Elbit Systems Ltd (ESLT) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems Third Quarter 2018 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 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. Yossi Gaspar, Elbit's Chief Financial Officer.

Yossi 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 the safe harbor statement in the company's press release issued earlier today also refer to the contents of this conference call. With that, I would like now to turn the call to Yossi. Yossi, 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 the reconciliation in today's press release.

This quarter, we saw a 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 was 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 vehicle areas of operation.

In terms of the 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 DIRCM 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 a 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 last year. Taxes in the third quarter were $8.9 million or 12.6% of pretax income versus $14.6 million or 20% of pretax 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 a 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 shall now -- I shall now turn over the call over to Mr. Machlis, Elbit's Systems' CEO. Butzi, please.

Thank you, Yossi. We are pleased with our overall results, particularly the solid 12% 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 continued to perform well. In Asia-Pacific, we recently announced 2 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 country's navy for our Naval Remote Controlled Weapon Stations. Both these contracts represent our unique capacity enabling customers to draw on our exceptionally broad portfolio to meet their range of comprehensive operational needs.

In the U.K., we announced a GBP 10 million order with a maximum of potential GBP 4 million from the U.K. MOD for a battlefield management application. The ongoing and increasing demand for our solutions are clear indications of the growing operational importance of advanced and combat-proven capabilities that we have in all domains of operational engagement.

Maritime, land and air, Elbit has proven time and again that we can build our businesses successfully on both an 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 and value creation.

I will be happy to take your questions. Operator, please.

(Operator Instructions) The first question is from Pete Skibitski of Alembic Global.

Guys, can 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 since that will be the last year of the transition that we should see similar high single-digit, low double-digit type of growth as you complete that accounting transition?

This is Yossi. I would tell you the following. We are now building, every quarter, the 606 versus the 605 accounting and by the end of this year, by -- 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. Joseph, one more for you. I know you've 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've seen in the last couple of years and then this quarter, but I'm wondering if you can help us understand the timing on the receivables because I would think at some point over the next year or 2 that the receivables will reverse and maybe even your whole working capital account, such that working capital would be a source of cash rather than the use of cash?

Yes, I think you are correct. That was our strategy. I would say that we have recently declined a little bit on this approach and -- because we were successful in positioning ourselves where -- 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.

(Operator Instructions) The next question is from [Vineet Khera] of Citibank.

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?

What IMI? IMI?

Yes, IMI deal.

As was 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.

Okay. And any impact which we could see on the financials?

Once we close, we will prepare the starting balance sheet and if we -- in case we close within the next several days, then the fourth quarter will reflect, of course, partially on a proportional basis, the performance of IMI in the remaining period of 2018, probably somewhere 4 to 6 weeks of performance. That is what we expect to happen.

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) 782-4291. In Israel, please call 039-25-5927. And internationally, please call 9723-925-5927. 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 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 2018 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.