Elbit Systems Ltd. (NASDAQ:ESLT)
Q1 2014 Earnings Conference Call
May 13, 2014 9:00 AM ET
Ehud Helft – CCG Investor Relations
Bezhalel Machlis – President and Chief Executive Officer
Joseph Gaspar – Executive Vice President and Chief Financial Officer
Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems’ First quarter 2014 Results Conference Call. All participants are present in listen only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. As a reminder, this conference is being recorded.
You should have all received by now the company’s press release, if you have not received it, please contact Elbit Investor Relations team at GK Investor Relations at or view it in the in new section of the company’s website www.elbitststems.com.
I would now like to hand over the call over to Mr. Ehud Helft of GK Investor and Public Relations. Ehud, please go ahead.
Thank you operator and good day to everybody. On behalf of all the investors, I would like to thank Elbit Systems management for hosting this call. Joining us on the call today are Mr. Butzi Machlis, Elbit’s President and CEO; and Mr. Yossi Gaspar, Elbit Systems’ Chief Financial Officer.
Yossi would begin by providing a discussion of the financial results of the quarter, followed by Butzi, who would talk about some of its significant events during the quarter and beyond. We'll then turnover the call for the question-and-answer session. Before we begin, I woo like to point out the Safe Harbor statement in the company’s press released issued earlier today, also refers to the content of this conference.
With that, I would like to now turn over the call to Yossi. Yossi please.
Thank you Ehud. Hello everyone and thank you for joining us today. Like last quarter we would provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. You can find all the details GAAP financial data as well as the non-GAAP information in today’s press release.
We are pleased with our first quarter 2014 results. Our results indicate a strong and stable business with a solid improvement in backlog surpassing the $6 billion milestone for the first time. I would now highlight and discuss some of the key figures and trends. Our first quarter of 2014 revenues $682.6 million, slightly ahead of the $680.2 million last year. in terms of revenue breakdown across our area of operation in the quarter, C4ISR systems was 37%, Airborne Systems was 42%, Armored vehicle systems was 8%, Electro-Optics systems 10% and the rest was 3%.
Compared to last year the make up of the overall mix was very similar to that of the current quarter. In terms of geographic breakdown for the first quarter Israel was 24% of revenues, North America was 20%, Europe 16%, Asia-Pacific was 17%, Latin America 10% and the rest of the world was 4%. Compared with the first quarter of last year, Israel grew strongly mainly due to the approval of the government budget that released the funding for some project that was pending for a while.
North America, Asia-Pacific and Europe were lower as a portion of our revenues. I note that we do not see these quarterly fluctuations in our revenue breakdown as indicative of any long-term trends. More than that we believe that the long-term trends remain for the higher potential growth in the emerging defense markets of Asia-Pacific and Latin America and we expect that the long-term trend will be an increase in the overall portion of our revenues coming from these regions.
For the first quarter, our gross margin was 28.3%, at the same level as the first quarter of last year. Operating income in the first quarter was $69.9 million with an operating margin 8.8%. This is compared with an operating income of $53.7 million and an operating margin of 7.9% in the first quarter of last year. I know that we have one-time income of $6 million related to a gain from change in holdings. Excluding this one-time income the operating income in the first quarter of this year would have been $64 million representing operating margin of 7.9% at the same level as the first quarter of last year.
In terms of breakdown of these expenses, our net income expenses of the first quarter in 2014 were 7.2% of revenues compared with 7.5% in the first quarter of 2013. The reason for the slight decrease was primarily due to higher participation in our R&D expenses by the office of the Chief Scientist and the Minister of Defense in Israel. In fact, our gross R&D was actually higher this quarter and last year.
Marketing and selling expenses were 8.1% of revenues in the quarter compared with 8.2% in the first quarter of last year. Our G&A expenses in first quarter were 5.2% of revenues, compared with 4.7% of revenues in the first quarter of 2013. Financial expenses for the first quarter of this year were $4.7 million compared with financial expenses of $7.9 million in the first quarter of last year. The differentials between the financial expenses in each period are primarily due to exchange rate differences in the various currency in which we operate compared to the U.S. dollar.
Consolidated net income for the first quarter of 2014 was $48.2 million or a net margin of 7.1% of revenues. This compared with the net income of $41.4 million in the first quarter of 2013. In non-GAAP net income in the first quarter was $51.9 million or margin of 7.6% compared to $51.1 million, or margin of 7.5% reported in the first quarter of last year.
Income per diluted share for the first quarter of 2014 was $1.13, and excluding the one-term income it was $0.99. This is compared with $0.98 for the first quarter of last year. On a non-GAAP basis, earnings per share in the first quarter of 2014 were $1.22 same as for the first quarter of last year.
Our backlog of orders at the end of the first quarter was $6.06 billion; $288 million higher than the backlog at the end of the first quarter of last year which stood at $5.78 billion. The solid growth in our backlog is a positive indication for the prudential of our future growth, approximately 66%, or $3.9 billion also the current backlog is scheduled to be performed during 2014 and 2015.
Operating cash flow for the quarter ended in March 31, 2014 was $80.8 million, as compared to $13.8 million in the quarter of last year. Finally, the Board of Directors declared a dividend of $0.32 per share for the first quarter of 2014.
That ends my summary, and I shall now turn the call over to Mr. Machlis. Butzi Please.
Thank you, Yossi. I'm pleased with our overall stock to 2014, particularly the solid growth in our backlog. This is an indication to us that we have to potential to grow by providing us with good visibility into our revenues over the coming years.
