SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the Month of March 2005
-----------------------
ELBIT SYSTEMS LTD.
(Translation of Registrant's Name into English)
Advanced Technology Center, P.O.B. 539, Haifa 31053, Israel
(Address of Principal Corporate Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
|X| Form 20-F |_| Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): |_|
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a
Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): |_|
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a
Form 6-K submitted to furnish a report or other document that the registrant
foreign private issuer must furnish and make public under the laws of the
jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
|_| Yes |X| No
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______________
Attached hereto as Exhibit 1 and incorporated herein by reference is
the Registrant's press release, dated March 15, 2005.
Attached hereto as Exhibit 2 and incorporated herein by reference is
the Registrant's Management Report with respect to the results of operations of
the Registrant for the year ended December 31, 2004.
Attached hereto as Exhibit 3 and incorporated herein by reference is
the Registrant's consolidated audited financial statements for the year ended
December 31, 2004.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELBIT SYSTEMS LTD.
(Registrant)
By: /s/ Ilan Pacholder
-------------------
Name: Ilan Pacholder
Title: Corporate Secretary
Dated: March 15, 2005
EXHIBIT INDEX
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Exhibit No. Description
----------- -----------
1. Press Release, dated March 15, 2005.
2. Management's Report.
3. Financial Statements.
Exhibit 1
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[LOGO OF ELBIT SYSTEMS]
Earnings Release
ELBIT SYSTEMS REPORTS FOURTH QUARTER
AND YEAR-END RESULTS FOR 2004
Record Revenues, Net Earnings and Order Backlog
o 22.9% Increase in Backlog of Orders to $2.15 billion
o 4.7% Increase in Annual Consolidated Revenues to $940 million
o 15.3% Increase in Annual Consolidated Net Earnings to $53 million
EPS $1.36 excluding non-cash effect of option plan
Haifa, Israel, March 15, 2005 - Elbit Systems Ltd. (the "Company") (NASDAQ:
ESLT), the international defense electronics company, today reported its
consolidated results for the fourth quarter and year-ended December 31, 2004.
The Company's backlog of orders as of December 31, 2004 reached $2.15 billion,
as compared with $1.75 billion at the end of 2003. 66% of the backlog relates to
orders outside of Israel. Approximately 74% of the Company's backlog as of
December 31, 2004 is scheduled to be performed during 2005 and 2006.
Consolidated revenues for the year ended December 31, 2004 increased by 4.7% to
$940 million from $898 million in 2003.
Consolidated revenues for the fourth quarter of 2004 increased by 3.1% to $270.8
million from $262.8 million in the corresponding quarter in 2003.
Consolidated net earnings for the year ended December 31, 2004 increased by
15.3% to $53 million, as compared to $45.9 million in 2003. Diluted earnings per
share in ("EPS") 2004 were $1.29, as compared with $1.14 in 2003. Excluding the
non-cash effect of the Company's option plan, EPS in 2004 was $1.36, as compared
to $1.24 in 2003.
Consolidated net earnings for the fourth quarter of 2004 were $14.1 million,
compared to $12.5 million in the same period in 2003. Diluted EPS for the fourth
quarter of 2004 were $0.34, as compared with $0.31 for the fourth quarter of
2003. Excluding the non-cash effect of the Company's option plan, EPS in the
fourth quarter of 2004 was $0.35 as compared to $0.34 in the fourth quarter of
2003.
During the fourth quarter of 2004, the Company adopted the fair value
recognition provision of SFAS No. 123, effective January 1, 2004. The Company
uses the Black-Scholes-Merton formula to estimate the fair value of stock
options granted to employees. Compensation cost is recorded over the vesting
period on a straight-line basis. Following the adoption of SFAS 123 the
financial result will no longer be effected by the impact of changes in the
Company's share price on employees stock based compensation.
Gross profit for the fourth quarter of 2004 was $72.6 million, as compared with
gross profit of $54.1 million in the fourth quarter of 2003, and the gross
profit margin in the fourth quarter of 2004 was 26.8%, as compared with 20.6% in
the fourth quarter of 2003.
The Company produced an operating cash flow of $81.5 million in 2004.
The President and CEO of Elbit Systems, Joseph Ackerman, commented: "We are
pleased to report our ninth consecutive year of increased revenues, net profit
and backlog of orders. 2004 was a very important year for Elbit Systems in terms
of key programs, with the win of the Digital Army Program in Israel and the
selection for the Watchkeeper Program in the UK together with Thales. On the
acquisitions side, we signed an agreement to acquire the controlling
shareholdings of Tadiran Communications and Elisra. We believe that the
investments made in the development of new technologies, and the strategic steps
taken in 2004, lay a solid foundation for the continued development of Elbit
Systems in accordance with our long-term business plan."
The Board of Directors has declared a dividend of $0.13 per share for the fourth
quarter of 2004. The dividend will be paid on April 18, 2005, net of taxes and
levies, at the rate of 20.58%. The record date of the dividend is April 5, 2005.
The total dividend to be paid for 2004 is $2.17 per share.
Conference Call
The Company will be hosting a webcast and conference call today, Tuesday, March
15th at 10.30am EST. On the call, management will review and discuss the
results, and will be available to answer investor questions.
To participate, please access Elbit Systems' investor relations web-site at
http://www.elbitsystems.com. An online replay will be available from 2 hours
after the call ends, and will be available for 30 days.
Alternatively, please call one of the teleconferencing numbers that follow.
Please begin placing your calls at least 5 minutes before the conference call
commences. If you are unable to connect using one of the toll-free numbers,
please try the international dial-in number.
US Dial-in Numbers: 1 866 860 9642
UK Dial-in Number: 0 800 917 5108
ISRAEL Dial-in Number: 03 918 0610
INTERNATIONAL Dial-in Number: +972 3 918 0610
At: 10:30am Eastern Standard Time, 7:30am Pacific Standard Time, 3:30pm
Greenwich Mean Time or 5:30pm Israel Time.
In addition, a replay of the call will be available by telephone starting two
hours after the call ends until Thursday, March 17, 10:30 am EST. To access the
replay please dial:
1-877-332-1104 (US) or +972-3-925-5945 (international and Israel)
About Elbit Systems Ltd.
Elbit Systems Ltd. is an international defense electronics company engaged in a
wide range of defense-related programs throughout the world, in the areas of
aerospace, ground and naval systems, command, control, communications,
computers, intelligence, surveillance and reconnaissance (C4ISR) and advanced
electro-optic technologies. The Company focuses on the upgrading of existing
military platforms and developing new technologies for defense applications. For
further information, please visit the Company web site at www.elbitsystems.com
Company Contact: IR Contact:
Ilan Pacholder Ehud Helft / Kenny Green
V.P. Finance & Capital Markets
Corporate Secretary
Elbit Systems Ltd GK International
Tel: +972-4 831-6632 Tel: 1-866-704-6710
Fax: +972-4 831-6659 Fax: + 972 - 3 - 607 - 4711
E-mail: pacholder@elbit.co.il E-mail: Kenny@gk-biz.com
E-mail: Ehud@gk-biz.com
STATEMENTS IN THIS PRESS RELEASE WHICH ARE NOT HISTORICAL DATA ARE
FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
OR OTHER FACTORS NOT UNDER THE COMPANY'S CONTROL, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM THE RESULTS, PERFORMANCE OR OTHER EXPECTATIONS IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DETAILED IN THE COMPANY'S PERIODIC FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
(FINANCIAL TABLES TO FOLLOW)
ELBIT SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS
(In thousand of US Dollars)
December 31 December 31
2004 2003
--------- ---------
Audited Audited
Assets
Current Assets:
Cash and short term deposits 34,847 76,846
Trade receivable and others 267,151 251,644
Inventories, net of advances 249,041 249,225
--------- ---------
Total current assets 551,039 577,715
Affiliated Companies & other Investments 62,886 38,223
Long-term receivables & others 85,100 78,565
Fixed Assets, net 244,288 229,221
Other assets, net 95,987 100,012
--------- ---------
1,039,300 1,023,736
========= =========
Liabilities and Shareholder's Equity
Current liabilities 378,450 378,731
Long-term liabilities 221,810 188,811
Minority Interest 4,340 4,115
Shareholder's equity 434,700 452,079
--------- ---------
1,039,300 1,023,736
========= =========
ELBIT SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF INCOME
(In thousand of US Dollars, except for per share amounts)
For the Year Ended Three Months Ended
December 31 December 31
---------------------- ----------------------
2004 2003 2004 2003
------- ------- ------- -------
Audited Unaudited
Revenues 939,925 897,980 270,775 262,757
Cost of revenues 689,626 672,711 198,198 208,649
------- ------- ------- -------
Gross Profit 250,299 225,269 72,577 54,108
Research and development, net 66,846 54,919 23,277 11,913
Marketing and selling 69,912 69,943 19,190 19,247
General and administrative 47,832 46,077 12,876 12,153
------- ------- ------- -------
Total operating expenses 184,590 170,939 55,343 43,313
------- ------- ------- -------
Operating income 65,709 54,330 17,234 10,795
Financial expenses, net (5,852) (4,870) (2,974) (1,403)
Other income (expenses), net 770 53 831 542
------- ------- ------- -------
Income before income taxes 60,627 49,513 15,091 9,934
Provisions for income taxes 15,219 11,334 3,507 832
------- ------- ------- -------
45,408 38,179 11,584 9,102
Company's share of partnerships and affiliated
Companies income, net 7,765 7,209 3,180 3,271
Minority rights (180) 557 (639) 101
------- ------- ------- -------
Net income 52,993 45,945 14,125 12,474
======= ======= ======= =======
Earnings per share
Basic net earnings per share 1.33 1.18 0.35 0.32
======= ======= ======= =======
Diluted net earnings per share 1.29 1.14 0.34 0.31
======= ======= ======= =======
Exhibit 2
---------
Elbit Systems Ltd.
------------------
Management's Report
-------------------
For the Year Ended December 31, 2004
------------------------------------
This report should be read together with the audited consolidated
financial statements and related notes of Elbit Systems Ltd. ("Elbit
Systems" and together with its subsidiaries, the "Company" or the
"Group"), for the year ended December 31, 2004 and the Company's Form
20-F for the year ended December 31, 2003, filed by the Company with
the U.S. Securities and Exchange Commission ("SEC") and with the
Israeli Securities Authority.
Forward looking statements with respect to the Company's business,
financial condition and results of operations in this document are
subject to risks and uncertainties that could cause actual results to
differ materially from those contemplated in such forward looking
statements, including, but not limited to, product demand, pricing,
market acceptance, changing economic conditions, risks in product and
technology development, the effect of the Company's accounting policies
as well as certain other risk factors which are detailed from time to
time in the Company's SEC filings.
A. Executive Overview
------------------
Business Description
--------------------
Elbit Systems operates in the area of upgrading existing airborne,
ground and naval defense platforms and is engaged in projects involving
the design, development, manufacture and integration of advanced
integrated defense systems, electronic systems, electro-optic systems
and products and software intensive programs and products for the
defense and homeland security sectors. In addition, the Company
provides support services for such platforms, systems and products.
The Company is engaged in leading projects in Israel and worldwide, in
areas such as air, ground and naval Command, Control, Communication,
Computers, Intelligence, Surveillance and Reconnaissance ("C4ISR")
systems, digital maps, night vision systems, pilot helmet mounted
systems, display and data processing systems, unmanned air vehicles
("UAVs"), computerized simulators, communication systems, thermal
imaging products, laser products, optical systems for space
applications, airborne reconnaissance systems, optic communication
systems and products, security systems and products, surveillance
products and systems and electric drive systems.
The Company provides a wide range of logistic support services,
including operation of pilot training services for the Israeli Air
Force on a private financing initiative ("PFI") basis. Several of the
Group's companies also provide advanced engineering and manufacturing
services to various customers, utilizing their significant
manufacturing capabilities. The Company often cooperates with
industries in Israel and in various other countries.
The Company tailors and adapts its technologies, integration skills,
market knowledge and battle-proven systems to each customer's
individual requirements in both existing and new platforms. By
upgrading existing platforms with advanced electronic and electro-optic
technologies, the Company provides customers with cost-effective
solutions, and its customers
1
are able to improve their technological and operational capabilities
within limited defense budgets.
The Company operates in a competitive environment for most of its
projects, systems and products. Competition is based on product and
program performance, price, reputation, reliability, maintenance costs
and responsiveness to customer requirements. This includes the ability
to respond to rapid changes in technology. In addition, its competitive
position sometimes is affected by specific requirements in particular
markets.
Recent Events
-------------
o On December 13, 2004, the Company announced that it signed an
agreement with the Israeli Ministry of Defense ("IMOD") for
the Digital Army Program ("DAP") in an amount of approximately
$200 million. The DAP, which will also include an additional
material amount of U.S. Military Funding ("FMF"), will be
performed over a ten-year period.
o On January 11, 2005, the Company reported that its subsidiary
Elop has recently been selected to supply advanced Imagery
Intelligence Systems ("IMINT") to various customers at a total
value of over $100 million.
o On January 26, 2005, the Company announced that its U.S.
subsidiary has been awarded a follow-on contract to supply
Enhanced Vision Systems ("EVS") to Gulfstream for all their
large cabin aircraft models. The multi-year contract is valued
at approximately $20 million.
o On February 16, 2005, the Company reported that it has been
awarded a contract, valued at over $30 million, to provide the
Israeli Air Force with a command and control mission
management systems for airborne platforms.
Acquisition of Tadiran Communication Ltd. shares
------------------------------------------------
On December 27, 2004, the Company announced that it reached an
agreement with Koor Industries Ltd. ("Koor") to purchase all of Koor's
approximately 32% holdings in Tadiran Communications Ltd. ("Tadiran").
This purchase will be made concurrently with Koor's purchase of
approximately 9.8% of Elbit Systems' shares from Federmann Enterprises
Ltd. ("Federmann") based on agreements reached between Federmann and
Koor. The transaction will be executed in two stages as described
below.
In the first stage the Company will purchase from Koor approximately
13.8% of Tadiran's shares and Koor will purchase from Federmann
approximately 5.3% of the Company's shares. The Company already holds,
as of March 1, 2005, approximately 6% of Tadiran's shares acquired
through prior purchases on the market, and therefore, following
completion of the first stage will own approximately 20% of Tadiran's
shares. Koor will support the Company's appointment of the greater of 3
members or 20% of Tadiran's board of directors, and Federmann will
support Koor's appointment of a member of the Company's board of
directors.
2
In the second stage the Company will purchase the balance of Koor's
holdings in Tadiran. Koor will purchase an additional approximately
4.5% of the Company's shares from Federmann and Federmann will support
Koor's appointment of an additional member to the Company's board,
including the Board's Vice Chairman. The second stage is subject to
Koor completing the sale to Tadiran of Koor's 70% holdings in Elisra
Electronic Systems Ltd. ("Elisra") on agreed upon terms. Subject to
those terms the Company agreed to support the purchase of the Elisra
shares by Tadiran at Tadiran's general shareholders meeting. In the
event that the sale of the Elisra shares to Tadiran is not made within
16 months of the signing of the transaction agreements, then Koor and
the Company will have equal representation on Tadiran's board of
directors, and an agreement regarding joint control of Tadiran will
enter into effect between the Company and Koor.
The Company will purchase from Koor the 32% of the Tadiran shares at a
price of $37 per share, resulting in a total purchase price of
approximately $146 million. Koor will purchase from Federmann the 9.8%
of the shares in the Company at a price of $24.70 per share, resulting
in a total purchase price of approximately $99 million.
Under the Koor-Federmann shareholders agreement, which will become
effective upon the completion of the first stage of the Koor-Federmann
transaction, Koor will obtain certain tag along rights in the event of
Federmann's sale of shares in the Company, and Koor will be subject to
certain restrictions on the transfer of its shares in the Company.
Also, Koor has agreed to vote at general shareholders meetings of the
Company in accordance with Federmann's instructions, with certain
exceptions, and Koor will receive certain additional non-transferable
rights.
On January 5, 2005, the Company's Audit Committee and board of
directors approved the agreements with Koor relating to the Company's
purchase of Koor's shares in Tadiran. On February 28, 2005, the
Company's shareholders at an extraordinary general shareholders meeting
approved the agreement with Koor relating to the Company's purchase of
Koor's shares in Tadiran. The parties are currently in the process of
obtaining the remaining approvals for the transaction.
The Company's Proxy Statement dated February 7, 2005, filed with the
SEC, contains a detailed description of the transaction and the related
agreements.
Financial Highlights
--------------------
The Company's revenues increased by 4.7% and reached $939.9 million in
2004. The main increase in revenues was in the electro-optics area of
operation.
The Company's net earnings increased by 15.3% and were $53 million. The
diluted earnings per share ("EPS") were $1.29 in 2004, as compared to
$1.14 in 2003. The net earnings and net earnings per share were
effected by a non-cash expense related to the Company's stock option
plan. Excluding that effect, net earnings and diluted net earnings per
share in 2004 were $55.7 million and $1.36, respectively, as compared
to $49.7 million and $1.24 in 2003.
Effective January 1, 2004, the Company adopted the fair value
recognition provision according to SFAS No. 123. The Company uses the
Black-Scholes-Merton formula to estimate the fair value of stock
options granted to employees at grant date. Compensation cost is
recorded over the vesting period on a straight-line basis.
The Company's backlog increased by 22.9% and as of December 31, 2004
reached $2.15 billion, as compared to $1.75 billion as of December 31,
2003.
3
The Company's cash flow generated from operations in the year ended
December 31, 2004 was $81.5 million, as compared to $91.4 million in
the year ended December 31, 2003.
The Board of Directors declared a dividend of $0.13 per share for the
last quarter of 2004.
B. Market Trends
-------------
Trends in the defense electronics and homeland security markets in
which the Company operates have been impacted by the nature of recent
conflicts and terrorism activities throughout the world. Lessons
learned in Operation Iraqi Freedom, Afghanistan, and the attacks of
September 11, 2001, among other events, have increased the focus of
defense forces on low intensity conflicts and homeland security.
