAP operating income increased to $107.3 million in Q4 2021, though the operating margin slightly declined to 7.2% from 7.6% in Q4 2020 Operating Income | Metric | Q4 2021 (USD millions) | % of Revenues (Q4 2021) | Q4 2020 (USD millions) | % of Revenues (Q4 2020) | | :------------------ | :--------------------- | :---------------------- | :--------------------- | :---------------------- | | GAAP Operating Income | 107.3 | 7.2% | 104.6 | 7.6% | Financial and Other Income/Expenses, and Taxes Financial expenses decreased significantly, other income turned positive, but taxes on income surged to $92.2 million due to an $80.0 million one-time tax expense Financial and Other Income/Expenses, and Taxes | Metric | Q4 2021 (USD millions) | Q4 2020 (USD millions) | | :------------------------ | :--------------------- | :--------------------- | | Financial expenses, net | 19.6 | 32.5 | | Other income (expense), net | 9.7 | (7.3) | | Taxes on income | 92.2 | 1.9 | - Tax expenses in Q4 2021 included a one-time expense of approximately $80.0 million related to the amendment of legislation regarding exempt earnings in Israel[12] Net Income and Earnings Per Share GAAP net income attributable to shareholders significantly decreased to $8.2 million ($0.18 diluted EPS) in Q4 2021, primarily due to a one-time tax expense Net Income and Earnings Per Share | Metric | Q4 2021 (USD millions) | % of Revenues (Q4 2021) | Q4 2020 (USD millions) | % of Revenues (Q4 2020) | | :------------------------------------------- | :--------------------- | :---------------------- | :--------------------- | :---------------------- | | GAAP Net income attributable to shareholders | 8.2 | 0.5% | 67.8 | 4.9% | | GAAP Diluted EPS | 0.18 | - | 1.53 | - | - The decrease in GAAP net income in Q4 2021 was mainly a result of the one-time tax expense mentioned in 'Taxes on income'[12] Full Year 2021 Financial Results Elbit Systems achieved strong full-year 2021 financial results, with significant revenue and operating income growth, despite a substantial one-time tax expense Revenues and Cost of Revenues Full-year 2021 revenues increased by 13.2% to $5,278.5 million, with cost of revenues as a percentage of revenues decreasing to 74.3% from 75.0% in 2020 Revenues and Cost of Revenues | Metric | FY 2021 (USD millions) | % of Revenues (FY 2021) | FY 2020 (USD millions) | % of Revenues (FY 2020) | YoY Change | | :---------------- | :--------------------- | :---------------------- | :--------------------- | :---------------------- | :--------- | | Revenues | 5,278.5 | - | 4,662.6 | - | +13.2% | | Cost of revenues | 3,920.5 | 74.3% | 3,497.5 | 75.0% | +12.1% | - Cost of revenues in 2020 included non-cash expenses of approximately $60.0 million, related to impairment of assets and inventory write-offs due to the impact of COVID-19[19] Revenue Distribution by Areas of Operation Airborne systems and C4ISR systems were the primary revenue contributors in 2021, with growth driven by precision guided munitions sales and the Sparton acquisition Revenue Distribution by Areas of Operation | Area of Operation | FY 2021 (USD millions) | % of Total Revenues | FY 2020 (USD millions) | % of Total Revenues | | :------------------------ | :--------------------- | :------------------ | :--------------------- | :------------------ | | Airborne systems | 2,005.8 | 37.9% | 1,650.4 | 35.4% | | C4ISR systems | 1,371.5 | 26.0% | 1,145.7 | 24.6% | | Land systems | 1,254.7 | 23.8% | 1,258.9 | 27.0% | | Electro-optic systems | 452.9 | 8.6% | 475.9 | 10.2% | | Other | 193.6 | 3.7% | 131.7 | 2.8% | - The increase in revenues in Airborne systems was mainly a result of sales of airborne precision guided munitions in Asia-Pacific[17] - The growth in revenues in the C4ISR systems area was mainly due to Sparton, a U.S. subsidiary acquired and consolidated in the Company's results from the second quarter of 2021[17] Revenue Distribution by Geographical Regions North America and Asia-Pacific were the largest geographical revenue contributors, with growth driven by airborne systems, Sparton products, medical instrumentation, and precision guided munitions Revenue Distribution by Geographical Regions | Geographical Region | FY 2021 (USD millions) | % of Total Revenues | FY 2020 (USD millions) | % of Total Revenues | | :------------------ | :--------------------- | :------------------ | :--------------------- | :------------------ | | Israel | 1,094.7 | 20.7% | 1,106.4 | 23.7% | | North America | 1,608.6 | 30.5% | 1,500.6 | 32.2% | | Europe | 884.5 | 16.8% | 819.0 | 17.6% | | Asia-Pacific | 1,443.5 | 27.3% | 961.8 | 20.6% | | Latin America | 126.7 | 2.4% | 140.1 | 3.0% | | Other countries | 120.5 | 2.3% | 134.7 | 2.9% | - The increase in North America was mainly a result of higher sales of airborne systems and Sparton's products, as well as growth in sales of medical instrumentation[18] - The increase in Asia-Pacific was due to sales of airborne precision guided munitions[18] Operating Expenses R&D expenses increased in absolute