2023-05-01 12:30:08 ET
Elbit Systems (ESLT)
2022 Annual Report
May 01, 2023, 09:00 AM ET
Company Participants
Rami Myerson - Investor Relations
Butzi Machlis - President, Chief Executive Officer
Kobi Kagan - Chief Financial Officer
Yossi Gaspar - Senior Executive Vice President, Business Management
Conference Call Participants
Pete Skibitski - Alembic Global Advisors
Ellen Page - Jefferies
Ella Fried - Bank Leumi
Shahar Carmi - Psagot
Presentation
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the conference call to discuss Elbit Systems’ 2022 Annual Report. All participants are at present in 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.
I would now like to hand over the call to Rami Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead.
Rami Myerson
Thank you, Yanni. Good day everyone and welcome to the call today to discuss our 2022 Annual Report that includes disclosure on the new segment reporting structure. On the call with me today are Butzi Machlis, our President and CEO; Kobi Kagan, our CFO, and Yossi Gaspar, Senior EVP, Business Management.
Before we begin, I would like to point out that the Safe Harbor statement and the company’s annual report on Form 20-F file don May 1, 2023 also refers to the contents of this conference call. As we do on our regular quarterly conference calls, we will provide you with both our regular GAAP financial data as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the on-going business. You can find all the detailed GAAP financial data as well as the non-GAAP information and the reconciliations in the annual report.
On this call we will only discuss our financial results as of December 31, 2022. We plan to report Q1 2023 returns towards the end of May. We reported our earnings for 2022 on March 28, 2023 in our 2022 annual results press release. There are no changes to the financial information we disclosed in our 2022 annual report. However, we would want to call out our segment financial information included in the annual report which we will report going forward.
We will now begin with the presentation of Elbit Systems five segments followed by Kobi who will provide information on the financial results of the segments. We will then turn the call over to a question-and-answer session.
With that, I would like now to turn the call over to Butzi. Butzi, please.
Butzi Machlis
Thank you, Rami. The annual report that was filed today includes new information on the segmental reporting structure that Elbit has adopted and plan to disclose going forward. I would like to provide some background on our decision to update our disclosure. At our investor conference on 28th March, we presented the transformation that Elbit is implementing for the company with revenues of around $3.5 billion a few years ago, to a company with infrastructure in place to support annual revenues of $6 billion to $7 billion with improved profitability and cash generation.
This follows the strong growth in our backlog to a record level of more than US$15 billion, approximately 2.8 times our 2022 revenues. As part of our regular processes and the operational transformation, that also includes changes to our internal reporting as well as correspondence with our regulator, we decided to adapt the way we disclose our operations to the market.
This is also an opportunity to provide additional transparency to investors and analysts analysis. Elbit Systems report segment information in five segments beginning with the year ended December 31, 2022. The 2022 financial information we reported on each segment is compared retrospectively to the financial performance of each segment in 2021 and 2020. The segments are organized by a combination of the nature of products and services offered together with the geographical based segments, Elbit Systems of America or ESA.
Reflecting the way management manages the company, the U.S. is the largest difference market and we believe this structure is suitable to maximize the significant potential. The five reportable segments are Aerospace, which provides product and systems for urban platforms, unmanned air solutions, precision guided munition or PGM, sensors, aero structures, training and simulator systems, as well as commercial aviation systems.
C4I and cyber provide C4I systems, data links and radio communication systems and equipment, cyber intelligence, autonomous and Homeland Security Solutions. ISTAR and EW provide a wide range of electro optics and laser systems, as well as a range of electronic warfare and SIGINT systems. Land provide land based systems for armored and other military vehicles, artillery and mortar systems, munition for land, air, and sea applications including PGM, armed vehicle and other platforms mobility and protection Systems.
Elbit Systems of America or ESA provides products and systems solution principally to the U.S. Military, [indiscernible] military reserve, Homeland Security, medical implementation, and commercial aviation customers. Management encourages the segment to cooperate on a range of common projects performed by the company. It is common for the segment to provide the products to the same customers, either through joint projects or by marketing and offering combined and integrated solutions containing a variety of capabilities, products and technologies of the company's portfolio from various businesses or subsidiaries, all tailored to satisfy the customers or project specific requirements. Management also remains focused on the consolidated result as an important measure of performance, particularly given the high level of cooperation among the segments.
