Elbit Systems Ltd. (NASDAQ:ESLT) Q4 2016 Earnings Conference Call March 22, 2017 10:00 AM ET
Kenny Green - GK Investor Relations
Butzi Machlis - President and Chief Executive Officer
Yossi Gaspar - Chief Financial Officer
Yoav Burgan - Poalim Sahar
Welcome to Elbit Systems’ Fourth Quarter and Full Year 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 and Public Relations at 1646-688-3559 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. Kenny Green of GK Investor Relations. Kenny, please go ahead.
Thank you. Thank you 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. Bezhalel (Butzi) Machlis, Elbit’s President and CEO; and Mr. Yossi Gaspar, Elbit Systems' Chief Financial Officer. Yossi will begin by providing a discussion of the financial results of the fourth quarter and full year 2016 followed by Butzi who will talk about some of the significant events during the quarter and beyond. We will then turn the call over 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 to hand the call over to Yossi. Yossi, please go ahead.
Thank you, Kenny. Hello, everyone and thank you for joining us today. As we do every quarter, 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 the today’s press release. Overall, we are pleased with our yearly performance in 2016 as well as in the final quarter in particular with the growth in revenues, margin improvements, strong cash flow as well as the continued positive trend in the backlog.
I will now highlight and discuss some of the key figures and trends. Our fourth quarter 2016 revenues were $953.7 million, an increase of 8% compared with the $886.6 million reported in the fourth quarter of 2015. I note that our fourth quarter revenues like last year was the strongest of the year. For 2016 as a whole, our revenues were $3.26 billion versus $3.11 billion last year, representing a growth of approximately 5%. In terms of revenue breakdown across our areas of operation in the quarter, airborne system was 36%, C4ISR was 34%, armored vehicle systems was 16%, electro-optics was 10% and the rest was 4%. Compared with the fourth quarter of last year, the overall revenue mix from the areas of operation was similar with the slight increase in contribution from armored vehicle systems.
In terms of geographic breakdown for the quarter, North America was 24% of revenues, Europe was 23%, Asia Pacific 22%, Israel was 21%, Latin America was 6%, and the rest of the world was 4%. Compared with the fourth quarter of last year, we saw increased contributions from Europe and Israel and the lower contribution from Latin America.
Looking at 2016 as a whole, we saw increased contribution for C4ISR and lower contribution for armored vehicle systems. This was due mainly to an increase in radio communication and cyber space -- with the lower level of sales of fire control systems to Asia- Pacific region compared with last year.
Geographically in 2016, our revenues were fairly diversified between North America, Asia-Pacific, Europe and Israel. Compared with last year we saw increased contribution from Europe as I discussed earlier, as well as in Israel due to increased C4ISR and airborne sales.
The fourth quarter, the non-GAAP gross margin improved to 30.3% versus 29.6% in the fourth quarter of 2015. Our GAAP gross margin was 29.4% versus 28.6% last year. For the full year of 2016, non-GAAP gross margin was 30.4% versus 29.8% last year. Our GAAP gross margin was 29.4% versus 28.9% last year. Improvement in the gross was due to a number of factors. This includes our continued effort to improve profitability by looking for synergies across our various units while maintaining efficient operations and ongoing control over cost.
The fourth quarter non-GAAP operating income increased 6.3% to $97.3 million, or 10.2% of revenues compared with $91.5 million or 10.3% of revenues last year. The GAAP operating income increased by 12% to $87.5 million, or 9.2% of revenues versus $78 million, or 8.8% of revenues last year.
For 2016 as a whole, non-GAAP operating income grew to $322.6 million, or 9.9% of revenues compared with $316 million, or 10.2% of revenues last year. The GAAP operating income grew by 11% to $299 million, or 9.2% of revenues versus $268.6 million, or 8.6% of revenues last year.
During 2016, we had other income of approximately $17.6 million which we do not include under our non-GAAP results. This was due to gains on two of our commercial venture subsidiaries in the energy and automotive sphere following a round of outside investment.