terms but decreased as a percentage of revenues, while G&A expenses rose primarily due to the Sparton acquisition Operating Expenses | Expense Category | FY 2021 (USD millions) | % of Revenues (FY 2021) | FY 2020 (USD millions) | % of Revenues (FY 2020) | | :----------------------- | :--------------------- | :---------------------- | :--------------------- | :---------------------- | | Research and development, net | 395.1 | 7.5% | 359.7 | 7.7% | | Marketing and selling, net | 291.8 | 5.5% | 290.7 | 6.2% | | General and administrative, net | 267.4 | 5.1% | 223.9 | 4.8% | - The increase in general administrative expenses in 2021 was mainly as a result of general and administrative expenses related to the acquisition and consolidation of Sparton[22] Operating Income GAAP operating income for FY 2021 increased significantly to $418.5 million, with the operating margin improving to 7.9%, despite non-cash expenses in the prior year Operating Income | Metric | FY 2021 (USD millions) | % of Revenues (FY 2021) | FY 2020 (USD millions) | % of Revenues (FY 2020) | | :------------------ | :--------------------- | :---------------------- | :--------------------- | :---------------------- | | GAAP Operating Income | 418.5 | 7.9% | 325.7 | 7.0% | - GAAP operating income in 2020 included non-cash expenses of approximately $60 million related to impairment of assets and inventory write-offs due to the impact of Covid-19[22] Financial and Other Income/Expenses, and Taxes Financial expenses decreased significantly, partly due to a gain from fair value changes, while taxes on income substantially increased to $131.4 million, including an $80.0 million one-time expense Financial and Other Income/Expenses, and Taxes | Metric | FY 2021 (USD millions) | FY 2020 (USD millions) | | :-------------------- | :--------------------- | :--------------------- | | Financial expenses, net | 40.4 | 71.3 | | Other income, net | 5.3 | 7.4 | | Taxes on income | 131.4 | 36.4 | | Effective Tax Rate | 34.3% | 13.9% | - Financial expenses, net in 2021 included a gain from changes in fair value of financial assets of approximately $18.8 million[25] - Taxes on income in 2021 included a one-time expense of approximately $80.0 million related to the "release" of Exempt Earnings[27] Net Income and Earnings Per Share GAAP net income attributable to shareholders increased to $274.4 million ($6.20 diluted EPS) in 2021, despite a significant one-time tax expense Net Income and Earnings Per Share | Metric | FY 2021 (USD millions) | % of Revenues (FY 2021) | FY 2020 (USD millions) | % of Revenues (FY 2020) | | :------------------------------------------- | :--------------------- | :---------------------- | :--------------------- | :---------------------- | | GAAP Net income attributable to shareholders | 274.4 | 5.2% | 237.7 | 5.1% | | GAAP Diluted EPS | 6.20 | - | 5.38 | - | Backlog and Cash Flow from Operations The backlog of orders reached a record $13,661 million, and net cash provided by operating activities increased substantially, driven by customer debt payments and higher advances Backlog and Cash Flow from Operations | Metric | As of Dec 31, 2021 (USD billions) | As of Dec 31, 2020 (USD billions) | YoY Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Backlog of orders | 13.661 | 11.024 | +23.9% | | Net cash provided by operating activities (USD millions) | 416.9 | 278.8 | +49.5% | - Approximately 72% of the current backlog is attributable to orders from outside Israel, and approximately 60% is scheduled to be performed during 2022 and 2023[29] - The higher level of operating cash flow in 2021 was mainly a result of payment of outstanding debts by customers, mainly the Israeli Ministry of Defense, as well as higher advances received from customers, mainly in Israel and Europe[29] Company Specific Disclosures This section details the company's response to the COVID-19 pandemic and the potential impact of share price fluctuations on employee compensation costs Impact of Covid-19 Pandemic The company effectively managed COVID-19 impacts through safety measures, supply chain security, and cost control, with defense activities largely unaffected and a healthy balance sheet maintained - Implemented cost control measures, maintained business continuity, and secured supply chain amidst global disruptions caused by Covid-19[33] - Defense activities, which account for most of the business, were not materially impacted by the pandemic during 2020 and 2021[34] - As of December 31, 2021, Elbit Systems had a healthy balance sheet, adequate levels of cash, and access to credit facilities that provide liquidity[35] Potential Impact of Share Price on Employee Compensation A significant increase in the company's share price could materially impact costs under its stock price-linked employee compensation plans - A significant increase in the Company's share price could have a significant impact on the costs to the Company under its various stock price linked compensation plans for