I will now hand over the call to Kobi to discuss the financial results of each segment for 2022. Kobi please.
Kobi Kagan
Thank you, Butzi. Hello everyone, and thank you for joining us today. I would like to reiterate Rami's comment that there are no changes to the consolidated financial results we reported on the 28th March in the annual report filed today. I will start my review with some of the highlights of our consolidated 2022 financial results and will then elaborate on the financial information of each segment.
Our consolidated revenues increased by 4% to $5.5 billion in 2022 from $5.3 billion in 2021. GAAP operating income was $368 million versus $419 million in 2021. Non-GAAP operating income in 2022 was $357 million or 6.5% of revenues compared with $451 million or 8.5% of revenues in 2021. As a reminder, GAAP and non-GAAP operating income in 2022 included expenses of approximately $62 million related to stock price linked compensation plans.
I will now review the financial results of each segment, and we note that our segmented disclosure of operational income is provided on a GAAP basis. Aerospace revenue increased by 9% to $1.73 billion in 2022 from $1.58 billion in 2021, mainly due to training and simulation and UAS space. Aerospace operating income in 2022 was $106.8 million and 6.2% of Aerospace segment revenues compared to $129.2 million and 8.2% of segment revenues in 2021. The $22.5 million decrease in operating income was mainly due to increased employee compensation expenses and negative project mix.
C4I and Cyber revenues increased by 8% to $678 million in 2022 from $625 million in 2021, mainly due to growth in radio and naval command and control system sales. C4I and Cyber operating income in 2022 was $49 million and 7.2% of C4I and Cyber segment revenues compared to $44.4 million and 7.1% of segment revenues in 2021. The $4.6 million increase in operating income was mainly due to the increase in revenues partially offset by increased employee compensation expenses.
ISTAR and EW revenues increased by 2% to $1.05 billion in 2022 from $1.03 billion [ph], million in 2021, mainly due to Armored vehicles night vision and target acquisition system sales. ISTAR and EW operating income in 2022 was $49.1 million and 4.7% of ISTAR and EW segment revenues compared to $66 million and 6.4% of segment revenues in 2021. The $16.9 million decrease in operating income was mainly due to increased employee compensation expenses and negative project mix.
Land revenues increased 5% to $1.17 billion 2022 from $1.12 billion in 2021, mainly due to airborne precision munition sales. Land operating income in 2022 was $28.6 million and 2.4% of Land segment revenues compared to $35.6 million and 3.2% of segment revenues in 2021. The $7 million decrease in operating income was mainly due to increased employee compensation expenses.
ESA revenues decreased by 2% to $1.46 billion in 2022 from $1.49 billion in 2021, mainly due to lower medical instrumentation and military of avionic sales, partially offset the growth of night vision sales and one additional quarter of Sparton sales compared to 2021. ESA operating income in 2022 was $75 million and 5.1% of ESA segment revenues compared to $124.3 million and 8.3% of segment revenues in 2021. The $49.3 million decrease in operating income was mainly due to the decrease in COVID-19 medical instrumentation sales that picked in 2021, supply chain disruptions and negative project mix.
Other operating income was $68.9 million in 2022 compared to $14.7 million in 2021, and included capital gains related to the sales of building and investments by subsidiaries in Israel and the UK, as well as facility evacuation grant received by subsidiary in Israel.
Going forward, we plan to continue to report revenues and operating income of each segment in our annual report. In our press release for the first, second and third quarter, we will provide revenues by segment, which reflect the way we manage our business. Revenues by segment in our press releases for the first, second, and third quarter will replace revenues by areas of operation that were previously provided. The revenue split by geographical revenues and areas of operation were also disclosed in our annual report. The areas of operations are a capability or platform-based classification that crossover the different segments.
An example of this are our EW Systems provided to the U.S. end customer through our ESA segment for installation on the US Air National Guard F16 aircraft. These are included in the urban systems area of operations, and they are reported as inter segment sales by the ISTAR and EW segment and as third party sales by the ESA segment.
And with that, we will be happy to take your questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question is from Pete Skibitski of Alembic Global. Please go ahead.
