UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
OR
for the fiscal year ended December 31 , 2023
Commission File No. 0-28998
OR
OR
(Exact name of Registrant as specified in its charter) | ||
| Not Applicable | ||
| (Translation of Registrant’s name into English) | ||
| (Jurisdiction of incorporation or organization) | ||
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
1.0 New Israeli Shekel per share | ||||||||
Securities registered or to be registered pursuant to Section 12(g) of the Act. | ||
| Not Applicable | ||
(Title of Class) | ||
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. | ||
| Not Applicable | ||
| (Title of Class) | ||
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 44,453,850
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒ Yes □ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
□ Yes ☒ No
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes □ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes □ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer", "accelerated filer” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Emerging growth company | |||||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☒ | International Financial Reporting ☐ Standards as issued by the International Accounting Standards Board | Other ☐ | |||||||||
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
□ Item 17 □ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Table of Contents
| Item | Description | Page | ||||||
PART I
General Disclosure Standards
The consolidated financial statements of Elbit Systems Ltd. (Elbit Systems) included in this annual report on Form 20-F are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). Unless otherwise indicated, all financial information contained in this annual report is presented in U.S. dollars. References in this annual report to the “Company”, “we”, “our”, “us” and terms of similar meaning refer to Elbit Systems and our subsidiaries unless the context requires otherwise.
The name “ELBIT SYSTEMS”, and our logo, brand, product, service and process names appearing in this document, are the trademarks of the Company or our affiliated companies. All other brand, product, service and process names appearing in this document are the trademarks of their respective holders and appear for informational purposes only. Reference to or use of any third-party mark, product, service or process name herein does not imply any recommendation, approval, affiliation or sponsorship of that or any other mark, product, service or process name. Nothing contained herein shall be construed as conferring by implication, estoppel or otherwise any license or right under any patent, copyright, trademark or other intellectual property right of the Company or any of our affiliated companies.
Cautionary Statement with Respect to Forward-Looking Statements
This annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Israeli Securities Law, 1968, as amended (the Israeli Securities Law). These statements relate to our current plans, estimates, strategies, goals, beliefs, intents, expectations, assumptions and projections about future events and as such do not relate to historical or current facts. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.
Forward-looking statements contained herein generally are identified by the words “anticipate”, “intend”, “believe”, “estimate”, “project”, “expect”, “will likely result”, “strategy”, “plan”, “may”, “should”, “will”, “would”, “will be”, “will continue” and similar expressions, and the negatives thereof. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, the outcomes of which cannot be predicted. Therefore, actual future results, performance and trends may differ materially from these forward-looking statements due to a variety of factors, including, without limitation:
•governmental regulations and approvals;
•changes in governmental priorities (including budgeting) or policies;
•general market, political and economic conditions in the countries in which we operate or sell, including Israel and the United States, among others, or which may affect the global economy, including worldwide conflicts such as the ongoing conflict between Russia and Ukraine;
•implications of conflicts in the Middle East, including the “Swords of Iron” war and any future developments related thereto;
•global or national health considerations, including the outbreak of a pandemic or contagious disease;
•the development and launch of our products, or their market acceptance;
•our projected expenses and capital expenditures;
•differences in anticipated and actual program performance, including the ability to perform under long-term fixed-price contracts;
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•fluctuations in foreign currency exchange rates;
•the scope and length of customer contracts;
•our ability to achieve strategic goals from acquisitions of businesses and the risks associated with the integration of such businesses;
•our ability to protect our proprietary information;
•our ability to avoid, withstand and/or recover from cyber-attacks on our systems;
•the effect of competitive products, technology and pricing;
•our ability to attract, incentivize and retain key employees;
•changes in applicable tax rates;
•changes in interest rates;
•inventory write-downs and possible liabilities to customers from program cancellations, including due to political relations between Israel and countries where our customers may be located; and
•the outcome of legal and/or regulatory proceedings and changes in legislation.
The factors listed above are not all-inclusive, and further information about risks and other factors that may affect our future performance is contained in this annual report on Form 20-F. All forward-looking statements speak only as of the date of this annual report, unless otherwise indicated. Although we believe the expectations reflected in the forward-looking statements contained in this annual report are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We expressly disclaim any obligation to update or review any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.
Item 1. Identity of Directors, Senior Management and Advisers.
Information not required in annual report on Form 20-F.
Item 2. Offer Statistics and Expected Timetable.
Information not required in annual report on Form 20-F.
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Item 3. Key Information.
3A. [Reserved]
3B. Capitalization and Indebtedness
Information not required in annual report on Form 20-F.
3C. Reasons for the Offer and Use of Proceeds
Information not required in annual report on Form 20-F.
Risk Factors
We attempt to identify, manage and mitigate risks to our business. However, some of these risks are not within our control, and risks and uncertainty cannot be fully eliminated or predicted. Prior to investing in our ordinary shares you should carefully consider the following risk factors as well as other information contained in this annual report. The risk factors presented below may not necessarily be in order of importance or probability of occurrence.
Risks Related to Our Operations
A cyber or security attack or other similar incident resulting in a breach, disruption or failure in our or our supply chain's digital environment could adversely affect us. Our operations depend heavily on the continued and secure functioning of our varied digital environment software and hardware that stores, processes and transmits data within the Company and from and to us and our business partners. This digital environment is subject to breach, damage, destruction, disruption, malfunction or failure from, among other things, cyber-attacks and other unauthorized intrusions, power losses, telecommunications failures, earthquakes, fires and other natural disasters.
We are continuously subjected to attempted cyber-attacks, ranging from standard phishing mails to sophisticated campaigns. Our computer and communications systems, databases and users face ongoing threats of malicious software (malware), social engineering, distributed denial of service (DDoS), malicious code, zero-day vulnerabilities and other security threats and system disruptions carried out by different threat actors. For example, in June 2022, our monitoring and protection systems detected a cyber-incident at our U.S. subsidiary involving unauthorized access by a ransomware group to our subsidiary's network that resulted in disclosure of certain personal data and a minimal amount of non-critical business data. The incident was contained through the implementation of various measures, including the immediate shut-down of the network, which was gradually restored. Relevant authorities were notified by our subsidiary. We believe this incident did not have a material impact on the Company.
In particular, we are targeted by experienced and skilled computer programmers and hackers, including those sponsored by or acting for foreign governments or terrorist organizations. Such programmers and hackers attempt to penetrate or circumvent our cyber security defenses, obtain data and damage or disrupt our digital environment in order to, among other things, misappropriate or compromise our intellectual property or other proprietary or protected information or that of our employees, customers and other business partners, prevent us from being able to use such information in our operations or demand that we pay ransom. Our suppliers are also sometimes subject to cyber-attacks, which pose a risk to those of our systems and operations that are dependent on such suppliers.
Governmental and other end users and customers are increasingly requiring us and our supply chain to meet specific computer system cyber protection and information assurance requirements and standards as a pre-condition to receive customer program-related information and enter into business contracts. We devote significant resources to configure, operate, maintain, monitor, upgrade and improve the security of our systems and databases and to meet applicable customer requirements regarding their protection. However, despite our efforts to secure our systems and databases and meet cyber protection and information assurance requirements, such as by adding data security obligations and data breach notification requirements in our agreements with certain third-party service providers, due to the complex and evolving nature of the cyber security risk landscape, we and our suppliers may still face system failures, data breaches, loss of intellectual property and interruptions in our operations, or fail to meet customer requirements, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. For information about our cybersecurity risk management, strategy and governance, see Item 16K. Cybersecurity.
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We may experience production delays, discontinuation of supply or liability if suppliers fail to make compliant or timely deliveries. The manufacturing process for some of our products largely consists of the assembly, integration and testing of purchased components. Some components are available from a small number of suppliers, and in a few cases a single source (sometimes due to limitations we, the Israeli government, the U.S government or others apply with respect to purchase from certain sources). Limited sources of supply, as well as any discontinuation of supply, could result in added costs and manufacturing delays. Moreover, if our subcontractors fail to meet their design, delivery schedule, information assurance, regulatory compliance or other obligations, we could be held liable by our customers, and we may be unable to obtain full or partial recovery from our subcontractors for those liabilities. Similar implications can result from disruptions in transportation and shipping of supplies which could cause delays and increase costs. Worldwide geopolitical conditions, such as the ongoing conflict between Russia and Ukraine and the related sanctions have resulted in a general increase in these risks. These conditions have also resulted in worldwide shortages and supply chain disruption, thereby causing additional procurement costs to the Company and delays in our production. Furthermore, the “Swords of Iron” war and increased tensions in the Middle East have also caused supply chain disruptions due to limitations on export to Israel as well as limited transportation by air and sea and subsequent increase in costs of purchasing and shipping materials. We are working to mitigate these risks, including by increasing our inventories, however we cannot eliminate all potential impacts to our business. The foregoing disruptions could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We could be adversely affected if we are unable to recruit and retain key employees and corresponding knowledge. Our success depends on key management, engineering, scientific and technical personnel and our continuing ability to attract and retain highly qualified personnel. Over the past few years, we have witnessed growing competition for the services of such personnel and an increase in the costs required for the recruitment and retention of qualified personnel, particularly in certain engineering areas. We face risks related to business operations, research and development, as well as risks of losing knowledge and expertise through the loss of key employees, including due to geopolitical considerations. Moreover, our competitors may hire and gain access to the expertise of our former employees. The loss of key employees and the failure to attract highly qualified personnel in the future, as well as the failure to maintain and continue to develop knowledge relevant to technological innovation, could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We face execution risks. In recent years, the Company has experienced a considerable increase in demand for its products resulting in strong order growth. This growth may continue if global demand for the Company's products and solutions is sustained. To address the strong demand for its products and solutions, Elbit has decided to invest additional resources in its manufacturing facilities, recruit additional employees and make additional adjustments such as updating working procedures and processes and information technology systems. If the Company fails to adequately plan for or continuously address the increased demand for its products and solutions due to, for example, insufficient levels of work force, materials or components and/or lacking the required infrastructure, it may not be able to fulfill its existing contracts on schedule or may not be able to enter into new contracts, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We face acquisition and integration risks. From time to time we make equity or asset acquisitions and investments in companies and technology ventures. Such acquisitions generally are intended to achieve various strategic initiatives including the expansion of our product or service offerings, technical capabilities or customer base. See Item 4. Information on the Company – Mergers, Acquisitions and Divestitures. These acquisitions involve risks and uncertainties such as:
•our pre-acquisition due diligence may fail to identify material risks or we may fail to accurately estimate the commercial and technical value of the acquired assets;
•significant acquisitions may negatively impact our financial results, including cash flow and financial liquidity;
•significant goodwill assets recorded on our consolidated balance sheet from prior acquisitions are subject to impairment testing, and unfavorable changes in circumstances could result in impairment to those assets;
•acquisitions may result in significant additional unanticipated costs associated with unforeseen risks, price adjustments or write-downs;
•we may not integrate newly-acquired businesses and operations in an efficient and cost-effective manner;
•relocation, combination or upgrade of facilities of acquired businesses may be more costly or time consuming than planned;
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•we may fail to achieve the strategic objectives, synergies, cost savings, financial and other benefits expected from acquisitions;
•the technologies acquired may not prove to be those needed to be successful in our markets, may be less mature or less relevant than anticipated, may not have adequate intellectual property rights protection or may infringe proprietary rights of others;
•we may assume significant liabilities and exposures that exceed the enforceability or other limitations of applicable indemnification provisions, if any, or the financial resources of any indemnifying parties, including indemnity for intellectual property (IP), tax or regulatory compliance issues, such as anti-corruption and environmental compliance, that may result in us incurring successor liability;
•we may fail in identifying or transferring some of the assets that are required for the operation of the acquired businesses or fail to retain key employees of the acquired businesses;
•the attention of senior management may be diverted from our existing operations, or we may spend significant financial and management resources on potential acquisitions that do not materialize;
•we may be exposed to potential shareholder claims or conflicts if we acquire an interest in a publicly traded company or become a shareholder with partial holdings in a private company;
•certain of our newly acquired operating subsidiaries in various countries could be subject to more restrictive regulations by the local authorities after our acquisition, including regulations relating to foreign ownership of, and export authorizations for, local companies (which have become more stringent in recent years), which could adversely impact the acquisition's value; and
•we may lose expertise and knowledge if key employees are not retained for a sufficient period of time.
We cannot ensure that these risks or other unforeseen factors will not offset the intended benefits of the acquisitions, and such risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Our operations may be negatively impacted by international health pandemics. In recent years, the Covid-19 pandemic has adversely impacted the global economy, the markets in which we operate and our operations, including a slow-down in our commercial aviation business. The pandemic's macro-economic implications included disrupted transportation networks and global supply chains and shortages of components, which have caused us increased costs and extended lead times, and also prompted us to increase our inventories. The emergence of new variants or other pandemics, as well as possible governmental responsive actions, such as quarantines, lockdowns, restrictions on holding large-sale events and travel restrictions, could create business disruptions for us and our customers, supply chain and other business partners, potentially resulting in cessation, reduction or delay of business and an increase of our costs and may also impact government priorities and budgets and the demand for our products. These could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We may be affected by failures of our prime contractors. We often act as a subcontractor, and a failure of a prime contractor to meet its obligations may affect our ability to receive payments under our subcontract.
Undetected problems in our products or manufacturing processes and misuse of our products could impair our financial results and give rise to potential product liability, breach of contract or other claims. We offer a wide portfolio of products and solutions, which is routinely being updated and adjusted. From time to time, we encounter unintentional defects or malfunctions in our products and solutions, or deficiencies in the manufacturing processes of such products and solutions. In addition, we often rely on subcontractors to design and manufacture some components that are embedded in our systems. In the event of defects in the design, production or testing of our or our subcontractors’ products and systems, including our products and solutions sold for safety purposes in the homeland security and commercial aviation areas, or if the cyber protection measures included in our products and solutions do not operate as intended, we could face substantial repair, replacement, delays or service costs, potential liability and damage to our reputation. Similar issues could arise if we fail to timely implement and maintain our manufacturing processes or if a defected part affects our development, production and operation infrastructures. In addition, we must comply with regulations and practices to prevent the use of parts and components that are considered as counterfeit or that violate third-party intellectual property rights. Our efforts to implement appropriate design, manufacturing and testing processes for our products or systems may not be sufficient to prevent such occurrences. We could also be subject to claims if our products are intentionally or unintentionally misused. We may not be able to obtain product liability or other insurance to fully cover such risks in a cost-effective manner, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
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We may face labor relations disputes or not be able to amend collective bargaining agreements in a timely manner. We are party to collective bargaining agreements that cover a substantial number of our employees, a number which could increase, for example, as a result of future acquisitions of companies. We have faced and may in the future face attempts to unionize additional parts of our organization. Disputes with trade unions or other labor relations difficulties, as well as failure to timely amend or extend collective bargaining agreements, could lead to labor disputes, slow downs, strikes and other measures, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. For further information, see Item 6. – Directors, Senior Management and Employees – Employees – Collective Bargaining Agreements.
Our business could be adversely affected by climate change, regulatory requirements and market responses thereto. Global climate change could increase the risks of natural disasters and hazards, such as earthquakes, flooding, fires, rising temperatures and sea levels. The impacts of such events could affect our operations and facilities, as well as those of our suppliers and customers, and increase our operational costs. Current or future insurance arrangements may not provide protection for costs that may arise from such events, particularly if such events are catastrophic in nature. In addition, increased focus on climate change in recent years has led to emerging regulation and new policy requirements by various authorities around the world, including with respect to greenhouse gas emissions. New and evolving laws and regulations such as recently adopted SEC rules on climate-related disclosures, could mandate different or more restrictive standards than those currently in effect, could require us to change our methods of operation and make additional capital investments, or could result in legal and regulatory proceedings against us. We are currently evaluating the impact of these new rules and regulations on our Company. See also “Risks Related to Legal and Regulatory Requirements – Our operations may expose us to liabilities under various environmental protection, health and safety laws and regulations” below. Climate change, as well as Environmental, Social and Governance (ESG) in general, has also become the focus of investors, advisory service providers, financial institutions, some of our business partners and other market participants, including some of our customers, and those groups are increasingly evaluating our environmental, social and governance practices, disclosures and performance before making investments and other business decisions. The effects and costs of climate change, or any failure to meet related requirements and evolving stakeholder expectations in connection with ESG, could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Risks Related to Our Markets and Industry
Our future success in a competitive industry depends on our ability to develop new offerings and technologies. The markets we serve are highly competitive and characterized by rapid changes in technologies and evolving industry standards. In addition, some of our systems and products are installed on platforms that may have a limited life or become obsolete. Unless we develop new offerings or enhance our existing offerings, we may be susceptible to loss of market share resulting from the introduction of new or enhanced offerings by our competitors. We compete with many large and mid-tier defense, homeland security and commercial aviation contractors on the basis of system performance, cost, overall value, delivery and reputation. Many of these competitors are larger and have greater resources than us, and therefore may be better positioned to take advantage of economies of scale and develop new technologies. Some of these competitors are also our suppliers in some programs. Accordingly, our future success will require that we:
•identify emerging technological trends;
•identify additional uses for our existing technology to address customer requirements;
•develop, upgrade and maintain competitive products and services;
•add innovative solutions that differentiate our offerings from those of our competitors;
•bring solutions to the market quickly at cost-effective prices;
•develop working prototypes as a condition to receiving contract awards; and
•structure our business, through joint ventures, teaming agreements and other forms of alliances, to reflect the competitive environment.