In terms of our expenses for the quarter, total operating expenses were 20.3% of revenues compared to 19.8% of revenues in the fourth quarter of last year. The breakdown was net R&D expenses at 7% of revenues versus 7.8% last year, marketing and selling expenses at 9.2% of revenues versus 7.5% last year and G&A expenses at 3.9% of revenues versus 4.4% last year. We view our both our R&D and marketing and selling expenses together as an investment in our future. And we have increased their total to about 60% of sales in the fourth quarter in order to capitalize on increased sales opportunities we are pursuing in many of our end markets.
For the full year, operating expenses were 20.3% of revenues compared to 20.2% last year. The breakdown was net R&D expenses at 7.8% of revenues similar to that of last year, marketing and selling expenses at 8.3% of revenues versus 7.7% last year and the G&A expenses at 4.6% of revenues slightly less versus 4.7% last year.
Financial expenses in the fourth quarter of 2016 were $9.2 million compared with financial expenses of $2.3 million in the fourth quarter of last year. In 2016 as a whole, our financial expenses were $23.7 million compared with $20.2 million last year. For the fourth quarter, non-GAAP net income grew 5% to $77.7 million, or a net margin of 8.2% versus $74.2 million, or net margin of 8.4% last year. Non-GAAP diluted earnings per share were $1.82 compared with $1.74 last year. On a GAAP basis, fourth quarter net income grew 6% to $67.1 million and a net margin of 7% versus $63 million and a net margin of 7.1% last year. GAAP net income per diluted share was $1.57 compared with $1.47 last year.
For 2016 as a whole, non-GAAP net income grew by 5% to $254.2 million, or a net margin of 7.8% versus $242.4 million, or net margin of 7.8% last year. Non-GAAP diluted earnings per share were $5.95 compared with $5.67 last year. At GAAP basis 2016 net income grew 17% to $236.9 million, or a net margin of 7.3% versus $202.5 million last year and a net margin of 6.5%. GAAP net income per diluted share was $5.54 as compared to $4.74 last year.
Our backlog of orders at the year end of 2016 was $6.91 billion, $345 million higher than the backlog at the end of last year. Approximately 69% of our current backlog is scheduled to be performed during 2017 and 2018. This figure is at the similar proportion of the backlogs scheduled to be performed in the upcoming two years compared to that at the same time last year. Operating cash flow for the quarter was $240 million compared with $179 million in the same quarter last year. In 2016 as a whole, we had positive cash flow of $208 million versus $435 million in 2015. Strong cash flow in 2015 was a result of increased collections and advanced payments on contracts receipt.
The Board of Directors declared a dividend of $0.44 per share for the fourth quarter of 2016. In 2016 as a whole, we declared $1.64 in dividends to our shareholders.
That ends my summary and I shall now turn the call over to Mr. Machlis. Butzi, please go ahead.
Thank you, Yossi. We are pleased with our financial results for the quarter culminating a strong 2016. We continued to demonstrate strong growth in year-over-year revenue as well as a higher level of growth margin and the increase in operating and net profit for the quarter as well as for the year. Additionally, a good sign for the future is that our backlog has continued its long-term growth strength and ends the year at 5% ahead of last year, which is very similar to what we saw at the end of 2015.
This backlog growth continues to provide us with strong revenue visibility over the long term. Today's geopolitical environment supports an increased demand for defense and homeland security solutions especially in Europe, Asia-Pacific and in the US. In fact, because of the increased opportunities in many of our end market, we made a decision to enhance resources devoted to capitalizing of many of these opportunities, both in the short term as well as in the future. An important achievement for Elbit Systems in 2016 was achieving benefit from some of our commercial ventures. In 2016, we saw capital gain of $17.6 million following a dilution event on two of our commercial ventures. One of which is in the automotive technology arena and the other is in a subsidiary focused on energy technology.
I'd like to highlight some of our recent successes. Last month the United States Army awarded us an ID/IQ contract of up to $110 million for Mortar Fire Control Systems which consist of Mounted and Dismounted Mortar Fire Control Systems, and a lightweight handheld mortar ballistic computer. This system improves mission success with greater accuracy while reducing potential exposure. This award follows a similar award from the US army for $103 million for Mortar Weapon Systems in November last year. Also in February, we received $110 million contract from an Asia-Pacific country to upgrade and maintain the dozens of Mi -17 helicopter over a five year period. We have extensive operational experience in rotary-wing modernization activities, including conversion of utility and assault helicopters into multi-role platforms, upgrading existing utility and attack platforms, as well as supplying cutting-edge systems for latest-generation aircraft. We also provide full maintenance and support packages can serve our customer as prime contractor, systems integrator, component supplier or service contractor as needed.
