Elbit Systems Ltd (NASDAQ:ESLT) Q3 2018 Earnings Conference Call November 20, 2018 9:00 AM ET
Ehud Helft - Investor Relations
Bezhalel Machlis - President and Chief Executive Officer
Joseph Gaspar - Executive Vice President and Chief Financial Officer
Pete Skibitski - Alembic Global
Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Third Quarter 2018 Results Conference Call. All participants are at present in a 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 1-646-688-3559 or view it in the News section of the Company’s website www.elbitsystems.com.
I would now like to hand over the call to Mr. Ehud Helft of GK Investor Relations. Ehud, please go ahead.
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 today on the call are Mr. Bezhalel Machlis, Elbit's President and CEO; and Mr. Jose Gaspar, Elbit's Chief Financial Officer.
Jose will begin by providing a discussion of the financial results for the third quarter of 2018, 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 turn the call to Jose. Jose please?
Thank you, Ehud. 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 a reconciliation in today’s press release. This quarter, we saw solid year-over-year revenue growth, as well as continued growth in the backlog.
I will now highlight and discuss some of the key figures and trends in our financial results. Our third quarter 2018 revenues were $895 million compared with $801 million last year up 11.8% year-over-year.
The growth was driven by sales from our continually growing backlog as well as the addition of revenues from our acquisition of Universal Avionics Systems, which was fully consolidated in the second quarter of this year.
In terms of revenue breakdown across our areas of operation in the quarter, airborne systems was 40%, C4ISR was 33%, land systems were 17%, electro-optics was 8%, and the rest was 2%. Compared with the third quarter of last year, airborne systems made up a larger portion of our sales primarily due to the acquisition of Universal. In addition, there were strong revenues in the armored vehicles areas of operations.
In terms of geographic breakdown for the quarter, North America was 26% of our revenues, Europe was 19%, Israel was 18%, Asia-Pacific 25%, Latin America was 7% and the rest of the world was 5%.
North America increased partially due to the acquisition of Universal. Asia-Pacific also grew due to the increased sales of electronic warfare systems and UAS. There was also an increase in the rest of the world sales driven by armored vehicles and [indiscernible] systems.
For the third quarter the non-GAAP gross margin was 29.1% versus 32% last year. Our GAAP gross margin was 28.6% in the quarter versus 31.3% last year. I note that our gross margin in the third quarter of last year was particularly high due to the mix of products we sold.
The third quarter non-GAAP operating income was $85.7 million or 9.6% of revenues compared with $89.2 million or 11.1% of revenues last year. GAAP operating income in the quarter was $79.1 million or 8.8% of revenues compared with $82.2 million or 10.3% of revenues last year.
Our GAAP operating expenses for the quarter were 19.8% of revenues compared with 21.1% of revenues in the third quarter of last year.
The operating expense breakdown in the quarter was as follows: Net R&D expenses were 7.8% of revenues versus 8.4% last year, marketing and selling expenses were 7.8% of revenues versus 8.4% last year and G&A expenses were 4.2% of revenues versus 4.3% last year.
Financial expenses for the third quarter of 2018 were $8.1 million compared with financial expenses of $9.3 million in last year. Taxes in third quarter were $8.9 million or 12.6% of pre-tax income versus $14.6 million or 20% of pre-tax income last year.
For the third quarter, non-GAAP net income was $69.8 million or a net margin of 7.8% versus $67.3 million or net margin of 8.4% last year. Non-GAAP diluted earnings per share were $1.63 compared with $1.57 last year.
On a GAAP basis, third quarter consolidated net income was $64.1 million or a net margin of 7.2% versus $61.5 million or a net margin of 7.7% last year. GAAP diluted earnings per share were $1.50 compared with $1.44 last year.
Our backlog of orders as of September 30, 2018 was $8,108 billion, $467 million higher than the backlog at the end of the third quarter of 2017, representing an increase of 6.1%.
Approximately 45% of the current backlog is scheduled to be performed during 2018 and 2019 and 55% of the current backlog is scheduled for 2020 and beyond. The ratio is similar to that at the same time last year.