Pete Skibitski
Hi, good afternoon guys.
Butzi Machlis
Good afternoon.
Kobi Kagan
Hi, good afternoon.
Pete Skibitski
Guys, do you expect any cost savings or any revenue synergies from this new alignment? Butzi, maybe you could give us more color on how you think things could change as a result of this.
Butzi Machlis
As you know, Pete, we organized the company in a different structure recently and just for example, we combined the [indiscernible] division with the elbow division and we combined EW and the Electro Optic activities together under another division and it's part of the transformation we are performing in the company in order to gain more synergies, to reduce overheads and to be more effective and proactive to the market. And as I said, this is part of the transformation process the company is activating right now in order to reach the revenue level of between $6 billion to $7 billion in the coming years and to improve profitability and cash generation.
Pete Skibitski
That's great. Very helpful. And then you may have touched on this at the beginning, but in terms of the segment heads and their annual incentive compensation, how are you guys incenting them? Is it sales growth, margin growth anything else? I wasn't sure about that.
Yossi Gaspar
Hi, Pete. This is Yossi. How are you?
Pete Skibitski
Good, how are you?
Yossi Gaspar
Good, thanks. Regarding the incentive program we have for each individual starting from the highest level, executive level and down to our program managers and below, defined goals that vary from function to function, that include for example, cash generation, that include profitability, that include revenues, new business, quality criteria and so on. Every year we define the major highlights that are important for the company and accordingly we assign for each function the goals and we measure them of course, quarterly and we compensate them by year end usually with an advance by midyear.
Pete Skibitski
Okay. Okay, very helpful. Thank you for that. And just last one from me, question about the U.S. segment. I think you guys mentioned it was a 5.1% operating margin in 2022, which 5.1% I would say is below U.S. peers. And I know you guys have built ESA up over decades kind of one piece at a time, small pieces, initially to get a foothold. But, so my question is, do you guys expect to consider maybe some portfolio reshaping, maybe some portfolio pruning in the U.S.? Because I imagine there are some big margin differences among the businesses in in ESA for you. I imagine there are some lower margin businesses and some much higher margin businesses, and it strikes me that maybe there's an opportunity there longer-term.
Yossi Gaspar
Yes Pete, we see all our activities in the U.S. as core activities. We always adapt here and there and some of the activities. But in general, we -- all the activities we have in the U.S. are core to the company. The U.S. is very important, that's the largest market for Elbit today. And we see it as a strategic market for us. It's true that in 2022 now the OP or the profit was impacted by stock price linked compensation expenses, as well as lower medical infra instrumentation sales and by supply chain disruptions and the increase of electronic components.
I also want to remind all of us that we went live with the new ERP system in the U.S. which was not an easy task as well. But all of it and of course project mix as usual. So all of it is, most of it is behind us and I expect our numbers in the U.S. to improve.
Pete Skibitski
Okay, thanks so much for the color guys. I appreciate it.
Butzi Machlis
Thanks Pete.
Operator
The next question is from Ellen Page of Jefferies. Please go ahead.
Ellen Page
Hi, guys. Good morning.
Butzi Machlis
Good morning.
Ellen Page
Just following Pete's question on margins. If we look across the segment, you're in kind of the mid- to high single-digit range across segments. Where do you see the most opportunity for margin expansion? You used to talk about a 10% total company target long-term. Just as we think about margin improvement across the businesses to get there?
Butzi Machlis
I would expect all segments to grow to the neighborhood of 10%. That's a strategic -- or even above that, that's a strategic goal we have placed to the management and the things that they're all progressing to this direction. And the beauty of that is the portfolio, the wide portfolio we have on one hand and the graphical spread on the other hand. And the combination of these two creates stability. So altogether, I do -- all together, I think the company will reach the 10% quite soon. And as we've mentioned in the conference, which was held a month ago, 2022 was a year of transformation.
We are investing hundreds of million dollars in new facilities in Israel as well as in the U.S., in Germany, in the U.K. in order to convert the backlog to revenues and to profit this we are going to conclude implementation of new ERP system mid this year. And after that, we will all operate on one ERP, based on one standard system, which will help us also to create more effective and more efficient. And we reorganized the company recently in order to be more relevant to the market and more effective at what -- but this is true for all the segments.