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We need to continually invest significant human capital and financial resources to pursue these goals, and there can be no assurance that adequate resources will continue to be available to us or be prioritized for these purposes. We may experience difficulties that delay or prevent our development, introduction and marketing of new or enhanced offerings, and such new or enhanced offerings may not achieve adequate market acceptance. Moreover, new technologies or changes in industry standards or customer requirements could render our offerings obsolete or unmarketable. Any new offerings and technologies are likely to involve costs and risks relating to design changes, the need for additional capital and new production tools, satisfaction of customer specifications, adherence to delivery schedules, specific contract requirements, supplier performance, customer performance and our ability to predict program costs. New products sometimes lack sufficient demand or experience technological problems or production delays. Our customers frequently require demonstrations of working prototypes prior to awarding contracts for new programs or require short delivery schedules which sometimes causes us to purchase long-lead items or materials in advance of the contract award, without any certainty of receiving the award. Moreover, due to the design complexity of our products, we sometimes experience delays in developing and introducing new products. Such delays sometimes result in increased costs and development efforts, deflect resources from other projects or increase the risk that our competitors may develop competing technologies that gain market acceptance in advance of our products. If we fail in our new product development efforts, or our products or services fail to achieve market acceptance more rapidly than the products or services of our competitors, our ability to obtain new contracts could be negatively impacted. Any of the foregoing costs and risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Our revenues depend on a continued level of government business. We derive most of our revenues directly or indirectly from government agencies, mainly the Israeli Ministry of Defense (IMOD), the U.S. Department of Defense (DoD) and other military or governmental authorities of various countries, pursuant to contracts awarded to us under defense and homeland security-related programs. The funding of these programs could be reduced or eliminated due to numerous factors, including geopolitical events and macro-economic conditions, as well as changes in policies or priorities of a specific government or security pacts between several governments. As a result, our current orders from such governmental customers may be subject to modifications and terminations, and our future orders may be reduced, due to factors over which we have no or little control. In some cases, such developments, as well as other changes relating to specific markets or customers, may lead to our exit from certain business operations, which could also result in asset impairment. On March 5, 2024, the Company reported an expected write-off in the fourth quarter of 2023 of approximately $18 million related to the restructuring and closing of an underperforming subsidiary with limited synergies to the Company. A reduction or elimination of government spending under current contracts with us and changes in future spending priorities, and our discontinuation of certain business operations, could cause a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We face risks in our international operations. We derive a significant portion of our revenues from international sales. Entry into new markets as well as changes in international, political, economic or geographic conditions could cause significant reductions in our revenues. In addition to the other risks from international operations set forth elsewhere in these risk factors, some of the risks of doing business internationally include international trade sanctions, imposition of tariffs and other trade barriers and restrictions. Imposition of import restrictions or tariffs by any government could lead to retaliatory actions by other countries with broad effects in many industries and economies internationally. Broad-based international trade conflicts, as well as conflicts involving the State of Israel, such as the “Swords of Iron” war, could have negative consequences on the demand for our products and services outside Israel as well as on exports from other countries to Israel (including by our suppliers) (see “Conditions in Israel and the Middle East may affect our operations” below). Some of our global subsidiaries and their employees and business partners are also subject from time to time to protests and vandalism that are aimed against Israel, Elbit and Israeli defense contractors. Other risks of doing business internationally include political and economic instability in the countries of our customers and suppliers, changes in diplomatic and trade relationships, increasing instances of terrorism worldwide and armed conflicts, some of which may be affected by Israel’s overall political situation (see “Risks Related to Our Israeli Operations and Environment” below). Although we generally do not conduct business in Russia and Ukraine, an escalation or expansion of this conflict could continue to affect additional regions and increase the volatility of global economic conditions. In addition, sanctions by the Israeli government, the U.S. government or by other governments or international organizations that apply with respect to our counterparties to certain contracts may make it difficult or impossible to complete these or other related contracts. Trade restrictions applied by the Israeli government with respect to certain countries sometimes also limit our sales to other governments that did not apply the same restrictions. All of these could, in turn, affect our business. As of the date of this annual report we are unable to predict the full impact of the conflict between Russia and Ukraine nor the “Swords of Iron” war on the economy or on our business and operations. Any of the foregoing risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
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We face increasing requirements for industrial participation and localization by many of our customers. In recent years, there has been a growing trend in numerous countries to encourage work with local industries, including through various incentives and budgetary allocations. Examples include a preference for purchasing from domestic suppliers and requirements for cooperation with local entities, including transfer of technologies and production lines. Adhering to such a trend often involves complex operational issues and investments in facilities and subsidiaries in the local country. In addition, a number of our international programs require us to meet “Industrial Participation” or offset obligations, which involve additional costs. See Item 5. Operating and Financial Review and Prospects – Off-Balance Sheet Transactions. If we fail to successfully collaborate with our business partners to meet requirements for cooperation with local entities, or to meet our Industrial Participation or offset obligations, we could be subject to contractual penalties or termination and our ability to obtain new business could be negatively impacted. This could, in turn, have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Due to consolidation in our industry, we are likely to compete with certain potential customers. As the number of companies in the defense industry has decreased in recent years, the market share of some prime contractors has increased. Some of these companies are vertically integrated with in-house capabilities similar to ours in certain areas. Thus, at times we could be seeking business from certain of these prime contractors, while at other times we could be competing with some of them. Decisions to consolidate business by these major contractors or our failure to maintain good business relations with them could negatively impact our business.
Certain of our contracts may be terminated by our customers. Our contracts with customers may be terminated, amended or delayed by our customers for various reasons, including for their convenience. Such terminations, amendments or delays which the Company from time to time faces, may be due to factors over which we have little or no control (see also “Our revenues depend on a continued level of government business” above). In some cases, termination would eliminate our right to payment under the contract and could also cause additional expenses, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. On March 5, 2024, the Company reported an expected write-off in the fourth quarter of 2023 of approximately $34 million related to a discontinued project.
We are subject to risks associated with artificial intelligence (AI) technologies. We currently incorporate AI capabilities into some of our products and solutions and in our business operations, and we may do so more in the future. The rapid pace and complexity of AI development may require the investment of resources for us to remain competitive, and we may not receive sufficient returns if we are not successful in achieving the outcomes we expect. In addition, our competitors may incorporate AI into their products more quickly or more successfully than us, which could impair our ability to compete effectively (see also “Our future success in a competitive industry depends on our ability to develop new offerings and technologies” above). Because AI is a developing technology, with a developing legal framework, use of AI may expose us to additional liability as well as technological, operational, legal, regulatory and other risks, particularly if the AI we adopt produces errors, causes infringement or otherwise does not function as intended. All of these risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Financial-Related Risks
We face currency exchange risks. We generate a substantial amount of our revenues in currencies other than the U.S. dollar (our financial reporting currency), mainly New Israeli Shekels (NIS), Great Britain Pounds (GBP), Euro, Brazilian reals and Australian dollars, and we incur a substantial amount of our expenses (primarily human resources, operational and supply chain expenses) in currencies other than the U.S. dollar, mainly NIS. To the extent we derive our revenues or incur our expenses in currencies other than the U.S. dollar, we are subject to exchange rate fluctuations between the U.S. dollar and such other currencies. For example, we are sometimes negatively affected by exchange rate changes during the period from the date we submit a price proposal until the date of contract award or until the date(s) of payment. Certain currency derivatives we use to hedge against exchange rate fluctuations may not fully protect against sharp exchange rate fluctuations, and in some cases we are not be able to adequately and cost-effectively hedge against all exchange rate fluctuations. In addition, our international operations expose us to the risks of price controls, restrictions on the conversion or repatriation of currencies, or even devaluations or hyperinflation in the case of currencies issued by countries with unstable economies. All of these currency-related risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. See below “Risks Related to Our Israeli Operations and Environment – We may be affected by changes in Israel’s economy” and Item 5. Operating and Financial Review and Prospects – Impact of Inflation and Exchange Rates.
We may be adversely affected by increased levels of inflation and interest rates. Disruptions and volatility in the global economy and financial markets in recent years have put upward pressure on prices, causing widespread inflation. In response to rising inflation, central banks in the markets in which we operate, including the Bank of Israel and the United States Federal Reserve, have raised interest rates and tightened their monetary policies. Both domestic and international markets experienced significant inflationary pressures and rising interest rates during financial year 2022. Despite a degree of moderation in 2023, the levels of inflation and interest rates remained high. In addition, the Company's debt level increased in 2023. As a result, the Company's borrowing costs have significantly increased.
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Even if the moderation continues, the decrease in inflation and interest rates may not be rapid and thus inflation and interest rates may remain at a relatively high level for a period, causing the Company additional considerable costs, such as costs of supplies and human resources, mainly under long-term fixed-price contracts. High interest rates could also cause an additional significant increase in our borrowing costs on existing debt subject to variable interest rates and new debt that we may issue, could affect the fair value of our investments and may further expose us to currency exchange risks. See also “We face currency exchange risks” above and “We face risks relating to financing for our operations and issuing guarantees” below. A global environment of high levels of inflation and interest rates and concurrent increased costs may also continue to impact our customers’ purchasing power, budgets, priorities and our industry overall. Interest rate increases or other government actions taken to reduce inflation could also slow borrowing and spending, thereby placing economic markets at risk of recession, which could also affect the performance of our business partners under our joint projects. All of these risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We face risks of cost overruns in fixed-price contracts. Most of our contracts are fixed-price contracts, under which we generally assume the risk that increased or unexpected costs may reduce profits or generate a loss. The risk of adverse effects on our financial performance from such increased or unexpected costs can be particularly significant under fixed-price contracts for which changes in estimated gross profit/loss are recorded on a “cumulative catch-up basis”. See Item 5. Operating and Financial Review and Prospects – General – Critical Accounting Policies and Estimates – Revenue Recognition and Item 18. Financial Statements - Note 2S. The costs which typically fluctuate under our fixed-price contracts relate to internal design and engineering efforts, system or product certification processes and purchase of materials and components. In some cases we underestimate the costs to be incurred in a fixed-price contract, and experience a loss on the contract. Losses due to increased or unexpected costs in fixed-price contracts could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We have risks relating to pre-contract costs. We sometimes participate in “risk-sharing” contracts, or incur pre-contract costs relating to specific anticipated contracts or delivery orders, in which our non-recurring costs or other costs that are pre-contract costs, are only recoverable if the contract or order is actually awarded or if there is a sufficient level of sales for the applicable product, which typically is not guaranteed. In some cases the anticipated contract is not awarded or sales do not occur at the level anticipated, and as a result, we are not able to recover our non-recurring or pre-contract costs. Such pre-contract costs could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We face fluctuations in revenues and profit margins. Our revenues may fluctuate between periods due to changes in pricing, sales volume or project mix. Moreover, because certain of our project revenues are recognized upon achievement of performance milestones, such as units-of-delivery/point-in-time revenue recognition, we sometimes experience fluctuations in year-to-year and quarter-to-quarter financial results, which may be significant. Similarly, our profit margin may vary significantly during the course of a project as a result of changes in estimated project gross profits that are recorded in results of operations on a cumulative catch-up basis pursuant to the percentage-of-completion accounting method due to judgment and estimates that are complex and are subject to a number of variables (such as the complexity of the required work, length of performance, labor productivity, availability of materials, execution by our suppliers, and payments by our customers). See Item 5. Operating and Financial Review and Prospects – General – Critical Accounting Policies and Estimates – Revenue Recognition and Item 18. Financial Statements – Note 2S. As a result, our financial results for prior periods may not provide a reliable indicator of our future results. In addition, because of the significance of management’s judgments and estimation processes mentioned above, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial condition.
Our backlog of projects under contract is subject to unexpected adjustments, delays in payments and cancellations. Our backlog includes revenue we expect to record in the future from signed contracts and certain other commitments. Many projects may remain in our backlog for an extended period of time due to the size or long-term nature of the contract. In addition, from time to time, for reasons beyond our control (including economic conditions, exchange rate fluctuations or customer needs), projects are delayed, scaled back, stopped or cancelled, or customers delay making payments, which may adversely affect the revenue, profit and cash flow that we ultimately receive from contracts reflected in our backlog.
We have risks related to our debt obligations. In connection with our bank credits and loans, our notes listed on the Tel-Aviv Stock Exchange and the Commercial Paper we issued in Israel, we are subject to certain restrictions and are obligated to meet certain covenants. These restrictions affect, and may limit or eliminate, our ability to plan for or react to market conditions, meet capital needs or otherwise carry out our activities or business plans. Our ability to comply with the terms of our financing arrangements can be affected by events beyond our control, including prevailing economic, financial market and industry conditions, and we cannot assure that we will be able to comply when required. These terms could limit our ability to take advantage of financing, mergers and acquisitions or other opportunities. A breach of any restrictive covenants in our financing agreements, as well as our failure to repay our debts or maintain our rating, could result in an event of default
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under those agreements, which could in turn lead to acceleration of the debts, cross-defaults, and other penalties. These could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. For additional information on our debt see Item 5. Operating and Financial Review and Prospects – Financial Resources; Israeli Series B, C and D Notes and – Israeli Commercial Paper.
We have risks related to the inherent limitations of internal control systems. We are subject to a range of requirements relating to internal control over financial reporting. Despite our internal control measures, we may still be subject to financial reporting errors or even fraud, which we may not detect. A control system, which is increasingly based on computerized processes, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. In addition, the benefit of each control must be considered relative to its cost, and the design of a control system must reflect such reasonable resource constraints. Implementation of changes or updates to our control systems, including implementation of our enterprise resource planning (ERP) system at additional sites worldwide, may encounter unexpected difficulties and delays. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts, by collusion of two or more persons or by management overriding the controls. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with applicable policies or procedures may deteriorate. See Item 15. Controls and Procedures. Failure to maintain effective internal controls, and possible investigations or sanctions by regulatory authorities, could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We face risks relating to financing for our operations and issuing guarantees. A number of our major projects require us to arrange, or to provide, guarantees in connection with a customer’s financing of a specific project. These include commitments by us as well as guarantees provided by financial institutions relating to advance payments received from customers. Customers typically have the right to draw down against advance payment guarantees in the event of a default claim under the applicable contract. In addition, some customers require that contract payment periods be extended for a number of years, sometimes beyond the period of contract performance. We may face difficulties in issuing guarantees or providing financing for our programs, including in cases where a customer encounters impaired ability to continue to comply with extended payment terms. Moreover, our balance sheet could reflect increased leverage if we were required to provide significant financing for our programs. See Item 4. Information on the Company – Financing Terms.
In some of our projects, we are exposed to the credit risks of our customers (see Item 4. Information on the Company – Financing Terms). We sometimes seek to protect all or part of our financial exposure by various measures such as insurance, however, such measures may not always be available in a cost-effective manner, may not fully cover our risks and may not be maintained through the entire program term. In addition, we sometimes assist our customers with obtaining financing from third parties. Such financing is normally insured but when insurance does not cover our full exposure, a customer's failure to pay us may result in a write-off and additional costs to the Company.
In an inflationary climate, we are also required to enter loan commitments with higher interest rates than comparable loan commitments in the past (see above – “We may be adversely affected by increased levels of inflation and interest rates”). Our borrowings under variable interest rate instruments expose us to interest rate risk. As interest rates increase, our debt service obligations on our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Difficulties in obtaining financing at attractive rates could impact our ability to adequately meet our business needs or execute our growth strategy. Any of the foregoing risks could have a material adverse affect on our business, reputation, financial condition, results of operations and cash flow.
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Our effective tax rate may be subject to fluctuations. Our worldwide effective tax rate could fluctuate as a result of several factors, many of which are outside of our control, including: (i) changes in the mix of revenues and income we derive from the jurisdictions where we operate that have different statutory tax rates; (ii) amendments to tax laws and regulations and changes in interpretations in the jurisdictions where we operate; and (iii) tax assessments, including any related tax interest or penalties, which could significantly affect our income tax expense for the period in which the assessments take place. In addition, our tax returns are periodically audited or subject to review by tax authorities in the various jurisdictions in which we operate around the world. Moreover, the Organization for Economic Cooperation and Development (OECD) has introduced the base erosion and profit shifting (BEPS) project. Increases in our effective tax rates from the above factors could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Changes to tax laws or classifications in any of the jurisdictions in which we operate could materially affect us and our shareholders. Tax laws, including tax rates, in the jurisdictions in which we operate are often unsettled and may be subject to significant changes. For example, the U.S. tax reform enacted in 2022 (informally titled the Inflation Reduction Act) introduced a number of significant changes to the U.S. federal income tax rules. The OECD’s BEPS project has resulted in wide-ranging and continuous changes in the principles of international taxation and the tax laws in individual countries, including the new Global Minimum Tax rules (GLOBE) introduced in 2021 (referred to as “Pillar 2”). Pillar 2 rules contemplate changes to numerous international tax principles and national tax incentives and enforce other arrangements such as a minimum effective tax liability. Governments have been translating the Pillar 2 rules into specific national tax laws, as previously done with respect to BEPS, and Pillar 2 is effective as of financial year 2024, in certain countries, but not including Israel. These changes, when adopted by individual countries, could adversely affect our financial position, including our provision for income taxes. At this stage we cannot assess the impact of the new rules on our financial results.
