Defense industry company Elbit Systems finished the third quarter of 2019 with higher revenue and orders backlog, but a decline in profit margins, attributable mainly the mix of projects in the quarter. Elbit Systems posted $1.1 billion in revenue in the third quarter, 23% more than in the third quarter of 2018. Revenue totaled $3.2 billion in the first nine months of the year, up 22.3%, compared with the corresponding period last year. Revenue growth is attributable to the acquisition of IMI Systems, completed exactly one year ago during the fourth quarter of 2018.
A geographic breakdown of revenue shows that revenue from the US increased and accounted for 30% of Elbit Systems' revenue in the third quarter, compared with 22.5% in the Asian Pacific region, 22.3% in Israel, and 17.7% in Europe. Elbit Systems president and CEO Bezhalel Machlis said, "This is a very significant figure, which is part of a long-term strategy. Defense budgets are going up all over the world, and Elbit Systems operates in many countries with a broad portfolio. We want to take advantage of the global increase in defense budgets to build positions in countries that will show results years from now, and this requires investment. Our emphasis is on the US, Western Europe and NATO countries, and Australia. We are continuing our activity at some level of intents in other places, of course." Examples of success in this strategy cited by Machlis include the avionics contract for hundreds of planes in the US and a win in a tender for communications systems for the Swiss army.
"Globes": What about the Israeli market?
Machlis: "It continues to be an important market because of the connection with the Ministry of Defense, development of the future systems, and the fact that most of our engineering labor force is there. At the same time, most of our sales are not in Israel."
According to GAAP accounting rules, Elbit Systems had a $72.1 million net profit attributable to shareholders in the third quarter, compared with $64.1 million in the corresponding quarter last year. Profit totaled $177 million in the first three quarters of the year, down 14.1%, compared with the corresponding period last year.
Elbit Systems' third quarter non-GAAP net profit was less than in the third quarter of 2018, with its gross profit ratio down from 29.1% to 26.3%, and its operating profit margin fell from 9.6% to 7.3%. Non-GAAP net profit totaled $58.7 million, down from $67.3 million in the third quarter of last year. Non-GAAP net profit was up 2.8% to $189 million in the first nine months of 2019. Commenting on the decline in profit margins in the third quarter, Machlis said, "This resulted from the mix of projects in the quarter, but this is not a long-term situation. We are taking steps to boost our long-term effectiveness and performance. In addition, IMI began at a lower point than Elbit Systems, and we are proceeding there according to our plan, which is advancing faster than expected. We are making a profit at IMI. Progress is being made, but it takes time."
Following its acquisition of IMI, Elbit Systems recently made another acquisition - Harris Night Vision for $350 million. Machlis does not rule out further acquisitions, saying, "Our balance sheet is strong, and Elbit Systems' strategy is to look for two types of acquisitions: technological acquisitions that supplement our portfolio, and acquisitions that create market positions." The acquisition of Harris Night Vision was completed towards the end of the third quarter, and did not have a significant effect on results in the quarter.
Elbit Systems' cash flow in the first nine months of 2019 was minus $140 million compared with minus $20.3 million in the corresponding period in 2018 and a positive $192 million cash flow in all of 2018. Elbit Systems CFO Joseph Gaspar explained, "The cash flow reflects the increase in the working capital needed for getting ready for an increase in sales in the following quarters. This is the inventory element. The second element is customers. We expect to collect the money from customers. It's a little more difficult in Israel because of the decisions by the Ministry of Finance and the Ministry of Defense. We'll get the money. It will take time, but it will come. The money from overseas customers always comes; it just a matter of time."
Does this mean that Elbit Systems is being affected by the lack of a government and a budget in Israel?
"To some extent."
Elbit Systems is traded on Nasdaq and the Tel Aviv Stock Exchange at a $7.2 billion market cap, following a 34% rise in its share price over the past year.
Published by Globes, Israel business news - en.globes.co.il - on November 26, 2019
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