Operating cash flow for the third quarter was a negative of $19.1 million compared with a negative cash flow of $142.6 million in the same quarter last year. Finally, the Board of Directors declared a dividend of $0.44 per share for the third quarter of 2018.
That ends my summary and I shall now turn over the call over to Mr. Machlis, Elbit Systems’, CEO. Butzi, please.
Thank you, Jose. We are pleased with our overall results particularly the solid 1% growth in revenue which was a combination of ongoing organic growth as well as the addition of revenues from the acquisition of Universal last quarter. Even while delivering strong revenue growth, we continued to increase our backlog providing us with strong visibility for many years to come.
Our long-term growth has always been built on both investing in our existing businesses, growing it on an organic basis, while at the same time acquiring and adding synergistic businesses to our organization.
Our core businesses continues to perform well. In Asia-Pacific we recently announced two large orders. We received a $167 million order for one of our ISTAR solution. That is our system for providing aerial intelligence, Surveillance, Target Acquisition and Reconnaissance.
Earlier we received a $173 million contract with an Asia-Pacific countries’ Navy for our Naval Remote Control Weapon Stations. All this contracts represents our unique capacity enabling customers to draw on our exceptionally broad portfolio to meet the range of comprehensive operational needs.
In the UK we announced a £10 million order with a maximum potential £4 million from the UK MOD for a Battlefield Management Application. The ongoing and increasing demand for our solutions are clear indications of the growing operational importance of advanced incumbent, proven capabilities that we have in all domains of operational engagement.
Maritime, land and air as this has proven time and again that we can build our businesses successfully on both in organic basis as well as acquiring and assimilating new organizations and technologies into the Elbit family. This continues to remain our long-term strategy and we look forward to it providing us with many years of continued growth in various situation.
I will be happy to take your questions. Operator, please.
[Operator Instructions] The first question is from Pete Skibitski of Alembic Global. Please go ahead.
Good evening guys. Guys could you quantify for us how much the transition to ASC 606 contributed to the revenue growth in the quarter and as well should we think that the fourth quarter - I think that will be the last year of transition, we should see similar high single-digit, low double-digit type of growth as you complete that accounting transition?
This is Jose. I will say the following, we are now building every quarter the 606 versus the 605 accounting and by the end of this year with the quarterly results of the fourth quarter we will release the information.
Presently the information is in process of building it up and we are not in a position to provide that information publicly; however, next quarter we will actually have double reporting one for 606 and one for 605.
Okay, I appreciate that. Jose one more for you. I know you said in the past that you guys use your balance sheet to win contract with good credit customers and that could sometimes lead to receivables growth which we have seen in the last couple of years and in this quarter, but I'm wondering if you could help us understand the timing on the receivables, because I would think at some point over the next year or two that the receivables will reverse and maybe even your whole working capital accounts, I would say working capital will be a source of cash, whether the use of cash.
I think you are correct. That was our strategy. I would say that we have recently declined a little bit on this approach, because we are successful in positioning ourselves well with some of our major customers. And the assessment that the receivables are going to come in, the cash is going to come in within the next 12 to 24 months is very reasonable.
Okay. Thanks so much guys.
[Operator Instructions] The next question is from [Vineet Kharia of Citi Bank] (Ph). Please go ahead.
Hi guys, thank you for picking up my question. I have a question for you on this IMI deal, if you could throw some light on the impact of this deal and what the targets are?
Yes, IMI deal.
As we have announced yesterday this acquisition was approved by the government by the Minister of Finance as well as by the Prime Minister and we believe that it will be concluded in the coming days.
And any impact which we could see on the financials?
Once we close, we will prepare the stocks in balance sheet and in case we closed within the next several days then the fourth quarter will reflect of course partially on our proportional basis the performance of IMI in the remaining period of 2018, probably somewhere four to six weeks of performance. That is what we expect to happen.
Okay. thank you.
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 1-888-782-4291, in Israel please call 03-925-5927, and internationally please call 972-3925-5927. A replay of the call will also be available on the Company's website, www. elbitsystems.com. Mr. Machlis would you like to make your concluding statement?
I would like to thank all our employees for their continued hard work, to everyone in 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 LTD third quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.