In February 2022, the Council of the European Union updated its grey list, which includes countries that do not yet comply with all international tax standards but have committed to implementing reforms, to add Israel and nine other countries. In February 2024, the grey list was updated and Israel was removed therefrom, and stated to be cooperating with the EU and having no pending commitments. In order to be considered as cooperative for tax purposes, jurisdictions are required to meet the following criteria: tax transparency, fair taxation, and anti-BEPS measures. European entities engaging with countries listed on the grey or black lists may be subject to certain restrictions. Changes in tax laws, policies, treaties or regulations, and their interpretation or enforcement, are unpredictable. Any of these occurrences could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
In addition, changes to tax laws, their interpretation or our classification under them can result in adverse consequences to our shareholders. For example, in case Elbit Systems is treated as a Passive Foreign Investment Company (a PFIC), during any taxable year during which a U.S. Shareholder (as defined in Item 10. Additional Information – Taxation – United States Federal Income Tax Considerations) holds our ordinary shares, certain adverse U.S. federal income tax consequences and additional reporting requirements could apply to that U.S. Shareholder. Based on our audited financial statements and relevant market and shareholder data, we do not believe we were treated as a PFIC with respect to our 2023 or 2022 taxable year and do not expect to be a PFIC for our current taxable year or in the reasonably foreseeable future. However, whether we are a PFIC is a factual determination that must be made at the close of each year and is based on factors that may be outside of our control, including, among other things, the valuation of our ordinary shares and assets, which will likely change from time to time. See Item 10. Additional Information – Taxation – United States Federal Income Tax Considerations.
Funding obligations to our pension plans could reduce our liquidity. Funding obligations for certain of our pension plans are impacted by the performance of the financial markets and interest rates. When interest rates are low, or if the financial markets do not provide expected returns, we are required to make additional contributions to these pension plans. Volatility in the equity markets or actuarial changes in mortality tables can change our estimate of future pension plan contribution requirements. See Item 18. Financial Statements – Notes 2R and 17.
Our business involves risks that may not be adequately covered by insurance. Our business involves the development and production of products and systems for customers around the world. These products and systems can involve new technologies that are not yet fully tested. In addition, in some cases our insurance policies contain exclusions from coverage such as war and terror and cybersecurity incidents. We may not be able to obtain product liability or other insurance to fully cover our risks in a cost-effective manner, and the monetary amount of our insurance coverage may not fully cover the liabilities we may incur from our activities, which could be substantial and could harm our business, reputation, financial condition, results of operations and cash flow. In addition, conditions in the global insurance market may make it more costly to obtain adequate insurance coverage in areas such as directors and officers (D&O) liability insurance.
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Risks Related to Legal and Regulatory Requirements
We are subject to government procurement and anti-bribery/corruption rules and regulations. We are required to comply with government contracting rules and regulations relating to, among other things, cost accounting, sales of various types of munitions, anti-bribery and procurement integrity, which increase our performance and compliance costs. See Item 4. Information on the Company – Governmental Regulation. Our supply chain is also required to comply with many of these regulations. We engage in certain markets considered to have high bribery and corruption risks. Investigations by government agencies have become more frequent in a number of countries, including Israel and the U.S. Failure to remain up to date with applicable regulatory changes around the world or to fully comply with these rules and regulations (as well as applicable sanctions regulations, such as those relating to Russia), whether directly or indirectly, could result in the modification, termination or reduction of the value of our contracts, additional costs, the assessment of penalties and fines against us, our suspension or debarment from government contracting or subcontracting for a period of time or criminal sanctions against us or our office holders, employees, supply chain or customers, all of which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We depend on governmental approvals for international sales, procurement and acquisitions. Our international sales, as well as our international procurement of skilled human resources, technology, software and hardware, depend largely on export authorizations and other approvals from the governments of Israel, the U.S. and other countries. See Item 4. Information on the Company – Governmental Regulation. In some cases, we are unable to obtain certain approvals and approvals granted to us may expire or be revoked. If we, our customers or our suppliers fail to obtain or comply with certain approvals in the future, or if certain approvals previously obtained are revoked or expire and are not renewed due to factors such as changes in political conditions, increasing stringency of international export control requirements or imposition of sanctions, our ability to sell our products and services to overseas customers and our ability to obtain goods and services essential to our business could be interrupted, resulting in a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
In addition, most countries require local governmental approval for acquisitions of domestic defense and homeland security-related businesses, which may be denied, or subject to unfavorable conditions or to conditions that could increase ongoing expenses, if the local government determines that the acquisition is not in its national interest. Such regulations are becoming more stringent in a number of countries. We may also be unable to obtain antitrust approvals for certain acquisitions as our operations expand. Failure to obtain such governmental approvals could negatively impact our future business and prospects.
Our operations may expose us to liabilities under various environmental protection, health and safety laws and regulations. Our operations are affected by environmental protection, health and safety requirements. Recent years have been characterized by a substantial increase in the stringency and enforcement of legal provisions and regulatory requirements in these areas and the cost of compliance with such regulatory changes. Changes in laws and regulations around the world may limit or otherwise affect the use of our products or impact our manufacturing processes, due to environmental protection, health, safety, or other considerations. These include, among other things, regulations regarding the storage and handling of hazardous materials, including munitions, used in our operations. See Item 4 – Information on the Company – Governmental Regulation – Environmental, Health and Safety Regulations. Standards adopted in the future, such as those related to greenhouse gas emissions, may require us to modify our methods of operation, which may necessitate additional resources. Failure to meet such standards may also affect our position in obtaining new business or investments (see also “Risks Related to Our Operations – Our business could be adversely affected by climate change, regulatory requirements and market responses thereto” above). Some of our operations involve inherent risks of physical injury, such as manufacturing and testing of our systems and platforms, as well as handling of hazardous materials including munitions and explosives. Despite our implementation of prevention measures and other efforts to protect the safety of our employees, we sometimes face accidents, resulting in physical injuries and damage to equipment, facilities and the environment. We are also sometimes required or otherwise choose to implement remediation measures to comply with environmental protection and health and safety requirements. Furthermore, some of our business licenses are for fixed periods and must be renewed from time to time. Renewal of such permits is not certain and is sometimes made contingent on additional environmental, health and safety conditions and costs. In connection with some of our operations, we are sometimes subject to certain procedures and orders under environmental, health and safety laws and regulations. In case of violation or liability under such laws and regulations, including with respect to any contamination or our storage, manufacture, testing or handling of munitions and explosives, as a result of our inability to obtain permits, or due to human error, accident, equipment failure or other causes, we could be subject to fines, costs, civil or criminal sanctions, face property damage or personal injury claims or be required to incur substantial investigation or remediation costs. These factors could cause disruptions in our operations and have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
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Our business depends on proprietary technology that may be infringed or disclosed without our authorization. Many of our systems and products depend on our proprietary technology for their success. Like other technology-oriented companies, we rely on a combination of IP, some of which is not formally protected. Our formally protected IP includes patents, trade secrets, copyrights and trademarks. We also utilize non-disclosure agreements, confidentiality provisions in sales, procurement, employment and other agreements and technical measures to establish and protect proprietary rights in our products. Our ability to successfully protect our IP may be limited because:
•IP laws in certain jurisdictions may be relatively ineffective;
•detecting infringements and enforcing proprietary rights may be difficult due to unavailability of details of competitors' technology and may divert management’s attention and company resources;
•contractual measures such as non-disclosure agreements and confidentiality provisions may afford only limited protection;
•our patents may expire, thus providing competitors access to the applicable technology;
•competitors may independently develop products that are substantially equivalent or superior to our products or circumvent our IP rights; and
•IP not formally protected may be misappropriated or leaked to our competitors.
In addition, sometimes third parties register patents in technologies relevant to our business areas and assert infringement claims against us. The cost of defending against infringement claims could be significant, regardless of whether the claims are valid. If we are not successful in defending such claims, we may be prevented from using or selling certain products of ours, be liable for damages and required to make adjustments to our software, technology or products, or to obtain licenses, which may not be available on reasonable terms, any of which may have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We are subject to laws and contractual obligations regarding data protection. Certain information we receive and maintain regarding our employees and third parties is subject to various local and national laws regarding privacy and data protection. Many of these laws are rapidly evolving and increasingly rigorous. In addition, we are frequently subject to contractual obligations requiring us to protect the confidential information of customers. A failure or perceived failure by us to comply with laws, industry standards or contractual obligations regarding the protection of data could subject us to enforcement actions and other litigation by customers and governmental authorities, fines, damages and negative publicity. These could, in turn, have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Other Risks Related to Our Ordinary Shares
Our share price may be volatile and may decline. Numerous factors, some of which are beyond our control and unrelated to our operating performance or prospects, may cause the market price of our ordinary shares to fluctuate significantly. Factors affecting market price include, but are not limited to: (i) variations in our operating results and ability to achieve our key business targets; (ii) sales or purchases of large blocks of stock; (iii) changes in securities analysts’ earnings estimates or recommendations; (iv) differences between reported results and those expected by investors and securities analysts; and (v) changes in our business including announcements of new contracts or other major events by us or by our competitors. In addition, we could be subject to securities class action litigation following periods of volatility in the market price of our ordinary shares.
Other general factors and market conditions that could affect our stock price include but are not limited to changes in: (i) the market’s perception of our business; (ii) the businesses, earnings estimates or market perceptions of our competitors or customers; (iii) the outlook for the defense, homeland security and commercial aviation industries; (iv) general market, economic or health (including pandemics) conditions unrelated to our performance; (v) the legislative or regulatory environment; (vi) government defense spending or appropriations; (vii) military or defense activities and conflicts locally and worldwide; (viii) the level of national or international hostilities; and (ix) the general geopolitical environment. A significant increase in our share price can also increase our payment obligations under our stock price-linked employee compensation plans (as occurred in 2022 in respect of our 2018 Phantom Plan).
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We have a major shareholder with significant influence over certain matters requiring shareholder approval. As of March 15, 2024, Federmann Enterprises Ltd. (FEL) owns approximately 44.03% of our ordinary shares, directly and indirectly. Therefore, subject to shareholder approval special majority requirements under the Israeli Companies Law - 1999, as amended (the Companies Law) and our articles of association, FEL may have significant influence over the outcome of matters requiring shareholder approval, including the election of directors. Michael Federmann, who serves as a member of our board of directors, is (through entities under his control) the controlling shareholder of FEL, and he is also the chair of the board and the chief executive officer of FEL. Therefore, Mr. Federmann controls, directly and indirectly, the vote of our ordinary shares owned by FEL. See below – Item 6. Directors, Senior Management and Employees – Board Practices – Appointment of Directors and – External Directors, Item 7. Major Shareholders and Related Party Transactions – Major Shareholders and Item 10. Additional Information – Approval of Certain Transactions and – Provisions Relating to Major Shareholders.
Risks Related to Our Israeli Operations and Environment
Conditions in Israel and the Middle East may affect our operations. Political, economic and military conditions in Israel and the Middle East directly affect our operations. Since the establishment of the State of Israel, a number of armed conflicts have taken place between Israel and some of its Arab neighbors. Although the recent Abraham Accords have enhanced Israel's relations with certain countries in the Middle East, an ongoing state of hostility, varying in degree and intensity, has caused security and economic problems for Israel, and for Israeli businesses and employees. Political, economic and military conditions in Israel and the Middle East could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
On October 7, 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of brutal attacks on civilian and military targets. Hamas also launched extensive rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in many other parts of Israel. Israel has also been attacked by other terrorist organizations on different fronts, including from Lebanon, which have prompted military responses from Israel. Following the attacks, the State of Israel declared a state of war, which is ongoing. See Item 4. Information on the Company – Conditions in Israel – “Swords of Iron” War.
While Elbit has experienced a material increase in orders from the IMOD since the start of the “Swords of Iron” war, at the same time the war has caused operational disruptions due to mobilization of personnel for reserve duty (also see below – “Many of our employees and some of our officers are obligated to perform military reserve duty in Israel”), evacuation of facilities for security and safety reasons and supply chain disruptions. As a result, we have relocated certain production lines from areas of the country that were evacuated, recruited additional employees, increased monitoring of our global supply chain to identify delays, shortages and bottlenecks, increased inventories and rescheduled deliveries to certain of our customers as necessary. The macro-economic effects of the war also include shortages of certain materials, limitations on transportation, and resulting increases in costs. The war may also have adverse effects on our reputation, cause delays in performance of orders, cause damages to our facilities and restrict our business activities with third parties. If the war is prolonged or escalates further, for example by expanding to additional fronts or becoming a broader regional conflict, the negative effects on our business may increase. The full extent of the effects of the war on the Company's performance will depend on future developments that are difficult to predict at this time and the risks related to the war could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Many of our employees and some of our officers are obligated to perform military reserve duty in Israel.
Generally, Israeli citizens and permanent residents are obligated to perform ongoing military reserve duty up to a specified age. Reserve soldiers may also be called to active military duty at any time under emergency circumstances, for extended periods. During the “Swords of Iron” war, a considerable number of our employees were called for reserves duty – as of December 31, 2023, approximately 15% of our work force in Israel had been mobilized. Since December the number of employees mobilized has decreased to approximately 7% as of March 15, 2024, and could fluctuate depending on future developments.
In accordance with Israeli law, effective as of March 15, 2024, employees on reserve duty continue to be fully paid by the Company, while the National Insurance Institute refunds the Company for their salaries, up to a certain statutory ceiling (which is sometimes lower than the salaries we pay to such employees) with no refund provided for additional employment costs. As a result, the Company has incurred, and will likely continue to incur, costs in respect of its employees who are called to reserve duty for which it is not fully indemnified by the government. For further details see below Item 4. Information on the Company – Conditions in Israel – National Insurance Institute. Although the Company has recruited additional employees to limit the effect of reserve call-ups on its business operations, the absence of our employees, as well as those of certain of our suppliers, for extended periods could cause delays in our programs and operations, and this, as well as the costs incurred by the Company, could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
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Political relations could limit our ability to sell or buy internationally. We could be adversely affected by the interruption or reduction of trade between Israel and its trading partners. Some countries, companies and organizations continue to participate in a boycott of Israeli firms, other firms doing business with Israel and Israeli-owned companies operating in other countries. These actions have increased since the commencement of the “Swords of Iron” war. In addition, foreign government defense export policies towards Israel could also make it more difficult for us to obtain the export authorizations necessary for our activities. See above “Risks Related to Our Markets and Industry”. Restrictive laws, policies or practices directed towards Israel or Israeli businesses or a decision to reduce trade with Israeli businesses could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Reduction in Israeli government spending or changes in priorities for defense products may adversely affect our earnings. The Israeli government may reduce its expenditures for defense items or change its defense or other priorities in the coming years. In addition, the Israeli defense budget may be adversely affected if there is a reduction in U.S. foreign military assistance. See above “Risks Related to Our Markets and Industry”. Any of the foregoing circumstances could have an adverse effect on our business, reputation, financial condition, results of operation and cash flow.
Extended periods without a stable coalition government could adversely affect the Israeli defense budget. Between 2019 and 2023, Israel has undergone five elections, with the most recent election held in November 2022. This has led to frequent changes in the composition of the government and delays in adopting budgets. This also has negatively impacted the ability of the IMOD to adopt a new budget, enter into new programs and make timely payments to its suppliers. Should such extended periods of instability reoccur, it could negatively affect our operations in Israel and have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
We may be affected by changes in Israel’s economy. From time to time Israel’s economy may experience inflation or deflation, low foreign exchange reserves, fluctuations in world commodity prices, and impact of military conflicts, civil and political unrest, budgetary constraints and other macro-economic changes. For example, it is widely believed that the ongoing “Swords of Iron” war has had and is anticipated to continue having adverse effects on the Israeli economy. Israel's economy may also be affected by occurrences experienced and fiscal policies employed by other international economies, such as those in the U.S. and Europe. For these and other reasons, in the past the government of Israel has intervened in the economy, employing various fiscal and monetary policies, import duties, foreign currency restrictions, controls of wages, prices and foreign currency exchange rates and regulations regarding the lending limits of Israeli banks to companies considered to be in an affiliated group. The Israeli government has periodically changed its policies in these areas. In the beginning of 2023, the Israeli government began a process to implement changes in the Israeli judicial system. Various financial, legal and commercial organizations and entities have claimed that such changes would weaken the Israeli judicial system and, as a result, could negatively impact the economic and financial conditions in Israel. At this stage, we cannot assess the likelihood of these changes being fully implemented or any potential impact on our business. Changes in the Israeli economy, as well as various policies implemented by the Israeli government, could make it more difficult for us to operate our business and could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
Israeli government programs and tax benefits may be terminated or reduced in the future. We participate in programs of the Israel Innovation Authority and the Israel Investment Center, for which we receive tax and other benefits as well as funding for the development of technologies and products. See Item 4. Information on the Company – Conditions in Israel – Israel Innovation Authority and Investment Center Funding. If we fail to comply with the conditions applicable to these programs, we may be required to pay additional taxes and penalties or make refunds and may be denied future benefits. From time to time, the Israeli government has discussed reducing or eliminating the benefits available under these programs, and therefore these benefits may not be available in the future at their current levels or at all.