In addition in January, through Rafael, we were awarded a $35 million contract for the supply of airborne laser designators to two Asia-Pacific countries. And back in November, you may remember we were awarded a $90 million contract from an Asia-Pacific country for our SPECTRO advanced electro-optic systems in ISTAR system providing high performance and visibility in all weather conditions. All as you can see Asia-Pacific also remains a key region for us with many opportunities.
Elsewhere in January, we announced a 30 months $17 million contract for multi spectral BrightNite systems to an air force in a NATO country. BrightNite delivers a crystal clear visual of the landscape, flight data and mission data, directly to the pilot, enabling intuitive flight in a head-up, eyes-out orientation in pitch dark and low visibility landing conditions.
Additionally, our Brazilian subsidiary, Ares was awarded $100 million contract to supply Remote Controlled Weapon Stations to the Brazilian Army over five years. This is a foreign contract adjusting to the customer satisfaction with our product.
Our cyber security efforts are also progressing well. Back in November of last year, CYBERBIT was awarded a contract to supply the first hands-on cyber-security training center for IT security professionals with the Cyber-Security Training Range of Maryland. And in February, CYBERBIT signed an agreement with Ni Cybersecurity to launch a Cybersecurity Training and Simulation Center in Tokyo.
Furthermore in November last year, Samsung SDS selected CYBERBIT to protect its customers against cyber attacks on their industrial control systems.
Overall, we are pleased with our ongoing wins. As we have demonstrated time and again, we continue to foresee our market requirement and develop cutting edge systems and technology as suitable to our customers' demanding needs. And as mentioned above, you have seen we are becoming increasingly successful in developing our ventures for commercial application.
In summary, our businesses continue to perform well throughout 2016 and based on our growing backlog we expect our performance to continue in 2017. Furthermore, we look forward to capitalizing on many of the opportunities we see in our end market. Our business system is well diversified, built on broad spectrum of technologies and product we sell into many countries and region. This we believe will enable us to continue our positive performance particularly in the fast changing global defense and homeland security environment.
And with that I'll be happy to take your questions.
The first question is from [Yoav Burgan]. Please go ahead.
I am curious where the Elbit Systems factories are located and are there any plans to expand or develop new factories in the Nahf as the population shifts south and to also encourage Israelis to move into the Nahf and provide assistance with jobs at your factories.
We have facilities and factories all over our small country starting from the north from Nahariya down to Beersheba to Rehovat to Ashkelon and recently in Arad as well. We just few years ago we established an activity in Beersheba just near the university to support open innovation and to support our growing cyber activity. Yesterday, the Israeli Minister of Defense has announced that we were awarded $100 million contract to provide new communication equipment to the Israeli army. This equipment will be produced and will be maintained in our new factory in Arad in the South to support the growing demand for jobs in the south.
There are no further questions at this time. Before I ask Mr. Kenny Green to go ahead with his closing statement, I'd like to remind participants that replay of this call will be available two hours after the conference ends. In the US please call 1-877-4560009. In Israel please call 03-925-5929. For international, please call 972-3925-5929. A replay of this call also be available on the company's website, www.elbitsystems.com. I see there is another question and a follow up from Yoav Burgan. Please go ahead.
Another aspect I was curious your expenses for R&D. What areas, products, and equipment are you looking into in terms of future development with your R&D expenses?
Actually our R&D is focused on all of our core technologies and core business products. We are focusing specifically on customer requirements, customer needs of the various configurations and technologies of all assistance. And distributing the various budget to support these activities including development of totally new products and new technologies that may come to the market several years in the future.
And with that I'd like to ask Mr. Machlis to go ahead with his concluding statement.
I'd like to thank all of our employees for the continued hard work. To everyone on the call, thank you for joining us today and for continued support and interest in our company. Have a good day and good bye.
Thank you. This concludes our Elbit Systems Limited Fourth Quarter 2016 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.
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