Elbit Systems Ltd. (ESLT) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Third Quarter 2014 Results Conference Call. [Operator Instructions] 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 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, everybody. On behalf of all the investors, I'd 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's Chief Financial Officer. Yossi 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 will then turn over the call for the question-and-answer session. Before we begin, I'd 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. With that, I would now like to turn over the call to Yossi. Yossi, please?

Thank you, Ehud. Hello, everyone, and thank you for joining us today. Like the last 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 financial data in today's press release. The third quarter results reflect the stability of the business, but were affected by increased financial expenses due to the U.S. dollar shekel changes. Thanks to our ongoing efficiency measures, we were able to keep our operating expenses at similar levels to last year. Additionally, we demonstrated continued improvement in the backlog, which is a good sign for the future potential growth in revenues. I will now highlight and discuss some of the key figures and trends. Our third quarter 2014 revenues were $722.7 million, slightly lower than the same period last year. In terms of revenue breakdown across our areas of operations in the quarter, airborne systems was 42% compared with 39% last year. C4ISR systems was 41% compared to 38% last year. Armored vehicle was 5% compared to 10% last year. Electro-optics was 8% compared to 9% last year. And the rest was 4%, essentially, the same as last year. The makeup of the overall mix was similar to last year, with some growth in airborne systems and a slight decline in electro-optics. I know that some of the -- in some cases, electro-optics systems are included within the C4ISR or airborne system projects, and as such cases, revenues from such electro-optics systems are included in those other areas. In the Armored Vehicle area, we had a decline in volume due to a general worldwide trend and the mix of systems sold in the quarter by the company. In terms of geographic breakdown in the third quarter, Israel was 22% of revenues; North America, 28%; Europe was 15%; Asia Pacific, 15%; Latin America was 19% of revenues; and the rest of the world was approximately 1%. The portion of revenues from Latin America and Asia-Pacific grew more significantly than the rest of the regions. This is encouraging, as we have been investing resources in these regions over the last couple of years in line with our long-term growth strategy. For the third quarter, our gross margin was 28.1%, which was slightly below the gross margin rate of 28.4% reported in the third quarter of last year. The decrease in the gross margin was mainly due to a mix of programs sold in the quarter. Operating income in the third quarter was $60.1 million which -- with an operating margin of 8.3%. This is compared with an operating income of $61.1 million and an operating margin of 8.4% in the third quarter of last year. In terms of breakdown of expenses in the quarter, our net R&D expenses in the third quarter of 2014 were 7.7% of revenues compared with 7.4% in the third quarter of last year. Marketing and selling expenses were 7.2% of revenues in the quarter compared with 8.5% in the third quarter of 2013. The change is a result of the mix of marketing efforts and sales efforts across various regions. Our G&A expenses in the third quarter were 4.9% of revenues compared with 4.2% of revenues in the third quarter of last year. Financial expenses for the third quarter of this year were $23.4 million. This was $16.8 million higher than the financial expenses of $6.6 million that we reported in the third quarter of last year. As we published a few weeks ago, we expected higher-than-normal financial expenses due to our currency hedging activities and given the sharp weakening of the Israeli shekel versus the U.S. dollar. We should be reminded that, in general, a weaker shekel is a positive for Elbit Systems as we generate a significant portion of our overall expenses in Israel, while the vast majority of our sales are outside of Israel. Taxes in the quarter were $105,000, or 0.3% tax rate, versus $7.5 million, or 13.6% tax rate, in the third quarter of last year. The decrease in the effective tax rate was mainly as a result of settlements of tax audits, including adjustment for prior years in some of the company's subsidiaries in Israel and the mix of the tax rates in the various jurisdictions in which the company entities generate taxable income. Consolidated net profit for the third quarter of 2014 was $35 million or a net margin of 4.8% of revenues. This is compared with a net income of $49.6 million, or 6.8% of revenues, in the third quarter of 2013. On a non-GAAP base, the net income in the third quarter was $43.9 million, a net margin of 6.1%, compared with $55.8 million, or net margin of 7.6%, reported in the third quarter of last year. Income per diluted share for the third quarter of 2014 was $0.82. This is compared with $1.17 for the third quarter of last year. On a non-GAAP basis, earnings per share this quarter were $1.03 compared with $1.32 in the third quarter of last year. Discounting the net effect of the increased financial expenses due to the change in exchange rates on our results in the quarter, as mentioned above, our net income would have been very similar to the net income reported in the third quarter of last year. Our backlog orders at the end of the third quarter stood at $6.23 billion, which is $532 million, or 9.3%, higher than the backlog at the end of the third quarter of last year, which stood at $5.7 billion. The strong growth in our backlog is generally a positive indication for the potential future growth in revenues and provides us with increased visibility over the coming years. Approximately, 49%, or $3.7 billion, of the current backlog is scheduled to be performed during the fourth quarter of this year and 2015. Operating cash flow used in the 9 months ended in September 30 was $195,000 as compared to a cash flow provided by operating activities of $24.1 million in the same period last year. The main reason for the reduced cash flow is the delay in payments from the Israeli Ministry of Defense. We see no risk in receiving these payments in the near future. Finally, the Board of Directors declared the dividend of $0.32 per share for the third quarter of 2014. That ends my summary, and I shall now turn the call over to Mr. Machlis. Butzi, please go ahead.