Ellen Page
Okay. And is there any kind of normalized profitability to think about for the Aerospace segment? It looks like it was pretty depressed a couple of years ago, and I just want to understand like in 2020 and I just want to end where it was like in the previous decade.
Kobi Kagan
We have in 2020, Ellen, it's Kobi. We have in 2020 onetime write-off related to COVID-19, which was around $50 million on that segment. And we disclosed it in our disclosure. There is -- the noncash items are being disclosed by segment. So you can go and you can look and see the numbers out there in our new disclosure.
Ellen Page
Okay, I’ll hop back in the queue.
Kobi Kagan
Thank you.
Operator
The next question is from Ella Fried of Bank Leumi. Please go ahead.
Ella Fried
Good afternoon from me and good morning for all the people on the other side. And I would like to refer to say that it's a very, I think, very positive for the company and for the market. This sector information is really liking. And I have a question maybe already partly answered, but still maybe you could add something. I see that most of the sectors that were the weakest this year well, about 2% higher, really dramatically higher profit in the previous year 2021. So is it mostly this -- you mentioned lots of factors, but is it mostly the supply chain across the board, I mean if you sold choose one factor to clearly hurt should see signed aerospace. I don't know the ones that we were lagging.
Butzi Machlis
Hi, Ella. Good afternoon. There are several reasons for that. In 2022, we had stock price compensation expenses which affected the 2022 numbers. And actually, if you convert it to percentage, it's about 1.2% of profit, which was hurt by these expenses. On top of that, supply chain disruption and price increases of electronic components also affected us all over the company. So these two factors are common to the all segments, and they all affected us. And both of them will be less relevant or almost non-relevant in 2023.
Also want to remind us that as was presented in the conference, we have invested hundreds of millions of dollars in new facilities in order to support the transformation the company is going through. And this took place in 2021 in a small number, in 2022 in big numbers, and it will continue also in 2023 in order to -- in order to enable us to convert the new business with the backlog we have into revenue and the profit.
And I also want to say that the exchange rate in 2023 is much favorable as it used to be in 2022, and we see less pressure in the labor market. So I do not expect to invest so much in bonuses as we invested in 2022.
Ella Fried
Okay. Thank you. And I don't know if you are relating to current update, but the same trend that you showed us was the first annual report. Are they intact? Are they -- I mean are there any changes? I mean, for better onwards that you could mention, if you can mention them.
Butzi Machlis
The answer is very simple is no. We do not see any effect on our businesses. And we see a lot of potential ahead of us in Europe as well as in the Far East and in the U.S. and also here in Israel. So I do not see any impact on Elbit.
Rami Myerson
Ella, we report our results in a few weeks' time, and that's when we will refer to the current environment. We have this call on until the end of December 2022.
Ella Fried
Okay, thank you very much. Thank you for this conversation.
Butzi Machlis
Thank you.
Rami Myerson
Thank you, Ella.
Operator
[Operator Instructions] The next question is from Shahar Carmi of Psagot. Please go ahead.
Shahar Carmi
Hi, thank you for taking my question. Just a quick one for me, please. With regard to ESA is the fact that you now present it separately, means that at one point in the future, that subsidiary might go to an IPA, is it something that you even consider? Thanks.
Butzi Machlis
Hello, Shahar. Good afternoon. It's Butzi. The answer is no. We -- the synergy between all the businesses, all the segments are crucial to the success of the company. And as you can see, there are many transactions between them. So we see Elbit Systems of America as an integrated part of Elbit and it will continue to be this way. So we do not consider an IPO.
Shahar Carmi
Okay. Thank you.
Butzi Machlis
Thanks, Shahar.
Operator
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 1888-782-4291. In Israel, please call 03-925-5900. And internationally, please call 972-3925-5900. A replay of this call will also be available on the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?
Butzi Machlis
I would like to thank 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.
Operator
Thank you. This concludes the Elbit Systems Ltd. 2022 Annual Report Conference Call. Thank you for your participation. You may go ahead and disconnect.
For further details see:
Elbit Systems (ESLT) 2022 Annual Report Transcript