Welcome to the Elbit Systems Limited third quarter 2012 results conference call. (Operator instructions) I would now like to hand over the call to Mr. Ehud Helft of CCG Investor Relations.
Thank you and good day to everybody. On behalf all the investors, I would like to thank Elbit Systems management for hosting this call. Joining us on the call today are Mr. Joseph Ackerman, Elbit Systems President and CEO; Mr. Josy Gaspar, Elbit Systems Chief Financial Officer.
Josy would begin by providing a discussion on the financial results of the quarter, followed by Joseph, who will talk about some of the significant events during the quarter and beyond. We will then turn over the call to the question-and-answer session.
Before we begin, I would like to remind out that the Safe Harbor statement in the company's press release issued earlier today also refers to the content of this conference call.
With that, I would like now to handover the call to Josy.
Thank you, Ehud. Hello everyone and thank you for joining us today. We will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. You can find all of the detailed financial data as well as other relevant information in today's press release.
I would highlight and discuss some of the key figures. Revenues were $677.5 million in the third quarter of 2012 as compared to $663.7 million in the third quarter of last year. In terms of revenue breakdown across our areas of operation in the quarter, Airborne Systems was 39%, Land Systems was 16%, C4ISR was 29%, Electro-Optics 10%, and the rest was 6%. These are similar percentages to those of last year with a slight increase in the Airborne Systems and a decrease in the C4ISR.
On a geographic basis, the United State was 34% of our revenues, Israel was 15%, Europe 19%, and the rest of the world was 32%. We do not see the quarterly fluctuations in our revenue breakdown as indicative of any long-term trends. However, on a year-over-year basis, there has been a trend of increasing sales in Asia-Pacific and Latin America, where defense budgets are growing and there was a decrease in the sales in Israel and some of the larger projects such as the DAP projects are in a transition phase.
For the first quarter, our gross margin was 28.3%, this was a decrease from the 30.8% level we saw last year. The decline in the gross margin was a result of increased competition in the marketplace. The company is focusing on process efficiencies, improvements, to mitigate this market pressure.
Operating income for the third quarter was $49 million, representing a 7.2% margin. Operating income in the third quarter of last year was $56.2 million or a margin of 8.5%. Despite the decline from last year, I'm encouraged by the fact that compared with second quarter of this year we were able to show an improvement in our operating income.
In terms of operating expense breakdown during the third quarter, our net R&D expenses for the quarter were slightly below the levels of those of the third quarter last year, at 7.5% of revenues compared with 8.4% a year ago. We do not see these quarterly fluctuations as indicative of any change in our R&D investment policy and see R&D expenses as an investment in our long-term potential.
Marketing and selling expenses remains at the same level as last year, and was 8.7% of our revenues in the quarter compared with 8.8% in the third quarter of last year. Our G&A expenses in the third quarter were 4.8% of revenues, slightly reduced from to 5.1% of revenues in the third quarter of last year.
We see for the last several quarters had continuous reduction in these expenses. This improvement is far due to general efficiencies and synergies realized from integration of various businesses acquired in recent years and special focus on G&A cost cutting activities.
Financial expenses for the third quarter of 2012 were $5.5 million compared to $3.1 million in the third quarter of last year. The increase in the financial expenses relates primarily to exchange rate fluctuations as well as the higher level of debt compared with last year. The affiliates, which we do not consolidate, contributed $1 million through the net income of the quarter compared with $4 million in the third quarter of last year.
Consolidated net income attributable to Elbit Systems shareholders for the third quarter was $39.5 million or a net margin of 5.8%. This is compared with net income of $36.5 million or net margin of 5.5% in the third quarter of 2011. Diluted net earnings per share for the third quarter were $0.95 compared with $0.85 in the third quarter of last year.
With respect to certain non-GAAP information, our non-GAAP operating profit was 9% of revenues compared with 10.6% of revenues in the third quarter of last year. The net income was $49.4 million or 7.3% compared with $66.4 million or 8.5% in the third quarter of last year. Non-GAAP EPS in the quarter was $1.18, in the third quarter of last year the non-GAAP EPS was $1.31.
Operating cash flow for the first three quarter of this year was $61 million compared with $11.2 million in the same period of last year. Our backlog of orders as of September 30, 2012, was $5.53 billion, an increase from the backlog at the end of the prior quarter was $5.46 billion.
Approximately 74% of the backlog for the late orders outside of Israel. Approximately 54% of the company's backlog as of September 30, 2012, is scheduled to be performed during the remainder of this year and 2013. Finally, the Board of Directors declared a dividend of $0.30 per share for the third quarter of 2012.