In the defense electronics market, there is an increasing demand for
products and systems in the areas of C4ISR. Accordingly, while the
Company continues to perform platform upgrades, more emphasis is being
placed on C4ISR, including information systems, intelligence gathering,
situational awareness, precision guidance, all weather and day/night
operations, border and perimeter security, UAV's, space and satellite
based defense capabilities and homeland security systems.
The Company believes that its core technologies and abilities will
enable it to take advantage of many of these emerging trends, as well
as to continue to participate in the "Current Force" legacy operations
of its customers.
In recent years consolidations in the defense industry have affected
competition. This has decreased the number but increased the relative
size and resources of the Company's competitors. The Company adapts to
evolving market conditions by adjusting its business strategy to
changing defense market conditions. It also anticipate continued
competition in defense markets due to declining defense budgets in many
countries.
The Company believes in its ability to compete on the basis of its
systems development and technological expertise, combat-proven
performance and policy of offering customers overall solutions to
technological, operational and financial needs.
C. Backlog of Orders
-----------------
The Company's backlog of orders as of December 31, 2004 reached $2,154
million, of which 66% were for orders outside Israel. The Company's
backlog as of December 31, 2003 was $1,752 million, of which 63% were
for orders outside Israel. The backlog includes only part of the DAP
contract signed with the IMOD in December 2004 (see "Recent Events"
above).
Approximately 74% of the Company's backlog as of December 31, 2004 is
scheduled to be performed during 2005 and 2006. The majority of the 26%
balance is scheduled to be performed in 2007 and 2008.
4
D. Operating Subsidiaries and Affiliated Entities
----------------------------------------------
o Elop Electro-Optics Industries Ltd. ("El-Op") - a wholly-owned
subsidiary registered in Israel, is engaged in the field of
advanced electro-optical products for defense, homeland
security and civil applications. El-Op's main areas of
activity include development and production of thermal imaging
products, laser products, optical systems for space
applications, airborne reconnaissance systems, optical
communications systems, fire control systems for combat
vehicles, homeland security products and other systems for
defense applications.
o EFW Inc. ("EFW") - a wholly-owned subsidiary registered in the
United States, serves as the base for the Group's activities
in the United States, mainly in the area of development,
production and maintenance of advanced defense products and
systems.
o Vision Systems International LLC ("VSI") - an affiliated
company in the United States, owned in equal parts each of EFW
and Rockwell Collins Inc., is engaged in the area of helmet
mounted systems primarily for fighter aircraft.
o Cyclone Aviation Products Ltd. ("Cyclone") - a wholly-owned
subsidiary registered in Israel, provides logistic support and
maintenance services for aircraft and helicopters and
manufactures structure components and sub-assemblies for
aircraft.
o Silver Arrow LP - a wholly-owned limited partnership
registered in Israel, is engaged in the business of UAV
systems and products.
o Ortek Ltd. ("Ortek") - a wholly-owned subsidiary registered in
Israel, is engaged mainly in the area of security products and
systems and night vision equipment.
o Kinetics Ltd. ("Kinetics") - a 51%-owned subsidiary registered
in Israel, is involved mainly in the development and
production of systems and components for combat vehicles.
o Semi-Conductor Devices ("SCD") - an Israeli affiliated
partnership held in equal part by each of the Company and
Rafael Armaments Development Authority Ltd. ("Rafael"), is
engaged in the development and production of infrared
detectors and laser diodes.
o Opgal Optronic Industries Ltd. ("Opgal") - an Israeli
affiliated company, owned 50.1% by the Company and 49.9% by
Galram Technologies Ltd., a wholly-owned subsidiary of Rafael,
is engaged mainly in the area of thermal imaging systems for
commercial applications.
o European subsidiary - a wholly-owned subsidiary registered in
Belgium, is involved mainly in development, manufacturing and
support of electro-optical products for defense and space
markets. The results of this subsidiary's operations have been
included in the Company's results from the third quarter of
2003.
5
The Company has holdings, directly and indirectly, in several
relatively small companies in various countries. These companies are
engaged mainly in the manufacturing, marketing and servicing of defense
avionics and electronics as well as defense related software.
The Company also has holdings, directly and indirectly, in several
non-defense technology spin-off companies whose activities are based on
technologies that were developed by the Company. The spin-off companies
are involved primarily in the areas of medical equipment, optical
communications and space satellites.
The Company evaluates investments in affiliates, partnerships and other
companies, and when relevant factors indicate other than temporary
decline in the fair value of the investments below their carrying
value, the Company adjusts the investment to the estimated fair value.
The value of these companies is subject to ongoing changes resulting
from their business conditions.
E. Critical Accounting Policies and Estimates
------------------------------------------
The Company's significant accounting policies are described in Note 2
to the audited consolidated financial statements for the year ended
December 31, 2004.
The Company's results of operations and financial condition are based
on the preparation of consolidated financial statements in conformity
with generally accepted accounting principles in the U.S. ("U.S.
GAAP"). The preparation of the consolidated financial statements
requires management to select accounting policies for critical
accounting areas as well as estimates and assumptions that affect the
amounts reported in the consolidated financial statements. Significant
changes in assumptions and/or conditions and changes in critical
accounting policies could materially impact the Company's operating
results and financial condition.
The most critical accounting policy applicable to the Company relates
to revenue recognition as described below.
The Company generates revenues from long-term contracts involving the
design, development, manufacture and integration of defense systems and
products and providing support and services for such systems and
products.
Revenues from long-term contracts are recognized based on Statement of
Position 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts" ("SOP 81-1") according to which
revenues are recognized on the percentage of completion basis.
Sales under long-term fixed-price contracts which provide for a
substantial level of development efforts in relation to total contract
efforts are recorded using the cost-to-cost method of accounting as the
basis to measure progress toward completing the contract and
recognizing revenues. According to this method, sales and profits are
recorded based on the ratio of costs incurred to estimated total costs
at completion. In certain circumstances, when measuring progress toward
completion, the Company considers other factors, such as achievement of
performance milestones.
Sales and anticipated profit under long-term fixed-price contracts that
involve both development and production are recorded on a percentage of
completion basis, using the cost-to-cost method and units-of-delivery
method as applicable. In certain circumstances, when measuring progress
6
toward completion under the development portion of the contract, the
Company considers other factors, such as achievement of performance
milestones.
Estimated contract profit is included in earnings in proportion to
recorded sales.
The percentage-of-completion method of accounting requires management
to estimate the cost and gross profit margin for each individual
contract. Estimated gross profit or loss from long-term contracts may
change due to changes in estimates resulting from differences between
actual performance and original estimated forecasts. Such changes in
estimated gross profit are recorded in results of operations when they
are reasonably determinable by management, on a cumulative catch-up
basis. Anticipated losses on contracts are charged to earnings when
determined to be probable.
Sales under cost-reimbursement-type contracts are recorded as costs are
incurred. Applicable estimated profits are included in earnings in the
proportion that incurred costs bear to total estimated costs.
Amounts representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and
realization is probable. Penalties and awards applicable to performance
on contracts are considered in estimating sales and profit rates and
are recorded when there is sufficient information to assess anticipated
contract performance.
The Company believes that the use of the percentage of completion
method is appropriate as the Group has the ability to make reasonably
dependable estimates of the extent of progress towards completion,
contract revenues and contract costs. In addition, contracts executed
include provisions that clearly specify the enforceable rights
regarding services to be provided and received by the parties to the
contracts, the consideration to be exchanged and the manner and terms
of settlement. In all cases the Group expects to perform its
contractual obligations, and its customers are expected to satisfy
their obligations under the contract.
In cases where the contract involves the delivery of products and
performance of services, the Company follows the guidelines specified
in EITF 00-21, "Revenue Arrangements with Multiple Deliveries" in order
to allocate the contract fees between the products accounted for under
SOP 81-1 and the services accounted for under SAB 104. The services
are recognized throughout the service period.
F. Impairment of Goodwill and Other Long-Lived Assets
--------------------------------------------------
Consistent with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," goodwill is not
amortized and is tested at least annually for impairment. According to
SFAS 142, an impairment loss will be recognized when the carrying value
of the goodwill is not recoverable and exceeds its fair value.
The methods commonly used to value a closely held company are the
Income, Market and Cost approaches. The Company's reported units fair
market value was estimated using two valuation methodologies: the
Income Approach and the Market Approach.
As of December 31, 2004, the Company's goodwill amounted to $32.8
million. The Company tested its goodwill as of December 31, 2004, and
concluded that no assessment of impairment loss was necessary.
7
Consistent with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company evaluates long-lived assets
for impairment and assesses their recoverability based upon anticipated
future cash flows. As of December 31, 2004, the Company's long-lived
assets amounted to $307.4 million, including $63.1 million in
intangible assets, and the Company concluded that no impairment loss
was necessary.
Should future impairment tests made by the Company determine that
impairment has occurred in the value of the Company's goodwill or
long-lived assets, such impairment may have a material effect on the
financial results of the Company in the period in which the impairment
is determined.
G. Sarbanes-Oxley Act
------------------
According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, the
Company is required to include in its annual report for the fiscal year
ending December 31, 2006 an assessment, as of the end of the fiscal
year, of the effectiveness of its internal controls over financial
reporting. (On March 2, 2005, the SEC extended the period for
implementation of Section 404 by Foreign Private Issuers such as the
Company from 2005 until 2006.)
During 2004, the Company took steps to assure compliance of its
documentation and internal controls over financial reporting with the
guidelines stipulated in the Sarbanes-Oxley Act. The Company plans to
continue with these steps during 2005 and 2006.
H. New Accounting Standards
------------------------
The significant accounting policies applied in the preparation of these
statements are identical to those applied in preparation of the latest
annual financial statements except as indicated below:
On December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004) ("123(R)"), Share-Based
Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees", and amends FASB
Statement No. 95, Statement of Cash Flows. Generally, the approach in
Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
The Company adopted the fair-value-based method of accounting for
share-based payments effective January 1, 2004 using the "modified
prospective method" described in FASB Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. The Company does
not anticipate that adoption of Statement 123(R) will have a material
impact on its results of operations or its financial position.
8
I. Stock Based Compensation
------------------------
Up until December 31, 2003, the Company followed Accounting Principles
Board Opinion No. 25 ("APB 25") "Accounting for Stock Issued to
Employees" and FASB Interpretation No. 44 ("FIN 44") "Accounting for
Certain Transactions Involving Stock Compensation" in accounting for
its employee stock option plans. The change in the Company's share
price affected the Company's financial results due to the impact of the
employee stock option plan adopted in 2000. The plan is comprised of
options for 5 million shares, divided into options to purchase up to
2.5 million shares and an additional 2.5 million "phantom" options. The
phantom options grant the option holders a number of shares
corresponding to the benefit component of the options exercised, as
calculated on the exercise date, in consideration for their par value
only, and are considered as a variable option plan.
Under APB No. 25, the total compensation is computed periodically
according to the change in the share price and amortized as
compensation expense, or income, based on the vesting period of the
options. The effect was allocated mainly to the Company's cost of goods
sold and general and administrative expenses, with smaller amounts
allocated to R&D and sales and marketing expenses. The amounts of the
expenses related to the stock option compensation are included in the
"Non-U.S. GAAP Disclosure" below.
As noted above, effective January 1, 2004, the Company adopted the fair
value recognition provision of SFAS No. 123. The Company uses the
Black-Scholes-Merton formula to estimate the fair value of stock
options granted to employees. Compensation cost is recorded over the
vesting period on a straight-line basis.
Following the adoption of SFAS No. 123, the financial results will no
longer be materially effected by the impact of changes in the Company's
share price on employee stock based compensation.
The following pro forma information shows the impact of SFAS No. 123,
had it been in effect in 2002 and 2003:
Year ended December 31,
-------------------------------------------
2004 2003 2002
---- ---- ----
Net income as reported $ 52,993 $ 45,945 $ 45,113
========= ======== ==========
Pro forma net income $ 52,993 $ 46,782 $ 41,416
========= ======== ==========
Net earnings per share:
Diluted net earnings per share as reported $ 1.29 $ 1.14 $ 1.13
========= ======== ==========
Pro forma diluted net earnings per share $ 1.29 $ 1.16 $ 1.04
========= ======== ==========
9
As result of the adoption of SFAS No. 123 from January 1, 2004, the net
income and diluted net earnings per share of the three previous
quarterly reports of 2004 are restated as follows:
Q1/04 Q2/04 Q3/04 Total
----- ----- ----- -----
Net income as reported $ 12,727 $ 11,311 $ 13,708 $ 37,746
========== ======== ======== ==========
Net income according to SFAS No. 123 $ 12,251 $ 13,301 $ 13,316 $ 38,868
========== ======== ======== ==========
Diluted net earnings per share as reported $ 0.31 $ 0.28 $ 0.33 $ 0.92
========== ======== ======== ==========
Diluted net earnings per share according to
SFAS No. 123 $ 0.30 $ 0.33 $ 0.32 $ 0.95
========== ======== ======== ==========
J. Off Balance Sheet and Other Long-Term Arrangements and Commitments
------------------------------------------------------------------
1. In connection with long-term projects in certain countries,
the Company and certain subsidiaries undertook to use their
respective best efforts to make or facilitate purchases or
investments in those countries at certain percentages
(typically up to 100%) of the amount of the specific contract.
The Company's obligations to make or facilitate third parties
making such investments and purchases are subject to
commercial conditions in the local market, usually without a
specific financial penalty. The maximum aggregate undertaking
as of December 31, 2004 amounted to $673 million to be
performed over a period of up to 11 years. In the opinion of
management, the actual amount of the investments and purchases
is anticipated to be less than that mentioned above, since
certain investments and purchases can result in reducing the
overall undertaking on more than a one-to-one basis.
2. The Company and certain Israeli subsidiaries partially finance
their research and development expenditures under programs
sponsored by the Office of the Chief Scientist in Israel
("OCS") for the support of research and development activities
conducted in Israel. At the time the participations were
received, successful development of the related projects was
not assured.
In exchange for participation in the programs by the OCS, the
Company and the subsidiaries agreed to pay 2%-5% of total
sales of products developed within the framework of these
programs. The obligation to pay these royalties is contingent
on actual sales of the products.
The Company and certain of its subsidiaries are also obligated
to pay certain amounts to the IMOD and others on specific
sales including sales resulting from the development of
certain technologies.
3. Future minimum lease commitments of the Group under various
non-cancelable operating lease agreements in respect of
premises, motor vehicles and office equipment as of December
31, 2004 are as follows: $6.7 million for 2005, $5.9 million
for 2006, $4.5 million for 2007, $3 million for 2008 and $13.1
million for 2009 and thereafter.
4. Three founding employees (the "Founders"), who collectively
hold approximately 32.3% of the outstanding shares of Kinetics
Ltd. ("Kinetics"), a 51%-owned Israeli subsidiary, have a put
option to jointly sell all of their shares in Kinetics to the
Company. Two private investors holding in the aggregate
approximately 16.7% of Kinetics' outstanding shares have "tag
along" rights in the event the Founders exercise the put
option.
10
The put option is exercisable from January 1, 2005 until
December 31, 2005 at a price equal to the higher of the
Founder's pro-rata share (corresponding to the Founder's
shareholding percentage) of the value of Kinetics as of the
option exercise date as determined by a third party appraiser
mutually acceptable to the Founders and to the Company, (the
appraiser will value Kinetics as if Kinetics had distributed
as dividends net profits accumulated up to the option exercise
date) or (b) $12,077,077, reduced by 3% per annum, or pro-rata
part thereof, for the period beginning on July 1, 2003 and
ending on the option exercise date.
5. The Company had, as of December 31, 2004, approximately $380
million in guarantees issued on its behalf by banks, mainly in
respect of advance payment and performance guarantees provided
in the regular course of business.
6. In connection with bank credits and loans, including
performance guarantees issued by banks and bank guarantees
securing certain advances from customers, the Company and
certain subsidiaries are obligated to meet certain covenants.
Such covenants include requirements for shareholders' equity,
current ratio, operating profit margin, tangible net worth,
EBITDA, interest coverage ratio and total leverage. As of
December 31, 2004, the Company and its subsidiaries are in
full compliance with all covenants.
7. As of December 31, 2004 and 2003, the Company had purchase
commitments which amount to $345 and $348 million,
respectively. These purchase orders and subcontracts are
typically in a standard format proposed by the Company, with
the subcontracts and purchase orders also reflecting
provisions from the Company's applicable prime contract that
are appropriate to flow down to subcontractors and vendors.
The terms typically included in these purchase orders and
subcontracts are consistent with Uniform Commercial Code
provisions in the United States for sales of goods, as well as
with specific terms called for by its customers in
international contracts. These terms include the Company's
right to terminate the purchase order or subcontract in the
event of the vendors' or subcontractors' default, as well as
the Company's right to terminate the order or subcontract for
the Company's convenience (or if the Company's prime
contractor has so terminated the prime contract). Such
purchase orders and subcontracts typically are not subject to
variable price provisions.
K. Acquisitions During 2004
------------------------
In the third quarter of 2004, the Company (through a subsidiary of EFW)
acquired a business from Computer Instruments Corporation Inc. ("CIC")
of Westbury, New York in consideration for approximately $2.3 million
in cash. The acquired assets relate to the design and manufacture of
aviation pressure transducers, air data probes and air data computers.
11
L. Summary of Financial Results
The following table sets forth the consolidated statements of
operations of the Company and its subsidiaries for the three-month
periods and years ended December 31, 2004 and December 31, 2003.
