Elbit Systems Ltd. (ESLT) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Fourth Quarter and Full Year 2014 Results Conference Call. All participants are present in listen-only-mode. Following the 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 the News section of the company's website, www.elbitsystems.com. I would now like to hand over the call to Mr. Kenny Green of GK Investor Relations. Kenny, please go ahead.

Thank you, operator. 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 Machlis, Elbit's President and CEO; and Mr. Yossi Gaspar, Elbit's Systems Chief Financial Officer. Yossi will begin by providing a discussion of the financial results for the full year and fourth quarter of 2014, 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. And with that, I would like to turn over the call 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 information in today's press release. Overall we are pleased with our performance in 2014 and in the fourth quarter in particular, marking continues growth in revenues and backlog, which position us well for 2015. I will now highlight and discuss some of the key figures and trends. Our fourth quarter of 2014, revenues were $850.3 million, an increase of 4.8% compared with $811.5 million reported in the fourth quarter of 2013. I know that our fourth quarter revenues like last year was seasonally the strongest of the year. For 2014 as whole, we reported revenues of $2.96 billion, a slight increase over the $2.93 billion reported in 2013. In terms of revenue breakdown across our areas of operations in the quarter, C4ISR was 36%, airborne systems 37%, land systems 13%, electro-optics was 10% and the rest was 4%. Compared with the first quarter of last year from the overall mix, we saw an increase in airborne systems and a slight decrease in electro-optics. For 2014 as a whole, airborne systems and C4ISR grew as a portion of the overall revenue mix, while land systems and electro-optics were lower. In terms of geographic breakdown for the fourth quarter, Israel was 17% of our revenues, North America, 25, Europe 18, Asia Pacific was 22%, Latin America 17% and the rest of the world was 1%. Compared to the fourth quarter of last year, our target growth regions of Asia-Pacific and Latin America grew strongly. Revenues from Israel was lower due to lower orders of electro-optics, communication and regular equipments, also the Israeli Ministry of Defense. For 2014 as whole, revenues from Latin America and Asia-Pacific grew as portion of our overall mix, mainly due to increased sales of HLS, UAS, and EW systems to Latin America. Growth from Asia-Pacific was mainly driven by land fire-control systems. For the fourth quarter our gross margin was 27%, compared with 27.3% as reported for the fourth quarter of last year. The non-GAAP gross margin was 27.6% in the fourth quarter of 2014, compared with 28.1% in 2013. Full year gross margin was 27.9%, slightly lower than the 28.2% in 2013. On a non-GAAP basis, full year of 2014 gross margin was 28.6%, compared with 29% last year. Operating income in the fourth quarter was $64.2 million, with an operating margin of 7.6%. This is compared with an operating income of $57.9 million and an operating margin of 7.1% in the fourth quarter of last year. The non-GAAP operating income in the fourth quarter of 2014 was $74.8 million or an 8.8% of revenues, compared with $70.5 million or 8.7% of revenues in the fourth quarter of last year. For the full year, our operating income was $246.9 million with a margin of 8.3% compared with $239.4 million and a margin 8.2% in 2013. This represents a year-over-year increase of 3% in the margin. Non-GAAP operating income in 2014 was $283.2 million or 9.6% of revenues, compared with $278.6 million or 9.5% of revenues last year. In terms of breakdown of these expenses, our net R&D expenses for the fourth quarter of 2014 were 8.4% of revenues compared with 7.4% in 2013. For the full year, our net R&D expenses were 7.10% of revenues in 2014 compared with 7.5% of revenues in 2013. Marketing and selling expenses were 7% of revenues in the quarter, compared with 7.5% in the fourth quarter of last year. For the full year, our marketing and selling expenses were 7.2% of revenues, compared with 8% last year. Our G&A expenses in the fourth quarter were 4.1% of revenues, compared with 4.8% of revenues in the fourth quarter of last year. G&A expenses for the full year were 4.7% of revenues, compared with 4.4% of revenues last year. Total operating expenses for 2014 were 19.5% of revenues, compared with 20% of revenues in 2013. Financial expenses for the fourth quarter of 2014 were $11.2 million, compared with financial expenses of $10 million in the fourth quarter of last year. For 2014 as whole, our financial expenses were $47.5 million, compared with $37.3 million in 2013. The increase in the financial expenses this year versus last year was broad due to our currency hedging activities, given the sharp weakening of the Israeli shekel versus the U.S. dollar in the third quarter. In general, a weaker shekel is 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. However, due to our hedging policy in which we hedge for future periods it takes few quarters before the positive impact will affect us in our G&A. Consolidated net income in the fourth quarter of 2014 was $44 or a net margin of 5.2%. This is compared with a net income of $42.9 million, or net margin of 5.3% in the fourth quarter of 2013. Income per diluted share for the fourth quarter of 2014 was $1.03 compared with $1.01 in the fourth quarter of last year. On a non-GAAP basis, net income in the fourth quarter was $52.8 million or a net margin of 6.2%, compared with $53.5 million or net margin of 6.6% in the fourth quarter of last year. Non-GAAP diluted earnings per share were $1.24, compared to $1.26 in the fourth quarter of last year. For the full year 2014, consolidated net income was $171 million with a net margin of 5.8%, compared to $183.4 million in 2013 and a net margin of 6.3% last year. The lower [ph] total mix for 2014 was $4.01 compared to $4.34 last year. The non-GAAP income for 2014 was $201.1 million at a margin of 6.8% compared with $210.8 million or a margin of 7.2% reported last year. On a non-GAAP basis diluted earnings per share in 2014 was $4.71, compared with $4.99 for last year. Our backlog of orders at year end was $6.27 billion, 7.6% higher than the backlog at the end of 2013, which stood at $5.82 billion. This growth is a positive sign and provide us with increased confidence with growth view potential for our future growth. Approximately 69% of the 4.3 billion was of current backlog is schedule to be performed during 2015 and 2016. Operating cash flow was $178 million, as compared to $167 million last year. Finally, The Board of Directors declared the dividend of $0.35 per share for the fourth quarter of 2014. That ends my summary, and I should now turn the call over to Mr. Machlis. Butzi, please go ahead.