Thank you, Yossi. Overall, our ongoing core businesses' results continued to be demonstrating stability as indicated by the $60 million that we reported in operating income, similar to that of the third quarter last year. While in this quarter, our bottom line was somewhat masked by unusual level of financial expenses. I'm pleased that our ongoing businesses' performance had been stable over the past 2 years in a world where defense budget generally was shrinking. This was, particularly, true in the European and North American defense markets, which typically made up more than half of our revenues in the past. Our backlog, however, is telling more of a growth story and has been consistently increasing since 2012. This is a positive indication of our growth potential while providing us with increased visibility into the coming year. We know that there is a lag between backlog growth and revenue growth. But over the long-term, the growth rate in our revenue is a large part, a function of the growth rate in our backlog, which makes us optimistic for the future. Besides our backlog, I am optimistic for a number of other reasons. During the quarter, we saw a resurgence of activity in certain key geographical regions, which we focus on because of the growth potential and expanding defense budget, namely Latin America and Asia-Pacific. As Yossi mentioned, while Latin America was only 11% of our revenues in the third quarter of last year, in the current quarter, it made up 19% of our revenues. In fact, those target regions together were 24% of our revenues in third quarter last year and together were approximately 35% in the third quarter of this year. Furthermore, the shifting geopolitical landscape and the ever evolving global defense threats, combined with general macroeconomic components, is leading governments to reconsider the past trend of defense budget cuts. 2014 appeared to be the first year since 2009, where global defense spending did not decrease. While defense budget for 2015 is mainly, in many cases, are still being discussed, it seems that the trend, especially in the emerging markets of Asia-Pacific and Latin America, is that of defense budget increases. You may remember that in May, we won a 1-year $133 million contract for Homeland Security for Latin America customer. This followed a $100 million award in April for intelligence-gathering system, also to be performed in 1 year. In August, we received an $80 million contract to supply Latin American country with a C4ISR. The new unified communication network will play an important role during emergencies and natural disasters, facilitating a real-time common operational picture, providing land forces with enhanced operational performance when situation wants. In Asia, we received contract for $85 million over 3 years, most of which we earmarked for an F-5 aircraft [indiscernible] POGO, with the balance for the supply of electro-optics and communication systems. In the Philippines, in June, we were awarded a $2 million contract for upgraded armored personal carrier to the Philippine Armed Forces. This award followed an order received earlier this year for $290 million contract for tank upgrade program for another customer in the Asia-Pacific region. In North America, we had positive developments as well. A few weeks ago, in Canada, we were awarded an 18-month contract by Rheinmetall Canada to provide ELSAT 2100 Satellite-on-the Move system for use by the Canadian Armed Forces. In the U.S., our subsidiary was awarded 2-year contract to provide Apache Aviator Integrated Helmets to the United States Army. In summary, our businesses is performing well. We continued to win new businesses, particularly in our growth regions. While our businesses' perform -- performance has been stable over the past year, the fact that our backlog is over $0.5 billion ahead of where it was the same time last year, combined with what appears to be a more positive environment for the defense budget bodes well for our future. I look forward and I'm optimistic with regard to the opportunities ahead for Elbit Systems. With that, I will be happy to take your questions. Operator?

[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 (866) 276-1485. In Israel, please call (03) 925-5918. And internationally, please call 972-3-925-5918. A replay of the call will also be available on the -- at the company's website at www.elbitsystems.com. Mr. Machlis, would you like to make a concluding statement?

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 Ltd. Third Quarter 2014 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.