For the year For the three months
ended on December 31 ended on December 31
-------------------------------------- --------------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
$ % $ % $ % $ %
(In thousands of U.S. dollars except per share data)
Total revenues 939,925 100.0 897,980 100.0 270,775 100.0 262,757 100.0
Cost of revenues 689,626 73.4 672,711 74.9 198,198 73.2 208,649 79.4
--------- ------- --------- ------- --------- ------- --------- -------
Gross profit 250,299 26.6 225,269 25.1 72,577 26.8 54,108 20.6
--------- ------- --------- ------- --------- ------- --------- -------
Research and development expenses, net 66,846 7.1 54,919 6.1 23,277 8.6 11,913 4.5
Marketing and selling expenses 69,912 7.4 69,943 7.8 19,190 7.0 19,247 7.3
General and administrative expenses 47,832 5.1 46,077 5.1 12,876 4.8 12,153 4.6
--------- ------- --------- ------- --------- ------- --------- -------
184,590 19.6 170,939 19.0 55,343 20.4 43,313 16.5
--------- ------- --------- ------- --------- ------- --------- -------
Operating profit 65,709 7.0 54,330 6.1 17,234 6.5 10,795 4.1
Financing expenses, net (5,852) (0.6) (4,870) (0.5) (2,974) (1.1) (1,403) (0.5)
Other income (expenses), net 770 0.1 53 0.0 831 0.3 542 0.2
--------- ------- --------- ------- --------- ------- --------- -------
Income before income taxes 60,627 6.4 49,513 5.5 15,091 5.6 9,934 3.8
Provision for income taxes 15,219 1.6 11,334 1.3 3,507 1.3 832 0.3
--------- ------- --------- ------- --------- ------- --------- -------
45,408 4.8 38,179 4.2 11,584 4.3 9,102 3.5
Minority interest (180) 0.0 557 0.1 (639) (0.2) 101 -
Company's share of income of
affiliated entities 7,765 0.8 7,209 0.8 3,180 1.2 3,271 1.2
--------- ------- --------- ------- --------- ------- --------- -------
Net earnings 52,993 5.6 45,945 5.1 14,125 5.2 12,474 4.7
========= ======= ========= ======= ========= ======= ========= =======
Diluted earnings per share 1.29 1.14 0.34 0.31
========= ========= ========= =========
Weighted average number of shares
used in computation 41,041 40,230 41,399 40,327
========= ========= ========= =========
12
Non -U.S. GAAP Disclosure
-------------------------
The Company records non-cash expenses related to its employees' option
plans (See Note 17 to the audited consolidated financial statements for
the year ended December 31, 2004). Up until December 31, 2003, the
option plan expenses were calculated according to APB No. 25 based on
the vesting period and the exercise price (set on the date of the
options grant) and the Company share price at the end of each period
and were not affected directly from the results of operations or the
condition of the Company. As of January 1, 2004, the Company adopted
the fair value based method for share based payments using the
"modified prospective method" described in FASB No. 148. The Company
uses the Black-Scholes-Merton formula to estimate the value of stock
options granted to employees. This value is calculated on the grant
date and also is not affected directly by the results of operations
or the condition of the Company.
The Company believes that prior to the adoption of the modified
prospective method as of January 1, 2004 as described below above, the
non-cash expenses (income) related to the employees' option plans, did
not reflect properly the Company's performance on a period-to-period
basis.
For comparison purposes, the following table sets forth the Company's
results of operations, excluding the effect of the Company's share
option plan, reflecting the manner in which the Company's management
evaluates its results of operations.
For the year For the three months
ended December 31 ended December 31
-------------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- ------------- ------------ ------------
$ % $ % $ % $ %
(In thousands of U.S. dollars except per share data)
Net earnings as reported 52,993 5.6 45,946 5.1 14,125 5.2 12,474 4.8
Non-cash expense related to
option plan 2,710 0.3 3,793 0.4 493 0.2 1,083 0.4
------ --- ------ --- ------ --- ------ ---
Net earnings excluding option plan effect 55,703 5.9 49,739 5.5 14,618 5.4 13,557 5.2
====== === ====== === ====== === ====== ===
Diluted net earnings per share as reported 1.29 1.14 0.34 0.31
==== ==== ==== ====
Diluted net earnings per share excluding
option plan effect 1.36 1.24 0.35 0.34
==== ==== ==== ====
13
Revenues
--------
The Company's consolidated revenues increased by 4.7%, from $898.0
million in 2003 to $939.9 million in 2004.
The following table sets forth the Company's revenue distribution by
areas of operation:
Year ended
------------------------------------------------------
December 31, 2004 December 31, 2003
--------------------- -----------------------
$ millions % $ millions %
Airborne systems 367.9 39.1 373.6 41.6
Land vehicle systems 199.2 21.2 199.8 22.2
C4ISR systems 108.9 11.6 133.9 14.9
Electro-optics 200.3 21.3 140.5 15.7
Other (mainly non-defense engineering and
production services) 63.6 6.8 50.2 5.6
----- ----- ----- -----
Total 939.9 100.0 898.0 100.0
===== ===== ===== =====
C4ISR systems sales decreased by 19% from $133.9 million to $108.9
million. The decrease in revenues resulted mainly from the delay in the
receipt of certain orders for new projects, which were received but for
which revenues were not yet recognized.
Electro-optics sales increased by 43% from $140.5 million to $200.3
million. The increase in revenues resulted from increased sales of
homeland security systems for international customers, night sights for
various customers, the Night Targeting System ("NTS") to the U.S.
Marine Corps and other customers, as well as sales of electro-optic
products by a European subsidiary.
Other sales increased by 27% from $50.2 million to $63.6 million. The
increase in revenues was mainly from the manufacture of medical
instrumentation.
The following table sets forth the Company's distribution of revenues
by geographical regions:
Year ended
----------------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
$ millions % $ millions %
Israel 241.6 25.7 255.8 28.5
United States 348.5 37.1 332.3 37.0
Europe 124.1 13.2 109.4 12.2
Other countries 225.7 24.0 200.5 22.3
----- ---- ----- ----
Total 939.9 100.0 898.0 100.0
===== ===== ===== =====
The Company's sales are primarily to governmental entities and prime
contractors under government defense programs. Accordingly, the level
of the Company's revenues is subject to governmental budgetary
constraints.
14
Revenues from customers in Europe increased by 13% from $109.4 million
to $124.1 million. The increase in revenues in Europe resulted mainly
from the inclusion of a European subsidiary's revenues, starting only
in the third quarter of 2003 and for the entire year in 2004. Revenues
also increased in the United States and in other countries, mainly in
Latin America and Asia, while revenues in Israel declined as deliveries
under certain major programs entered final phases.
Gross Profit
------------
The Company's gross profit represents the aggregate results of the
Company's activities and projects and is based on the mix of programs
in which the Company is engaged during the reported period.
Reported gross profit in 2004 was $250.3 million (with gross profit
margin of 26.6%) as compared to $225.3 million (gross profit margin of
25.1%) in 2003.
The increase in the gross profit percentage was caused mainly by the
sale of a mix of products with improved profitability.
Research and Development ("R&D")
--------------------------------
The Company continually invests in R&D in order to maintain and further
advance its technologies, in accordance with a long-term plan, based on
its estimate of future market needs.
The Company's R&D activities in the reported period are coordinated
with, and partially funded by, third parties, including the IMOD and
the OCS. These programs were mainly in the areas of advanced airborne
systems, cutting edge electro-optics technology and products for
surveillance, aerial reconnaissance, lasers and space based sensors.
Gross R&D expenses in 2004 totaled $86.4 million (9.2% of revenues), as
compared with $65.5 million (7.3% of revenues) in 2003.
Net R&D expenses (after deduction of third party participation,
including the IMOD and the OCS) in 2004 totaled $66.8 million (7.1% of
revenues), as compared to $54.9 million (6.1% of revenues) in 2003.
During the second half of 2004, and especially during the fourth
quarter, the Company has invested significant R&D efforts to support
strategic business opportunities by developing products and
technologies for U.S. airborne programs and additional efforts relating
to the electro-optics systems. In support of these activities and
additional R&D projects, the Company was successful in obtaining
additional funding from external sources, to provide for the
development of advanced technologies and related products.
Marketing and Selling Expenses
------------------------------
The Company maintains its activities in developing new markets and
pursues various business opportunities according to the Company's
plans.
Marketing and selling expenses in 2004 were $69.9 million (7.4% of
revenues), as compared to a similar amount of $69.9 million (7.8% of
revenues) in 2003.
15
General and Administrative ("G&A") Expenses
-------------------------------------------
G&A expenses in 2004 were $47.8 million (5.1% of revenues), as compared
to $46.1 million (5.1% of revenues) in 2003.
The increase in G&A expenses in 2004 compared to 2003 were related to
cost of various exploratory merger and acquisition, legal, audit and
control activities, including expenses related to compliance with the
Sarbanes-Oxley Act.
Operating Profit
----------------
As a result of all of the above, reported operating income in 2004 was
$65.7 million (7.0% of revenues), as compared to $54.3 million (6.1% of
revenues) in 2003.
Financing Expenses (Net)
------------------------
Net financing expenses in 2004 were $5.9 million, as compared to $4.9
million in 2003.
The increase in the net finance expense resulted mainly from a decrease
in finance income as a result of lower level of cash and cash
equivalents as well as costs incurred in hedging with regards to Great
Britain pounds ("GBP").
Taxes on Income
---------------
The Company's tax rate represents a weighted average of the tax rates
to which the various companies in the Group are subject.
Provision for taxes in 2004 was $15.2 million (effective tax rate of
25.1%), as compared to a provision for taxes of $11.3 million
(effective tax rate of 22.9%) in 2003.
The change in the effective tax rate is attributable to the mix of the
tax rates in the various tax jurisdictions in which the Group's
companies generating the taxable income operate.
Company's Share in Earnings of Affiliated Entities
--------------------------------------------------
In 2004, the Company had net income of $7.8 million from its share in
earnings of affiliated entities, as compared to $7.2 million in 2003.
The companies and partnerships, in which the Company holds 50% or less
in shares or voting rights and are therefore not consolidated in its
financial statements, operate in complementary areas to the Company's
core business activities, including electro-optics and airborne
systems. The Company believes that its affiliates will continue to
contribute significantly to the Company's earnings.
Net Earnings and Earnings per Share ("EPS")
-------------------------------------------
Reported net earnings in 2004 were $53 million (5.6% of revenues), as
compared to reported net earnings of $45.9 million (5.1% of revenues)
in 2003. Reported fully diluted EPS was $1.29 in 2004, as compared to
$1.14 in 2003.
16
Excluding the option plan non-cash expenses in year ended December 31,
2004, net earnings in 2004 were $55.7 million (5.9% of revenues) and
the EPS was $1.36, as compared to $49.7 million (5.5% of revenues), and
an EPS of $1.24 in year ended December 31, 2003.
The number of shares used for computation of diluted EPS in the year
ended December 31, 2004 was 41,041 thousand shares, as compared to
40,230 thousand shares in the year ended December 31, 2003. The
increase in the number of shares used for computation of diluted EPS
was due mainly to exercise of options by employees during 2003 and
2204, and the change in the Company's share price.
M. Liquidity and Capital Resources
-------------------------------
The Company's cash flows are effected by the cumulative cash flows of
its various projects in the reported periods. Project cash flows are
affected by the timing of the receipt of advances and the collection of
accounts receivable from customers, which relate to specific events
during the project, while expenses are on-going. As a result, the
Company's cash flows may vary from one period to another.
The Company's policy is to invest its cash surplus primarily in
interest bearing deposits in accordance with its projected needs.
The resources available to the Company include mainly profits,
collection of accounts receivable, advances from customers, as well as
Government of Israel grants and participation and bank financing in
Israel and elsewhere based on its capital, assets and activities. In
addition, the Company has the ability to raise funds through the
offering of shares and debentures to the public from time to time.
The Company's net cash flow generated from operating activities in 2004
was $81.5 million, resulting mainly from net income for the period and
increase of accounts payable, which was partly offset by a decrease in
advances from customers.
Net cash flows used for investment activities in the year ended
December 31, 2004 were $70.9 million, which were used mainly for
procurement of property, plant and equipment and investment in
Tadiran's shares. The investments in fixed assets were made primarily
in equipment for the Group's various manufacturing plants and in a
building constructed at Elbit Systems' facility in Haifa, Israel.
Net cash flow used for financing activities in 2004 was $52.6 million,
which were used mainly for paying dividends.
On December 31, 2004, the Company had total borrowings in the amount of
$96.5 million, including $86.2 million in long-term loans, and $380
million in guarantees issued on its behalf by banks, mainly in respect
of advance payment and performance guarantees provided in the regular
course of business. On December 31, 2004, the Company had a cash
balance amounting to $34.1 million.
17
The Company and some of its subsidiaries operate with loan and credit
agreements that contain certain covenants. Such covenants include
requirements for shareholders' equity, current ratio, operating profit
margin, tangible net worth, EBITDA, interest coverage ratio and total
leverage. As of December 31, 2004, the Company and its subsidiaries are
in full compliance with all covenants.
As of December 31, 2004, the Company had working capital of $172.6
million, and its current ratio was 1.46. The Company's ratio of equity
to total assets was 41.8%.
N. Derivatives and Hedges
----------------------
Market risks relating to the Company's operations result primarily from
changes in interest rates and exchange rates. The Company typically
uses financial instruments to limit its exposure to those changes. The
Company also typically enters into forward contracts in connection with
transactions that are denominated in currencies other than U.S. dollars
and New Israeli Shekels ("NIS"). The Company may enter from time to
time into forward contracts and other hedging instruments related to
NIS, based on market conditions.
On December 31, 2004, the Company's liquid assets were comprised of
bank deposits. The Company's deposits and loans are based on variable
interest rates, and their value as of December 31, 2004 was therefore
not exposed to changes in interest rates. Should interest rates either
increase or decrease, such change may affect the Company's results of
operations due to changes in the cost of its liabilities and the return
on its assets that are based on variable rates.
The Company's functional currency is the U.S. dollar. On December 31,
2004, the Company had exposure due to liabilities denominated in NIS of
$57 million in excess of its NIS denominated assets. These liabilities
represent mostly wages and trade payables. The amount of the Company's
exposure to the changes in the NIS-U.s. dollar exchange rate varies
from time to time.
Most of the Company's assets and liabilities which are denominated in
currencies other than the NIS and the U.S. dollar were covered as of
December 31, 2004 by forward contracts and options. On December 31,
2004, the Company had forward contracts for the sale and purchase of
such foreign currencies totaling $30.9 million ($20.8 million in Euro,
$5.4 million in GBP and $4.8 million in other currencies). The results
of financial derivative activities in this quarter were not material.
On December 31, 2004, the Company had options for hedging future cash
flows denominated in GBP in the amount of $154 million. The fair market
value of the options as of December 31, 2004 and 2003 was not material.
O. Dividends
---------
The Board of Directors declared on March 14, 2005 a dividend of $0.13
per share. The total dividend declared for 2004 was $2.17 per share.
* * * * * * * * * * * * * *
18
Exhibit 3
---------
--------------------------------------------------------------------------------
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2004
-----------------------
(In U.S. dollars)
--------------------------------------------------------------------------------
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2004
In U.S. dollars
C O N T E N T S
---------------
Page
----
REPORT OF INDEPENDENT REGISTRED PUBLIC ACCOUNTING FIRM 2 - 3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 4 - 5
Consolidated Statements of Income 6
Statements of Changes in Shareholders' Equity 7 - 8
Consolidated Statements of Cash Flows 9 - 10
Notes to the Consolidated Financial Statements 11 - 56
# # # # # # #
1
[OBJECT OMITTED] ERNST & YOUNG
To the Shareholders of
Elbit Systems Ltd.
Haifa, Israel
REPORT OF INDEPENDENT REGISTRATED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Elbit Systems
Ltd. (the "Company") and its subsidiaries as of December 31, 2004 and 2003 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the two years in the period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2004 and 2003 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2004 in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2(X) to the consolidated financial statements, on January
1, 2004 the Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation."
Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
Haifa, Israel
March 14, 2005
2
[OBJECT OMITTED] ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Elbit Systems Ltd.
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity and cash flows of Elbit Systems Ltd. And its
subsidiaries for the year ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated results of the Company and
its subsidiaries operations and their cash flows for the year ended December 31,
2002 in conformity with United States generally accepted accounting principles.