Our results demonstrate strong and stable business. Our top line and margin profile were similar if not slightly ahead of those of last year. During the quarter, we saw an increase in activity in the two developing regions, which we see much long-term growth potential in the defense field, namely Asia-Pacific and Latin America.
In Asia-Pacific, we recently announced our selection for a tenth upgrade program under a contract, which was valued at approximately $290 million, to be performed over the current three-years. This significant contract demonstrates our unique capabilities and experience in upgrading main battle tanks in a key target market for us. This follows the important award of $229 million, we received at the end of last year, from the Australian Defence Forces for Battle Management Systems under the project in which we are the prime contractor.
In the Latin American region, we're awarded $100 million contract for the supply of Homeland Security Solution, to be performed over the coming year. We were supply in new in operated Intelligence Gathering System, considered to be a groundbreaking operational solution, we're very proud of this contract award in the key markets.
It is very much demonstration of how we can combine and synergies technologies from across our different divisions for the benefit of our customers. Also in the region is a Brazilian Air Force, purchased a Hermes 900 Unmanned Aircraft System, which will be used to support safety and security missions during the 2014 FIFA World Cup games. This particularly Hermes 900 system will be equipped with new and advanced intelligence gathering systems and will be operated by the air force in combine missions with the existing Hermes 450 fleets.
As well in the U.S., we announced that the U.S. Department of Homeland Security selected our subsidiary Elbit System North America as a prime contractor for the multi-year integrated fixed tower project for the United States border with Mexico, this project will focus on providing electronic protection in (non part) (ph) of the border. The value of the entire project with its options is $145 million and if successful it could live to further orders.
In Israel we received two awards from the Minister of Defense, one of which was a $23 million contract over five years for the operation and maintenance of the ground simulator in use by the Israeli Ground Force. The contract included a variety of stimulators both fixed and mobile dedicated to trainings for tanks, armored combat vehicles, driving simulators, intelligence training and other applications. The second contract was for $15 million over two years to upgrade the Israeli air force C-130H Hercules transport aircrafts.
Recently we also announced the award of $163 million contract over two years from European country for the supply of defense electronic systems for ground applications. In summary, our business is performing well, we are winning new businesses in all our regions, including key contract wins in targeted growth markets. Our backlog is also at an all-time high, I believe we continue to remain well-positioned strategically and financially and look forward to the opportunities ahead.
With that I will be happy to take your questions. Operator.
(Operator Instructions) The first question is from (indiscernible) Citi Bank. Please go ahead.
Hi, I have a few questions please. First of all I wanted to ask about sales, now they were flat year-over-year and we understand your business is volatile year-over-year, but you would have expected some growth. So can you please say something about it?
Yes. Most of the programs we are doing are long-term projects, and so it takes time until the backlog is transferred to further into revenues and profit. I’m very pleased with the fact the backlog grew and I’m sure that revenues and profits will grow in the future.
Okay. Second question please, I wanted to ask about the impact of the shekel on your margins in 2014 and 2015, what will happen with the margins if the shekel will stay as it is today?
Well we definitely don’t like the place the shekel and the dollar is today, it would be much better for us if the dollar would be stronger. However, as you can see both in the recent quarter and specifically in the quarter, we were able to manage with the present levels and still keep our profitably rates similar to last year. This was mainly due to significant cost cutting and the yield improvements that we had, which otherwise would have resulted in improved margins. Hopefully, we will see some change of the shekel dollar, but if not we still have ways to coupe with that.
Thank you very much.
(Operator Instructions) Next question is from (indiscernible). Please go ahead.
My question is with regard to intangibles, I know you amortize intangibles, but in the reports you mix it with the other depreciation, if you could please separate that item? And my second question is I see that even though you amortize intangibles, your intangible on the balance sheet grew in the first quarter, but I didn’t notice that you acquired any new company so I wanted to ask about that?
Okay. Regarding the amortization of intangible assets you can see the numbers in our non-GAAP release, which is part of our press release. We had a non-GAAP page and then you can see over there which is about $11 million per quarter, rough numbers. The growth – second part of the question the growth in the intangible in this quarter was mainly due to the increase in our share – in our holdings in one of our subsidiaries moving from 49% to 90% and which is actually increased the intangible number – the gross intangible number.
Okay. I see. Thank you.
Next question a follow-up question from (indiscernible). Please go ahead.
Thank you. Another question please, you had a high and positive operating cash flow this quarter, not of previous quarters. I wanted to ask why not to increase payment to your shareholders because I see the dividend payment increased only in $1 million and the payout ratio is even lower?
I would say that we have a long position of keeping our dividend payments rather stable, we did increase this quarter from $0.30 to $0.32, we manage our cash on a long-term basis and any quarterly fluctuations in cash they are not the major driver for our dividend payout.
Thank you very much. And my last question please is about a working capital, this year it was flat and not as last year, it was negative. So I wanted to ask is it something sustainable, any guidance for 2014, 2015 can we expect it?
I think we should look at an average working capital in the last four to six quarters. This may be more representative of the longer term trend.
Six you said?
No, four to six quarters.
Okay. Thank you very much.
There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S., please call 1-888-326-9310. In Israel, please call 03-925-5901. And internationally, please call 9723-925-5901. A replay of the call will also be available at the company's website, www.elbitsystems.com.
Mr. Machlis, would you like to make your concluding statements?
Yes. I would like to thank all our employees for their continued hard work. To everyone on the call, thank you for joining us today and for your continued support and interest in our company. Have a good day and goodbye.
Thank you. This concludes the Elbit Systems first quarter 2014 results conference call. Thank you for your participation. You may go ahead and disconnect.
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