Israeli law may delay, prevent or impact acquisition of our controlling interest. The Israeli Defense Entities Law (Protection of Defense Interests), 5766 – 2006 (the Israeli Defense Entities Law) requires Israeli government approval of an acquisition of “means of control” in Israeli defense companies such as Elbit Systems or Israeli defense companies we own or may acquire, in case a relevant order is issued by the Israeli government. Such an order may also contain additional conditions relating to the purchase or transfer of “means of control”. As of the date of this annual report, an order relating to us has yet to be issued. However, the IMOD initiated a process under which it intends for the Israeli government to finalize and issue an order that would designate Elbit Systems and most of our Israeli subsidiaries as “defense entities” under the Israeli Defense Entities Law. Since then, discussions have taken place between Elbit Systems and the IMOD about the terms and contents of the order. Such discussions have reached an advanced stage but have not yet been finalized. The issuance of such order could limit the ability of a potential purchaser to acquire a significant interest in our shares without the approval of the Israeli government. See also Item 4. Information on the Company – Governmental Regulation – Regulation of Israeli Defense Entities. In addition, the Companies Law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions could delay, prevent or impede an acquisition of a significant portion of our shares, even if such an acquisition would be considered beneficial by some of our shareholders.
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Being a foreign private issuer exempts us from certain SEC requirements. As a foreign private issuer within the meaning of rules promulgated under the Exchange Act, we are exempt from certain Exchange Act rules and requirements that apply to U.S. public companies, including: (i) the requirement to file with the SEC quarterly reports on Form 10-Q and current reports on Form 8-K; (ii) rules regulating the solicitation of proxies in connection with shareholder meetings; (iii) Regulation FD prohibiting selective disclosures of material information; and (iv) rules requiring insiders to disclose stock ownership and trading activities and establishing liability for profits realized from “short-swing” trading transactions (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months). Because of the foregoing, our shareholders may receive less information about our company and trading of our ordinary shares by our affiliates than would be provided to shareholders of a domestic U.S. company, and our shareholders may be afforded less protection under the U.S. federal securities laws than would be afforded to shareholders of a domestic U.S. company.
We may rely on certain Israel “home country” corporate governance practices which may not afford shareholders the same protection afforded to shareholders of U.S. companies. As a foreign private issuer Elbit Systems is permitted to follow, and in certain instances has followed, home country corporate governance practices instead of certain practices otherwise required under the Listing Rules of the NASDAQ Stock Market (Nasdaq Listing Rules) for domestic U.S. issuers. As described in Item 16G. Corporate Governance, we have previously informed Nasdaq that we elected to follow certain procedures permitted under the Companies Law instead of the Nasdaq Listing Rules, which require a listed company to obtain shareholder approval for the establishment or material amendment of an equity-based compensation plan. Under this “home country practice” exception provided in the Nasdaq Listing Rules for foreign private issuers, we could in the future elect to follow home country practices in Israel with regard to a broad range of other corporate governance matters. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq, may afford less protection than is afforded to investors under the Nasdaq Listing Rules applicable to domestic U.S. issuers. See Item 16G. Corporate Governance.
It may be difficult to enforce a non-Israeli judgment against us, our officers and directors. We are incorporated in Israel. Our executive officers and directors and our external auditors are not residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce against us or any of those persons in an Israeli court a U.S. court judgment based on the civil liability provisions of the U.S. federal securities laws. It may also be difficult to effect service of process on these persons in the United States. Also, it may be difficult for an investor, or any other person or entity, to enforce civil liabilities under U.S. federal securities laws in original actions filed in Israel. See below – Item 4. Information on the Company – Conditions in Israel – Enforcement of Judgments.
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Item 4. Information on the Company.
Company History
Elbit Systems Ltd. is a corporation domiciled and incorporated in Israel where we operate in accordance with the provisions of the Companies Law. Our predecessor Elbit Ltd. was incorporated in Israel in 1966 as Elbit Computers Ltd. Elbit Systems was formed in 1996, as part of the Elbit Ltd. corporate demerger, under which Elbit Ltd.’s defense-related assets and business were spun-off to us.
Trading Symbols, Address and Website
Our shares are traded on the Nasdaq Global Select Market (Nasdaq), under the symbol “ESLT”, and on the TASE.
Our main offices are in the Advanced Technology Center, Haifa 3100401, Israel, and our main telephone number at that address is (972)-77-2940000. Our principal offices in the United States are the headquarters of Elbit Systems of America, LLC (Elbit Systems of America) at 4700 Marine Creek Parkway, Fort Worth, Texas 76179-6969, and the main telephone number at that address is 817-234-6600.
Our website home page is www.elbitsystems.com. We make our website content available for informational purposes only. It should not be relied upon for investment purposes, nor is any information on it incorporated by reference in this annual report. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of this website is http://www.sec.gov/, and is not incorporated by reference into this annual report.
Business Overview
Major Activities
We are an international high technology company engaged in a wide range of programs throughout the world, primarily in the defense and homeland security arenas. We develop and supply a broad portfolio of airborne, land and naval systems and products for defense, homeland security and commercial applications. Our systems and products are installed on new platforms, and we also perform comprehensive platform modernization programs. In addition, we provide a range of training and support services.
Our major activities include: military aircraft and helicopter systems; commercial aviation systems and aerostructures; unmanned aircraft systems (UAS); flight academy solutions, electro-optic, night vision, high power energy solutions and countermeasures systems; naval systems; land vehicle systems; munitions; command, control, communications, computer, intelligence, surveillance and reconnaissance (C4ISR) and cyber systems; electronic warfare and signal intelligence systems; and other commercial activities.
Many of these major activities have a number of common and related elements, including common technologies and products, types of programs and customer interface. Therefore, certain of our subsidiaries, divisions or other operating units often jointly conduct marketing, research and development, manufacturing, performance of programs, sales and after sales support among these major activities.
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Principal Market Environment
The nature of military and homeland security requirements has evolved in recent years following the conflicts in Eastern Europe and the Middle East and the growing geopolitical instability in the Asia Pacific region. Governments around the world have announced plans to increase defense spending and demand for a range of advanced capabilities to better prepare for near peer high intensity conflicts.
This global trend has increased demand in the areas of C4ISR systems, cyber-defense systems, network centric information and operational systems, intelligence gathering systems, border and perimeter security systems, unmanned aircraft systems, unmanned surface vessels, remote controlled systems, precision munitions, tank, artillery and mortar munitions, vehicle survivability and force protection systems, signal intelligence (SIGINT) and electronic warfare (EW) systems, space and satellite-based defense capabilities and homeland security solutions. The technological advances in commercial technologies have led to increasing demand for technological solutions that incorporate digital transformation, including artificial intelligence, big data analytics, robotics, automation and information assurance by military forces. Moreover, there is a continuing demand for cost-effective logistic support and training and simulation services. We believe our synergistic approach of finding solutions that combine elements of our various activities positions us to meet evolving customer requirements in many of these areas.
We tailor and adapt our technologies, integration skills, market knowledge and operationally-proven systems to our customer's requirements in both existing and new platforms. By upgrading existing platforms with advanced technologies, we provide customers with cost-effective solutions, and our customers are able to improve their technological and operational capabilities within limited budgets. Our experience in providing “systems of systems” enables us to provide overall solutions in a range of areas to meet our customers’ comprehensive defense, homeland security and safety needs.
Following recent conflicts, governments around the world are striving to achieve independent capabilities, through focusing on the utilization of local defense industries. We believe our global footprint and local operating subsidiaries worldwide well position us to address this approach.
Segments
The Company reports segment information in five segments beginning with the year ended December 31, 2022. The Company’s segments are organized based on a combination of the nature of products and services offered, together with a geographic segment.
The Company’s five reportable segments are:
–Aerospace – mainly provides products and systems for airborne platforms, unmanned aerial solutions, precision guided munition (PGM) sensors, aerostructures, training and simulator systems, flight academy solutions, as well as commercial aviation systems.
–C4I and Cyber – mainly provides C4ISR systems, data links and radio communication systems and equipment, cyber intelligence solutions, autonomous solutions and homeland security solutions.
–Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR) and Electronic Warfare (EW) – mainly provides a wide range of electro-optic and laser systems and products and also provides a wide range of EW systems and SIGINT systems.
–Land – mainly provides land-based systems and products for armored and other military vehicles, artillery and mortar systems, munitions for land, air and sea applications including PGM, armored vehicle and other platforms’ survivability and protection systems.
–Elbit Systems of America (ESA) – mainly provides products and systems solutions principally to U.S. military, foreign military sales (FMS/FMF), homeland security (HLS), medical instrumentation and commercial aviation customers.
Many of the Company's projects and programs are performed across these segments and employees and managers are encouraged to cooperate on such common projects. It is common for the reportable segments to provide their products to the same customers either through joint projects or by marketing and offering combined and integrated solutions containing a variety of capabilities, products, and technologies of the Company’s portfolio from various businesses or subsidiaries, all tailored to satisfy the customer’s or project’s specific requirements. Management also remains focused on the consolidated results as an important measure of performance, particularly given the high level of cooperation among the segments.
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The following is additional information on each of our segments. Additional financial information on the segments is provided in Item 5. Operating and Financial Review and Prospects and in Item 18. Financial Statements – Notes 1, 2AC and 23.
Aerospace. Elbit Systems Aerospace offers a range of solutions including unmanned systems, training solutions, head mounted displays, avionics, PGM sensors, aerostructures and next generation aerial C4I and intelligence-gathering products and systems that are at the core of network-centric and multi-domain operations.
The Aerospace segment portfolio includes the following main capabilities:
Military Aircraft and Helicopter Systems
We offer a range of airborne systems and products that enhance operational capabilities and extend aircraft life cycles, ranging from a single sensor to an entire cockpit avionics suite. Our systems are integrated on fixed and rotary-wing, eastern and western, new and mature aircraft.
We design and supply advanced helmet-mounted systems, including helmet-mounted displays (HMD) for fixed-wing and rotary-wing aircraft.
Under our fixed-wing aircraft and helicopter upgrade programs, we integrate advanced electronic, communication, navigation, electro-optic and EW systems, such as integrated flight deck systems, mission management computers, displays, digital maps and digital recorders, head-up displays, airborne intelligence-gathering systems, PGM sensors, aircraft structural components and a range of aircraft tactical, virtual, appended and embedded trainers and simulators.
Unmanned Aircraft Systems (UAS)
Our portfolio of UAS includes integrated UAS (sometimes referred to as remote piloted vehicles, or RPVs) in various categories and for a range of applications as well as UAS training systems. The systems include airborne platforms, ground control stations, communication systems and various payloads, including stabilized electro-optic, electronic intelligence (ELINT) and communications intelligence (COMINT) payloads that can be adapted for various types of UAS.
Training Solutions and Support
Our training solutions include simulators with embedded virtual training capabilities for air, land, and naval operations and joint multi-domain training. We establish training centers worldwide and offer comprehensive flight academy solutions and services. We also supply logistic support services for airborne platforms, including repair and maintenance centers.
Commercial Aviation Systems and Aerostructures
Our portfolio of commercial aviation systems includes a range of systems and products for the commercial and business aviation market that are employed on fixed-wing aircraft and commercial helicopters. Our commercial aviation systems in the business aviation, commercial helicopter and air transport areas include full avionic suites, enhanced flight vision products and various other avionics products such as display, communication and flight management systems. We also provide aerostructure products such as pressurized and non-pressurized doors, composite beams and winglets.
C4I and Cyber. Elbit Systems C4I and Cyber offers a range of C4I, communication, autonomous systems and digital intelligence and cyber capabilities providing digital networked warfare solutions to military forces, intelligence agencies, homeland security forces, law enforcement agencies and first responders.
The C4I and Cyber segment portfolio includes the following main capabilities:
Communications
The Communications portfolio includes secured and resilient tactical software defined radios (SDR), HF, VHF and UHF radio and communication systems and products, from single-soldier radios to full-scale militaries, supporting multi-domain operations. Our satellite-on-the-move solutions enable users to share voice, video and data beyond line of sight while on the move. Our solutions support robotic autonomous systems and manned unmanned teaming (MUM-T) operations. Our communication network solution enables over-the-air control, monitoring and configuring of military wide networks and integrated Radio over IP (ROIP).
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Network Combat Systems (C4I)
Elbit Systems C4I and Cyber supports the digitization and modernization of Defense and HLS capabilities enhancing operational effectiveness. Our system engineering and integration capabilities are underpinned by our C4I, sensor and effector expertise combined with a broad portfolio of military grade tactical hardware for dismounted, mounted and fixed applications. Our solutions incorporate a cloud enabled, open standard architecture framework enabling seamless connectivity and interoperability across a multi-domain environment while maintaining an evergreen upgradable approach to enable upgrades to address future battlefield requirements.
Intelligence and Cyber
Our Intelligence & Cyber portfolio includes big data and analysis solutions that provide intelligence, military and law enforcement agencies with timely and actionable intelligence on a range of threats. Our solutions are designed to integrate secure cloud-based and defense driven generative AI products. Our end-to-end solutions aggregate and fuse large volumes of data from a wide spectrum of intelligence sources, including HUMINT, COMINT, WEBINT, OSINT and, IMINT and apply advanced information technologies, including big data, artificial intelligence (AI) and machine learning, to analyze the data. We also provide advanced cyber protection tools to protect network endpoints.
Robotics and Autonomy Systems & Sensing (RAS-S)
We design, integrate and deploy a range of robotic and autonomy systems (RAS). We also develop and produce sensors using a variety of technologies such as light detection and ranging (LIDAR), ultra wide band (UWB) and physical intelligence (PhysInt), for specific tactical mission requirements. We provide comprehensive, multi-layered solutions for one-to-many autonomous swarms and platforms capable of performing tactical operational missions or human-machine teaming by unmanned ground platforms and military-grade tactical drones. Our open architecture modular approach enables integration of robotic systems, sensors and effectors tailored to the operational requirements of the customer.
ISTAR and EW. Elbit Systems ISTAR and EW designs, manufactures and supports a diverse range of systems and sensors that leverage our advanced technological capabilities across electro-optics (EO), lasers and the electromagnetic spectrum. These systems and sensors are incorporated into comprehensive solutions for aerospace, ground and maritime applications. Our systems, sensors and applications can be provided standalone to defense customers or integrated into a solution provided by the Company's other segments and by other defense prime contractors.
The ISTAR and EW segments portfolio includes the following main capabilities:
Optronics and Laser Systems
The Optronics and Laser Systems portfolio includes self-protection suites, electronic countermeasure systems and sensors, surveillance and intelligence sensors for airborne, ground and naval platforms and payloads for unmanned platforms.
Our portfolio of EO systems and solutions includes integrated vision and targeting solutions, laser range-finders and laser designators, stabilized payloads, electro-optic intelligence, surveillance and reconnaissance (ISR) systems, Directional Infrared Countermeasure (DIRCM) systems as well as multiple vision-enhancing solutions for military forces and multi-spectral payloads and telescopes for space applications. We are a leading supplier of laser technology for military applications including high-power laser technology and solutions.
Electronic Warfare (EW), Signal Intelligence (SIGINT) and Radar Systems
Our EW and SIGINT portfolio includes intelligence, defensive and offensive solutions for a range of military applications. We provide EW self-protection suites, including radar warning receivers and laser warning systems, for airborne and maritime platform types. We also provide Infra-Red missile warning systems for combat aircraft, as well as for other fixed-wing and rotary-wing platforms, and electronic support solutions for threat identification.
We provide SIGINT systems for tactical and strategic intelligence-gathering including electronic intelligence (ELINT) and electronic countermeasures for naval, ground and airborne applications, communication intelligence (COMINT) and communication jamming systems, counter-improvised explosive devices (CIED) jamming systems for ground forces, counter unmanned aircraft system (CUAS) and cyber protection capabilities. We also supply command and control systems and simulators for anti-ballistic missiles programs.
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Naval Combat Management and Sonar Systems
We provide unmanned surface vessels (USV) for mine counter-measure (MCM) and anti-submarine warfare (ASW) missions, equipped with an array of sonars and underwater acoustic payloads.
Land. Elbit Systems Land segment provides products and systems for ground forces including military vehicle systems, artillery and mortar systems, rocket artillery systems, active protection systems for vehicles, and a range of air and ground launched precision guided munitions and ammunition. Elbit Systems Land provides solutions for a wide range of threats and operational scenarios for the land, air, and naval arenas. The activities of IMI Systems Ltd., acquired in 2018, were integrated into Elbit Systems Land.
The Land segment portfolio includes the following main capabilities:
Indirect Fire Systems
We provide a range of self-propelled automatic and semi-automatic 155mm howitzers that are designed to be adaptable and mounted on a broad range of truck chassis. We also provide fully automatic rocket-launchers that can launch a broad variety of precision-guided and free-flying rockets with various effective ranges. We also provide comprehensive mortar and tactical precision firepower solutions. These include mortar systems integrated on a variety of platforms and a range of 120mm mortar ammunition.
Turrets and Weapons Systems
We design, develop, manufacture and integrate turrets and weapon systems for ground combat vehicles including main battle tanks, armored personnel carriers and infantry fighting vehicles. Our portfolio includes remote-controlled weapon systems, manned and unmanned turrets, tanks and combat vehicle upgrade and modernization solutions, situational awareness systems and other combat vehicle systems.
Ammunition and Munition Systems
Elbit Systems Land develops and manufactures a comprehensive array of precision munitions, precision-guided rockets and missiles, artillery ammunition, tank munitions, explosives, air-to-ground precision strike systems as well as aircraft protection systems including expendable countermeasures. Our small caliber ammunition facility manufactures a complete range of small arms ammunition, ranging from 5.56 mm to 0.50 (12.7mm) calibers.
Active Protection Systems
We provide advanced survivability solutions for combat vehicles. For example, our Iron Fist Active Protection System (APS) provides a multi-layer active armor protection solution and we also supply soft-kill systems. Our advanced combat vehicle systems provide full 360-degree situational awareness in an open architecture as well as integrating the APS. Our solutions are offered as standalone to combat vehicle manufacturers or as part of combat systems provided by Elbit Systems.