LUBOSHITZ KASIERER
AN AFFILIATE MEMBER OF ERNST & YOUNG INTERNATIONAL
Haifa, Israel
March 24, 2003
3
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
December 31,
--------------------------------
Note 2004 2003
----------- -------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 34,109 $ 76,156
Short-term bank deposits 738 690
Trade receivables, (net of allowance for doubtful
accounts in the amount of $3,064 and $3,861 as of December
31, 2004 and 2003, respectively) (3) 214,816 203,281
Other receivables and prepaid expenses (4) 52,335 48,363
Inventories, net of advances (5) 249,041 249,225
-------------- --------------
Total current assets 551,039 577,715
-------------- --------------
INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in affiliated companies and a partnership (6A) 33,124 26,478
Available for sale securities (1G) 18,017 -
Investments in other companies (6B) 11,745 11,745
Long-term bank deposits and trade receivables (7) 2,102 2,347
Severance pay fund (2P) 82,998 76,218
-------------- --------------
147,986 116,788
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET (8) 244,288 229,221
-------------- --------------
INTANGIBLE ASSETS: (9)
Goodwill 32,847 32,576
Other intangible assets, net 63,140 67,436
-------------- --------------
95,987 100,012
-------------- --------------
$ 1,039,300 $1,023,736
============== ==============
The accompanying notes are an integral part of the consolidated financial statements
4
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
December 31,
--------------------------------
Note 2004 2003
----------- -------------- --------------
CURRENT LIABILITIES:
Short-term bank credit and loans (10) $ 8,592 $ 8,509
Current maturities of long-term loans (13) 1,656 6,532
Trade payables 118,391 106,252
Other payables and accrued expenses (11) 169,702 157,820
Customers advances and amounts in excess of
costs incurred on contracts in progress (12) 80,109 99,618
-------------- --------------
Total current liabilities 378,450 378,731
-------------- --------------
LONG-TERM LIABILITIES:
Long-term loans (13) 86,234 62,324
Advances from customers (12) 10,320 7,592
Deferred income taxes (15) 24,516 24,916
Accrued termination liability (14,2P) 100,740 93,979
-------------- --------------
221,810 188,811
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES (16)
MINORITY INTERESTS 4,340 4,115
-------------- --------------
SHAREHOLDERS' EQUITY: (17)
Share capital
Ordinary shares of New Israeli Shekels (NIS) 1 par value;
Authorized - 80,000,000 shares as of
December 31, 2004 and 2003;
Issued - 40,969,947 and 39,746,125 shares as
of December 31, 2004 and 2003, respectively;
Outstanding - 40,561,126 and 39,337,304 shares
as of December 31, 2004 and 2003, respectively 11,548 11,273
Additional paid-in capital 274,432 259,033
Accumulated other comprehensive loss (3,346) (3,992)
Retained earnings 156,387 190,086
Treasury shares - 408,821 shares as of
December 31, 2004 and 2003 (4,321) (4,321)
-------------- --------------
434,700 452,079
-------------- --------------
$ 1,039,300 $1,023,736
============== ==============
The accompanying notes are an integral part of the consolidated financial statements
5
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
Year ended December 31,
----------------------------------
Note 2004 2003 2002
---- ---- ---- ----
Revenues (18) $ 939,925 $ 897,980 $ 827,456
Cost of revenues 689,626 672,711 605,313
------- ------- -------
Gross profit 250,299 225,269 222,143
------- ------- -------
Research and development costs, net (19) 66,846 54,919 57,010
Marketing and selling expenses 69,912 69,943 65,691
General and administrative expenses 47,832 46,077 41,651
------- ------- -------
184,590 170,939 164,352
------- ------- -------
Operating income 65,709 54,330 57,791
Financial expenses, net (20) (5,852) (4,870) (3,035)
Other income (expenses), net 770 53 (462)
------- ------- -------
Income before taxes on income 60,627 49,513 54,294
Taxes on income (15) 15,219 11,334 9,348
------- ------- -------
45,408 38,179 44,946
Equity in net earnings of affiliated companies and
partnership 7,765 7,209 675
Minority interests in losses (earnings) of
subsidiaries (180) 557 (508)
------- ------- -------
Net income $ 52,993 $ 45,945 $ 45,113
Earnings per share (17G)
Basic net earnings per share
$ 1.33 $ 1.18 $ 1.17
======= ======= =======
Diluted net earnings per share $ 1.29 $ 1.14 $ 1.13
======= ======= =======
Number of share used in computation of basic net
earnings per share 39,952 39,061 38,489
======= ======= =======
Number of share used in computation of diluted net
earnings per share 41,041 40,230 39,863
======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements
6
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
Accumulated
Number of Additional other
outstanding Share paid-in comprehensive
shares capital capital income (loss)
------ ------- ------- -------------
Balance as of January 1, 2002 38,330,272 $ 11,054 $ 244,625 $ -
Exercise of options 473,235 100 4,040 -
Tax benefit in respect of options
exercised - - 648 -
Stock based
compensation - - (926) -
Dividends paid - - - -
Other comprehensive income (loss):
Minimum pension liability - - - (2,882)
Net income - - - -
----------- ----------- ----------- -----------
Total comprehensive income
Balance as of December 31, 2002 38,803,507 $ 11,154 $ 248,387 $ (2,882)
Exercise of options 533,797 119 5,147 -
Tax benefit in respect of options
exercised - - 758 -
Stock based compensation - - 4,741 -
Dividends paid - - - -
Other comprehensive income (loss):
Unrealized loss on derivative
instruments - - - (578)
Foreign currency translation differences - - - 340
Minimum pension liability - - - (872)
Net income - - - -
---------- ----------- ----------- -----------
Total comprehensive income
Balance as of December 31, 2003 39,337,304 $ 11,273 $ 259,033 $ (3,992)
========== =========== =========== ===========
Total Total other
Retained Treasury shareholders' comprehensive
earnings shares equity income
-------- ------ ------ ------
Balance as of January 1, 2002 $ 126,627 $ (4,321) $ 377,985
Exercise of options - - 4,140
Tax benefit in respect of options
exercised - - 648
Stock based
compensation - - (926)
Dividends paid (12,717) - (12,717)
Other comprehensive income (loss):
Minimum pension liability - - (2,882) $ (2,882)
Net income 45,113 - 45,113 45,113
--------- --------- --------- ---------
Total comprehensive income $ 42,231
=========
Balance as of December 31, 2002 $ 159,023 $ (4,321) $ 411,361
Exercise of options - - 5,266
Tax benefit in respect of options
exercised - - 758
Stock based compensation - - 4,741
Dividends paid (14,882) - (14,882)
Other comprehensive income (loss):
Unrealized loss on derivative
instruments - - (578) $ (578)
Foreign currency translation differences - - 340 340
Minimum pension liability - - (872) (872)
Net income 45,945 - 45,945 45,945
--------- --------- --------- ---------
Total comprehensive income $ 44,835
=========
Balance as of December 31, 2003 $ 190,086 $ (4,321) $ 452,079
========= =========== ===========
The accompanying notes are an integral part of the consolidated financial statements
7
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
Accumulated
Number of Additional other
outstanding Share paid-in comprehensive
shares capital capital loss
------------- ------------ ------------ -------------
Balance as of January 1, 2004 39,337,304 $ 11,273 $ 259,033 $ (3,992)
Cumulative effect of first time adoption
of the fair value based method for stock
based compensation expense - - (152) -
Exercise of options 1,223,822 275 10,985 -
Tax benefit in respect of options
exercised - - 1,179 -
Stock based compensation - - 3,387 -
Dividends paid - - - -
Other comprehensive income (loss):
Unrealized loss on derivative
instruments - - - (299)
Foreign currency translation differences - - - 450
Unrealized gains on available for sale
securities, net 1,396
Minimum pension liability - - - (901)
Net income - - - -
----------- ----------- ----------- -----------
Total comprehensive income
Balance as of December 31, 2004 40,561,126 $ 11,548 $ 274,432 $ (3,346)
=========== =========== =========== ===========
Total Total other
Retained Treasury shareholders' comprehensive
earnings shares equity income
------------ ------------- -------------- ----------------
Balance as of January 1, 2004 $ 190,086 $ (4,321) $ 452,079
Cumulative effect of first time adoption
of the fair value based method for stock
based compensation expense - - (152)
Exercise of options - - 11,260
Tax benefit in respect of options
exercised - - 1,179
Stock based compensation - - 3,387
Dividends paid (86,692) - (86,692)
Other comprehensive income (loss):
Unrealized loss on derivative
instruments - - (299) (299)
Foreign currency translation differences - - 450 450
Unrealized gains on available for sale
securities, net 1,396 1,396
Minimum pension liability - - (901) (901)
Net income 52,993 - 52,993 52,993
----------- ----------- ----------- -----------
Total comprehensive income $ 53,639
============
Balance as of December 31, 2004 $ 156,387 $ (4,321) $ 434,700
=========== =========== ===========
Accumulated other comprehensive loss (net of taxes)
---------------------------------------------------
December 31,
---------------------
2004 2003
Accumulated gains on derivative instruments $ (877) $ (578)
Accumulated foreign currency translation differences 790 340
Accumulated gains on available for sale securities 1,396 -
Accumulated minimum pension liability (4,655) (3,754)
------- -------
Accumulated other comprehensive loss $(3,346) $(3,992)
======= =======
The accompanying notes are an integral part of the consolidated financial statements.
8
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 52,993 $ 45,945 $ 45,113
Adjustments required to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 42,261 37,890 32,937
Stock based compensation 3,387 4,741 (926)
Deferred income taxes, net 153 35 (5,620)
Accrued severance pay, net (2,304) (1,240) 6,260
Gain (loss) on sale of property, plant and equipment 143 (915) 743
Tax benefit in respect of options exercised 1,179 758 648
Minority interests in earnings (losses) of subsidiaries 180 (557) 508
Equity in net losses (earnings) of affiliated companies and partnership, net of
dividend received (*) 385 (4,995) (675)
Changes in operating assets and liabilities:
Decrease (increase) in short and long-term trade receivables, other
receivables and prepaid expenses (16,871) 45,297 58,554
Decrease (increase) in inventories 2,932 (38,651) (55,106)
Increase (decrease) in trade payables, other payables and accrued expenses 20,522 32,147 (19,321)
Increase (decrease) in advances received from customers (18,535) (27,855) 42,999
Settlement of royalties with the Office of the Chief Scientist (3,714) (1,581) 9,197
Other adjustments (1,228) 337 683
-------- --------- --------
Net cash provided by operating activities 81,483 91,356 115,994
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (53,008) (61,287) (46,003)
Investment grants received for property, plant and equipment - - 119
Acquisition of subsidiaries and businesses (Schedule A) (2,315) (2,458) (5,280)
Investments in affiliated companies and subsidiaries (2,522) (1,049) (1,681)
Proceeds from sale of property, plant and equipment 2,560 5,815 956
Grant of long-term loan - - (714)
Collection of long-term loan - 2,400 -
Collection of short-term loan - - 1,371
Investment in long-term bank deposits (1,203) (1,750) (1,228)
Proceeds from sale of long-term bank deposits 1,507 3,568 1,689
Short-term bank deposits, net (48) 960 (204)
Investment in available for sale securities (15,869) - -
-------- --------- --------
Net cash used in investing activities (70,898) (53,801) (50,975)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 11,260 5,266 4,140
Repayment of long-term bank loans (35,826) (27,066) (3,249)
Receipt of long-term bank loans 58,410 10,000 2,233
Dividends paid (86,692) (14,882) (12,717)
Change in short-term bank credit and loans, net 216 (10,997) (19,729)
-------- --------- --------
Net cash used in financing activities (52,632) (37,679) (29,322)
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (42,047) (124) 35,697
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 76,156 76,280 40,583
-------- --------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 34,109 $ 76,156 $ 76,280
======== ========= ========
(*) Dividend received $ 8,150 $ 2,214 $ -
======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements.
9
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Year ended December 31,
-----------------------------------------------
2004 2003 2002
---- ---- ----
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ 13,305 $ 14,666 $ 21,730
======== ======== ========
Interest $ 3,122 $ 4,034 $ 2,947
======== ======== ========
SCHEDULE A:
Subsidiaries and businesses acquired (*)
Estimated net fair value of assets acquired and liabilities
assumed at the date of acquisition was as follows:
Working capital (surplus) deficiency (excluding
cash and cash equivalents) $ (707) $ 657 $ -
Property, plant and equipment (10) (249) (275)
Goodwill and other intangible assets (1,598) (1,334) (5,078)
Deferred income taxes - (1,765) -
Long-term liabilities - 198 -
Minority interest - 35 -
-------- -------- --------
(2,315) (2,458) (5,353)
Less short-term debt incurred on acquisition - - 73
-------- -------- --------
$ (2,315) $ (2,458) $ (5,280)
-------- -------- --------
(*) Defense Systems Division of Elron Telesoft in 2002 (see Note 1C).
In 2003 a European subsidiary (see Note 1D) and AD&D (see Note 1E).
In 2004 the assets of Computer Instruments Corporation Inc. (see Note 1F)
The accompanying notes are an integral part of the consolidated statements.
10
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 1 - GENERAL
A. Elbit Systems Ltd. (the "Company") is an Israeli corporation,
49% owned by the Federmann Group. On July 28, 2004, Elron
Electronic Industries Ltd. completed the sale of all of its
holdings in the Company, constituting approximately 19% of the
Company's outstanding share capital, to Federmann Enterprises
Ltd. The Company's shares are traded on the Tel Aviv Stock
Exchange and on the Nasdaq National Market in the United States.
The Company and its subsidiaries (the "Group") are engaged
mainly in the field of defense electronics. The Company's
principal wholly-owned subsidiaries are EFW Inc. ("EFW") and
Elop Electro-Optics Industries, Ltd. ("El-Op").
B. A majority of the Group's revenues are derived from direct or
indirect sales to governments or to government agencies. As a
result, a substantial portion of the Group's sales is subject to
the special risks associated with sales to governments or to
government agencies. These risks include, among others, the
dependency on the resources allocated by governments to defense
programs, changes in governmental priorities and changes in
governmental approvals regarding export licenses required for
the Group products and for its suppliers. As for major customers
refer to Note 18(C).
C. In January 2002, the Company acquired from Elron Telesoft Inc.
and its subsidiaries ("Elron Telesoft") the assets and the
business of the Defense Systems Division of Elron Telesoft ("the
Government Division") in consideration for $5,700 in cash. The
excess of the purchase price over the fair value of net tangible
assets acquired in the amount of approximately $5,100 was
allocated to technology and other intangible assets to be
amortized over a weighted average period of 3 years.
The Government Division is engaged mainly in the development of
communication systems, information technology and image
intelligence processing for defense and military applications.
The results of the Government Division have been included in the
consolidated financial statements from the first quarter of
2002.
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of the
Government Division were not material in relation to total
consolidated revenues and net income for the year 2002.
D. In June 2003, the Company (through El-Op) acquired all of the
outstanding ordinary shares of a European subsidiary, a company
registered in Belgium, in consideration for $1,846 in cash. The
acquisition was accounted for by the purchase method of
accounting.
This subsidiary develops, manufactures and supports
electro-optical products, mainly for the defense and space
markets.
The results of this subsidiary's operations have been included
in the consolidated financial statements from the date of
acquisition.
11
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 1 - GENERAL (Cont.)
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of this
subsidiary. were not material in relation to total consolidated
revenues and net income for the years 2002 and 2003.
E. In July 2003, the Company acquired approximately 54% of the
outstanding shares of Aero Design Development Ltd. ("AD&D") an
Israeli company in consideration for $1,406 in cash. The
acquisition was accounted for by the purchase method of
accounting.
AD&D develops, manufactures and builds airborne models and other
engineered products.
The excess of the purchase price over the fair value of net
tangible assets acquired in the amount of approximately $1,334
was allocated to technology ($1,000) to be amortized by the
straight-line method over a period of 10 years and to technology
goodwill ($334).
The results of AD&D.'s operations have been included in the
consolidated financial statements from the date of acquisition.
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of AD&D were
not material in relation to total consolidated revenues and net
income for the years 2002 and 2003.
F. In August 2004, the Company (through a subsidiary of EFW)
acquired a business from Computer Instruments Corporation Inc.
("CIC") of Westbury, New York in consideration for approximately
$2,315 in cash. The acquired assets relate to the design and
manufacture of aviation pressure transducers, air data probes
and air data computers.
The following table summarizes the fair value of the assets
acquired and liabilities assumed at the date of acquisition as
estimated by the Company, with the support of an external
appraisal:
Current Assets $ 994
Property and equipment 10
Technology 1,327
Goodwill 271
---------
Total assets acquired 2,602
Current liabilities assumed (287)
---------
Net assets acquired $ 2,315
=========
The technology acquired will be amortized by the straight-line
method over a period of 5-7 years. The results of CIC's
operations have been included in the consolidated financial
statements from the date of acquisition.
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of CIC were not
material in relation to total consolidated revenues and net
income for the years 2003 and 2004.
12
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 1 - GENERAL (Cont.)
G. On December 27, 2004, the Company reached an agreement with Koor
Industries ("Koor") to purchase all of Koor's holdings in
Tadiran Communications Ltd. ("Tadiran"), which represents
approximately a 32% interest in Tadiran. This purchase will be
made in parallel to Koor's purchase of approximately 9.8% of the
Company's shares from Federmann Enterprises Ltd. ("Federmann")
based on agreements reached between Federmann and Koor. The
transaction will be executed in two stages as described below.
In the first stage, the Company will purchase from Koor
approximately 13.8% of Tadiran's shares and Koor will purchase
from Federmann approximately 5.3% of the Company's shares. As of
March 1, 2005, the Company held approximately 6% of Tadiran's
shares acquired through purchases on the market, and therefore,
following completion of the first stage the Company will own
approximately 20% of Tadiran's shares. On completion of the
first stage, Koor will support the Company's appointment of the
greater of 3 members or 20% of Tadiran's board of directors, and
Federmann will support Koor's appointment of a member to the
Company's board of directors.
In the second stage, the Company will purchase the balance of
Koor's holdings in Tadiran. Koor will purchase an additional
approximately 4.5% of the Company's shares from Federmann, and
Federmann will support Koor's appointment of an additional
member to the Company's board of directors, including the
board's Vice Chairman. The second stage is subject to Koor
completing the sale to Tadiran of Koor's 70% holdings in Elisra
Electronic Systems Ltd. ("Elisra") on agreed upon terms. Subject
to those terms the Company agreed to support the purchase of the
Elisra shares by Tadiran at Tadiran's general shareholders
meeting. In the event that the sale of the Elisra shares to
Tadiran is not made by April 2006, then Koor and the Company
will have equal representation on Tadiran's board of directors,
and an agreement regarding joint control of Tadiran will enter
into effect between the Company and Koor.
The Company will purchase from Koor the 32% of the Tadiran
shares at a price of $37 per share, resulting in a total
purchase price of approximately $146,000. Koor will purchase
from Federmann the 9.8% of the shares in the Company at a price
of $24.70 per share, resulting in a total purchase price of
approximately $99,000.
Under the Koor-Federmann shareholders agreement, which will
became effective upon the completion of the first stage of the
Koor-Federrmann transaction, Koor will obtain certain tag along
rights in the event of Federmann's sale of shares in the
Company, and Koor will be subject to certain restrictions on the
transfer of its shares in the Company. Also, Koor has agreed to
vote at general shareholders meetings of the Company in
accordance with Federmann's instructions, with certain
exceptions, and Koor will receive certain additional
non-transferable rights.
On January 5, 2005, the Company's Audit Committee and board of
directors approved the agreements with Koor relating to the
Company's purchase of Koor's shares in Tadiran.