employees[37] Non-GAAP Financial Data This section explains the definitions and purpose of non-GAAP financial data and provides a reconciliation to GAAP figures for a clearer view of business performance Non-GAAP Definitions and Purpose Non-GAAP financial data offers a comprehensive view of business results and trends, aiding investors and management by adjusting for non-recurring or non-cash items - Non-GAAP financial data is presented to provide investors additional information on business performance and facilitate more meaningful comparisons of financial results over time[39] - Such non-GAAP information is used by the Company's management to make strategic decisions, forecast future results and evaluate the Company's current performance[39] - Non-GAAP presentations generally factor out items such as those with a non-recurring impact, various non-cash items, significant exchange rate differences, significant effects of retroactive tax legislation, and other items not considered part of regular ongoing business[40] Reconciliation of GAAP to Non-GAAP A detailed reconciliation table shows adjustments from GAAP to non-GAAP figures for gross profit, operating income, net income, and diluted EPS, including amortization, COVID-19 expenses, and tax effects Reconciliation of GAAP to Non-GAAP | Metric | GAAP (Q4 2021, USD millions) | Adjustments (Q4 2021, USD millions) | Non-GAAP (Q4 2021, USD millions) | | :------------------------------------------- | :--------------------------- | :---------------------------------- | :------------------------------- | | Gross Profit | $374.3 | Amortization of intangibles: $6.8 | $381.1 | | Operating Income | $107.3 | Amortization of intangibles: $12.8 | $120.1 | | Net Income attributable to Elbit Systems' shareholders | $8.2 | Amortization of intangibles: $12.8, Tax effect: $79.2, etc. | $94.9 | | Diluted Net EPS | $0.18 | Adjustments, net: $1.96 | $2.14 | - Key adjustments include amortization of purchased intangible assets, Covid-19 related expenses and write-offs, capital gain, impairment of investments and long-lived assets, revaluation of investment, non-operating foreign exchange losses, and tax effects[44] Recent Corporate Events & Dividend This section outlines recent significant contract awards, resolutions from the Annual General Meeting, and the latest dividend declaration Recent Contract Awards and Business Activities Elbit Systems secured several significant contracts, including a $350 million land systems contract, a $53 million airborne self-protection system contract, and a $130 million artillery munitions production line - Awarded a contract valued at approximately $350 million to supply an array of land systems to an international customer, to be fulfilled over three years (December 15, 2021)[46] - UAE subsidiary, Elbit Systems Emirates Limited, was awarded an approximately $53 million contract to supply Direct Infrared Countermeasures and airborne Electronic Warfare Self Protection Systems for the Airbus A330 Multi-Role Tanker Transport aircraft of the UAE Air Force (January 3, 2022)[47] - Awarded contracts with an aggregate value of approximately $130 million to deliver an artillery munitions production line in a country in Asia-Pacific, to be performed over 2.5 years (March 27, 2022)[54] Annual General Meeting Resolutions Shareholders re-elected seven non-External Directors and re-appointed Kost, Forer, Gabbay & Kasierer as the independent auditor for fiscal year 2021 - Shareholders re-elected seven non-"External Directors" to the Board to serve until the close of the next Annual General Meeting of Shareholders[47] - Shareholders re-appointed Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, as the Company's independent auditor for the fiscal year ending December 31, 2021[47] Dividend Declaration The Board of Directors declared a dividend of $0.50 per share for Q4 2021, payable on April 25, 2022, with a record date of April 11, 2022 - The Board of Directors declared a dividend of $0.50 per share for the fourth quarter of 2021[55] - The dividend's record date is April 11, 2022, and will be paid on April 25, 2022, after deduction of taxes at the source, at the rate of 16.8%[55] Investor Information & Company Profile This section provides details on investor communications, annual report filing, an overview of Elbit Systems, contact information, and forward-looking statements Conference Call and Investor Conference Elbit Systems hosted a conference call and an investor conference on March 29, 2022, to discuss results and engage with investors - A conference call was hosted on March 29, 2022, at 9:00 a.m. Eastern Time, for management to review results and answer questions[56] - An investor conference was held in Israel on March 29, 2022, starting at 10:00 a.m. Israel time, streamed live in Hebrew with simultaneous English translation[59] Annual Report Filing The company's Annual Report on Form 20-F for fiscal year 2021, including financial statements, is scheduled to be filed in April 2022 - The