Elbit Systems of America (ESA). Elbit Systems of America mainly provides products, system solutions, and support services focused on the defense, homeland security, law enforcement, commercial aviation, and medical instrumentation markets. Most of ESA's revenues are derived from the U.S. government, its allies, or large prime U.S. defense contractors.
ESA provides a range of capabilities from advanced electro-optics to maintenance and repair of complex military hardware and systems, commercial aviation and medical instrumentation. These capabilities are used on land, in the sea, and in the air. In addition to developing and manufacturing advanced solutions, we maintain the systems and components we create, and we frequently maintain systems originally manufactured by other contractors.
ESA frequently acts as a prime contractor in the U.S. for the products and services of the Company's other segments, leveraging the Company's wide technologies and capabilities. The ESA portfolio includes various capabilities based on the technologies and solutions of the Company's other segments, as well as U.S originated capabilities.
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The ESA portfolio includes the following main capabilities:
–Airborne holistic situational awareness and decision-making through helmet mounted displays, head-down displays, head-up displays, and mission computers;
–Maritime solutions, networks, and communications through sonobuoys and undersea systems produced by ESA's Florida-based subsidiary, Sparton Corporation;
–Next-generation warfighter information systems through advanced night vision, hand-held targeting systems, soldier systems, tactical radios, networking, and command & control;
–Electronic warfare solutions, electro-optical infrared systems, and airborne assets & payloads deployed through unmanned aerial systems;
–Ground combat vehicle systems such as turrets, vehicle protection systems, 360-degree situational awareness solutions, and vehicular components;
–Next-generation precision fire support, including multi-modal seekers, mortar weapon systems and munitions;
–Expeditionary and survivable command, control, communication and computing solutions (C4) to enable networked C4 Intelligence, Surveillance and Reconnaissance and Joint All-Domain Command and Control solutions for mounted and dismounted warfighters;
- Border security and force protection solutions that can be fixed, mobile, and supplied in expeditionary configurations;
- Commercial aviation portfolio including a line of air data products, cockpit instrumentation and vision systems;
- ESA’s subsidiary KMC Systems develops advanced clinical and operational solutions for life science customers in the intelligent lab and fluidic automation space.
Revenues
The following table provides our consolidated revenues by geographic region, expressed as a percentage of total revenues for the years ended December 31, 2021, 2022 and 2023:
| 2021 | 2022 | 2023 | |||||||||||||||
| Israel | 21% | 19% | 19% | ||||||||||||||
| North America | 30% | 27% | 24% | ||||||||||||||
| Europe | 17% | 23% | 30% | ||||||||||||||
| Asia-Pacific | 27% | 26% | 21% | ||||||||||||||
| Latin America | 2% | 2% | 2% | ||||||||||||||
| Others | 2% | 3% | 4% | ||||||||||||||
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The table below shows our consolidated revenues by reported segments for the years ended December 31, 2021, 2022 and 2023:
(U.S. dollars in millions)
| Year Ended December 31, 2021 | Year Ended December 31, 2022 | Year Ended December 31, 2023 | |||||||||||||||
| Aerospace | |||||||||||||||||
| External customers | $ | 1,281.4 | $ | 1,471.1 | $ | 1,613.2 | |||||||||||
| Intersegment revenue | 301.9 | 262.1 | 260.1 | ||||||||||||||
| 1,583.3 | 1,733.2 | 1,873.3 | |||||||||||||||
| C4I and Cyber | |||||||||||||||||
| External customers | 590.1 | 631.3 | 668.4 | ||||||||||||||
| Intersegment revenue | 34.6 | 47.1 | 52.7 | ||||||||||||||
| 624.7 | 678.4 | 721.1 | |||||||||||||||
| ISTAR and EW | |||||||||||||||||
| External customers | 888.2 | 882.2 | 996.9 | ||||||||||||||
| Intersegment revenue | 138.1 | 163.4 | 182.5 | ||||||||||||||
| 1,026.3 | 1,045.6 | 1,179.4 | |||||||||||||||
| Land | |||||||||||||||||
| External customers | 1,028.1 | 1,075.8 | 1,241.0 | ||||||||||||||
| Intersegment revenue | 88.8 | 92.7 | 65.2 | ||||||||||||||
| 1,116.9 | 1,168.5 | 1,306.2 | |||||||||||||||
| ESA | |||||||||||||||||
| External customers | 1,490.7 | 1,451.1 | 1,455.2 | ||||||||||||||
| Intersegment revenue | 2.1 | 5.6 | 9.7 | ||||||||||||||
| 1,492.8 | 1,456.7 | 1,464.9 | |||||||||||||||
| Revenues | |||||||||||||||||
| Total revenues (external customers and intersegment) for reportable segments | 5,844.0 | 6,082.4 | 6,544.9 | ||||||||||||||
| Less - Intersegment revenue | (565.5) | (570.9) | (570.2) | ||||||||||||||
| Total consolidated revenues | $ | 5,278.5 | $ | 5,511.5 | $ | 5,974.7 | |||||||||||
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Subsidiary Organizational Structure
Our beneficial ownership interest in our major subsidiaries is set forth in Exhibit 8 to this annual report. Our equity and voting interests in these entities are the same as our beneficial ownership interests.
Below is a general description of our major subsidiaries, each of which is wholly-owned. We also have other smaller subsidiaries and investments in companies in Israel, Europe, North America, South America and Asia-Pacific that conduct marketing, engineering, manufacturing, logistic support and other activities, principally in the subsidiary’s local market. Our subsidiaries generally operate across our segments, often in collaboration with us and with other subsidiaries.
Elbit Systems of America
Elbit Systems of America, a Delaware limited liability company, and its subsidiaries, provide products and systems solutions focusing on U.S. military, homeland security, medical instrumentation and commercial aviation customers. Elbit Systems of America and its subsidiaries have operational facilities in Fort Worth, Texas, Merrimack, New Hampshire, Charleston, South Carolina, Talladega, Alabama, Roanoke, Virginia, Fairfax, Virginia, Boca Raton, Florida and DeLeon Springs, Florida. Elbit Systems of America also has a 50% interest in a joint venture with Collins Aerospace, a unit of Raytheon Technologies Corp., which is engaged in the area of helmet-mounted display systems for fixed-wing military and para-military aircraft. Elbit Systems of America acts as a contractor for U.S. Foreign Military Financing (FMF) and Foreign Military Sales (FMS) programs. See below “Governmental Regulations – Foreign Military Financing (FMF)”. Each of Elbit Systems of America’s operational facilities has engineering and manufacturing capabilities. Elbit Systems of America’s manufacturing facilities in Alabama, Texas, New Hampshire, Virginia and Florida also have significant maintenance and repair capabilities. See below “Manufacturing” and “Customer Satisfaction and Quality Assurance”.
Elbit Systems of America, Elbit Systems and intermediate Delaware holding company subsidiaries are parties to a Special Security Agreement (SSA) with the United States Department of Defense (DoD). The SSA provides the framework for controls and procedures to protect classified information, controlled unclassified information and export-controlled data. The SSA allows the Elbit Systems of America companies to participate in classified U.S. government programs even though, due to their ownership by Elbit Systems, the Elbit Systems of America companies are considered to be under the control of a non-U.S. interest. Under the SSA, a Government Security Committee of Elbit Systems of America’s board of directors was permanently established to supervise and monitor compliance with Elbit Systems of America’s export control and national security requirements. The SSA also requires Elbit Systems of America’s board of directors to include outside directors who have no other affiliation with the Company. Elbit Systems of America’s board of directors also includes an officer of Elbit Systems of America and up to two inside directors, who have other affiliations with the Company. The SSA requires outside directors and officers of the Elbit Systems of America companies who are directors, and certain other senior officers, to be U.S. resident citizens and eligible for DoD personnel security clearances.
Sparton DeLeon Springs, LLC (Sparton DeLeon Springs), a subsidiary of Elbit Systems of America and Sparton Corporation (Sparton), which was acquired by Elbit Systems of America in 2021, is a party to and operates under a Proxy Agreement to which Elbit Systems of America, Elbit Systems and the DoD are also parties. The Proxy Agreement is necessary because Sparton DeLeon Springs performs more sensitive programs in support of the U.S. Navy’s anti-submarine warfare efforts that require additional protection from a U.S. national security perspective. Under the Proxy Agreement, three independent proxy holders, who have no prior affiliation with Sparton DeLeon Springs, Elbit Systems or Elbit Systems of America, govern the affairs of Sparton DeLeon Springs and monitor compliance with the U.S. government’s export control and national security requirements. The Proxy Holders and certain senior officers of Sparton De Leon Springs must be resident U.S citizens and eligible for DoD personnel security clearances.
C4I and Cyber. Headquartered in Netanya, Israel, Elbit Systems C4I and Cyber Ltd. (C4I and Cyber) is engaged in the worldwide market for C4ISR systems, data links and radio communication systems and equipment, cyber intelligence solutions, autonomous solutions and homeland security solutions.
Elisra. Based in Holon, Israel, Elbit Systems EW and SIGINT – Elisra Ltd. (Elisra) provides a wide range of electronic warfare (EW) systems, signal intelligence (SIGINT) systems and C4ISR technological solutions for the worldwide market.
Elop. Based in Rehovot, Israel, Elbit Systems Electro-optics Elop Ltd. (Elop) designs, engineers, manufactures and supports a wide range of electro-optic and laser systems and products mainly for defense, space and homeland security applications for customers worldwide.
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ELS. Headquartered in Ramat HaSharon, Israel, Elbit Systems Land Ltd. (ELS) is engaged in the design and manufacture of land-based systems and products for armored and other military vehicles, artillery and mortar systems.
IMI. Headquartered in Ramat HaSharon, Israel, IMI Systems Ltd. (IMI) is engaged in the design and manufacture of a wide range of precision munitions for land, air and sea applications and guided rocket systems, as well as armored vehicle and other platforms survivability and protection systems for defense and homeland security applications.
Mergers, Acquisitions and Divestitures
Part of our growth strategy includes our continued activity in mergers and acquisitions and joint ventures with respect to businesses, assets and complementary technologies both in Israel and internationally. The Company’s structure often enables us to benefit from the synergy of our overall capabilities while at the same time allowing us to focus on local requirements.
During 2023 and the beginning of 2024, we continued to invest resources in pursuing acquisition and investment opportunities that meet our strategic goals and acquisition criteria in key markets.
In addition, we continue to evaluate our holdings and from time to time pursue divestiture of businesses that are not considered to be core to our strategy.
Property, Plant and Equipment
Facilities Owned or Leased by the Company (square feet)
Israel(1) | U.S.(2) | Other Countries(3) | |||||||||||||||
| Owned | 2,066,738 | 894,735 | 1,039,287 | ||||||||||||||
| Leased | 7,035,265 | 861,043 | 635,479 | ||||||||||||||
(1)Includes offices, development and engineering facilities, manufacturing facilities, maintenance facilities, hangar facilities and landing strips in various locations in Israel.
(2)Includes mainly offices, development and engineering facilities, manufacturing facilities and maintenance facilities of Elbit Systems of America, primarily in Texas, New Hampshire, South Carolina Florida, Alabama and Virginia. The facilities in New Hampshire, Florida and Alabama are located on owned land totaling approximately 109 acres. Universal Avionics Systems Corporation's facilities are located in Arizona, Washington and Georgia, of which 166,000 square feet are owned and 83,000 square feet are leased.
(3)Includes offices, design and engineering facilities and manufacturing facilities in Europe, Latin America, Canada and Asia-Pacific.
Recent Investment in Facilities. Over the last two years the average annual net investment in our facilities, including land and buildings, equipment, machinery and vehicles, amounted to approximately $196 million. We believe that our current facilities are adequate for our operations as now conducted.
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Governmental Regulation
Government Contracting Regulations. We operate under laws, regulations, administrative rules and other legal requirements governing defense and other government contracts, mainly in Israel and the United States. Some of these legal requirements carry major penalty provisions for non-compliance, including disqualification from participating in future contracts. In addition, our participation in governmental procurement processes in Israel, the United States and other countries is subject to specific regulations governing the conduct of the process of procuring defense and homeland security contracts, including increasing requirements in the area of cyber production, information assurance and supply chain assurance.
Israeli Export Regulations. Israel’s defense export policy regulates the sale of a number of our systems and products, as well as certain technologies and services. Current Israeli policy encourages exports to approved customers of defense systems and products such as ours, as long as the export is consistent with Israeli government policy. Subject to certain exemptions, a license is required to initiate marketing activities. We also must receive a specific export license for defense-related hardware, software and technology exported from Israel. Israeli law also regulates export of “dual use” items (items that are typically sold in the commercial market but that also may be used in the defense market). In 2023, more than 50% of our revenue was derived from exports subject to Israeli export regulations.
U.S. and Other Export Regulations. Elbit Systems of America’s export of defense and dual use products, as well as defense-related technical data and defense services to Israel and other countries, is subject to applicable authorizations of the U.S. government, typically under the U.S. International Traffic in Arms Regulations (ITAR) and the U.S. Export Administration Regulations (EAR). Such authorizations may be in the form of export and import licenses, as well as technical assistance agreements (TAAs) or manufacturing license agreements (MLAs) for transfers of technical data and performance of defense services. This also applies to any other U.S. entities who export defense products or defense-related services and technology to our Israeli and other non-U.S. entities, in order to perform work for U.S. programs or to work with U.S. contractors in third countries. Employment by our U.S. affiliated companies of Israeli nationals assigned to work in defense-related technical areas is also subject to licensing requirements. Applications for export authorizations require disclosure of information regarding the intended sales and users of the applicable hardware, software or technology. The U.S. government may deny an export authorization if it determines that a transaction is counter to U.S. policy or national security. Our business is also affected by other governments’ export regulations, including with respect to end user restrictions of our suppliers’ governments.
Regulation of Israeli Defense Entities. The Israeli Defense Entities Law establishes conditions for the approval of an acquisition or transfer of “means of control” of an entity that is determined to be an Israeli “defense entity” under the terms of the law. Designation as a “defense entity” occurs through an order to be issued jointly by the Israeli Prime Minister, Defense Minister and Minister of Economy. No such order for Elbit Systems has been issued as of the date of this annual report. However, in 2021, the IMOD initiated a process under which it intends for the Israeli government to finalize and issue an order that would designate Elbit Systems and most of our Israeli subsidiaries as “defense entities” under the Israeli Defense Entities Law.
Orders to be issued under the Israeli Defense Entities Law may establish various conditions and restrictions. It is anticipated that Israeli government approval will be required for acquisition of a specific percentage of shares or voting rights in Elbit Systems that would constitute “means of control” under the law. “Means of control” for this purpose could include, for example, the right to vote a specified percentage of shares at a shareholders’ meeting or to appoint a director. Orders relating to “defense entities” are also anticipated to, among other matters: (1) impose restrictions on the ability of non-Israeli resident citizens to hold means of control or to be able to “substantially influence” “defense entities”; (2) require that senior officers of “defense entities” have appropriate Israeli security clearances; (3) require that a defense entity’s headquarters be in Israel; (4) subject a defense entity’s entering into certain joint ventures and mergers and transferring certain technology or means of manufacturing, to the approval of the IMOD; and (5) require “defense entities” to maintain certain essential production lines and development capacities in Israel.
As a condition to our acquisition of IMI in 2018, the Israeli government issued an order that requires Israeli government approval in the event of a sale of a controlling interest in IMI. Under separate regulations, Elbit Systems and our major Israeli subsidiaries have been designated as “defense companies” by the Defense Minister with respect to Israeli law governing various other aspects of defense security arrangements.
Since the IMOD initiated the process mentioned above, discussions have taken place between Elbit Systems and the IMOD regarding the terms, scope and contents of the order, which have reached an advanced stage but have not yet been finalized.
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Approval of U.S. and Other Defense Acquisitions. Many countries in addition to Israel require governmental approval of acquisitions of local defense companies or assets by foreign entities. Mergers and acquisitions of defense-related and other potentially sensitive businesses in the U.S. are subject to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Under FIRRMA, our acquisitions of defense-related and other potentially sensitive businesses in the U.S. require review, and in some cases approval, by the Committee on Foreign Investment in the United States (CFIUS). CFIUS has the authority to impose additional restrictions through National Security Agreements (NSA) as part of its review and approval of the acquisitions. Elbit Systems of America is subject to several NSAs.
“Buy American” Laws. The U.S. “Buy American” laws impose price differentials or prohibitions on procurement of products purchased under U.S. government programs. The price differentials or prohibitions apply to products that are not made in the United States or that do not contain U.S. components making up at least 60% of the total cost of all components in the product. However, a Memorandum of Agreement between the United States and Israeli governments qualifies Israeli products as “U.S. content” for the purposes of the Buy American laws for specified products, including most of the products currently sold in the United States by Elbit Systems and our Israeli subsidiaries.
