Elbit Systems Ltd. (ESLT) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Elbit Systems Ltd. Second Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, August 13, 2013. I would like to hand the call over to Mr. Ehud Helft of CCG Investor Relations. Ehud, please go ahead.

Yes, thank you, and good day, 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 Systems President and CEO; and Mr. Yossi Gaspar, Elbit Systems Chief Financial Officer. Butzi will begin by providing a discussion of the financial results of the quarter, followed by Butzi, who will talk about some of the significant events during the quarter and beyond. We'll then turn over the call to the question-and-answer session. Before we begin, I would like to point out to 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 like to turn over the call to Yossi. Yossi, please.

Thank you, Ehud. Hello, everyone, and thank you for joining us today. As usual, I will provide you with both our regular GAAP financial data, as well as certain supplemental non-GAAP information. You will find all the details, GAAP financial data, as well as the non-GAAP information in today's press release. Our results of the second quarter show growth in both revenue and in backlog, as well as a solid improvement in margins across the board. We are particularly pleased that our backlog has now grown for 5 consecutive quarters and is over 6% higher than the backlog at the end of the second quarter of last year. I will now highlight and discuss some of the key figures and trends. Revenues in the second quarter of 2013 were $702.9 million, as compared to $676.4 million in the second quarter of 2012, growing by 4% over the last year. In terms of revenue breakdown across our areas of operation in the quarter, Airborne systems was 41%, land vehicle systems was 9%, C4ISR systems was 37%, Electro-Optics systems were 11%, and the rest was 2%. Compared with last year, we saw growth in Airborne systems revenue, while land systems was a lower portion of our revenue. On a geographic basis, North America remained our largest region at 28% of revenues. Israel was 21%, Europe was 21%, Asia-Pacific was 19%, Latin America 10% and the rest of the world was 1%. We do not generally see quarterly fluctuations in our revenue breakdown as an indicative of any long-term trends. However, compared with last year, revenues from Israel and Europe grew as a portion of the overall mix, while we saw a reduction of revenues from North America. Gross margins. For the second quarter, our gross margin was 28.9%, an improvement from the 28% gross margin that was reported for the second quarter of last year. The non-GAAP gross margin in the second quarter of 2013 was $208.5 million, or 29.7% of revenues, compared with $194.8 million, or 28.8% of revenues, in the second quarter of 2012. Operating income for the second quarter was $66.7 million or 9.5% margin. This represents a strong year-over-year growth of 58% in the operating income compared with $42.1 million or 6.2% margin as reported in the second quarter of last year. The non-GAAP operating income in the second quarter of 2013 was $70.5 million or 10% of revenues compared with $54.1 million or 8% of revenues in the second quarter of 2012. The company benefited from a legal settlement, which reduced the G&A expenses by a net amount of $7.6 million during the quarter. This resulted in G&A expenses in the second quarter of 4% of revenues compared with 4.7% of revenues in the second quarter of last year. Our net R&D expenses for the quarter were 7.3% of revenues compared to 8.2% last year. On an absolute and growth basis, our R&D expenses were at a similar level to those of the second quarter last year. The lower net R&D spending during the second quarter was due to higher external participation in our overall R&D spending. Marketing and selling expenses were 8.1% of revenues in the quarter compared with 8.9% in the second quarter of last year. The overall trend of improvement in our operating margin is mainly due to generally improved efficiencies in the operation of our business, over time, as well as the synergies realized from the integration of various businesses we have acquired. Financial expenses for the second quarter of 2013 were $12.7 million compared with $2.3 million in the second quarter of last year. A higher level of financial expenses in the second quarter of 2013 was mainly due to the weakening of the Brazilian and Australian currencies versus the U.S. dollar. Last year, in the second quarter, we had relatively low financial expenses due to the depreciation of the Israeli shekel against the U.S. dollar. We reported a tax expense of $5.1 million, which is an effective tax rate of 9.4% in the second quarter of this year, as compared to the tax expense of $2.8 million, or effective tax rate of 7.1% in the second quarter of 2012. The affiliates, which we do not consolidate, contributed $2.5 million to the net income of this quarter. This is compared to $3.18 million last year. Consolidated net income attributable to Elbit Systems shareholders for the second quarter was $49.6 million or a net margin of 7.1%. This is compared with net income of $38.3 million or a net margin of 5.7% in the second quarter of 2012. Diluted net earnings per share for the second quarter were $1.17 compared with $0.90 for the second quarter of last year. Our non-GAAP net income was $50.4 million or 7.2% of revenues compared with $48.2 million or 7.1% of revenues in the second quarter of 2012. Non-GAAP EPS for the quarter was $1.19 compared with $1.14 for the second quarter of last year. Operating cash flow for the first half of 2013 was $60.9 million compared with $56.2 million in the first half of last year. Our backlog of orders as of June 30, 2013, stood at over $5.8 billion, a slight increase from the backlog at the end of the prior quarter, which stood at $5.78 billion. The backlog of orders increased by $340 million in the last 12 months. Approximately 59% of the backlog is scheduled to be performed during the rest of 2013 and 2014. The majority of the balance is scheduled to be performed in 2015 and 2016. Finally, the Board of Directors declared a dividend of $0.30 per share for the second quarter of 2013. That ends my summary. And I shall now turn the call over to Butzi Machlis. Butzi?