13
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 1 - GENERAL (Cont.)
On February 28, 2005, the Company's shareholders at an
extraordinary general shareholders meeting approved the
agreement with Koor relating to the Company's purchase of Koor's
shares in Tadiran. As of March 1, 2005, the parties were in the
process of obtaining approvals required for the transaction.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States ("U.S. GAAP"). As applicable to the consolidated
financial statements of the Group, such principles are substantially
identical to accounting principles generally accepted in Israel,
except as described in Note 22.
A. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
and disclosure of contingent assets and liabilities in the
financial statements and accompanying notes. Actual results
could differ from those estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The Company's revenues are generated mainly in U.S. dollars. In
addition, most of the Company's costs are incurred in U.S.
dollars. The Company's management believes that the U.S. dollar
is the primary currency of the economic environment in which the
Company operates. Thus, the functional and reporting currency of
the Company is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars
are presented at their original amounts. Transaction and
balances in other currencies have been remeasured into U.S.
dollars in accordance with principles set forth in SFAS No. 52
"Foreign Currency Translation". All exchange gains and losses
from the remeasurement mentioned above are reflected in the
statement of income in financial income or expenses.
For those foreign subsidiaries whose functional currency has
been determined to be other than the U.S. dollar, assets and
liabilities are translated at year-end exchange rates and
statement of income items are translated at average exchange
rates prevailing during the year. Such translation adjustments
are recorded as a separate component of accumulated other
comprehensive income in shareholders' equity.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly and majority-owned subsidiaries.
The consolidated subsidiaries include El-Op, EFW and other
Israeli and non-Israeli subsidiaries.
14
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
C. PRINCIPLES OF CONSOLIDATION (CONT.)
Intercompany transactions and balances including profit from
intercompany sales not yet realized outside the Group have been
eliminated upon consolidation.
D. CASH EQUIVALENTS
Cash equivalents, are short-term highly liquid investments that
are readily convertible to cash with maturities of three months
or less at the date of acquisition.
E. SHORT-TERM BANK DEPOSITS
Short-term bank deposits are deposits with maturities of more
than three months but less than one year. The short-term bank
deposits are presented at their cost.
F. MARKETABLE SECURITIES
Investments in a marketable securities are designed as available
for sale according to Statement of Financial Accounting Standard
No. 115 "Accounting for Certain Investments in Debt and Equity
Securities", ("SFAS No. 115"). Accordingly, these securities are
stated at fair value, with unrealized gains and losses, net of
taxes reported in accumulated other comprehensive income (loss),
a separate component of the shareholders equity.
G. INVENTORIES
Inventories are stated at the lower of cost or net realizable
value. Inventory write-offs are provided for slow-moving items
or technological obsolescence for which recoverability is not
probable.
Cost is determined as follows:
o Raw materials using the average cost method.
o Costs incurred on long-term contracts in progress include
direct labor costs, material costs, subcontractors, other
direct costs and overheads. These costs represent recoverable
costs incurred for production, allocable operating overhead
cost and, where appropriate, research and development costs
(refer to Note 2(T)).
o Labor overhead is generally included in our hourly rate and is
allocated to each project according to the amount of hours
invested. Material overhead is allocated to each project based
on the value of direct material that is charged to the
project.
Advances from customers are allocated to the applicable contract
inventories and are reflected as an offset against the related
inventory balances.
15
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
H. INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES
Investments in non-marketable shares of companies in which the
Group holds less than 20% and the Group does not have the
ability to exercise significant influence over operating and
financial policies of the companies are recorded at cost.
Investments in companies and partnership over which the Group
can exercise significant influence (generally, entities in which
the Group holds between 20% and 50% of voting rights) are
presented using the equity method of accounting. Profits on
intercompany sales, not realized outside the Group, were
eliminated. The Group discontinues applying the equity method
when its investment (including advances and loans) is reduced to
zero and it has not guaranteed obligations of the affiliate or
otherwise committed to provide further financial support to the
affiliate.
The Group applies Emerging Issues Task Force ("EITF 99-10")
"Percentage Used to Determine the Amount of Equity Method
Losses", according to which the Group recognizes equity method
losses based on the ownership level of the particular investee
security or loan held by the Group to which the equity method
losses are being applied.
A change in the Company's proportionate share of a subsidiary's
or investee's equity, resulting from issuance of shares by the
subsidiary or investee to third parties, is recorded as a gain
or loss in the consolidated income statements. If the
realization is not assured, such as when the issuing company is
a development stage company, the gain from issuance is accounted
for as an equity transaction pursuant to SAB 51 "Accounting
Sales of Stock by a Subsidiary".
Management evaluates investments in affiliates and other
companies for evidence of other than temporary declines in
value. When relevant factors indicate a decline in value that is
other than temporary, the Company records a provision for the
decline in value. A judgmental aspect of accounting for
investments involves determining whether an other-than-temporary
decline in value of the investment has been sustained. Such
evaluation is dependent on the specific facts and circumstances.
Accordingly, management evaluates financial information (e.g.
budgets, business plans, financial statements, etc.) in
determining whether another-than-temporary decline in value
exists. Factors indicative of another-than-temporary decline
include recurring operating losses, credit defaults and
subsequent rounds of financings at an amount below the cost
basis of the investment. This list is not all inclusive and
management weighs all quantitative and qualitative factors in
determining if another-than-temporary decline in value of an
investment has occurred.
I. LONG-TERM TRADE RECEIVABLES
Long-term trade receivables from extended payment agreements are
recorded at their estimated present values (determined based on
the original rates of interest).
16
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
J. LONG-TERM BANK DEPOSITS
Long-term bank deposits are deposits with maturities of more
than one year. These deposits are presented at cost including
accumulated interest.
K. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of
accumulated depreciation and investment grants. For equipment
produced for the Group's own use, cost includes materials, labor
and overhead, but not in excess of the fair value of the
equipment.
Depreciation is calculated by the straight-line method over the
estimated useful life of the assets at the following annual
rates:
%
---------------
Buildings 2-4 (mainly 4%)
Instruments, machinery and equipment 10-33
Office furniture and other 6-33
Motor vehicles 15-20 (mainly 15%)
Land rights and leasehold improvements - over the term of the
lease.
L. INVESTMENT GRANTS
As a governmental incentive for industrial companies in Israel,
the "Investment Center" which is a branch of the Israel
Ministry of Industry and Trade, permits industrial companies to
submit a request to qualify as an "Approved Enterprise". An
Approved Enterprise is entitled to certain benefits in respect
of capital investments. The benefits may be in the form of
reduced tax rates and of capital grants received as a percentage
of the investments of the Approved Enterprise. The amount of a
capital grant is determined as a percentage of the Approved
Enterprise investment in property, plant and equipment. As a
condition to the granting of these benefits, the Approved
Enterprise is obligated to perform the applicable industrial
plan as detailed in the request to the Investment Center (see
Note 15(A)(3) and 16(J)). These capital grants are non-royalty
bearing and are not conditioned on the results of operations. As
the capital grants are a direct participation in the cost of the
acquisition, of property, plant and equipment they are offset
against property, plant and equipment and amortized over the
period of the related investments.
17
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
M. IMPAIRMENT OF LONG-LIVED ASSETS
The Group's long-lived assets and identifiable intangible assets
are reviewed for impairment in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets"
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset.
If an asset is determined to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value. As of December 31,
2004, no impairment losses have been identified.
N. INTANGIBLE ASSETS
Intangible assets are stated at cost net of accumulated
amortization. Intangible assets are being amortized over their
useful life using the straight-line method.
O. GOODWILL
Goodwill represents the excess of the cost of acquired
businesses over the net fair values of the assets acquired and
liabilities assumed. Goodwill that arose from acquisitions prior
to July 1, 2001, was amortized until December 31, 2001 on a
straight-line basis over 10 - 20 years. Under SFAS No. 142,
effective as of January 1, 2002, goodwill is no longer
amortized, but is instead tested for impairment at least
annually (or more frequently if impairments indicators arise).
SFAS 142 prescribes a two phase process for impairment testing
of goodwill. The first phase screens for impairment, while the
second phase (if necessary) measures impairment.
In the first phase of impairment testing, goodwill attributable
to each of the reporting units is tested for impairment by
comparing the fair value of each reporting unit with its
carrying value. If the carrying value of the reporting unit
exceeds its fair value, the second phase is then performed. The
second phase of the goodwill impairment test compares the
implied fair value of the reporting unit's goodwill with the
carrying amount of that goodwill. If the carrying amount of the
reporting unit's goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to
that excess.
Fair value of a reporting unit is determined using discounted
cash flows. Significant estimates used in the methodology
include estimates of future cash flows, future short-term and
long-term growth rates and weighted average cost of capital for
each of the reporting units.
As of December 31, 2004, no impairment losses have been
identified.
18
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. SEVERANCE PAY
Under Israeli law and employment agreements, the Group's
companies in Israel are required to make severance payments and,
in certain situations, pay pensions to terminated employees. The
calculation is based on the employee's latest salary and the
period of his/her employment. The companies' obligation for
severance pay and pension is provided by monthly deposits with
insurance companies, pension funds and by an accrual.
The value of severance pay funds is presented in the balance
sheet and includes profits accumulated to balance sheet date.
The amounts deposited may be withdrawn only after fulfillment of
the obligations pursuant to Israeli severance pay law or labor
agreements. The values of the deposited funds are based on the
cash surrendered value of these funds and include immaterial
profits.
Severance pay expenses for the years ended December 31, 2004,
2003 and 2002, amounted to approximately $15,574, $11,491and
$10,138, respectively.
Q. REVENUE RECOGNITION
The Group generates revenues from long-term contracts involving
the design, development, manufacture and integration of defense
systems and products and providing support and services for such
systems and products.
Revenues from long-term contracts are recognized based on
Statement of Position 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" ("SOP
81-1") according to which revenues are recognized on the
percentage of completion basis.
Sales under long-term fixed-price contracts which provide for a
substantial level of development efforts in relation to total
contract efforts are recorded using the cost-to-cost method of
accounting as the basis to measure progress toward completing
the contract and recognizing revenues. According to this method,
sales and profits are recorded based on the ratio of costs
incurred to estimated total costs at completion. In certain
circumstances, when measuring progress toward completion, the
Company considers other factors, such as achievement of
performance milestones.
Sales and anticipated profit under long-term fixed-price
production type contracts are recorded on a percentage of
completion basis, using the units-of-delivery as the basis to
measure progress toward completing the contract and recognizing
revenues.
Sales and anticipated profit under long-term fixed-price
contracts that involve both development and production are
recorded on a percentage of completion basis, using the
cost-to-cost method and units-of-delivery method as applicable.
In certain circumstances, when measuring progress toward
completion under the development portion of the contract, the
Company considers other factors, such as achievement of
performance milestones.
19
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Q. REVENUE RECOGNITION (CONT.)
Estimated contract profit is included in earnings in proportion
to recorded sales.
The percentage-of-completion method of accounting requires
management to estimate the cost and gross profit margin for each
individual contract. Estimated gross profit or loss from
long-term contracts may change due to changes in estimates
resulting from differences between actual performance and
original estimated forecasts. Such changes in estimated gross
profit are recorded in results of operations when they are
reasonably determinable by management, on a cumulative catch-up
basis. Anticipated losses on contracts are charged to earnings
when determined to be probable.
Sales under cost-reimbursement-type contracts are recorded as
costs are incurred. Applicable estimated profits are included in
earnings in the proportion that incurred costs bear to total
estimated costs.
Amounts representing contract change orders, claims or other
items are included in sales only when they can be reliably
estimated and realization is probable. Penalties and awards
applicable to performance on contracts are considered in
estimating sales and profit rates and are recorded when there is
sufficient information to assess anticipated contract
performance.
The Group believes that the use of the percentage of completion
method is appropriate as the Group has the ability to make
reasonably dependable estimates of the extent of progress
towards completion, contract revenues and contract costs. In
addition, contracts executed include provisions that clearly
specify the enforceable rights regarding services to be provided
and received by the parties to the contracts, the consideration
to be exchanged and the manner and terms of settlement. In all
cases the Group expects to perform its contractual obligations
and its customers are expected to satisfy their obligations
under the contract.
In cases where the contract involves the delivery of products
and performance of services, the Group follows the guidelines
specified in EITF 00-21, "Revenue Arrangements with Multiple
Deliverables" in order to allocate the contract fees between the
products accounted for under SOP 81-1 and the services accounted
for under SAB 104. The services are recognized throughout the
service period.
In certain circumstances, sales under short-term fixed-price
production type contracts are accounted for in accordance with
SAB No. 104, "Revenue Recognition in Financial Statements" ("SAB
104"), and recognized when the following criteria are met:
persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price to the buyer is fixed or
determinable, no further obligation exists and collectability is
reasonably assured.
As for research and development costs accounted for as contract
costs refer to Note 2(T).
20
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
R. PRE-CONTRACT COSTS
Pre-contract costs are deferred and included in inventory, only
when such costs can be directly associated with a specific
anticipated contract and if their recoverability from the
specific contract is probable according to the guidelines of SOP
81-1.
S. WARRANTY
The Group estimates the costs that may be incurred under its
basic warranty and records a liability in the amount of such
costs at the time revenue is recognized. The specific terms and
conditions of those warranties vary depending upon the product
sold and the country in which the Group does business. Factors
that affect the Group's warranty liability include the number of
delivered products, engineering estimates and anticipated rates
of warranty claims. The Group periodically assesses the adequacy
of its recorded warranty liability and adjusts the amount as
necessary.
Changes in the Group's provision for warranty during the year
are as follows:
2004 2003
---- ----
Balance, at January 1 $ 9,692 $ 8,541
Warranties issued during the year 4,737 4,491
Warranties forfeited or exercised during the year (4,952) (3,340)
--------------- -------------
Balance, at December 31 $ 9,477 $ 9,692
=============== =============
T. RESEARCH AND DEVELOPMENT COSTS
Research and development costs, net of participations, are
charged to operations as incurred. Group sponsored research and
development costs primarily include independent research and
development and bid and proposal efforts.
Under certain arrangements in which a customer participates in
product development costs, the Group's portion of such
unreimbursed costs is expensed as incurred. Customer-sponsored
research and development costs incurred pursuant to contracts
are accounted for as part of the contract costs.
Certain Group companies in Israel receive grants (mainly
royalty-bearing) from the Government of Israel and from other
sources for the purpose of funding approved research and
development projects. These grants are recognized as a deduction
from research and development costs at the time the applicable
company is entitled to such grants on the basis of the research
and development costs incurred.
21
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
U. INCOME TAXES
The Group accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". This Statement prescribes
the use of the liability method whereby deferred tax assets and
liability account balances are determined based on differences
between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. The Group provides a valuation allowance, if necessary,
to reduce deferred tax assets to their estimated realizable
value.
V. CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash and
cash equivalents, short and long-term deposits and trade
receivables.
The majority of the Group's cash and cash equivalents and
deposits are invested in dollar instruments with major banks in
Israel and in the U.S. Management believes that the financial
institutions that hold the Group investments are financially
sound and accordingly, minimal credit risk exists with respect
to these investments.
The Group's trade receivables are derived primarily from sales
to large and stable customers and governments located mainly in
Israel, the United States and Europe. The Group performs ongoing
credit evaluations of its customers and to date, has not
experienced any unexpected material losses except for a one time
loss in 2002 of approximately $4,600 due to the insolvency of
one of the Group's customers. An allowance for doubtful accounts
is determined with respect to those amounts that the Group has
determined to be doubtful of collection.
W. DERIVATIVE FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"), requires companies to recognize all of its
derivative instruments as either assets or liabilities in the
statement of financial position at fair value. The accounting
for changes in the fair value (i.e. gains or losses) of a
derivative instrument depends on whether it has been designated
and qualifies as part of a hedging relationship and further, on
the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument,
based upon the exposure being hedged, as a fair value hedge,
cash flow hedge or a hedge of a net investment in a foreign
operation.
22
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
W. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)
For derivative instruments that are designated and qualify as a
fair value hedge (i.e., hedging the exposure to changes in the
fair value of an asset or a liability or an identified portion
thereof that is attributable to a particular risk), the gain and
loss on the derivative instrument as well as the offsetting loss
or gain on the hedged item attributable to the hedged risk are
recognized in the same line item associated with the hedged item
in current earnings during the period of the change in fair
values. For derivative instruments that are designated and
qualify as a cash flow hedge (i.e. hedging the exposure to
variability in expected future cash flows that is attributable
to a particular risk), the effective portion of the gain or loss
on the derivative instrument is reported as a component of other
comprehensive income and reclassified into earnings in the same
line item associated with the forecasted transaction in the same
period or periods during which the hedged transaction affects
earnings.
The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized as a
financial expense in current earnings during the period of
change.
For derivative instruments not designated as hedging
instruments, the gain or loss is recognized as a financial
expense in current earnings during the period of change.
As part of its hedging strategy, the Group enters into forward
exchange contracts in order to protect the Group from the risk
that the eventual dollar cash flows from the sale of products to
international customers will be adversely affected by changes in
the exchange rates.
As part of its cash flow hedging strategy the Group enters into
forward exchange contracts to hedge forecasted salary expenses
denominated in a currency other than the U.S. dollar.
As of December 31, 2004, the Group had forward contracts with a
notional amount of approximately $30,900 to purchase and sell
foreign currencies ($20,800 in Euro, $5,400 in Great Britain
Pounds ("GBP") and $4,800 in other currencies). The Group also
had options to hedge future cash flow denominated in GBP in the
amount of $154,000. The forward contracts and the options mature
in 2005.
The fair value of the foreign exchange contracts and the options
as of December 31, 2004 is minimal.