Foreign Military Financing (FMF). Elbit Systems of America participates in United States FMF programs. These programs require countries, including Israel, receiving military aid from the United States to use the funds to purchase products containing mainly U.S. origin components. In most cases, subcontracting under FMF contracts to non-U.S. entities is not permitted. As a consequence, Elbit Systems of America generally either performs FMF contracts itself or subcontracts with U.S. suppliers. The U.S. government may authorize the IMOD to utilize a portion of the FMF budget under the United States Subcontracting Procurement (USSP) channel. In such cases, companies such as Elbit Systems or our Israeli subsidiaries, who are acting as the Israeli prime contractor to the IMOD under the NIS-funded portion of an IMOD program, are authorized to negotiate and enter into a subcontract directly with a U.S. supplier. However, payment of the funds under a USSP channel subcontract is administered by the IMOD Purchasing Mission to the U.S. The scope of such USSP channel authorization has increasingly required that the funds be used in U.S. dollars. We believe our U.S. subsidiaries, which are U.S. operating companies, are well positioned to engage in U.S. dollar-funded FMF programs. Elbit Systems of America also participates in U.S. Foreign Military Sales (FMS) programs.
Procurement Regulations. Solicitations for procurement by governmental purchasing agencies in Israel, the United States and other countries are governed by laws, regulations and procedures such as those relating to procurement integrity, including due diligence, avoiding conflicts of interest and corruption, and meeting information assurance and cyber-security requirements. Such regulations also include provisions relating to the avoidance of human trafficking and counterfeit parts in the supply chain. In view of the ongoing conflict between Russia and Ukraine, various countries and organizations have adopted specific sanctions and regulations to restrict, among other things, the use of certain goods and technologies originating from Russia. Similarly, the United Stated has adopted specific regulations to restrict, among other things, the procurement of goods or services from specific Chinese entities. Such regulations may apply to us, as well as our supply chain.
Anti-Bribery/Corruption Regulations. We conduct operations in a number of markets that are considered high risk from an anti-bribery/anti-corruption compliance perspective. Laws and regulations such as the Israel Penal Code, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and corresponding legislation in other countries, prohibit providing personal benefits or bribes to government officials in connection with the governmental procurement process. Israeli defense exporters, such as Elbit Systems, are required to maintain and follow an anti-bribery/corruption compliance program.
Cybersecurity and Data Privacy Regulations. Certain data relating to our employees, customers and supply chain that we receive and maintain is subject to data privacy regulations, including those of the European General Data Privacy Regulation and corresponding Israeli legislation.
There has also been an increased focus on cybersecurity, as global privacy, cybersecurity and data protection-related laws and regulations are evolving, extensive, and complex. We are also required to comply with expanding and increasingly complex cybersecurity regulations and guidelines in the United States, Israel and elsewhere with respect to reporting adverse events and additional requirements for avoiding or responding to an adverse event.
Audit Regulations. The IMOD audits our books and records relating to its contracts with us. Our books and records and other aspects of projects related to U.S. defense contracts are subject to audit by U.S. government audit agencies. Such audits review compliance with government contracting cost accounting and other applicable standards. If discrepancies are found this could result in a downward adjustment of the applicable contract’s price as well as potential penalties. Some other customers have similar rights under specific regulations or contract provisions.
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Competition Laws. Competition laws and regulations in Israel, the United States and other countries often require governmental approvals for transactions that are considered to limit competition. Such transactions may include the formation of joint venture entities, cooperative agreements for specific programs or areas, as well as mergers and acquisitions.
Munitions Regulations. Sales of certain types of munitions we produce are subject to various domestic laws and international conventions.
Civil Aviation Regulations. Several of the products sold by Company entities for commercial aviation applications are subject to flight safety and airworthiness standards of the U.S. Federal Aviation Administration (FAA) and similar civil aviation authorities in Israel, Europe and other countries.
Food and Drug Administration Regulations. Medical products designed and manufactured by Elbit Systems of America’s Medical Instruments – KMC Systems business unit are subject to U.S. Food and Drug Administration (FDA) regulations.
Environmental, Health and Safety Regulations. We are subject to a variety of environmental, health and safety laws and regulations in the jurisdictions in which we have operations. This includes regulations relating to air, water and ground contamination, hazardous waste disposal and other areas with a potential environmental, health or safety impact.
Increased public concern may result in more international, U.S. federal, and/or regional requirements to reduce or mitigate the effects of climate change, such as regulating greenhouse gas emissions, policies mandating or promoting the use of renewable or zero-carbon energy and sustainability initiatives, and additional taxes on fuel and energy. Legislation or regulations may be enacted or promulgated in any jurisdiction in which we do business that impose more stringent restrictions and requirements than our current legal or regulatory obligations. In January 2023, the European Corporate Sustainability Reporting Directive (CSRD) came into force, which requires in-scope companies, among other things, to make sustainability reports including certain mandatory disclosures and other voluntary disclosures on impacts, risks, and opportunities in relation to sustainability matters identified as material by the relevant entity. On March 6, 2024, new SEC rules on climate-related disclosure were adopted which will subject us to burdensome and potentially costly emissions and other data gathering and reporting requirements. The Company is currently assessing the potential impact of the CSRD and SEC rules.
Industrial Participation/Offset
As part of their standard contractual requirements for defense programs, several of our customers include “Industrial Participation” or “offset” provisions. These provisions are typically obligations to make, or to facilitate third parties to make, various specified transactions in the customer’s country, such as procurement of defense and commercial products, investment in the local economy, collaborations with academic institutions and transfer of know-how. For further information about Industrial Participation/ offset obligations, see Item 5. Operating and Financial Review and Prospects – Off-Balance Sheet Transactions.
Financing Terms
Types of Financing. There are several types of financing terms applicable to our contracts. In some cases, we receive progress payments related to our progress in performing the contract. Sometimes we receive advances from the customer at the beginning, or during the course, of the project, and sometimes we also receive milestone payments for achieving specific milestones. In some programs we extend credit to the customer, sometimes based on receipt of guarantees or other security. In other situations work is performed before receipt of the payment, which means that we finance all or part of the project’s costs for various periods of time. In some cases, we enter into arrangements in which we sell our rights under certain accounts receivables from our contracts with customers, on a non-recourse basis, to advance payments on their account. See Item 18. Financial Statements – Notes 2AA and 2AD(3).
Financing arrangements may extend beyond the term of the contract’s performance. When we believe it is necessary, we seek to protect all or part of our financial exposure by letters of credit, insurance or other measures, although in some cases such measures may not be readily available or may not fully cover our risk. In some cases, third parties, such as banks that provide financing to our customers in connection with our programs, have certain types of recourse to us in the event of a default in payment by our customers under their obligations to the financing banks.
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Advance Payment Guarantees. When we receive advances prior to incurring contract costs or making deliveries, the customer frequently requires guarantees against advances paid. These guarantees are issued either by financial institutions or by us. We have received substantial advances from customers under some of our contracts. In certain circumstances, such as if a contract is canceled for default and there has been an advance or progress payment, we may be required to return payments to the customer as provided in the specific guarantee. As part of the guarantees we provide to receive progress payments or advance payments, some of our customers require us to transfer to them title in inventory acquired with such payments. See Item 5. Operating and Financial Review and Prospects – General – Long-Term Arrangements and Commitments – Bank and Other Financial Institution Guarantees.
Performance Guarantees. A number of projects require us to provide performance or product (warranty) guarantees in an amount equal to a percentage of the contract price. In certain cases we also provide guarantees related to the performance of Industrial Participation/ offset obligations. Some of our contracts contain clauses that impose penalties or reduce the amount payable to us if there is a delay or failure in performing in accordance with the contract or the completion of a phase of work, including in some cases during the warranty period. These types of guarantees may remain in effect for a period of time after completion of deliveries under the contract. Such guarantees are customary in defense transactions, and we provide them in the normal course of our business. See Item 5. Operating and Financial Review and Prospects – General – Long-Term Arrangements and Commitments – Bank and Other Financial Institution Guarantees.
Intellectual Property
Patents, Trademarks and Trade Secrets. We own hundreds of active patent families including patents and applications registered or filed in Israel, the United States, the European Patent Office and other jurisdictions. We also hold dozens of living trademark families relating to specific products. A significant part of our intellectual property assets relates to unique applications of advanced software-based technologies. Some of these applications are protected by patents, and others are considered as our trade secrets and proprietary information. We take a number of measures to safeguard our intellectual property against infringement as well as to avoid infringement of other parties’ intellectual property. For risks related to our intellectual property see Item 3. Key Information – Risk Factors – Risks Related to Legal and Regulatory Requirements.
Governmental Customers’ Rights in Data. The IMOD usually retains specific rights to technologies and inventions resulting from our performance under contracts for end use by the IMOD or the Israel Defense Forces (IDF). This generally includes the right to disclose the information to third parties, including other defense contractors that may be our competitors. When the IMOD funds research and development, it usually acquires rights in the data developed under such funding. We often may retain a non-exclusive license for such inventions. The Israeli government usually is entitled to receive royalties on export sales in relation to sales resulting from government financed development. However, if only the product is purchased without development effort, we normally retain the principal rights to the technology. Sales of our products to the U.S. government and some other customers are subject to similar conditions. Subject to applicable law, regulations and contract requirements, we attempt to maintain our intellectual property rights and provide customers with the right to use the technology only for the specific project under contract.
Licensing. There are relatively few cases where we manufacture under license. Such licenses typically apply to the use of technologies that are the result of collaboration with academic institutions or where we are manufacturing another company’s product in accordance with that company’s specifications. In such cases, the licensor typically is entitled to royalties or other types of compensation. In some cases where we have acquired business lines we obtain a royalty-free license to use the applicable technology for specified applications. We also obtain licenses to use software tools in our engineering and development activities and utilize open source software licenses in projects where such use is appropriate. Occasionally, we license parts of our intellectual property to customers or business partners as part of the requirements of a particular contract. We also sometimes license technology to other companies for specific purposes or markets, such as the right to manufacture certain components of our products or the right to use certain of our intellectual property relating to operation and adaptation of our training and simulation systems. Due to the growing trend of a number of governments requiring us to work with their local industries, such licensing has become more prevalent.
Research and Development
We invest in research and development (R&D) according to a long-term plan based on estimated market needs. Our R&D efforts focus on anticipating operational needs of our customers, achieving reduced time to market and increasing affordability. We emphasize improving existing systems and products and developing new ones using emerging or existing technologies, including an increasing use of open source software.
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Our R&D projects relate to defense, homeland security and commercial applications. We perform R&D projects to produce new systems for the IMOD and other customers, sometimes in collaboration with our business partners. These projects give us the opportunity to develop and test emerging technologies. We develop tools for fast prototyping for both the design and development process. Fast prototyping permits the operational team members to effectively specify requirements and to automatically transfer them into software code. We also are engaged in long-term investments in science and technology infrastructure and building blocks, often in collaboration with academic bodies. We employ thousands of software, hardware and systems engineers. In addition, most of our program and business line managers have engineering backgrounds. About half of our total workforce is engaged in technology-related functions, including research, development and engineering.
Our companies in Israel have collectively been awarded the Israel Defense Prize 32 times, recognizing extraordinary contributions to defense technological innovations.
Our customers, the Israel Innovation Authority in the Ministry of Economy and Industry (formerly the Office of Chief Scientist) and other R&D granting authorities sometimes participate in our R&D funding for our Israeli-based companies. Some of our subsidiaries outside of Israel receive funding of certain of their R&D activities from their respective governments or customers. We also invest our own funds in research and development activities. This investment is in accordance with our strategy and plan of operations. The table below shows amounts we invested in R&D activities for the years ended December 31, 2021, 2022 and 2023.
| (U.S. dollars in millions) | 2021 | 2022 | 2023 | ||||||||||||||
| Total Investment | $ | 447.9 | $ | 501.8 | $ | 502.6 | |||||||||||
| Less Participation* | (52.8) | (66.1) | (78.2) | ||||||||||||||
| Net Investment | $ | 395.1 | $ | 435.7 | $ | 424.4 | |||||||||||
*See above “Intellectual Property - Governmental Customers' Rights in Data” and see below – “Conditions in Israel – Israel Innovation Authority and Investment Center Funding”.
Manufacturing
We manufacture and assemble our systems and products at our operational facilities in Israel, the U.S., Europe, Brazil and Australia and at the facilities of certain of our subsidiaries in other countries. These facilities contain warehouses, electronic manufacturing areas, mechanical workshops, final assembly and test stations with test equipment. We also have supporting infrastructure including fully automated surface mount technology lines and clean rooms for electro-optic components, solid state components integration, environmental testing and final testing, including space simulation and thermal chambers. We also have computerized logistics systems for managing manufacturing and material supply. We are in an advanced stage of integrating new manufacturing execution systems across our manufacturing plants, to enhance optimization, controlled decision making and Industrial Internet of Things implementation. A number of our manufacturing activities are provided on a shared services basis by several of our in-house centers of excellence.
As part of our global Environmental, Social and Governance (ESG) strategy, we conduct environmentally friendly manufacturing activities and ongoing measurements to reduce electricity, water and fuel consumption. We invest in technological solutions in our manufacturing processes that support environmental protection, such as the type of energy utilization and choice of components and materials.
We also manufacture and assemble composite materials, metal parts and machinery. One of our Israeli subsidiaries has a high technology semiconductor manufacturing facility where it performs electronic integration and assembly of thermal imaging detectors and laser diodes. We also manufacture and repair test equipment.
We manufacture commercial avionics and aircraft components, as well as perform maintenance, repair and overhaul at our U.S. FAA-registered facilities in the U.S., Europe and Israel. We also manufacture medical equipment at U.S. FDA-registered facilities in the U.S.
As part of our efforts to protect our employees while maintaining business continuity during the “Swords of Iron” war, we have relocated some of our production lines from facilities in areas of the country that have been evacuated to other facilities.
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Seasonality
Although revenues may sometimes increase towards the end of a fiscal year, no material portion of the Company’s business is considered to be seasonal. The timing of revenue recognition is based on several factors. See Item 5. Operating and Financial Review and Prospects – General – Critical Accounting Policies and Estimates – Revenue Recognition.
Supply Chain
We conduct supply chain activities that consist of procurement, logistics and planning at most of our operational facilities. On a global company level, we use a “hybrid” operating model that combines global procurement management, logistics and planning. By using this model, we strive to leverage economies of scale, develop centers of excellence and reduce supply chain cycle times and risks. The raw materials we use are generally available from a range of suppliers internationally. We generally do not depend on single sources of supply, however, in some projects, specific subcontractors are designated by the customer (sometimes with specific requirements for localization). In some cases our sources of supply are limited due to restrictions that we, the Israeli government, the U.S government or others impose. We use supplier performance and risk management tools and other methodologies to monitor suppliers’ on-time delivery and quality and encourage them to continuously improve their performance and reduce supply chain risks. We require our suppliers to adhere to our Supplier Code of Conduct and to comply with a range of procurement compliance standards, including those relating to the avoidance of human trafficking, counterfeit parts and conflict minerals. Our production strategy is usually “Make To Order” (MTO), where materials and products are purchased and manufactured following receipt of a customer purchase order. As a result of the Covid-19 pandemic the conflict between Russia and Ukraine and the increased tension in the Middle East related to the “Swords of Iron” war there has been greater market volatility than in the past, with respect to the costs of transportation, the availability of which has become limited, and the costs of some of the raw materials and components that we utilize, as well as certain market shortages and limitations and delays in supply. In some cases, we have increased our inventories in order to partially offset these supply chain disruptions, support the production to answer the growing demand of the IMOD and maintain deliveries to our customers.
Customer Satisfaction and Quality Assurance
We invest in continuous improvement of processes, with emphasis on deficiency mitigation, aiming to achieve customer satisfaction throughout all stages of our operations. This includes development, design, integration, manufacturing and services for software and hardware, for the range of our systems and products. We measure our customers’ satisfaction and feedback annually, using unified questionnaires. Our quality teams are involved in assuring compliance with processes and administrating quality plans. These activities begin at the pre-contract stage and continue through the customer’s acceptance of the product or services.
We also use project management methods such as Kaizen and Lean. We evaluate such processes on a regular basis. Our processes are based on various engineering planning and developing tools. This infrastructure, together with recognized management methodologies and applications, assists us in our efforts to provide high quality and on-time implementation of projects. We are advancing in the process of implementing an ERP system, with the goal of consolidating uniform best practices for quality and operations across the organization. As part of the ERP ecosystem, we are in the process of adapting and implementing a new Manufacturing Operations Management (MOM) system, an advanced Manufacturing Execution System (MES), aiming to enhance our production efficiency and “Industry 4.0” readiness. In this framework, we are also working to implement digital transformation processes and integrate advanced analytics in our production lines. We also maintain applicable certifications for our information technology systems.
All Israeli operational sites are certified for one or more of the following: ISO-9001, ISO-90003 for software, AS9100 (certified for revision D and compliant to AQAP requirements), AS9115 for software, ISO-14001, ISO-45001, FAA Part 145 and European Aviation Safety Agency (EASA) Part 145 for maintaining civil products, Part 21 G for production of civil products and EMAR NLD-MAR-21 for production of military aviation products. All of our operational sites in Israel are also certified for ISO-27001 (Information Security Management System), ISO-27032 and ISO-27035 for cyber security, ISO/IEC 27018:2019 (Information technology Security techniques Code of practice for protection of personally identifiable information (PII) in public clouds acting as PII processors) and ISO/IEC 27017:2015 (Information technology Security techniques Code of practice for information security controls based on ISO/IEC 27002 for cloud services). Representatives of our customers generally test our products before acceptance. A number of our customers have authorized us to conduct acceptance testing of our products on their behalf.
