Elbit Systems Ltd. (NASDAQ:ESLT)
Q3 2016 Earnings Conference Call
November 17, 2016 10:00 ET
Ehud Helft - GK Investor Relations
Butzi Machlis - President and Chief Executive Officer
Yossi Gaspar - Chief Financial Officer
Butzi Machlis - Chief Executive Officer
Gilad Alper - Excellence
Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems’ Third Quarter 2016 Results Conference Call. All participants are at 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’s Investor Relations team at GK Investor Relations or view it in the News section of the company’s website, www.elbitsystems.com.
I would now like to hand the call over to Mr. Ehud Helft of GK Investor Relations. Ehud, please go ahead.
Thank you, operator. 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; Mr. Yossi Gaspar, Elbit’s Chief Financial Officer. Yossi will begin by providing a discussion of the financial results of the third quarter of 2016 followed by Butzi 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 point out that the Safe Harbor statement in the company’s press release issued earlier today also refers to the content of this conference call.
And with that, I would like now to hand over the call to Yossi. Yossi, please.
Thank you, Ehud. Hello, everyone and thank you for joining us today. As usual, we will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliation in today’s press release. Overall, we are pleased with our performance in the third quarter in particular with the ongoing increase in our backlog, which supports our continued revenue growth ahead. Additionally, we are happy with the improvements in the margins and the bottom line net income.
I will now highlight and discuss some of the key figures and trends. Our third quarter 2016 revenues were $780.8 million, an increase of 2.1% over the $764.8 million reported in the third quarter of 2015. In terms of revenue breakdown across our areas of operation in the quarter, C4ISR was 47%, airborne systems was 39%, electro-optics was 7%, land systems, 4% and the rest was approximately 3%. Compared with the third quarter last year, C4ISR was up substantially mainly due to increase in deliveries of communications systems to Europe while land systems were down due to the completion of major land system deliveries to Asia-Pacific.
In terms of geographic breakdown for the quarter, North America was 25% of revenues, Israel, 23%, Asia-Pacific 23%, Europe was 21%, Latin America 7%, and the rest of the world 1%. Compared with the third quarter of last year, we primarily saw increased contributions from Europe and Israel and the lower contribution from Asia-Pacific. For the third quarter, the non-GAAP gross margin was 30.5%, similar to that of the third quarter of 2015. Our GAAP gross margin was 29.5% versus 29.2% in the third quarter of last year.
The third quarter non-GAAP operating income was $77.9 million or 10% of revenues compared with $80.3 million or 10.5% of revenues last year. Our GAAP operating income increased by 20% to $78.3 million or 10% of revenues compared with $65.3 million or 8.5% of revenues last year. During the quarter, we had other income of approximately $10.5 million, which we do not include in our non-GAAP results. This is due to a net gain from a valuation of an investment made by an outside investor in one of our commercial ventures subsidiaries in the energy space.
In terms of our expenses for the quarter, total operating expenses were 19.5% of revenues and excluding the capital gain were 20.8% of revenues. This is compared with 20.7% of revenues in the third quarter of last year. The breakdown of these expenses was net R&D at 8.4% of revenues versus 8% last year, marketing and selling expenses at 7.8% of revenues versus 7.9% last year and G&A expenses of 4.6% of revenues compared with 4.8% last year. Financial expenses for the third quarter of 2016, was $7.3 million compared with financial expenses of $6.1 million in the third quarter of last year.
Our share in affiliates for the quarter was an income of $1.4 million versus $1.7 million last year. For the third quarter, non-GAAP net income was $62.5 million or a net margin of 8% versus $62.3 million or a net margin of 8.1% in the third quarter of last year. Non-GAAP diluted earnings per share were $1.46 at the same level as that of last year. On a GAAP basis, consolidated third quarter net income grew 28% to $63.4 million and a net margin of 8.1% versus $49.7 million and a net margin of 6.5% last year. GAAP diluted earnings per share were $1.48 as compared with $1.16 last year.
Our backlog of orders at the quarter end was $6.8 billion, $460 million or 6.5% higher than the backlog at the end of the third quarter of 2015. Approximately 48% of the current backlog is scheduled to be performed during the fourth quarter of 2016 and 2017. Operating cash flow for the quarter was negative $17.3 million compared with a positive or $139.2 million the same quarter last year. The negative cash flow was mainly due to late collection of receivables from customers. We do not see any risk in collection of these receivables in the coming quarter. The Board of Directors declared a dividend of $0.40 per share for the third quarter of 2016.
That ends my summary and I shall now turn over the call to our Elbits CEO, Mr. Butzi Machlis. Butzi, please go ahead.
Thank you, Yossi. We are pleased with our third quarter financial results. We ’e continue to demonstrate growth in revenue as well as improvements in our net profit and overall margins. Additionally, a good sign for the future is our continued strong year-over-year growth in backlog which stands 6.5% ahead of the level as of the end of the third quarter last year. This continues to provide us with revenue visibility over the long-term. Additionally, our backlog increasingly includes some long-term projects.