Thank you, Yossi. Our 2014 result continues to demonstrate a strong and steady business. Our top line and margin profile was similar with those of last year and we have been happy with the stability in our financials, especially in the whole world where defense budget was shrinking This has been 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 has been telling a growth story over the past few quarters diligently, consistent quarter-over-quarter increases. This is a good indication of our potential to grow, while providing us with increased revenue visibility into the coming years. The strong growth in backlog of over 30% compared with end of 2014 provides a solid start for 2015 and now those policies offset. In our fourth quarter guidance for the resurgence in defense activities in the two regions which we target overall, it is the long-term concession, mainly Asia-Pacific and Latin America. Beyond this, the industry in the global economic landscape, combined with general global macroeconomic improvement have led to a better recurrent trend in advance. In 2014, global defense spending proved to have bottomed up. The recurrent safety group for patterning studies acuminate that global defense budget actually grew by 112% in 2014, driving – driven by primary – by Asian economics. In addition, we have proposed 2016 European defense budget of course to increase over 2015. In particular, we still have this trend and have especially been selected in Asia Pacific and international market in that of defense study included. Our growth in backlog continues to be driven by our online opening businesses. In Asia, in the fourth quarter we are still account for $85 million over 3 year, most of which were for an acquired aircraft avionics operate program with the balance for the supply of electro-optics and communication agencies. And more rapidly, we are still in air group for an Asian Army for a mini MUSIC DIRCM system for Blackhawk helicopters. In Latin America, during the quarter we are still ongoing value of $160 million for the Brazilian Army for the upgrade of four Grumman C-1A aircraft. The Grumman C-1A upgrade will include aircraft return to service, engine replacement, installation and integration of new avionics, new communication systems and ECS systems and air-to-air refueling capabilities. While our local market in Israeli was bit upper, by budget delays, in May 2014 and early 2015 we have seen a pick up and have won several important awards. We are the largest group. We were awarded a $90 million contract for the Israeli Ministry of Defense for the maintenance of the Israeli Air Force F-16 array's avionics systems over 11 years. The project will also include the establishment of the new and cutting edge national maintenance center for the IAF's squadrons and bases. We were also awarded $100 million contract to procure six new firefighting aircraft and operate the firefighting squadron over 18. We recently achieved $54 million contract for the supply and maintenance of advanced electro-optics systems for the Israeli army. And finally, we won $117 million contract under which we will the supply the C41 systems to develop the next generation of systems under the Israeli Digital Army Project. A master program that computerizes fairly, early forces operations. In summary, our businesses has continued to perform well, looking ahead and we'll conduct to drive from these budget and value we have set with our operator with all new best and $1 billion ahead of where it was the same time last year. We are optimistic for positive year in 2015. With that, I will be happy to take you questions. Operator?

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 the continued support and interest in our company. Have a good day, and good-bye.