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Quality certifications applicable to defense products of Elbit Systems of America’s operating units include certifications for CMMI Level 3 of the SEI, ISO-9001, AS9100 (certified for revision D) and compliance with NATO AQAP requirements. In the area of commercial aviation Elbit Systems of America’s operating units hold AS9110 (certified to rev. C) for Aviation Maintenance Organizations and NLD-MAR-145, EASA-145 certification as well as a variety of FAA Supplemental Type Certifications (STCs) including FAA Part 145 approved repair stations. In the medical equipment area, Elbit Systems of America is certified for ISO-13485:2016, is registered with the FDA as a GMP manufacturer and is FDA-compliant with Quality Systems Regulations 21 CFR Parts 820, 803 and 806.
Service and Warranty
We instruct our customers on the proper maintenance of our systems and products. In addition, we often offer training and provide equipment to assist our customers in performing their own maintenance. When required, support may be provided by a local support team or by specialists sent from our facilities. We also provide performance-based logistics services and operation of flight school fleets.
We generally offer a warranty of up to two years for our systems and products following delivery to, or installation by, the customer. In some cases we offer longer warranty periods. We accrue warranty obligations specifically determined for each project based on our experience and engineering estimates. These accruals are intended to cover post-delivery functionality and operating issues for which we are responsible under the applicable contract.
Marketing and Sales
We actively take the initiative in identifying the individual needs of our customers throughout the world. We then focus our research and development activities on systems designed to provide tailored solutions to those needs. We often provide demonstrations of prototypes and existing systems to potential customers.
We market our systems and products either as a prime contractor or as a subcontractor to various governments and companies worldwide. In Israel, we sell our military systems and products mainly to the IMOD. A number of marketing related support services are provided on a central shared services basis to various units in the Company. The marketing of our systems, products and services in other parts of the world is supported by subsidiaries, joint ventures and representatives.
In the U.S., generally Elbit Systems of America leads our sales and marketing activities from its facilities throughout the U.S. Elbit Systems of America operates under a Special Security Agreement, and a subsidiary of Elbit Systems of America (Sparton DeLeon Springs) operates under a Proxy Agreement, both of which allow Elbit Systems of America and its subsidiaries to work on certain classified U.S. government programs. See above “Subsidiary Organizational Structure – Elbit Systems of America.” Our subsidiaries in other countries typically lead the marketing activities in their home countries, often assisted by marketing and business development personnel based in Israel.
Over the past several years, we have entered into cooperation agreements with defense contractors, platform manufacturers and other companies in Israel, the United States, Europe, Latin America, Asia-Pacific and certain other markets. These agreements provide for joint participation in marketing and performance of a range of projects around the world. In other situations, we actively pursue business opportunities as either a prime contractor or a subcontractor, usually together with local companies. We often enter into cooperation agreements with other companies for such opportunities.
Competition
We operate in a competitive environment for most of our projects, systems and products. Competition is based on product and program performance, price, reputation, reliability, life cycle costs, overall value to the customer, responsiveness to customer requirements and the ability to respond to rapid changes in technology. In addition, our competitive position sometimes is affected by specific requirements in particular markets.
Continuing consolidation in the defense industry has affected competition. In addition, many major prime contractors are increasing their in-house capabilities. These factors have decreased the number but increased the relative size and resources of our competitors. We adapt to market conditions by adjusting our business strategy to changing market conditions.
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Competitors in the sale of some of our products to the government of Israel include Israel Aerospace Industries and Rafael Advanced Defense Systems among others. Outside of Israel, we compete in a number of areas with major international defense and homeland security contractors principally from the United States, Europe and Israel. Our main competitors include divisions and subsidiaries of Northrop Grumman, Raytheon, General Dynamics, BAE Systems, L3Harris, Thales, Airbus, Leonardo, Saab, Textron, Teledyne Technologies, Boeing, Lockheed Martin, AeroVironment, Rohde & Schwarz, Rheinmetall, Kongsberg, Safran, Hensoldt, CMC, CAE, Aselsan, Bharat Electronics, Cubic, Cognyte, Baykar, Turkish Aircraft Industries, Hanwha, LIG Next1 and Poongsan. Many of these competitors have greater financial, marketing and other resources than we do. We also compete in the worldwide defense and homeland security markets with numerous smaller companies. In certain cases, we also engage in strategic cooperative activities and in specific projects with some of our competitors, such as original equipment manufacturers (OEMs) in the U.S. and Europe.
Overall, we believe we are able to compete on the basis of our systems development and technological expertise, our systems’ operationally-proven performance and our policy of offering customers overall solutions to technological, operational and financial needs.
Major Customers
Sometimes, our revenues from an individual customer account for more than 10% of our revenues in a specific year. Our only such customers during the last three years were the IMOD, which accounted for 18% in 2021, 17% in 2022 and 16% in 2023, and the U.S. government, which accounted for 21% in 2021, 19% in 2022 and 17% in 2023.
Environmental, Social and Governance (ESG) Practices
Policy. We place importance on our ESG practices, including environmental, health and safety (EHS); corporate governance, ethics and anti-corruption; fair labor practices and human rights; supply chain compliance; and social responsibility to the communities in which we live and work. This is consistent with our policy of emphasizing responsible and ethical business practices. Our ESG policies are overseen by our board of directors (Board) and managed by our senior management. We establish multi-year ESG-related goals. Our ESG activities support our involvement as active members in leading sustainability and ethics organizations. We published an ESG Highlights Report for years 2021-2022, available on our website, detailing our main ESG-related activities, including our progress towards achieving ESG-related goals.
Environmental, Health and Safety Compliance. As part of our overall ESG policies, we are committed to leading environmental, health and safety standards in all aspects of our operations. This includes all regulatory requirements as well as compliance with ISO-14001 and ISO-45001 standards. We also conduct a number of measures on an ongoing basis to promote environmentally friendly operational practices and address climate change goals, including measures to reduce electricity, fuel and water consumption, to increase recycling and to incorporate environmental protection measures in our manufacturing processes (see “Manufacturing” above).We are also engaged in various business and operational activities related to the environment. For example, in 2023 one of our subsidiaries, Opgal Optronic Industries Ltd., added a production line for its methane leaks detection camera, which enables monitoring and treatment of greenhouse gas emissions that are harmful to the environment.
We utilize a global EHS management system and internal audits and surveys to address risk analysis, regulatory compliance and policy updates. EHS risks are an integral part of our risk management processes. We periodically review and assess our compliance with applicable EHS regulations and our internal policies, address gaps and establish corresponding action plans. In 2023, we participated in the Carbon Disclosure Project for the fourth time and published for the fourth time an EHS report summarizing key elements of our compliance activities, which is available on our website. There are no material environmental issues that prevent the Company from using our facilities or materially affect our ongoing activities.
Corporate Governance, Ethics and Anti-Corruption. We conduct our business activities and develop Company policies based on a firm commitment to ethical practices and corporate governance best practices. Our Board complies with leading corporate governance practices as set forth in Board committee charters published on our website. We also promote gender diversity among our Board members and have adopted a policy of having at least 25% gender-diverse members on our Board. We also have a dedicated process for risk management that is coordinated with our Board.
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In addition to our Code of Business Conduct and Ethics (Ethics Code) (see Item 16B. – Code of Ethics) and compliance with applicable laws and regulations, we have an active Company-wide ethics compliance program, incorporating a range of policies and procedures. This includes the anti-bribery/corruption area where we have a policy of zero tolerance for corruption. Our anti-bribery/corruption compliance program also includes a number of elements such as whistleblower and investigation processes, contractual requirements, due diligence, ongoing organization-wide as well as function-focused training, record keeping and enforcement. We also expect our supply chain and Industrial Participation/ offset transactions to follow ethical practices (see “Supply Chain Compliance” below). Our Ethics Code, Whistleblower and Investigations Procedure, Anti-Bribery and Corruption Compliance Policy, Procedure on Anti-Bribery and Corruption Due Diligence, Business Entertainment and Gifts Policy and Supplier Code of Conduct are published on our website. We are also active in a number of international organizations relating to ethics and compliance.
Fair Labor Practices and Human Rights. Our ESG policies address fairness and transparency in our workforce, and we promote and implement fair labor practices and employees’ human rights throughout our organization. Our Human Rights Statement, which was adopted by our Board, is published on our website. We respect data privacy relating to our employees. We act to prevent sexual harassment and workplace bullying. We also implement non-discriminatory hiring and promotion practices and actively pursue gender diversity in our workforce. In addition, we promote transparency with our employees regarding our labor and management practices. As part of the implementation of the Equal Pay for Female and Male Employees Law in Israel, we conduct an evaluation regarding possible gender pay gaps among our employees according to the criteria provided by the law, and publish the results on our website. We also provide certain information to our employees, as required under the law.
Compliance with the Convention on Cluster Munitions. All of our activities in the area of munitions, including those of IMI, are in compliance with the international Convention on Cluster Munitions that entered into force in August 2010.
Supply Chain Compliance. Our policy is to follow leading ESG practices in relation to our supply chain. Our suppliers are required to commit to our Supplier Code of Conduct, which is published on our website, that addresses supply chain compliance issues such as fair labor practices, combating human trafficking, ethics and anti-corruption, avoidance of conflicts of interests, restrictions on the use of conflict minerals, cyber security and prevention of counterfeit parts. Our Supplier Code of Conduct also provides a whistleblower mechanism for current and potential members of our supply chain. Our Industrial Participation/ offset activities also are conducted in accordance with our supply chain compliance policies and procedures.
Community-Related Activities. Our ESG policy encourages the voluntary efforts of our Company entities and employees, who donate their time and efforts in the support of members of our communities who are in need. In this regard, we strive to give priority to initiatives that promote educational advancement in less developed communities, particularly in the technology sectors. We also focus on initiatives that encourage greater numbers of women to engage in engineering-related careers. We promote numerous other community support activities, including involvement on a national level in major charitable organizations in Israel and the U.S.
Conditions in Israel
“Swords of Iron” War. On October 7, 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of brutal attacks on civilian and military targets. Hamas also launched extensive rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in many other parts of Israel. Israel has also been attacked by other terrorist organizations on different fronts, including from Lebanon, which have prompted military responses from Israel. Following the attacks, the State of Israel declared a state of war, which is ongoing.
Since the commencement of hostilities, Elbit Systems has experienced a material increased demand for our products and solutions from the IMOD compared to the demand levels prior to the war. We have also increased our support to the IMOD, mainly through deliveries of our systems and the dedicated efforts of our employees. At the same time, the Company continues to support its international customers. Since the beginning of the “Swords of Iron” war, the Company has been awarded various contracts by the IMOD in an aggregate amount of over $2 billion, as of March 15, 2024. Out of such amount, approximately $900 million is included in the Company’s backlog of orders as of December 31, 2023. Subject to further developments, which are difficult to predict, the IMOD’s increased demand for the Company’s products and solutions may continue and could generate material additional orders to the Company.
While the vast majority of our facilities in Israel continue to operate uninterrupted, some of our operations have experienced disruptions due to supply chain and operational constraints, the relocation of certain production lines, evacuation of employees and mobilization of our employees for reserve duty. As of December 31, 2023, approximately 15% of our work force in Israel had been mobilized. As of March 15, 2024, the number of employees mobilized has decreased to approximately 7% and could fluctuate depending on future developments.
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Elbit Systems has taken a number of steps to protect the safety and security of our employees, support our increased production, mitigate potential supply chain disruptions and maintain business continuity, among them relocation of production lines from facilities in areas of the country that have been evacuated to other facilities; recruitment of additional employees; increased monitoring of our global supply chain to identify delays, shortages and bottlenecks; rescheduling deliveries to certain of our customers as necessary; and increasing inventories.
The extent of the effects of the war on the Company's performance will depend on the future developments of the war that are difficult to predict at this time, including its duration and scope. We continue to monitor the situation closely.
Trade Agreements. Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is also a party to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from several countries. These preferences allow Israel to export products covered by such programs either duty-free or at reduced tariffs.
Israel Innovation Authority and Investment Center Funding. The government of Israel, through the Israel Innovation Authority (IIA) in the Ministry of Economy (formerly the Office of the Chief Scientist) and the Israel Investment Center (the Investment Center), encourages research and development projects oriented towards export products and participates in the funding of such projects as well as company investments in manufacturing infrastructures. Our Israeli companies receive IIA funding through various channels, such as transfer of knowledge from an academic institution for a product, bi-lateral product development and innovative product development. Our companies participating in such development of products usually pay the Israeli government a royalty at various rates, and such funding is typically subject to a number of conditions. See Item 5. Operating and Financial Review and Prospects – General – Long-Term Arrangements and Commitments – Government Funding of Development. Separate Israeli government consent is required to transfer to third parties technologies developed through projects in which the government participates in the funding of the development effort. The Investment Center promotes Israeli export products and increased industrialization of peripheral areas through investment in industrial infrastructure. The Investment Center either provides grants for qualified projects or provides tax benefits for qualified industrial investments by Israeli companies.
Israeli Labor Laws. Our employees in Israel are subject to Israeli labor laws. Some employees are also affected by provisions of collective bargaining agreements. These labor laws and collective bargaining agreements concern, inter alia, employment terms (such as working hours, minimum wages, pension and social rights, annual leave, sick leave, parental rights, work related accidents), procedures and conditions for dismissal, employment of temporary or external workforce and other conditions of employment.
Severance Pay. Under Israeli law, our Israeli companies are required to make severance payments to terminated Israeli employees. The severance reserve is calculated based on the employee’s last salary and period of employment. A portion of the severance pay and pension obligation is covered by payment of monthly premiums to insurance companies/ policies under approved plans and to pension funds. The deposits presented in the balance sheet include profits accumulated to the balance sheet date. However, Elbit Systems and our Israeli subsidiaries have entered into agreements with some of our employees implementing Section 14 of the Severance Payment Law, relating to the treatment of severance pay. See Item 18. Financial Statements – Note 2Q and 17.
National Insurance Institute. Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. These amounts also include payments for national health insurance. As of December 31, 2023, the payments to the National Insurance Institute were equal to approximately 19.6% of wages, subject to a cap if an employee’s monthly wages exceed a specified amount. The employee contributes approximately 61.2%, and the employer contributes approximately 38.8%.
During the “Swords of Iron” war, some of our employees were mobilized for reserve duty (see above “Swords of Iron” War”). In accordance with the Israeli law in effect as of March 15, 2024, employees on reserve duty continue to be fully paid by the Company, while the National Insurance Institute refunds the Company for their salaries, up to a certain statutory ceiling (which is sometimes lower than the salaries we pay to such employees) with no refund provided for additional employment costs. As a result, the Company has incurred, and will likely continue to incur, costs in respect of its employees who are called to reserve duty for which it is not fully indemnified by the government. The relevant authorities in the Israeli government have initiated certain processes to promote an arrangement, according to which in some cases and subject to certain conditions, employers will be indemnified by the government, up to a certain statutory ceiling, for certain additional employment costs related to social benefits of its employees that were called for reserve duty in a state of emergency, as defined by law. There is no certainty that such arrangement will be approved.
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Enforcement of Judgments
Israeli courts may enforce U.S. and other foreign jurisdiction final executory judgments for liquidated amounts in civil matters, obtained after due process before a court of competent jurisdiction, provided that, among other things:
•the prevailing law of the foreign state in which the judgment is rendered allows for the enforcement of judgments of Israeli courts;
•adequate service of process has been made and the defendant has had a reasonable opportunity to be heard;
•the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
•the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;
•an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court; and
•the judgment is no longer subject to a right of appeal.
Foreign judgments enforced by Israeli courts generally will be payable in Israeli currency. Under existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli currency at the foreign currency’s exchange rate on the payment date or in foreign currency. Until collection, an Israeli court judgment stated in Israeli currency will ordinarily be linked to the Israeli Consumer Price Index (CPI) plus interest at the annual rate (set by Israeli regulations) in effect at that time. Judgment creditors must bear the risk of unfavorable exchange rates. This summary is not intended to be, and should not be regarded as, legal advice.
Item 4A. Unresolved Staff Comments.
None.
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Item 5. Operating and Financial Review and Prospects.
The following discussion and analysis should be read together with our audited consolidated financial statements and notes appearing in Item 18 below.
General
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Item 18. Financial Statements – Note 2.
Our results of operations and financial condition are based on our consolidated financial statements, which are presented in conformity with United States generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial statements requires management to select accounting policies, and to make estimates, assumptions and judgments that involve the accounting policies described below that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions and changes in our critical accounting policies could materially impact our operating results and financial condition.
We believe our most critical accounting policies relate to:
•Revenue Recognition;
•Business Combinations;
•Impairment of Long-Lived Assets and Goodwill;
•Useful Lives of Long-Lived Assets;
•Income Taxes;
•Stock-Based Compensation Expense; and
•Post-employment Benefits Liabilities.
Revenue Recognition
We generate revenues primarily from fixed-price long-term contracts involving the design, development, manufacture and integration of defense systems and products. In addition, to a lesser extent, we provide non-defense systems and products as well as support and services for our systems and products.
Revenues from our contracts are principally recognized using the Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) 606. We assess contractual arrangements at inception according to the five-step model of ASC 606.
We recognize revenues for each of the identified performance obligations when our customer obtains control of the products or services. The assessment of when the customer obtains control involves significant judgments, including, inter alia, whether there is an alternative use for a product, the contract terms, assessment of the enforceable rights for payments, and technical or contractual constraints. As a practical expedient we may occasionally account for group of performance obligations or contracts collectively, as opposed to individually by using the “portfolio approach” or the “series of distinct goods and services” method. Under the “portfolio approach” practical expedient, the Company may combine individual performance obligations, if the goods or services of the individual performance obligations have similar characteristics and the Company reasonably expects that the effect on the financial statements of applying this guidance would not defer materially from applying the guidance to the individual contracts or performance obligations within that portfolio. In addition, as a practical expedient, the Company does not assess the existence of a significant financing component when the difference between payment and transfer of control is less than one year.