We are pleased with our overall level of profitability in the quarter. There has been a gradual trend of improving gross margins. This is the result of our efforts to operate efficiently, improve internal processes while harvesting synergies across our worst businesses units. I would like to relate for a moment to the gain of $10.5 million that we recorded this quarter from one of our commercial ventures, which is a type of venture we spin off from time to time. These are subsidiaries that we established in house that take out technologies and apply them for commercial market applications. In 2016, we have seen two such events at our commercial ventures, creating value for us, gains following an investment event. May I remind you that in the first quarter we saw a gain from a subsidiary in the automatic technology arena and this quarter we saw a gain from a subsidiary focused on energy technologies.
I would like to highlight some of the successes we have seen during the past 3 months. In Asia, we are awarded a 4-year contract valued at over $90 million for our SPECTRO XR Advanced Electro-Optic Systems. This is an ultra-long range, day-night, multi-spectral electro-optical system ISA system that provides users with high performance and visibility in all weather conditions, especially adverse ones. In the U.S., we received 2 years also of $7.3 million contract with United States Army to supply the Bradley Fighting Vehicle, Gunner’s Hand Station providing accurate targeting abilities. Furthermore, in the U.S., our subsidiary CYBERBIT was awarded a contract to supply the first hands-on cyber security training center for IT security professionals to the Cyber Security Training Range of Maryland.
Public sector organizations manage highly sensitive infrastructure and cannot afford to have the staff first encounter with the swift occur during attacks. By training and simulating the response processes in advance, security staff can dramatically improve their performance. CYBERBIT’s training and simulation platforms will instruct cyber security professionals on how to protect national assets and infrastructure against other attacks. It enables security and business institutes to practice incidental responsible in realistic setting that replicate the actual work environment. Overall, we are pleased with our recent contract wins and Elbit Systems continue to demonstrate a strong ability to foresee the market requirements and to develop the most cutting edge systems suitable for our customers demanding now and in the future.
In summary, our business continued to perform well. We expect that our ongoing increase in backlog will support growth in the coming quarters and years. In addition, our businesses remains very well diversified, built on broad spectrum of technologies and products. We sell into many countries and regions. This, we believe, will enable us to continue our performance particularly in this fast changing globally defense environment.
And with that, I will be happy to take your questions.
Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is from Gilad Alper of Excellence. Please go ahead.
Hi. Thanks for taking my call. I just wanted to ask about the – what can we expect in terms of ongoing growth rates of revenues, because there seems to be some volatility from quarter-to-quarter, I think last quarter was about or almost 4%, now we are down back to 2% and also I think that you made a comment about the backlog increasingly including long-term projects, is that a reason in your mind for the similar disconnect between the very nice growth rates we are seeing in the backlog and how about lower growth rates we are seeing in revenues? Thanks.
In general, as you know, we don’t give guidance. However, I think that you have pointed it rightly that our backlog has grown year-over-year over 6.5%. By the end of the day, this backlog is going to turn into revenues, as I said 48% of it in the next five quarters. So, if you look at these numbers, I think that the growth in this quarter of slightly over 2% is not representative of the future. Probably the numbers will be somewhere between what you have seen in the last three quarters, four quarters on average based on the existing backlog. So, the fluctuations that we have seen in the first quarter slightly low growth, second quarter, I believe it was 4.5%, the third quarter about 2.1%. These fluctuations are an outcome of the specific contracts that the company has and the deliveries according to these contracts. So, I would not take a lot of – and put a lot of emphasis on a specific quarter. I would look more on a longer term three quarters, four quarters average to get better feeling.
Okay. And just about the comment about the backlog increasingly including long-term projects, is that something that has an – that’s having an impact on the translation from backlog to revenues?
To some extent, of course it has. But in our press release, you can see the ratio of the backlog that is going to be sold in the next five quarters compared to the ratio that we released last year. The difference is not extremely high and it reflects the growth in the potential revenues in the future.
[Operator Instructions] We have a follow-up question by Gilad Alper of Excellence. Please go ahead.
Yes. Thanks again. Just a question on the IMI acquisition, is there any update, any progress, how long are you going to wait with that acquisition before you commit your, whatever money you want to spend on acquisition to another acquisition? Thanks.
As the – as we said last time IMI, we see many synergies between IMI and Elbit and we hope that this acquisition will take place. The process right now is not in our hands. Actually the government is managing the process. And we believe and we hope that at the end it will happen. Of course it should happen in the conditions that are relevant to us. In parallel, we are looking for other acquisitions in other places. And then we still believe that acquisition is an important element in our strategy.
Okay. Let me just insist on just one point, I mean in Israel things sometimes take instead of 2 years they take two decades and I am not sure I am exaggerating, so the question is how long are you going to wait, because if you just wait you can’t do any other acquisitions, because you don’t have funds to buy something like IMI and also some other big acquisitions, so at what stage do you say enough is enough?
As I said, we are already looking for additional acquisitions in other places and we are continuing to monitor the process.
Gilad, may I add from the financial point of view, if you look at our balance sheet, you will definitely see that we have a strong balance sheet and which can support more than one acquisition.
Okay, cool. Thank you.
There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statements, I would like to remind participants a replay of this call will be available two hours after the conference ends. In the U.S., please call 188-326-9310. In Israel, please call 03-925-5900. And internationally, please call 9-723-925-5900. A replay of this call will also be available at the company’s website at www.elbitsystems.com. Mr. Machlis would you like to make your concluding statements.
Thank you. 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 good-bye.
Thank you. This concludes the Elbit Systems Limited third quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.
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