23
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. STOCK-BASED COMPENSATION
Up until January 1, 2004, the Company elected to follow
Accounting Principles Board Opinion No. 25 ("APB 25")
"Accounting for Stock Issued to Employees" and FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain
Transactions Involving Stock Compensation" in accounting for its
employee stock option plans. Under APB 25, the Company accounted
for stock option grants using the intrinsic value method whereby
compensation expense is equal to the excess, if any, of the
quoted market price of the stock over the exercise price at the
grant date of the award or if applicable at a subsequent
measurement date. The Company recognized the expense over the
vesting period of the award on a straight-line basis. Phantom
options were accounted for as variable awards and accordingly
compensation expenses were measured at the end of each reporting
period and amortized on an accelerated basis over the remaining
vesting period (See Note 17).
Effective January 1, 2004 the Company adopted the fair value
recognition provisions of SFAS No. 123. Under the modified
prospective method of adoption selected by the Company under the
provisions of SFAS No. 148, the recognition provisions are
applied to all employee awards granted, modified, or settled
after January 1, 2004, and to previously granted awards that
were not fully vested on the date of adoption. Compensation cost
is recorded over the vesting period on a straight-line basis.
The cumulative effect on the deferred taxes relating to stock
based compensation resulting from the adoption of SFAS No. 123
amounted to a reduction of $152 and was recorded as a one time
adjustment to additional paid-in capital.
24
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. STOCK-BASED COMPENSATION (CONT.)
If the Company had elected to adopt the fair value recognition
provisions of SFAS No. 123 as of its original effective date,
pro forma net income and pro forma basic diluted net income per
share for the years ended December 31, 2002 and 2003 would be as
follows:
Year ended December 31,
--------------------------------------
2004 2003 2002
-------- -------- ----------
Net income as reported $ 52,993 $ 45,945 $ 45,113
Add - Stock based compensation
expense (income), net of
related tax effects as reported
(intrinsic method) 2,710 3,793 (741)
Deduct - Stock based compensation expense
under fair value based method of SFAS 123
net of related of tax effects (2,710) (2,956) (2,956)
-------- -------- ----------
Pro forma net income 52,993 $ 46,782 $ 41,416
======== ======== ==========
Net earnings per share:
Basic net earnings per share as
reported $ 1.33 $ 1.18 $ 1.17
======== ======== ==========
Diluted net earnings per share as
reported $ 1.29 $ 1.14 $ 1.13
======== ======== ==========
Pro forma basic net earnings per share $ 1.33 $ 1.20 $ 1.08
======== ======== ==========
Pro forma diluted net earnings per
share $ 1.29 $ 1.16 $ 1.04
======== ======== ==========
The fair value for these options was estimated using a
Black-Scholes option pricing model with the following weighted
average assumptions:
2004 2003 2002
---- ---- ----
Divided yield 2.20% 2.19% 1.99%
Expected volatility 26.7% 19.03% 21.9%
Risk-free interest rate 4% 1.20% 1.34%
Expected life 4 years 6 years 6 years
25
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Y. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash and
cash equivalents, short-term bank deposits, trade receivables,
short-term bank credit and loans and trade payables approximate
their fair values due to the short-term maturities of such
instruments.
The carrying amount of the available for sale marketable
securities is recorded according to its fair market value, as
determined by quoted market prices on stock exchange.
Long-term loans are estimated by discounting the future cash
flows using current interest rates for loans of similar terms
and maturities. The carrying amount of the long-term loans
approximates their fair value.
The fair value of foreign currency contracts (used for hedging
purposes) is estimated by obtaining current quotes from
investment bankers.
It was not practicable to estimate the fair value of the Group's
investments in shares of non-public companies that are accounted
for under the cost and equity method because of the lack of a
quoted market price and the inability to obtain valuation of
each company without incurring excessive costs. The carrying
amounts of these companies as of December 31, 2003 and 2004 were
$38,223 and $44,869, respectively, and represent the original
cost of acquisition, and in the case of affiliates also the
Company's equity in the earnings/losses of the affiliates and
its share in the changes of the affiliates' equity since the
dates of acquisition.
Z. BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share are computed based on the weighted
average number of ordinary shares outstanding during each year.
Diluted net earnings per share is computed based on the weighted
average number of ordinary shares outstanding during each year,
plus dilutive potential ordinary shares considered outstanding
during the year. Outstanding stock options are excluded from the
calculation of the diluted net earnings per ordinary share when
such securities are anti-dilutive. In all the years presented no
stock options were excluded.
26
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
AA. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
(1). In February 2004, the FASB issued EITF Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" ("EITF 03-1"). This
EITF was issued to determine the meaning of
other-than-temporary impairment and its application to
investments in debt and equity securities within the scope
of SFAS 115. EITF 03-1 also applies to investments in
equity securities that are both outside SFAS 115's scope
and are not accounted for by the equity method, which are
defined as "cost method investments". The impairment
measurement and recognition guidance prescribed in EITF
03-1 is delayed until the final issuance of FSP EITF
03-01-a. The disclosure requirements for investments
accounted for under SFAS 115 are effective for annual
reporting periods ending after June 15, 2003 and for costs
method investments for annual reporting periods ending
after June 15, 2004. The Company does not expect that the
adoption of the provisions of EITF 03-1 will have a
material effect on its financial position or results of
operations.
(2). In November 2004, the FASB issued Statement of Financial
Accounting Standard No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." ("SFAS 151"). SFAS
151 amends Accounting Research Bulletin ("ARB") No. 43,
Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight handling costs and wasted
materials (spoilage) should be recognized as
current-period charges. In addition, SFAS 151 requires
that allocation of fixed production overheads to the costs
of conversion be based on normal capacity of the
production facilities. SFAS 151 is effective for inventory
costs incurred during fiscal years beginning after June
15, 2005. The Company does not expect that the adoption of
SFAS 151 will have a material effect on its financial
position or results of operations.
(3). On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 123 (revised 2004)
("123(R)"), Share-Based Payment, which is a revision of
FASB Statement No. 123, "Accounting for Stock-Based
Compensation". Statement 123(R) supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees", and amends
FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to
be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than July 1,
2005. Early adoption will be permitted in periods in which
financial statements have not yet been issued. The Company
expects to adopt Statement 123 (R) on July 1, 2005. Since,
as noted in Note 2(AA) below, the Company adopted,
effective January 1, 2004, the fair-value-based method of
accounting for share-based payments, the adoption of
Statement 123(R) is not expected to have a material impact
on the Company's results of operation or its financial
position.
27
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
AA. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)
Statement 123(R) permits public companies to adopt its
requirements using one of two methods:
o A "modified prospective" method in which compensation cost
is recognized beginning with the effective date (a) based
on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and
(b) based on the requirements of Statement 123(R) for all
awards granted to employees prior to the effective date of
Statement 123(R) that remains unvested on the effective
date.
o A "modified retrospective" method which includes the
requirements of the modified prospective method described
above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year
of adoption.
The Company plans to adopt Statement No. 123(R) using the
modified prospective method.
The Company adopted the fair-value-based method of accounting
for share-based payments effective January 1, 2004 using the
"modified prospective method" described in FASB Statement No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Currently, the Company uses the
Black-Scholes-Merton formula to estimate the value of stock
options granted to employees and expects to continue to use this
acceptable option valuation model upon the required adoption of
Statement 123(R) on July 1, 2005. The Company does not
anticipate that adoption of Statement 123(R) will have a
material impact on its results of operations or its financial
position. However, Statement 123(R) also requires that the
benefits of tax deductions in excess of recognized compensation
cost be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date.
While the Company cannot estimate what those amounts will be in
the future (because they depend on, among other things, when
employees exercise stock options), the amount of operating cash
flows recognized in prior periods for such excess tax deductions
was $1,179, $758, and $648 in 2004, 2003 and 2002, respectively.
AB. RECLASSIFICATIONS
Certain financial statement data for prior years has been
reclassified to conform to current year financial statement
presentation.
28
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 3 - TRADE RECEIVABLES, NET
Trade receivables
December 31,
----------------------------
2004 2003
---- ----
Open accounts (*) $ 181,995 $ 170,287
Unbilled receivables 35,885 36,855
Less - allowance for doubtful accounts (3,064) (3,861)
--------- ---------
$ 214,816 $ 203,281
========= =========
(*) Includes affiliated companies $ 10,823 $ 6,668
========= =========
Note 4 - OTHER RECEIVABLES AND PREPAID EXPENSES
December 31,
----------------------------
2004 2003
---- ----
Deferred income taxes $ 20,603 $ 21,908
Prepaid expenses 17,914 14,310
Government institutions 5,719 5,826
Employees 1,204 513
Others 6,895 5,806
--------- ---------
$ 52,335 $ 48,363
========= =========
Note 5 - INVENTORIES, NET OF ADVANCES
December 31,
----------------------------
2004 2003
---- ----
Cost incurred on long-term contracts
in progress $ 254,009 $ 254,910
Raw materials 71,813 78,504
Advances to suppliers and subcontractors 21,164 20,137
--------- ---------
346,986 353,551
Less -
Cost incurred on contracts in progress
deducted from customer advances 14,533 14,581
--------- ---------
332,453 338,970
Less -
Advances received from customers (*) 75,776 77,482
Provision for losses 7,636 12,263
--------- ---------
$ 249,041 $ 249,225
========= =========
The Company has transferred legal title of inventories to certain
customers as collateral for advances received.
(*) Advances are allocated to the relevant inventories on a
per-project basis. In cases (projects) where the advances are in
excess of the inventories, the net amount is presented as a
liability. In cases where the inventories are in excess of advances
received, the net amount is presented as an asset.
29
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
A. Investments in companies accounted for under the equity method:
December 31,
-------------------------------
2004 2003
---- ----
SCD (1) $19,186 $17,347
VSI (2) 6,966 6,149
RedC (5) 3,100 -
Opgal (3) 2,873 2,390
Others (4) 999 592
------- -------
$33,124 $26,478
======= =======
(1) Semi Conductor Devices ("SCD") is an Israeli partnership,
held 50% by the Company and 50% by Rafael Armaments
Development Authority Ltd. ("Rafael"). SCD is engaged in
the development and production of various thermal
detectors and laser diodes. SCD is jointly controlled and
therefore is not consolidated in the Company's financial
statements.
(2) Vision Systems International LLC ("VSI") based in San
Jose, is a California limited liability company that is
held 50% by EFW and 50% by a subsidiary of Rockwell
Collins Inc. VSI operates in the area of helmet mounted
display systems for fixed wing military and paramilitary
aircraft. VSI is jointly controlled and therefore is not
consolidated in the Company's financial statements.
(3) Opgal Optronics Industries Ltd. ("Opgal") is an Israeli
company owned 50.1% by the Company and 49.9% by a
subsidiary of Rafael. Opgal focuses mainly on commercial
applications of thermal imaging and electro-optic
technologies. The Company jointly controls Opgal with
Rafael, and therefore Opgal is not consolidated in the
Company's financial statements.
(4) Mediguide Inc. ("Mediguide") and its Israeli subsidiary,
Mediguide Ltd., were established in 2000 as a spin-off
from the Company. The share capital of Mediguide consists
of Common shares and Preferred A, B, C and D shares. The
Common shares and the Preferred shares, both have voting
rights. The Company holds all of the Common shares of
Mediguide which constitute approximately 55% (43% on a
fully diluted basis) of the voting rights of Mediguide.
During 2001-2004, Mediguide issued Preferred shares to
other investors in consideration for approximately
$34,355. The Preferred shares issued entitle the other
investors to preference rights senior to all other classes
of shares previously issued by Mediguide in a liquidation
or a deemed liquidation event. Therefore, the Company did
not record any gain as a result of the above transaction.
In addition the Preferred shares entitle their holders to
certain participating rights. Accordingly, based on the
guidance in EITF 96-16, the Company does not consolidate
Mediguide. The carrying value of the investment in
Mediguide is zero.
30
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
(CONT.)
A. Investments in companies accounted for under the equity method
(cont.)
(5) RedC Optical Networks Inc. ("RedC"), a company registered
in Delaware, is engaged in the multi-focal optic
communications sector and as of December 31, 2003 was held
36.5% by El-Op. RedC designs develops and manufacture
optical amplifiers for dense wave-length multiplexing
optical networks for telecommunications. In the year ended
December 31, 2002, the Company recorded a provision for
loss on its investment in RedC of $2,500. This provision
has been presented under "Equity in net earnings of
affiliated companies and partnership".
In November 2004, El-Op acquired all of the outstanding
voting Preferred A shares of RedC from MRV Communications
Inc. for a consideration of $2,000, in accordance with
El-Op's right of first refusal based on the Preferred A
shares investment agreement. Prior to the acquisition,
El-Op held 57% of the Ordinary shares of RedC which
reflected 36.5% of its voting rights. Following the
acquisition, El-Op held 57% of the Ordinary shares and
100% of the Preferred A shares, which reflected 72.5% of
RedC's voting rights.
In December 2004, El-Op signed a Transfer Agreement for
selling all of it's holdings in RedC, including the
Ordinary shares and Preferred A shares, in consideration
for $3,100 which was paid in cash on the closing date in
January 2005. The closing was subject to certain
conditions, which were all met by January 21, 2005.
El-Op allocated the purchase price to the fair value of
the assets acquired and liabilities assumed.
Such allocation resulted in negative goodwill amounting to
approximately to $1,100. Since Red-C had no assets which
could be reduced by the negative goodwill, according to
the provisions of FAS 141, this goodwill was recorded as
other income in the financial statements.
31
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
(CONT.)
A. Investments in companies accounted for under the equity method
(cont.)
(6) The summarized aggregate financial information of
companies accounted for under the equity method is as
follows:
Balance Sheet Information:
December 31,
------------------------
2004 2003
-------- --------
Current assets $124,352 $105,457
Non-current assets 21,646 15,799
-------- --------
Total assets 145,998 121,256
======== ========
Current liabilities 68,655 59,076
Non-current liabilities 3,868 4,584
Shareholders' equity 73,475 57,596
-------- --------
Current assets $145,998 $121,256
======== ========
Income Statement Information:
Year ended December 31,
---------------------------------------
2004 2003 2002
---- ---- ----
Revenues $213,680 $183,426 $138,493
Gross profit 55,285 45,616 36,278
Net income 15,195 13,976 6,904
(7) See Note 16(F) for guarantees.
32
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
(CONT.)
B. Investments in companies accounted for under the cost method
December 31,
----------------------
2004 2003
---- ----
Sultam (1) $ 3,500 $ 3,500
ISI (2) 7,230 7,230
AAI (3) 1,000 1,000
Others 15 15
------- -------
$11,745 $11,745
======= =======
(1) Sultam Systems Ltd. ("Sultam"), held 10%, is an Israeli
company engaged in the development and manufacturing of
military systems in the artillery sector.
(2) ImageSat International N.V. ("ISI"), held 14% (10% on a
fully diluted basis), is engaged in the operation of
satellite photography formations and commercial delivery
of satellite photography for civil purposes.
(3) AeroAstro Inc. ("AAI") - In January 2003, the Company
purchased 8.33% of the common stock of AAI, a Delaware
corporation in consideration for $1,000. AAI is engaged in
innovative micro and nanospacecraft applications. AAI
manufactures low-cost satellite systems and components,
used in its own spacecraft and for spacecraft development
in and outside the U.S.
Note 7 - LONG-TERM BANK DEPOSITS AND TRADE RECEIVABLES
December 31,
-------------------
2004 2003
---- ----
Deposits with banks for loans granted
to employees (*) $1,603 $1,901
Long-term trade receivables 452 393
Other deposits with banks 47 53
------ ------
$2,102 $2,347
====== ======
(*) The deposits are linked to the Israeli CPI, bear annual interest
of 4% and are presented net of current maturities of $534 (2003 -
$633).
33
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 8 - PROPERTY, PLANT AND EQUIPMENT, NET
December 31,
---------------------------
2004 2003
Cost (1):
Land, buildings and leasehold improvements (2) $ 151,285 $ 140,812
Instruments, machinery and equipment (3) 222,153 196,229
Office furniture and other 26,828 25,254
Motor vehicles 37,308 29,776
--------- ---------
437,574 392,071
Accumulated depreciation (193,286) (162,850)
--------- ---------
Depreciated cost $ 244,288 $ 229,221
========= =========
Depreciation expenses for the years ended December 31, 2004, 2003
and 2002 amounted to $35,001, $30,775 and $26,525, respectively.
(1) Net of investment grants received (mainly for instruments,
machinery and equipment) in the amounts of approximately $29,800
as of both December 31, 2004 and 2003.
(2) Includes, rights in approximately 9,225 square meters of land in
Tirat Hacarmel, Israel. The land is leased from the Israel Land
Administration until the years 2014 to 2024 with a renewal
option for additional periods of up to 49 years. The Company's
rights in the land have not yet been registered in its name.
Includes, rights in approximately 10,633 square meters of land
in Rehovot, Israel. The land is leased from the Israel Land
Administration until the year of 2043 with a renewal option for
additional periods of up to 49 years. The Company's rights in
the land have not yet been registered in its name.
(3) Includes equipment produced by the Group for its own use in the
aggregate amount of $69,146 and $59,318 as of December 31, 2004
and 2003, respectively.
(4) As for pledges of assets - see Note 16(I).
34
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 9 - INTANGIBLE ASSETS, NET
A.
Weighted average
number of years
of amortization December 31,
--------------- --------------------
2004 2003
---- ----
Original cost:
Technology (1) 15 $ 85,413 $ 82,449
Trade marks (2) 17 8,000 8,000
Goodwill (3) 37,884 37,613
-------- --------
131,297 128,062
-------- --------
Accumulated amortization:
Technology 28,365 21,555
Trade marks 1,908 1,458
Goodwill 5,037 5,037
-------- --------
35,310 28,050
-------- --------
Amortized cost $ 95,987 $100,012
======== ========
(1) The technology acquired consists of four major items as
follows:
In 2000, the Company completed a merger with El-Op. A
portion of the purchase price was allocated to technology
($45,000), based on an independent appraisal. The
technology acquired in the merger with El-Op comprises
various technologies relating to:
a. Diode pumped and other advanced solid-state lasers
incorporating add-on eye-safety options.
b. Detectors for thermal imaging devices, including 2-D
arrays for second and third generation forward looking
infrared sensors.
c. Line of sight command, control and stabilization
systems employing computerized digital controllers.
d. Sophisticated image and signal processing, utilizing
the modern equipment and software.
e. High precision mechanical and optical component design
and manufacturing for the visible, ultraviolet and
infrared spectra, including special and exotic
materials, diffractive and planar optics, space borne
lightweight optics and multi-layer coatings.
f. Aviation instruments such as precision altimeters and
air speedometer.