Thank you, Yossi. I'm pleased with the strong results we have achieved in the second quarter. We demonstrated growth in revenue compared with both the second quarter of last year as well as the previous quarter. I'm encouraged by the continued growth in backlog, growing now for the fifth consecutive quarter. This gives us a confidence that our performance and growth will continue in the coming year. Over the past few years, we have worked hard at improving the efficiencies within all our divisions, as well as leveraging our global intercompany synergies. In line with this effort, we'll continue to find many areas where our subsidiaries can provide increased value of the entire organization. These efforts have enabled us to improve the way we design and produce our products and systems, improving our gross margins. In addition, in this quarter, we were able to increase our revenues and operate a business with the biggest footprint, without a corresponding increase in our operating expenses. Another positive aspect in our results is a recovery in our revenues from both Europe and Israel. As reported, we grew our revenues by 30% in Israel and 80% in Europe compared with the second quarter of last year. This growth helped compensate for low sales from the United States during the quarter. Similarly, the revenue diversification in our business is beneficial in our challenging business environment. While we grew to the Israeli and European markets, this does not detract from our belief in the potential from emerging regions. Recently, we had some important wins and development in these emerging markets, and I would like to highlight a few of them. In Africa, we were awarded a $40 million contract to supply the Wise Intelligence Technology system for intelligence analysis and cyber defense, which is a unique field-proven system. This win is another demonstration of our leadership in the field of intelligence analysis and cyber defense, field-proven solution, highly suitable for countries, armies and critical infrastructure sites. Another example of growth in our Intelligence System businesses is the award of a $32 million contract for an intelligence system for the Australian Federal Police. This is considered a very important development for our businesses, as well as further enhancing our position in the Australian market. In South Korea, we took the significant step of establishing a jointly owned company, together with the Korean company Sharp Aviation. The company is called Sharp Elbit Systems Aerospace or SESA. We currently own 19%, with an option to reach 50%. SESA will offer avionic solution for projects such as the Korean Light Attack Helicopter and the Korean Future Fighter development project. As a Korean company, SESA will also be able to offer solutions to foreign suppliers and OEMs, selling different goods and services in Korea. We consider Korea to be a very important market, and we believe this step will bring us new opportunities in the region. In Brazil, we were awarded a contract to supply Electro-optic Observation Systems to Savis, a subsidiary of Embraer. This is part of the first phase of the multi-year Sisfron Integrated Border Monitoring System. This award marks a breakthrough for our electro-optics activities in Brazil, a significant market for us. In summary, so far, 2013 is developing as a solid year for Elbit Systems, both in terms of business opportunities and our profitability level. With that, I would like now to open the call for questions and answers. Operator?

[Operator Instructions] The first question is from Dov Rosenberg of Clal Finance.

I was just wondering, on the geo split, looking forward, if you can give us any color maybe on sort of how the backlog is divided between the geographies? Or say, where you think the geographical split would be in a year or 2 from now?

This is Yossi. The backlog is essentially divided very closely to what our present last 12 months revenues have shown. So going forward, we do not expect any significant fluctuations between the regions.

So do you expect, at any point, as we can keep on talking about Brazil and India and Australia, and all these new regions that are sort of going very well and building traction and you guys investing there. And I'm sort of wondering if that will break out at any point, or will still be U.S., Europe, Israel?

We still consider these regions as regions with great potential. And looking for a range over the next 12 months, we definitely believe that the balance that we see today will change slightly. We also have seen in the past, if you recall, that the European region did provide a lower percentage of revenues compared to what this quarter showed.

That's helpful. Just one more question, sort of looking ahead. As percentage of revenue -- I mean as I understand that in G&A, there was a special one-time impact from the settlement. As far as the sales and marketing and R&D, is that around the 7.5%, 8% for R&D, and 8% and 8% and a bit for sales and marketing? Is that a normalized rate going forward, also?

As you know, Dov, we do not give forecast and guidance. However, if you look at what has happened in the recent quarters, then you definitely can deduct from that more or less where we are going to be in the future.

The next question is from Aviran Revivo of Sphera Fund.

Can you give us some color on the working capital requirements going forward, specifically, on the increase on the receivables in the first half?

The thing that we have seen during the last 12 to 18 months is a reduction in our capital investments, which actually now more than meet, essentially, our amortization level. You can see that from our cash data that we released. So we expect that to be, in the future, essentially, at that level, more or less, going forward. So that I don't expect any drastic changes in that. From point of view of customers, outstanding customers in our balance sheet, we have seen during the recent quarters some growth in that. And the reason for that is that we are using these elements as well, meaning our strengths in our balance sheet, to help customers, from point of view of funding longer-term programs, to be awarded to us. So going forward, I expect more or less what we have seen in the last -- the trends we have seen in the last 12 months will be with us in the future as well.

I see. So the increase in the receivables and the customers' obligations is currently, say though [ph], geographic? I mean…

Not necessarily. No, not necessarily. There is a diversity between the various customers in all geographies. In Israel, with the Ministry of Defense is a significant part of that. But there are some other customers as well.

[Operator Instructions] 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 2 hours after the conference ends. In the U.S., please call 1 (888) 326-9310; in Israel, please call (039) 25-5921; and internationally, please call 9 (723) 925-5921. A replay of this call will also be available at the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

Thank you. I would like to thank management and 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 Ltd. Second Quarter 2013 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.