That ends my summary and I will now turn the call over to Mr. Ackerman.
Thank you, Josy. I am really encouraged by the result of this quarter. We reported a solid set of financial parameters demonstrating stability and hope in our business. Like everyone else, Elbit Systems is affected by current global economic trends. However, we have a very long-term perspective in view. Our technology development strategy looks at glance for many years ahead, well beyond any short-term economical volatility.
This long-term focus on bettering our future capabilities and building the technology integration for the needs of the next decades has allowed us to consistently grow at a steady pace over many decades. For example, we started working on our UAS strategy in the 90s, and only in the past few years have this technology moved into mainstream.
In the current quarter our gross margins were stable at around same level we have seen for the past two quarters, and our operating expenses were slightly lower than the level we have seen in the past few quarters in a regards to show an improved operating margin. Our revenues grew in the last three quarters over the same period of last year mainly due to increased exposure to the continuing developing to Latin America and the Asia-Pacific markets, which I had spoken about in past quarters.
As I have said, we are increasingly focusing on these global markets as we already see a shift from defense spending in rest of the markets to a more balanced global spending future. We are incurrent with a slight increase in our backlog over last quarter and we drift as a general trend has been a return to incremental improvement, which is a good sign for the future. And furthermore, we're recently won a number of important contracts, including many of those growing regions, all of which are contributing to our backlog.
In Asia-Pacific region we received a contract of $30 million to supply a particular country artillery corps with an autonomous artillery systems. We also received a second contract of $20 million to supply western country armed forces with personal radio systems.
We also received an order from the Australian Defense Forces for the supply of battle management system for the Royal Australian Navy's landing craft. We are particularly encouraged by the success that we have in Australia, a country with significant potential for us, in which we only recently established a local presence.
In Brazil, our subsidiary AEL was awarded a $15 million initial production order for unmanned products to be supplied to the Brazilian Army. This order is a part of the $260 million framework contract that we announced in January last year, for 30 millimeters unmanned product for the Brazilian Army's Guarani program.
Furthermore, a few weeks ago, Ares, another of our subsidiary in Brazil received a production order for all the Brazil Army and amounting to $25 million for Remote Controlled Weapon Stations. As for Latin America, we received an $18 million contract to establish a Mission Training Center for fighter aircrafts for this particular country by 2014.
In Israel, TOR, advanced fighter training, our partnership with Israel Aerospace Industries reached an agreement with the Ministry of Defense with regards to a contract totaling $603 million, of which our share is $420 million. In the establishment phase of the project, we are establishing an enhanced logistic support and maintenance infrastructure for the new trainer as well as there an advanced ground training array.
The new Advance Hydraulic System is designed to improve the readiness of Israeli Air Force's pilots in operating next generation aircraft. We are pleased as our training products are gaining strong traction both inside as well as outside Israel. It further strengthen our position as world leaders in the field of advanced technical training. We are also seeing increase in the recent activity of United States, which made up a fair of our revenues this quarter.
Elbit Systems of America was awarded a $17 million contract from Boeing to upgrade their Apache Block III Mission Processor and VSI, later, has awarded a contract from the Royal Danish Air Force for Night Vision Cueing and Night Vision Imagining Systems technology.
In summery, I'm really pleased with the quarter and excited with the direction in which Elbit is heading and its future potential. And with that, I will be happy to take your questions.
(Operator Instructions) The first question is from Tobey Wagner of Barclays.
Tobey Wagner - Barclays
I'll have two questions on the financial. I will start with OpEx. We have seen it decreasing as a result of your cost reduction program, can you just comment on the R&D side which has reached lower than usual level?
On the OpEx, we had debt cover up operating expenses on a multiyear basis to the overall business volume and to the forecast of the investments in our technology. One of the things that we're doing through these efficiency cycles is that we're looking at R&D programs that can be consolidated between the various sides that these programs are performed and through that build some efficiencies.
Sometimes during our reviews, we find synergies can be build by just consolidating two development teams and just achieving essentially the same goals on the long-term without spending that much money in the near-to-mid term. So these are one of the actions that we are taking. In addition to that, we of course, prioritize the R&D efforts to fit as much as possible our designated markets requirement.
Tobey Wagner - Barclays
And now just about that taxes, it's been the second quarter in a row that you display a lower than usual effective tax rate, what rate should we use on margining perspective going forward?
I would say that if you take the last four to six quarters on average, I think this is a more representative number than just this or last quarter.
The next question is from (Doug Rosenberg) of (inaudible).