In 2000, EFW acquired from Honeywell Inc., Honeywell's
business relating to head-up displays and tracking systems
for pilot helmets. An amount of $9,300 was allocated to
the acquired technology based on its estimated fair value
as prepared by the Company.
35
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 9 - INTANGIBLE ASSETS, NET (CONT.)
In 2001 and 2002, the Company acquired a Brazilian company
which serves as a center for the production and logistic
support of defense electronics programs in Brazil. An
amount of $5,500 was allocated to technology related to
the maintenance and support of avionic equipment.
In 2002, the Company acquired the business of the Defense
Systems Division of Elron Telesoft as detailed in Note
1(C) above in consideration for $5,700. An amount of
$5,100 was allocated to the technology related to the
government information technology control systems software
developed by Elron Telesoft.
(2) Includes trade marks acquired in the merger with El-Op in
2000.
(3) Includes mainly goodwill resulting from the merger with
El-Op ($34,200) in 2000 and goodwill acquired from
Honeywell Inc. ($1,800) in 2000. Until January 1, 2002,
goodwill was amortized at an annual rate of 5% - 10%. The
change in goodwill results from an acquisition of the
business of CIC (See Note 1(F) above).
B. Amortization expenses amounted to $7,260, $7,222 and $6,412 for
the years ended December 31, 2004, 2003 and 2002, respectively.
C. The annual amortization expense relating to intangible assets
existing as of December 31, 2004 is estimated to be
approximately as follows:
2005 $ 6,900
2006 5,600
2007 5,400
2008 5,200
2009 4,900
Thereafter 35,140
------------
Total $ 63,140
============
Note 10 - SHORT-TERM BANK CREDIT AND LOANS
December 31,
--------------------------------------------------------------------
2004 2003 2004 2003
----------------- --------------- ---------------- --------------
Short-term bank loans: Interest Rate
---------------------------------
In U.S. dollars 4.2-4.6% 3.3-4.75% $ 3,967 $ 533
In Euro - 3.5% - 1,927
------- -------
3,967 2,460
------- -------
Short-term bank credit:
In NIS unlinked 5.7-8.1% 7.2% 2,120 4,684
In U.S. dollars 4.4% 2.6% 2,505 1,365
------- -------
4,625 6,049
------- -------
$ 8,592 $ 8,509
======= =======
Weighted Average Interest Rate 4.7% 5.4%
36
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 11 - OTHER PAYABLES AND ACCRUED EXPENSES
December 31,
-------------------------
2004 2003
---- ----
Payroll and related expenses $ 42,491 $ 33,382
Provision for vacation pay 26,936 25,280
Government institutions (*) 31,619 25,243
Provision for warranty 9,477 9,692
Cost provisions and others (**) 59,179 64,223
-------- --------
$169,702 $157,820
======== ========
(*) Includes a provision for income taxes net of advances paid
and provision for royalties to the Office of the Chief
Scientist of Israel (See Note 16(A)).
(**) Includes provisions for estimated future costs in respect
of basic design and system operating difficulties, arising
subsequent to delivery and acceptance by the customer. The
calculation of the provision is based on past experience.
In addition, these amounts include unbilled services of
services provided.
Note 12 - CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED ON
CONTRACTS IN PROGRESS
December 31,
------------------------
2004 2003
---- ----
Advances received $180,738 $199,273
Less -
Advances presented under long-term liabilities 10,320 7,592
Advances deducted from inventories 75,776 77,482
-------- --------
94,642 114,199
Less -
Costs incurred on contracts in progress 14,533 14,581
-------- --------
$ 80,109 $ 99,618
======== ========
As for guarantees and liens see Note 16(F).
Note 13 - LONG-TERM LOANS
December 31,
Interest Years of -----------------------
Currency % maturity 2004 2003
------------ ------------ -------- ---- ----
Banks U.S. dollars Libor + mainly
0.75%-1.25% 2-3 $ 83,469 $ 57,574
Banks NIS-unlinked Israeli Prime - - 3,599
Office of Chief NIS-linked to
Scientist the Israeli-CPI 4.4% 3 4,131 7,683
Other 290 -
-------- ----------
87,890 68,856
Less-current maturities 1,656 6,532
-------- ----------
$ 86,234 $ 62,324
======== ==========
37
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 13 - LONG-TERM LOANS (CONT.)
The Libor rate as of December 31, 2004 was 2.56%. The maturities of
these loans after December 31, 2004 are as follows:
2005 - current maturities $ 1,656
2006 40,527
2007 42,550
2008 165
2009 170
2010 and thereafter 2,822
-------------
$ 87,890
=============
See Note 16(G) for covenants.
Note 14 - BENEFIT PLANS
EFW, the Company's subsidiary in the U.S., has adopted for its
employees in the U.S. benefits plans as follows:
Defined Benefit Retirement Plan
EFW has two defined benefit pension plans (the "Plans")
substantially covering its employees in the U.S. Monthly benefits
are based on years of benefit service and annual compensation.
Annual contributions to the Plans are determined using the unit
credit actuarial cost method and are equal to or exceed the minimum
required by law. Pension fund assets of the Plans are invested
primarily in stock, bonds and cash by a financial institution, as
the investment manager of the Plans' assets.
38
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 14 - BENEFIT PLANS (Cont.)
The following table reconciles the benefit obligations, Plans
assets, funded status and net asset (liability) information of the
Plans:
December 31,
--------------------------
2004 2003
---- ----
Benefit obligation at beginning of year $ 34,965 $ 28,439
Service cost 3,000 2,480
Interest cost 2,191 1,921
Actuarial losses 2,307 2,825
Unrecognized transition obligation 1,056 -
Benefits repaid (822) (700)
-------- --------
Benefit obligation at end of year 42,697 34,965
-------- --------
Plans assets at beginning of year 21,196 15,558
Actual return on Plan assets 1,756 2,689
Contributions by employer 2,971 3,649
Benefits repaid (822) (700)
-------- --------
Plans assets at end of year 25,101 21,196
-------- --------
Funded status of Plans (underfunded) (17,595) (13,769)
Unrecognized prior service cost (180) (195)
Unrecognized transition obligation 1,056 -
Unrecognized net actuarial loss 11,447 9,395
-------- --------
Net amount recognized $ (5,272) $ (4,569)
======== ========
Net asset (liability) consists of:
Accrued benefit liability $(13,899) $(11,011)
Intangible asset 895 51
Accumulated other comprehensive income 7,732 6,391
-------- --------
Net amount recognized $ (5,272) $ (4,569)
======== ========
Weighted average assumptions:
Discount rate as of December 31, 6.00% 6.25%
Expected long-term rate of return on Plan's assets 8.50% 9.00%
Rate of compensation increase 3.00% 3.00%
Year ended December 31,
---------------------------------------
2004 2003 2002
---- ---- ----
Components of net periodic pension cost:
Service cost $ 3,000 $ 2,480 $ 2,067
Interest cost 2,191 1,921 1,678
Expected return on Plans' assets (1,951) (1,573) (1,597)
Amortization of prior service cost (15) (15) 28
Recognized net actuarial loss 451 339 -
------- ------- -------
Net periodic pension cost $ 3,676 $ 3,152 $ 2,176
======= ======= =======
39
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 14 - BENEFIT PLANS (Cont.)
Defined Contribution Plan
The 401(k) savings plan ("401(k) plan") is a defined contribution
retirement plan that covers all eligible employees, as defined in
section 401(k) of the U.S. Internal Revenue Code. EFW's employees
may elect to contribute a percentage of their annual gross
compensation to the 401(k) plan. EFW may make discretionary matching
contributions as determined by the subsidiary. Total expense under
the 401(k) plan amounted to $1,744 for the year ended December 31,
2004 (2003 - $1,629, 2002 - $1,369).
Note 15 - TAXES ON INCOME
A. APPLICABLE TAX LAWS
(1) Measurement of taxable income under Israel's Income Tax
(Inflationary Adjustments) Law, 1985:
Results for tax purposes for the Company and certain of
its Israeli subsidiaries are measured and reflected in
accordance with the change in the Israeli Consumer Price
Index ("CPI"). As explained above in Note 2(B), the
consolidated financial statements are presented in U.S.
dollars. The differences between the change in the Israeli
CPI and in the NIS/U.S. dollar exchange rate cause a
difference between taxable income and the income before
taxes reflected in the consolidated financial statements.
In accordance with paragraph 9(f) of SFAS No. 109, the
Company has not provided deferred income taxes on the
above differences resulting from changes in exchange rates
and indexing for tax purposes.
(2) Tax benefits under Israel's Law for the Encouragement of
Industry (Taxes), 1969:
The Company and certain subsidiaries in Israel (mainly
El-Op and Cyclone Aviation Products Ltd.) are "Industrial
Companies", as defined by the Law for the Encouragement of
Industry (Taxes), 1969, and as such, these companies are
entitled to certain tax benefits, mainly amortization of
costs relating to know-how and patents over eight years,
accelerated depreciation and the right to deduct public
issuance expenses for tax purposes.
40
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - TAXES ON INCOME (CONT.)
(3) Tax benefits under Israel's Law for the Encouragement of
Capital Investments, 1969:
Several expansion programs of the Company and certain of
its Israeli subsidiaries ("the companies") have been
granted "Approved Enterprise" status under Israel's Law
for the Encouragement of Capital Investments, 1959. For
some expansion programs, the companies have elected the
grants track and for others they have elected the
alternative tax benefits track, waiving grants in return
for tax exemptions.
Accordingly, certain income of the companies, derived from
the "Approved Enterprise" expansion programs is tax exempt
for two-year to ten-year period and subject to reduced tax
rates of 25% for a five-year to eight-year period
commencing in the year in which the companies had taxable
income (limited to twelve years from commencement of
production or fourteen years from the date of approval,
whichever is earlier). As of December 31, 2004, the tax
benefits for these exiting expansion programs will expire
within the period of 2005 to 2012.
The entitlement to the above benefits is subject to the
companies fulfilling the conditions specified in the above
referred law, regulations published hereunder and the
letters of approval for the specific investments in
"Approved Enterprises". In the event of failure to comply
with these conditions, the benefits may be canceled and
the companies may be required to refund the amount of the
benefits, in whole or in part, including interest. (For
liens - see Note 16(J)). As of December 31, 2004,
Management believes that the companies are meeting all
conditions of the approvals.
As of December 31, 2004, retained earnings included
approximately $116,500 in tax-exempt profits earned by the
companies' "Approved Enterprises". If the retained
tax-exempt income is distributed, it would be taxed at the
corporate tax rate applicable to such profits as if the
Company had not elected the alternative tax benefits track
(currently - 25%) and an income tax liability would be
incurred of approximately $29,100 as of December 31,
2004.
The companies' board of directors have decided that their
policy is not to declare dividends out of such tax-exempt
income. Accordingly, no deferred income taxes have been
provided on income attributable to the companies'
"Approved Enterprise".
41
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - TAXES ON INCOME (CONT.)
(3) Tax benefits under Israel's Law for the Encouragement of
Capital Investments, 1969 (Cont.):
In Israel, income from sources other than the "Approved
Enterprise" during the benefit period will be subject to
tax at the regular corporate tax rate of 35%.
Since the companies are operating under more than one
approval, and since part of their taxable income is not
entitled to tax benefits under the above mentioned law and
is taxed at the regular tax rate of 35%, the effective tax
rate is the result of a weighted combination of the
various applicable rates and tax exemptions, and the
computation is made for income derived from each approval
on the basis of formulas specified in the law and in the
approvals.
B. NON - ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are taxed based on tax laws in their
countries of residence (mainly in the U.S.).
C. INCOME BEFORE TAXES ON INCOME
Year ended December 31,
----------------------------------
2004 2003 2002
---- ---- ----
Income before taxes on income:
Domestic $43,642 $38,423 $42,317
Foreign 16,985 11,090 11,977
------- ------- -------
$60,627 $49,513 $54,294
======= ======= =======
42
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
D. TAXES ON INCOME
Year ended December 31,
------------------------------------------
2004 2003 2002
---- ---- ----
Taxes on income:
Current taxes:
Domestic $ 6,661 $ 12,346 $ 11,654
Foreign 7,651 718 6,114
-------- -------- --------
14,312 $ 13,064 $ 17,768
-------- -------- --------
Deferred income taxes:
Domestic 1,463 (4,672) (3,561)
Foreign (556) 2,942 (2,059)
-------- -------- --------
907 (1,730) (5,620)
-------- -------- --------
Taxes in respect of prior years - - (2,800)(*)
-------- -------- --------
$ 15,219 $ 11,334 $ 9,348
======== ======== ========
(*) A reduction of tax expenses due to adjustments of
estimated tax provision pursuant to the completion of
prior years' tax assessments in respect of various Group
companies with the tax authorities.
43
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
E. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of net
deferred tax assets and liabilities are as follows:
Deferred
Tax asset (liability)((1)
-------------------------
Total Current Non-current
-------- -------- --------
As of December 31, 2004
Deferred tax assets:
Reserves and allowances $ 12,797 $ 13,191 $ (394)
Inventory 5,376 5,376 -
Net operating loss carryforwards 5,395 149 5,246
-------- -------- --------
23,568 18,716 4,852
Valuation allowance (3,445) - (3,445)
-------- -------- --------
Net deferred tax assets 20,123 18,716 1,407
-------- -------- --------
Deferred tax liabilities:
Property, plant and equipment (12,999) - (12,999)
Intangible assets (10,285) 2,639 (12,924)
Available for sale securities (752) (752) -
-------- -------- --------
(24,036) 1,887 (25,923)
-------- -------- --------
Net deferred tax assets (liabilities) $ (3,913) $ 20,603 $(24,516)
======== ======== ========
As of December 31, 2003
Deferred tax assets:
Reserves and allowances $ 11,149 $ 11,187 $ (38)
Inventory 7,952 7,952 -
Net operating loss carryforwards 6,606 439 6,167
-------- -------- --------
25,707 19,578 6,129
Valuation allowance (3,879) - (3,879)
-------- -------- --------
Net deferred tax assets 21,828 19,578 2,250
-------- -------- --------
Deferred tax liabilities:
Property, plant and equipment (12,769) - (12,769)
Intangible assets (12,067) 2,330 (14,397)
-------- -------- --------
(24,836) 2,330 (27,166)
-------- -------- --------
Net deferred tax assets (liabilities) $ (3,008) $ 21,908 $(24,916)
======== ======== ========
(1) The current tax asset is included in other receivables. Noncurrent tax
liability is included as a long-term liability.
44
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
F. As of December 31, 2004, The Group's Israeli subsidiaries have
estimated total available carryforward tax losses of
approximately $16,700, and the Group's non-Israeli subsidiaries
have estimated available carryforward tax losses of
approximately $7,300. These losses can be offset against future
taxable profits for an indefinite period. Deferred tax assets in
respect of the above carryforward losses amount to approximately
$5,400 in respect of which a valuation allowance has been
recorded in the amount of approximately $3,400.
G. Reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to income of
the Group, and the actual tax expense as reported in the
statements of operations, is as follows:
Year ended December 31,
---------------------------------------------
2004 2003 2002
---- ---- ----
Income before taxes as reported in the
consolidated statements of operations $ 60,627 $ 49,513 $ 54,294
Statutory tax rate 35% 36% 36%
======== ======== ========
Theoretical tax expense $ 21,219 $ 17,825 $ 19,546
Tax benefit arising from reduced rate as an
"Approved Enterprise" and other tax
benefits (7,196) (8,391) (9,054)
Tax adjustment in respect of different tax
rates for foreign subsidiaries 496 279 (461)
Operating carryforward losses for which
valuation allowance was provided (434) 126 2,189
Increase (decrease) in taxes resulting
from nondeductible expenses 1,095 993 (263)
Difference in basis of measurement for
financial reporting and tax return purposes (210) 846 458
Taxes in respect of prior years - - (2,800)
Other differences, net 248 (344) (267)
-------- -------- --------
Actual tax expenses $ 15,219 $ 11,334 $ 9,348
======== ======== ========
Effective tax rate 25.1% 22.9% 17.2%
======== ======== ========
H. AMENDMENT TO THE INCOME TAX ORDINANCE
On September 29, 2004, the Israeli Parliament approved the
Amendment to the Income Tax Ordinance (No. 140 and Temporary
Provision) (the "Amendment") which reduces the corporate tax
rate from 36% to 35% in 2004 and to a rate of 30% in 2007
progressively. The Amendment was signed and published in July
2004 and is therefore considered enacted in July 2004. The
adoption of the Amendment did not have a significant effect on
the Company's financial statements.
45
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES
A. ROYALTY COMMITMENTS
1. The Company and certain Israeli subsidiaries partially
finance their research and development expenditures under
programs sponsored by the OCS for the support of research
and development activities conducted in Israel. At the
time the participations were received, successful
development of the related projects was not assured.
In exchange for participation in the programs by the OCS,
the Company and the subsidiaries agreed to pay 2% - 5% of
total sales of products developed within the framework of
these programs. The royalties will be paid up to a maximum
amount equaling 100% to 150% of the grants provided by the
OCS, linked to the dollar and for grants received after
January 1, 1999, also bearing annual interest at a rate
based on LIBOR. The obligation to pay these royalties is
contingent on actual sales of the products, and in the
absence of such sales payment of royalties is not
required.