Company's Annual Report on Form 20-F (including its financial statements for the fiscal year ended December 31, 2021) will be filed in April, 2022[60] About Elbit Systems Elbit Systems Ltd. is an international high-technology company engaged in defense, homeland security, and commercial programs globally, focusing on aerospace, land, naval, C4ISR, and other advanced systems - Elbit Systems Ltd. is an international high technology company engaged in a wide range of defense, homeland security and commercial programs throughout the world[61] - The Company operates in areas such as aerospace, land and naval systems, C4ISR, unmanned aircraft systems, advanced electro-optics, EW suites, signal intelligence systems, and munitions[61] - The Company also focuses on upgrading existing platforms, developing new technologies for defense, homeland security and commercial applications, and providing a range of support services, including training and simulation systems[61][63] Contact Information Contact details are provided for key company executives and external investor relations representatives - Contact information is provided for Joseph Gaspar (Executive VP & CFO), Rami Myerson (Director, Investor Relations), David Vaaknin (VP, Head of Corporate Communications), and external IR contact Ehud Helft/Gavriel Frohwein at GK Investor Relations[64] Forward-Looking Statements This release contains forward-looking statements based on management's current expectations, subject to various risks and uncertainties, and the company does not undertake to update them - This press release may contain forward-looking statements based on management's current expectations, estimates, projections and assumptions about future events[64] - Actual future results, performance and trends may differ materially from these forward-looking statements due to a variety of factors, including scope and length of customer contracts, governmental regulations, changes in budgeting priorities, market conditions, and competitive environment[64] - The Company does not undertake to update its forward-looking statements[64] Consolidated Financial Statements This section presents the company's consolidated balance sheets, statements of income, statements of cash flow, and detailed revenue distribution for the reported periods Consolidated Balance Sheets The consolidated balance sheets detail the company's financial position as of December 31, 2021, and 2020, showing an increase in total assets to $9,317.3 million in 2021 Consolidated Balance Sheets | Metric | As of Dec 31, 2021 (USD thousands) | As of Dec 31, 2020 (USD thousands) | | :-------------------- | :--------------------------------- | :--------------------------------- | | Total Assets | 9,317,344 | 8,057,897 | | Total Current Assets | 4,980,004 | 4,272,898 | | Total Liabilities | 6,771,081 | 5,826,530 | | Total Equity | 2,546,263 | 2,231,367 | Consolidated Statements of Income The consolidated statements of income provide a detailed breakdown of revenues, costs, expenses, and net income for the full years and fourth quarters of 2021 and 2020 Consolidated Statements of Income | Metric | FY 2021 (USD thousands) | FY 2020 (USD thousands) | Q4 2021 (USD thousands) | Q4 2020 (USD thousands) | | :------------------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Revenues | 5,278,521 | 4,662,572 | 1,494,273 | 1,377,732 | | Gross profit | 1,358,048 | 1,165,107 | 374,349 | 357,833 | | Operating income | 418,508 | 325,687 | 107,272 | 104,625 | | Net income attributable to Elbit Systems Ltd.'s shareholders | 274,350 | 237,658 | 8,187 | 67,822 | | Diluted net earnings per share | 6.20 | 5.38 | 0.18 | 1.53 | Consolidated Statements of Cash Flow The consolidated statements of cash flow detail cash flows from operating, investing, and financing activities for 2021 and 2020, showing a significant increase in net cash from operating activities in 2021 Consolidated Statements of Cash Flow | Metric | FY 2021 (USD thousands) | FY 2020 (USD thousands) | | :------------------------------------------- | :---------------------- | :---------------------- | | Net cash provided by operating activities | 416,932 | 278,834 | | Net cash used in investing activities | (587,721) | (22,867) | | Net cash provided by (used in) financing activities | 150,988 | (198,233) | | Net (decrease) increase in cash and cash equivalents | (19,801) | 57,734 | Consolidated Revenue Distribution Detailed tables present the distribution of consolidated revenues by areas of operation and geographical regions for both full year and fourth quarter periods Consolidated Revenue Distribution | Category | FY 2021 (USD millions) | % of Total | | :------------------------- | :--------------------- | :--------- | | By Areas of Operation: | | | | Airborne systems | 2,005.8 | 37.9% | | C4ISR systems | 1,371.5 | 26.0% | | Land systems | 1,254.7 | 23.8% | | By Geographical Regions: | | | | North America | 1,608.6 | 30.5% | | Asia-Pacific | 1,443.5 | 27.3% | | Israel | 1,094.7 | 20.7% |