I know you guys mentioned not to look at quarterly, but if I look year-to-date and I see Israel has been down a little bit as a percentage, but within the backlog, we're still around the 25%. I was wondering if you expect them to return to the 25% level and if so when?
Israel, if you mentioned in the backlog we have that. And as I mentioned earlier in the data that I presented, the reduction in the last several quarters, in the revenues to Israeli market was caused by some delay in received of orders, actually last year for a continuation of one of the programs ,like the DAP program. These orders have been received and the production continues, and we expect to see those revenues at least partially coming back in the future next quarter and so on.
I was wondering also if you can give any color within the rest of the world, Latin America is growing or is Latin America growing as a percentage of part of that or do you see stronger in Asia Pacific, will occur within the rest of the world.
I think looking on a period-to-period like a year ago, and today we see consistency in that and the percentage of Latin America as part of the rest of the world is essentially the same like it was last year and the same goes for Asia Pacific.
Now, within others in the segment the non-defense, is that cyber? Can you elaborate a little bit on what other projects are within their and do you expect is that growing in parallel with the company or faster or slower?
Cyber is included in this C4I part and the non-defense is actually non-defense, it means, all kind of production contracts or commercial applications. Traditionally we have somewhere on an average of about 5%, all these kinds of businesses combined.
Just one last question, if there is any update on you have a lot of different partnerships which is really helping to sort of drive and stabilize any of the partnerships or is anything new in India or elsewhere?
Elbit's philosophy is to try to see where we can do partnering with companies, and we did that as you said in India. And this enabled us to have access to the Indian market as we did in Brazil with Embraer and UAVs in Brazil, and we see the result. And recently, as we announced, we teamed with Boeing on promoting UAVs. So yes, we will and we'll continue to do so.
In other words going forward, the business plan is to do more and more partnerships in different regions, is that the strategy?
Yes. Usually we have the right technology, but in some countries they would like to have to see a local product. And partners like Boeing in America and Embraer Brazil is big events.
The next question is from Simon Morris of Citibank.
Simon Morris - Citibank
Just to start with backlog, we saw we have a bit of backlog this quarter by 1%. Is that all just from Israel, is that mainly from that the big contract win of $420 million, is that in the backlog from this quarter or is it from anything else?
It's a combination of contracts and this contract that you mentioned has also been partially included.
Simon Morris - Citibank
It's not fully included yet in the backlog?
Simon Morris - Citibank
We've also seen on the cash flow side, the impact from increase in receivables this quarter, I guess that's an increased credit to the customers. Is this a trend, which we should expect going forward in terms of pressure of increased credit base to customers or is this one-off for the quarter?
We have seen that. Actually, if you look back the trend, we have seen that for the last four, six, maybe more quarters. And these are long, very long-term programs with some financial arrangements with our customers that calls for the increase in this line. And going forward, we'll definitely maintain that and maybe slightly grow.
Simon Morris - Citibank
If you actually look to the Europe and the U.S., we're moving quite fair towards the budget cuts, but we've actually seen growth in the nine months of this year, actually quite resilient. I mean, Europe stopped four month year-to-date, America's any tips and down, is that the fact of or in other words it's yet to come or is this the product niche of Elbit enabling it to maintain its growth going forward?
The reduction we foresee is the general defense spending. However, there is growth in commercial structure that we do, both from our company Cyclone in the U.S. and M7 in United States. And also generally, speaking the defense electronic portion of the defense spending is going to stay stable, while we will see a reduction in more of the platform business, and as you know Elbit is mainly in defense electronics.
We have a follow-up question from (Doug Rosenberg) of (inaudible).
Just one last question, I know you don't give guidance, but looking ahead the fourth quarter, do you expect a strong yearend? Should I compare, is it more comparable to, let's say, fourth quarter of last year or to this quarter?
As you know we do not provide guidance, I would suggest that you look at what has happened in the last several years, and conclude from there.
There are no further questions at this time. Before I ask to Mr. Ackerman to go ahead, with his closing statements, I would like to remind participants that a reply of this call will be available two hours after the conference ends. In the U.S., please call 1-888-782-4291. In Israel, please call 03-925-5904, and internationally, please call 972-3925-5904. A reply of this call will also be available on the company's website www.elbitsystems.com. Mr. Ackerman, would you like to go ahead and make your concluding statement?
Yes, I would like to thank all of our employees for their continued hard work, and to everyone on this call. Thank you for joining us today. Have a good day and good bye.
Thank you. This concludes the Elbit Systems Limited third quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.
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