In some cases, the Government of Israel participation
(through the OCS) is subject to export sales or other
conditions. The maximum amount of royalties is increased
in the event of production outside of Israel.
The Company and certain of its subsidiaries may also be
obligated to pay certain amounts to the Israeli Ministry
of Defense and others on certain sales including sales
resulting from the development of certain technologies.
Royalties expensed amounted to $5,802, $7,812 and $14,471
in 2004, 2003 and 2002, respectively.
2. In September 2001, the OCS issued "Regulations for the
Encouragement of Research and Development in Industry"
(rules for determining the level and payment of royalties)
(the "regulations"). The regulations allow large R&D
intensive companies to reach certain agreements with the
OCS regarding determination of the amount and payment
schedule of royalties, subject to certain conditions.
If the Company elects to adopt the regulations, it will
have to record a significant one-time expense resulting
from accruing a liability for an absolute amount of
royalties.
In May 2002, El-Op's Board of Directors approved an
arrangement, proposed by the OCS, according to which El-Op
pays commencing in 2002, an agreed amount of $10,632 in
exchange for a release from all obligations to pay
royalties in the future. As a result El-Op recorded an
expense for the agreed amount net of the accrual for
royalties previously recorded by El-Op in the amount of
$9,801. This expense is included cost of revenues.
46
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
B. COMMITMENTS IN RESPECT OF LONG-TERM PROJECTS
In connection with long-term projects in certain countries, the
Company and certain subsidiaries undertook to use their
respective best efforts to make or facilitate purchases or
investments in those countries at certain percentages of the
amount of the projects. The companies' obligation to make or
facilitate third parties making such investments and purchases
is subject to commercial conditions in the local market,
typically without a specific financial penalty. The maximum
aggregate undertaking as of December 31, 2004 amounted to
$673,000 to be performed over a period of up to 11 years. This
amount is typically tied to a percentage (up to 100%) of the
amount of a specific contract.
In the opinion of the Company's Management, the actual amount of
the investments and purchases is anticipated to be less than
that mentioned above, since certain investments and purchases
can result in reducing the overall undertaking on more than a
one-to-one basis.
C. LEGAL CLAIMS
The Company and its subsidiaries are involved in legal claims
arising in the ordinary course of business, including claims by
employees, consultants and others. Company's Management, based
on the opinion of its legal counsel, believes that the financial
impact for the settlement of such claims in excess of the
accruals recorded in the financial statements will not have a
material adverse effect on the financial position or results of
operations of the Group.
D. LEASE COMMITMENTS
The future minimum lease commitments of the Group under various
non-cancelable operating lease agreements in respect of
premises, motor vehicles and office equipment are as of December
31, 2004 as follows:
2005 $ 6,655
2006 5,939
2007 4,547
2008 3,022
2009 and thereafter 13,060
------------
$ 33,223
============
Rent expenses for the years ended December 31, 2004, 2003 and
2002 amounted to $6,842, $9,177, and $9,215, respectively.
47
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
E. PUT OPTION
Three founding employees (the "Founders"), who collectively hold
approximately 32.3% of the outstanding shares of Kinetics Ltd.
("Kinetics"), a 51%-owned Israeli subsidiary, have a put option
to jointly sell all of their shares in Kinetics to the Company.
Two private investors holding in the aggregate approximately
16.7% of Kinetics' outstanding shares have "tag along" rights in
the event the Founders exercise the put option.
The put option is exercisable from January 1, 2005 until
December 31, 2005 at a price equal to the higher of the
Founder's pro-rata share (corresponding to the Founder's
shareholding percentage) of:
(1) The value of Kinetics as of the option exercise date as
determined by a third party appraiser mutually acceptable to the
Founders and to the Company. The appraiser will value Kinetics
as if Kinetics had distributed as dividends net profits
accumulated up to the option exercise date; or
(2) $12,077, reduced by 3% per annum, or pro-rata part thereof,
for the period beginning on July 1, 2003 and ending on the
option exercise date.
As of December 31, 2004, the fair value of the aforementioned
option was immaterial.
F. GUARANTEES
1. Guarantees in the amount of approximately $380,000 were
issued by banks on behalf of Group companies in order to
secure certain advances from customers and performance
bonds.
2. The Company has provided, on a proportional basis to its
ownership interest, guarantees for two of its investees in
respect of credit lines granted to them from banks
amounting to $12,000 (2003- $13,900), of which $11,500
(2003 - $13,400) relates to a 50%-owned foreign investee.
The guarantees will exist as long as the credit lines are
in effect. The Company would be liable under the guarantee
for any debt for which the investee would be in default
under the terms of the credit line.
G. COVENANTS
In connection with bank credits and loans, including performance
guarantees issued by banks and bank guarantees in order to
secure certain advances from customers, the Company and certain
subsidiaries are obligated to meet certain financial covenants.
Such covenants include requirements for shareholders' equity,
current ratio, operating profit margin, tangible net worth,
EBITDA, interest coverage ratio and total leverage. As of
December 31, 2004 the Company and its subsidiaries were in full
compliance with all covenants.
48
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
H. CONTRACTUAL OBLIGATIONS
Substantially all of the purchase commitments relate to
obligations under purchase orders and subcontracts entered into
by the Company. These purchase orders and subcontracts are
typically in a standard format proposed by the Company, with the
subcontracts and purchase orders also reflecting provisions from
the Company's applicable prime contract that are appropriate to
flow down to subcontractors and vendors. The terms typically
included in these purchase orders and subcontracts are
consistent with Uniform Commercial Code provisions in the United
States for sales of goods, as well as with specific terms called
for by its customers in international contracts. These terms
include the Company's right to terminate the purchase order or
subcontract in the event of the vendors' or subcontractors'
default, as well as the Company's right to terminate the order
or subcontract for the Company's convenience (or if the
Company's prime contractor has so terminated the prime
contract). Such purchase orders and subcontracts typically are
not subject to variable price provisions. As of December 31,
2004 and 2003 the purchase commitments were $345,000 and
$348,400 respectively.
I. In order to secure bank loans and bank guarantees in the amount
of $10,019 as of December 31, 2004, certain Group companies
recorded fixed charges on most of their machinery and equipment,
mortgages on most of their real estate and floating charges on
most of their assets.
J. A lien on the Group's Approved Enterprises has been registered
in favor of the State of Israel. Grants received in respect of
projects which have not yet been approved amount to
approximately $220 (see Note 15 (A) (3) above).
49
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
Note 17 - SHAREHOLDER'S EQUITY
A. SHARE CAPITAL
Ordinary shares confer upon their holders voting rights, the
right to receive dividends and the right to share in equity upon
liquidation of the Company.
B. 2000 EMPLOYEE STOCK OPTION PLAN
In 2000, the Company adopted an employee stock option plan for
employees comprising options to purchase up to 2,500,000
ordinary shares. The exercise price approximates market price of
the shares at the grant date. The plan includes an additional
2,500,000 options to be issued as "phantom" share options that
grant the option holders a number of shares reflecting the
benefit component of the options exercised, as calculated at the
exercise date, in consideration for their par value only.
Options vest over a period of one to four years from the date of
grant and expire no later than six years from the date of grant.
Any options which are canceled or forfeited before expiration
become available for future grants. As of December 31, 2004,
453,794 options of the Company were still available for future
grants.
C. "PHANTOM" SHARE OPTIONS
Until January 1, 2004, the Company applied the provision of APB
No. 25, under which the phantom share options were considered to
be part a variable awards as defined in APB No. 25, and
accordingly the compensation cost of the options was measured at
the end of each reporting period and amortized by the
accelerated method over the remaining vesting period. Starting
January 1, 2004, the Company accounts for its stock based
compensation awards under the fair value based method.
D. A summary of the Company's share option activity under the plans
is as follows:
2004 2003 2002
--------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
------- ----- ------- ----- ------- -----
Outstanding-beginning
of the year 3,735,602 $ 12.30 4,511,724 $ 12.26 5,107,634 $ 11.93
Granted 130,500 15.67 13,000 14.91 27,000 14.92
Exercised (1,666,774) 12.12 (757,947) 12.13 (558,901) 9.45
Forfeited (69,071) 12.10 (31,175) 12.29 (64,009) 11.33
--------- --------- --------- --------- --------- ---------
Outstanding - end of the
year 2,130,257 $ 12.60 3,735,602 $ 12.30 4,511,724 $ 12.26
========= ========= ========= ========= ========= =========
Options exercisable at
the end of the year 1,950,903 $ 12.36 2,547,196 $ 12.23 2,287,790 $ 12.18
========= ========= ========= ========= ========= =========
50
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
E. The options outstanding as of December 31, 2004, have been
separated into ranges of exercise prices, as follows:
Options outstanding Options exercisable
---------------------------------------------------- -----------------------------
Weighted Weighted
Number average Weighted Number average
outstanding remaining average outstanding as exercise
as of contractual exercise of December price per
Exercise price December 31, 2004 life (years) price per share 31, 2004 share
-------------- ----------------- ------------ --------------- -------------- ---------
$10.61-$12.16 1,500 0.82 $ 12.16 1,500 $ 12.16
$12.18-$18.99 1,050,427 2.17 12.60 960,750 12.36
$12.18-$18.99(*) 1,078,330 2.23 12.59 988,563 12.35
--------- ---- ----------- --------- -----------
2,130,257 2.20 $ 12.60 1,950,903 $ 12.36
========= ==== =========== ========= ===========
(*) Phantom share options.
Compensation expense (income) amounted to $3,387, $4,741 and
$(926) were recognized during the years ended December 31, 2004,
2003 and 2002, respectively. All the compensation expenses
(income) in the years 2002 and 2003 were related to the Phantom
share options under the stock option plan. The expenses in 2004
were recorded based on SFAS No. 123 and SFAS No. 148 according
to the modified prospective method. The expenses (income) were
recorded as follows:
Year ended December 31,
---------------------------------------
2004 2003 2002
---- ---- ----
Cost of revenues $ 1,863 $ 2,608 $ (509)
R&D and marketing expenses 677 948 (185)
General and administration expenses 847 1,185 (232)
------- ------- -------
$ 3,387 $ 4,741 $ (926)
======= ======= =======
F. The weighted average exercise price and fair value of options
granted during the years ended December 31, 2004, 2003 and 2002
were:
Less than market price
---------------------------------------
Year ended December 31,
---------------------------------------
2004 2003 2002
---- ---- ----
Weighted average exercise price $ 15.67 $ 14.91 $ 14.92
Weighted average fair values on
grant date $ 6.62 $ 4.63 $ 4.31
51
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
G. Computation of basic and diluted net earnings per share:
Year ended Year ended Year ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------------------------- ----------------------------------- ----------------------------------
Net Net Net
income to Weighted income to Weighted income to Weighted
shareholders averaged Per shareholders averaged Per shareholders averaged Per
of Ordinary number of share of ordinary number of share of ordinary number of share
shares shares (*) amount shares shares (*) amount shares shares (*) amount
------------ ---------- ------ ------------ ---------- ------ ------------ ---------- ------
Basic net earnings $52,993 39,952 $ 1.33 $45,945 39,061 $ 1.18 45,113 38,489 $ 1.17
Effect of dilutive
securities:
Employee stock
options - 1,089 - 1,169 - 1,374
------- ------ ------- ------ ------ ------
Diluted net earnings $52,993 41,041 $ 1.29 $45,945 40,230 $ 1.14 45,113 39,863 $ 1.13
======= ====== ====== ======= ====== ====== ====== ====== ======
* In thousands
H. TREASURY SHARES
The Company's shares held by the Company and its subsidiaries
are presented at cost and deducted from shareholder's equity.
I. DIVIDEND POLICY
Dividends declared by the Company are paid subject to statutory
limitations. The Company's board of directors has determined not
to declare dividends out of tax exempt earnings.
52
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 18 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
The Group applies Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information", ("SFAS No. 131"). The Group operates in one reportable
segment (see Note 1 for a brief description of the Group's
business).
A. Revenues are attributed to geographic areas based on location of
the end customers as follows:
Year ended December 31,
----------------------------------------
2004 2003 2002
-------- -------- --------
Europe $124,130 $109,409 $144,862
U.S 348,509 332,323 267,686
Israel 241,601 255,742 225,674
Others 225,685 200,506 189,234
-------- -------- --------
$939,925 $897,980 $827,456
======== ======== ========
B. Revenues are generated by the following product lines:
Year ended December 31,
----------------------------------------
2004 2003 2002
---- ---- ----
Airborne systems $367,927 $373,580 $372,756
Land vehicles systems 199,224 199,800 135,700
Command, control, communications,
computers, intelligence, surveillance
and reconnaissance systems (C4ISR) 108,925 133,900 122,700
Electro-optical systems 200,322 140,500 148,200
Others 63,527 50,200 48,100
-------- -------- --------
$939,925 $897,980 $827,456
======== ======== ========
C. Revenues from single customer, which exceed 10% of total
revenues in the reported years:
Year ended December 31,
--------------------------
2004 2003 2002
---- ---- ----
IMOD 17% 21% 20%
U.S. Government 10% * *
* Less than 10%
53
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 18 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION (CONT.)
D. Long-lived assets by geographic areas:
Year ended December 31,
----------------------------------------
2004 2003 2002
---- ---- ----
Israel $237,887 $229,396 $211,256
U.S 84,701 81,261 83,814
Others 17,687 18,576 13,660
-------- -------- --------
$340,275 $329,233 $308,730
======== ======== ========
Note 19 - RESEARCH AND DEVELOPMENT COSTS, NET
Year ended December 31,
------------------------------------------
2004 2003 2002
-------- -------- --------
Total expenses $ 86,368 $ 65,487 $ 62,560
Less - participations (19,522) (10,568) (5,550)
-------- -------- --------
$ 66,846 $ 54,919 $ 57,010
======== ======== ========
Note 20 - FINANCIAL EXPENSES, NET
Year ended December 31,
-----------------------------------------
2004 2003 2002
---- ---- ----
Expenses:
On long-term bank debt $(1,544) $(2,215) $(2,765)
On short-term bank credit and loans (2,309) (2,182) (2,435)
Others (3,181) (3,905) (1,899)
------- ------- -------
$(7,034) (8,302) (7,099)
------- ------- -------
Income:
Interest on cash, cash equivalents
and bank deposits 628 309 1,547
Others 1,115 4,397 1,063
------- ------- -------
1,743 4,706 2,610
------- ------- -------
Gain (loss) from exchange rate
differences (561) (1,274) 1,454
------- ------- -------
$(5,852) $(4,870) $(3,035)
======= ======= =======
54
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 21 - RELATED PARTIES TRANSACTIONS AND BALANCES
Year ended December 31,
-------------------------------------
2004 2003 2002
---- ---- ----
Income -
Sales to affiliated companies (*) $56,346 $34,674 $37,924
Participation in expenses $ 2,594 $ 1,773 $ 902
Cost and expenses -
Supplies and services from affiliated
companies (**) $16,338 $21,606 $10,457
Participation in expenses $ 627 $ 1,751 $ 1,498
Financial expenses $ 3 $ 23 $ 110
December 31,
-----------------------
2004 2003
---- ----
Trade receivables and other receivables (*) $13,214 $ 6,668
Trade payables (**) $ 5,445 $ 4,975
(*) The significant sales include sales of helmet mounted
cueing systems purchased from the Company by VSI.
(**) Includes electro-optics components and sensors purchased by
the Company from SCD and electro-optics products purchased
by the Company from Opgal.
Note 22 - RECONCILIATION TO ISRAELI GAAP
As described in Note 1, the Company prepares its financial
statements in accordance with U.S. GAAP. The effects of the
differences between U.S. GAAP and generally accepted accounting
principles in Israel ("Israeli GAAP") on the Company's financial
statements are detailed below.
A building purchased from Elbit Ltd.
------------------------------------
According to Israeli GAAP, the Company charged to additional paid-in
capital reserves the excess of the amount paid over net book value
of a building acquired from Elbit Ltd in 1999. According to U.S.
GAAP, the entire amount paid is considered as the cost of the
building acquired.
Proportional consolidation method
---------------------------------
According to Israeli GAAP, a jointly controlled company should be
included according to the proportional consolidation method.
According to U.S. GAAP, the investment in such a company is recorded
according to the equity method.
55
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 22 - RECONCILIATION TO ISRAELI GAAP (cont.)
Tax benefit in respect of options exercised
-------------------------------------------
According to Israeli GAAP, tax benefits from employee options
exercised are recorded as a reduction of tax expense. According to
U.S. GAAP, the difference between the above mentioned tax benefits
and the benefits recorded in respect of compensation expense in the
financial statements are credited to additional paid-in capital.
Goodwill
--------
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill
and Other Intangible Assets" according to which goodwill and
intangible assets with indefinite lives are no longer amortized
periodically but are reviewed annually for impairment (or more
frequently if impairment indicators arise). According to Israeli
GAAP, all intangibles, including goodwill should be amortized.
Investment in marketable securities - Tadiran
---------------------------------------------
Pursuant to SFAS 115, marketable securities which are
available-for-sale are presented on the basis of their market value
and changes in such value are charged (or credited) to other
comprehensive income. According to Israeli GAAP non-current
investments in marketable securities are presented at cost.
1. Effect on net income and earnings per share
Year ended December 31,
------------------------------------------
2004 2003 2002
---- ---- ----
Net income as reported according to
U.S. GAAP $ 52,993 $ 45,945 $ 45,113
Adjustments to Israeli GAAP (458) 595 (4,227)
-------- -------- --------
Net income according to Israeli GAAP $ 52,535 $ 46,540 $ 40,886
======== ======== ========
2. Effect on shareholders' equity
As per
As reported Adjustments Israeli GAAP
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As of December 31, 2004
Shareholders' equity $434,700 $(13,124) $421,576
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As of December 31, 2003
Shareholders' equity $432,079 $(10,367) $421,712
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