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For most of our long-term contracts, where our performance does not create an asset with an alternative use, we recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by the governing law or clauses in the contract that typically allow the customer control in the work-in-process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit for products or services that do not have an alternative use to the Company.
For these performance obligations that are satisfied over time, we generally recognize revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation.
Revenue for performance obligations that are not recognized over time are recognized at the point in time when control transfers to the customer (which is generally when the customer can direct the use of and obtain substantially all of the remaining benefits from the products, generally when the customer obtains control after delivery).
Service revenues include contracts primarily for the provision of supplies and services other than those associated with activities related to the design, development or manufacturing or delivery of products. It may be a standalone service contract or a service performance obligation, which is distinct from a design, development or products delivery contract. Our service contracts include contracts in which the customer simultaneously receives and consumes the benefits provided as the contract is performed. Our service contracts primarily include operation-type contracts, outsourcing-type arrangements, “stand ready” type maintenance contracts, training and similar activities. Revenues from service contracts or performance obligations were less than 10% of total revenues in each of the fiscal years 2023, 2022 and 2021. For additional information see Item 18. Financial Statements – Note 2S.
Business Combinations
In accordance with ASC 805, “Business Combinations”, we allocate the purchase price (including estimated fair value of contingent consideration at the date of acquisition) of acquired businesses and companies to the tangible and intangible assets acquired and liabilities assumed, as well as to in-process research & development (IPR&D) and non-controlling interest, based on their estimated fair values. Determining such values requires management to make significant estimates and assumptions, especially with respect to intangible assets. See Item 18. Financial Statements –Note 2E for additional information.
We usually engage third-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Determining the fair values of certain assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions, mainly with respect to intangible assets. Management makes estimates of fair value based upon market participants’ assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies, and although such estimates are deemed to be consistent with market participants’ highest and best use of the assets in the principal or most advantageous market, they are inherently uncertain. While there are a number of different methods for estimating the value of intangible assets acquired, the primary method used is the discounted cash flow approach. Some of the more significant estimates and assumptions inherent in the discounted cash flow approach include projected future cash flows, including their timing, a discount rate reflecting the risk inherent in the future cash flows and a terminal growth rate. We also estimate the expected useful lives of the intangible assets, which requires judgment and can impact our results of operations. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
To the extent intangible assets are assigned longer useful lives, there may be less amortization expense recorded in a given period. Because we operate in industries which are extremely competitive, the value of our intangible assets and their respective useful lives are exposed to future adverse changes, which can result in an impairment charge to our results of operations.
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Impairment of Long-Lived Assets and Goodwill
Our long-lived assets, including identifiable property, plant and equipment and intangible assets, are reviewed for impairment in accordance with ASC 360-10-35, “Property, Plant and Equipment Subsequent Measurement”, 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. Fair value of non-financial assets is determined based on market participant assumptions. During the years ended December 31, 2021, December 31, 2022 and December 31, 2023, no material impairment of long-lived assets was identified. See Item 18. Financial Statements – Notes 2I and 2P for additional information.
Goodwill represents the excess of the cost of acquired businesses over the fair values of the assets acquired net of liabilities assumed. Goodwill is not amortized, but is instead tested for impairment at least annually (or more frequently if impairment indicators arise).
We review goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. Such events or circumstances could include significant changes in the business climate of our industry, operating performance indicators, competition or sale or disposal of a portion of a reporting unit. The assessment is performed at the reporting unit level. Our annual testing date for all reporting units is December 31.
Performing the goodwill impairment test requires judgment, including how we define reporting units and determine their fair value. We consider a component of our business to be a reporting unit if it constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component. We estimate the fair value of each reporting unit using a discounted cash flow methodology that requires significant judgment. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing backlog, expected future contracts, contracts with suppliers, labor agreements and general market conditions. We prepare cash flow projections for each reporting unit using a five-year forecast of cash flows and a terminal value based on the Perpetuity Growth Model. The five-year forecast and related assumptions are derived from the most recent annual financial forecast for which the planning process commenced in our fourth quarter. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital and includes factors such as the risk-free rate of return and the return an outside investor would expect to earn based on the overall level of inherent risk. The determination of expected returns includes consideration of the beta (a measure of risk) of traded securities of comparable companies. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
We evaluate goodwill for impairment by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value exceeds the estimated fair value, we measure impairment by comparing the derived fair value of goodwill to its carrying value, and any impairment determined is recorded in the current period. For each of the three years ended December 31, 2023, no material impairment of goodwill was identified. See Item 18. Financial Statements - Note 2P for additional information.
Useful Lives of Long-Lived Assets
Identifiable intangible assets and property, plant and equipment are amortized over their estimated useful lives. Determining the useful lives of such assets involves the use of estimates and judgments. In determining the useful lives we take into account various factors such as the expected use of the assets, effects of obsolescence, including technological developments, competition, demand and changes in business, acquisitions and other economic factors. If we experience changes and the useful lives of such assets increase or decrease, it will affect our results of operations. See above “Impairment of Long-Lived Assets and Goodwill” for further discussion of the effects of changes in useful lives.
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Income Taxes
We record income taxes using the asset and liability approach, whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and of operating losses and credit carry-forwards, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are more likely than not to be realized. We have considered future taxable income on a jurisdiction by jurisdiction basis and used prudent and feasible tax planning strategies and other available evidence in determining the need for a valuation allowance. In the event we were to determine that we would be able to realize these deferred income tax assets in the future, we would adjust the valuation allowance, which would reduce the provision for income taxes.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. As part of the determination of our tax liability, management exercises considerable judgment in evaluating tax positions taken by us in determining the income tax provision and establishes reserves for tax contingencies in accordance with ASC 740 “Income Taxes” guidelines. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate based on new information. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. During 2021, 2022 and 2023, certain of our subsidiaries settled certain income tax matters pertaining to multiple years in Israel and Europe. Elbit Systems and certain of our Israeli subsidiaries are undergoing tax audits by the Israeli Tax Authority. As of December 31, 2023, the provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest and penalties.
Management’s judgment is required in determining our provision for income taxes in each of the jurisdictions in which we operate. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcomes will not be different than those which are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made. See Item 18. Financial Statements - Notes 2V and 18.
Stock-Based Compensation Expense
We account for equity-based compensation in accordance with ASC 718 “Compensation - Stock Compensation” (ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options and cash-based awards linked to the share price such as our 2018 Phantom Bonus Retention Plan, based on estimated fair values. See Item 18. Financial Statements - Notes 2Y and 22. As of the date of this annual report our directors have not received any equity-based compensation.
Post-employment Benefits Liabilities
We have several post-employment benefit plans. The plans are funded partly by deposits with insurance companies, financial institutions or funds managed by a trustee. The plans are classified as defined contribution plans and as defined benefit plans.
Some current and former employees of the Company's subsidiaries, located mainly in Israel and in the U.S., have defined benefit pension plans for their retirement, which are maintained by the Company. Generally, according to the terms of the plans, as stated, the employees are entitled to receive pension payments based on, among other things, their number of years of service (in certain cases up to 70% of their last base salary) or computed, in certain cases, based on a fixed salary. In addition, some employees of a subsidiary in Israel are entitled to early retirement if they meet certain conditions, including certain age and seniority levels at the time of retirement.
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We recognize on a plan-by-plan basis the net funded status of our post-retirement benefit plans under U.S. GAAP as either an asset or a liability on our consolidated balance sheets. The funded status represents the difference between the fair value of each plan’s assets and the benefit obligation of the plan. The benefit obligation represents the present value of the estimated future benefits we currently expect to pay to plan participants based on past service.
The plan assets and benefit obligations are measured at the end of each year or more frequently, upon the occurrence of certain events such as a significant plan amendment, settlement or curtailment. The amounts we record are measured using actuarial valuations (based on independent actuarial advice) which are dependent upon key assumptions such as: discount rates, the expected long-term rate of return on plan assets (determined by considering the expected return available on assets underlying the current investment policy), participant longevity, employee turnover, inflation rates, future payroll increases and the health care cost trend rates for our retiree medical plans. The assumptions we make affect both the calculation of the benefit obligations as of the measurement date and the calculation of net periodic benefit cost in subsequent periods. When reassessing these assumptions, we consider past and current market conditions and make judgments about future market trends. We also consider factors such as the timing and amounts of expected contributions to the plans and benefit payments to plan participants. Any changes in these assumptions will impact (either increase or decrease) the carrying amount of our post-employment benefit obligations and plan assets. See Item 18. Financial Statements – Notes 2R and 17.
Governmental Policies
Governmental policies and regulations applicable to defense contractors, such as cost accounting and audit, export control, procurement solicitation and anti-bribery rules and regulations, could have a material impact on our operations. See Item 3. Key Information – Risk Factors – Risks Related to Legal and Regulatory Requirements and Item 4. Information on the Company – Governmental Regulation. According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, we are required to include in our annual report on Form 20-F an assessment, as of the end of the fiscal year, of the effectiveness of our internal control over financial reporting. See Item 15. Controls and Procedures – Management’s Annual Report on Internal Control Over Financial Reporting.
Recent Accounting Pronouncements
See Item 18. Financial Statements – Note 2AE.
Long-Term Arrangements and Commitments
Government Funding of Development. Elbit Systems and certain Israeli subsidiaries partially finance our research and development expenditures under programs sponsored by the Israel Innovation Authority (IIA) in the Ministry of Economy (formerly the Office of the Chief Scientist) for the support of research and development activities conducted in Israel. At the time the funds are received, successful development of the funded projects is not assured. In exchange for the funds, Elbit Systems and the subsidiaries pay 2% to 5% of total sales of the products developed under these programs. The obligation to pay these royalties is contingent on actual future sales of the products. Elbit Systems and some of our subsidiaries may also be obligated to pay certain amounts to the IMOD and others on certain sales including sales resulting from the development of some of the technologies developed with such respective entity’s funds. See Item 4. Information on the Company – Conditions in Israel – Israel Innovation Authority and Investment Center Funding and Item 18. Financial Statements – Note 2U and Note 21A.
Lease Commitments. The future minimum lease commitments of the Company under various non-cancelable operating lease agreements for property, motor vehicles and office equipment, excluding imputed interest, as of December 31, 2023 were as follows: $82.1 million for 2024, $70.0 million for 2025, $55.9 million for 2026, $42.1 million for 2027, $36.2 million for 2028 and $251.5 million for 2029 and thereafter. See Item 18. Financial Statements – Note 9.
Bank and Notes Covenants. In connection with our Series B, C and D Notes, bank credits and loans, including performance guarantees issued by banks and bank guarantees in order to secure certain advances from customers, Elbit Systems and certain subsidiaries are obligated to meet certain financial covenants. See below “Financial Resources”. Such covenants include, inter alia, requirements for shareholders’ equity, current ratio, operating profit margin, tangible net worth, EBITDA, interest coverage ratio, total leverage, equity and net financial debt. See Item 18. Financial Statements – Note 21E. In respect of each of the 12 month periods ending December 31, 2022 and 2023, the Company was in material compliance with its loan obligations.
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Commercial Paper. In August 2023, Elbit Systems completed an issuance in Israel of U.S. Dollar denominated commercial paper in an amount of approximately $300 million par value, followed by an additional amount of approximately $14 million par value in September 2023, bearing an annual interest of the three-months SOFR interest rate and an additional 1%. The commercial paper is for a term of 90 days, which may be extended by additional periods of 90 days each, up to a maximum period of five years, and is also subject to early repayment at the request of an investor with a seven business days notice, or at the Company's discretion, with a twenty-one days prior notice. The commercial paper is not listed on any stock exchange.
Bank and Other Financial Institution Guarantees. As of December 31, 2023 and 2022, guarantees in the aggregate amount of approximately $4,358 million and $3,858 million, respectively, were issued by banks and other financial institutions on behalf of several Company entities primarily in order to secure certain advances from customers and performance bonds.
Purchase Commitments. As of December 31, 2023 and 2022 we had purchase commitments of approximately $3,856 million and $3,029 million, respectively. These purchase orders and subcontracts are typically in standard formats proposed by us. These subcontracts and purchase orders also reflect provisions from the applicable prime contract that apply 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 requested by our customers in international contracts. These terms include our right to terminate the purchase order or subcontract in the event of the vendor’s or subcontractor’s default, and frequently also include our right to terminate the order or subcontract for our convenience (or if our prime contractor has so terminated the prime contract). Such purchase orders and subcontracts typically are not subject to variable price provisions.
Acquisitions During 2023
See Item 4. Information on the Company – Mergers, Acquisitions and Divestitures and Item 18. Financial Statements – Note 1D.
Backlog of Orders
Our backlog includes firm commitments received from customers for systems, products, services and projects that have yet to be delivered or completed, as applicable. Our policy is to include orders in our backlog only when specific conditions are met. Examples of these conditions may include, among others, receipt of a binding letter of commitment or contract, program funding, advances, letters of credit, guarantees and/or other commitments from customers. As a result, from time to time we could have unrecorded orders not included in our reported backlog.
We reduce backlog when revenues for a specific contract are recognized, such as when delivery or acceptance occurs or when contract milestones or engineering progress under long-term contracts are recognized as achieved, or when revenues are recognized based on costs incurred. In the unusual event of a contract cancellation, we reduce our backlog accordingly. The method of backlog recognition used may differ depending on the particular contract. Orders in currencies other than U.S. dollars are translated periodically into U.S. dollars and recorded accordingly.
Our backlog of orders as of December 31, 2023 was $17,756 million, of which 72% was for orders outside Israel. Our backlog of orders as of December 31, 2022 was $15,118 million, of which 75% was for orders outside Israel. Approximately 60% our backlog as of December 31, 2023 is scheduled to be performed during 2024 and 2025. The rest of the 40% balance is scheduled to be performed in 2026, 2027 and thereafter. Backlog information and any comparison of backlog as of different dates may not necessarily represent an indication of future sales.
Trends
The “Swords of Iron” war, as well as the ongoing conflict between Russia and Ukraine that escalated with the Russian invasion in 2022, have elevated geopolitical tensions throughout the world. These conflicts have also changed military and homeland security requirements, that until recently were focused on low intensity conflicts and defense against terrorism and cyber-attacks. Governments around the world have announced plans to increase defense spending and procure a range of advanced capabilities to better prepare for high intensity “near peer” conflicts.
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The deployment of large armored formations and the increased tempo and intensity of the conflicts have led to a change in defense procurement priorities and increased demand for capabilities that enable the fielding of large mechanized military formations capable of performing multi-domain operations and at the same time, addressing the risks presented by innovative technological capabilities deployed extensively in modern battlefields, such as remotely piloted aircraft and advanced munitions.
This global trend has increased demand in the areas of C4ISR systems, cyber-defense systems, network centric information and operational systems, intelligence gathering systems, border and perimeter security systems, unmanned aircraft systems, unmanned surface vessels, remote controlled systems, precision munitions, tank, artillery and mortar munitions, vehicle survivability and force protection systems, signal intelligence (SIGINT) and electronic warfare (EW) systems, space and satellite-based defense capabilities and homeland security solutions. The technological advances in commercial technologies have led to increasing demand for technological solutions that incorporate digital transformation, including artificial intelligence, big data analytics, robotics, automation and information assurance by military forces. Moreover, there is a continuing demand for cost-effective logistic support and training and simulation services.
One result of these conflicts has been plans announced by numerous European countries to significantly increase defense spending and strengthen their armed forces, which will likely take time to fully implement. This development has created various opportunities for Elbit Systems and its European subsidiaries and we believe that our core technologies and abilities will enable us to take advantage of many of these trends. At the same time, the conflicts have resulted in supply chain disruptions, market volatility and global sanctions (see Item 3. Risk Factors – Risks Related to our Operations).
Since the beginning of the “Swords of Iron” war the IMOD's demand for our products and solutions has materially increased. The war has also affected our operations, human resources and other aspects of our business. For additional information see Item 4. Information on the Company – Conditions in Israel – “Swords of Iron” war, and Item 3. Key Information – Risk Factors – Risks Related to Our Israeli Operations and Environment – Conditions in Israel and the Middle East may affect our operations.
Currently, we cannot assess the full impact of the “Swords of Iron” war nor of the conflict between Russia and Ukraine on our business.
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Summary of Operating Results
The following table sets forth our consolidated statements of operations for each of the three years ended December 31, 2023.
(in thousands of U.S. dollars except per share data)
| Year Ended December 31, 2023 | % | Year Ended December 31, 2022 | % | Year Ended December 31, 2021 | % | ||||||||||||||||||||||||||||||
| Revenues | $ | 5,974,744 | 100.0 | $ | 5,511,549 | 100.0 | $ | 5,278,521 | 100.0 | ||||||||||||||||||||||||||
| Cost of revenues | 4,491,790 | 75.2 | 4,138,266 | 75.1 | 3,920,473 | 74.3 | |||||||||||||||||||||||||||||
| Gross profit | 1,482,954 | 24.8 | 1,373,283 | 24.9 | 1,358,048 | 25.7 | |||||||||||||||||||||||||||||
| Research and development (R&D) expenses | 502,654 | 8.4 | 501,777 | 9.1 | 447,852 | 8.5 | |||||||||||||||||||||||||||||
| Less – participation | (78,234) | (1.3) | (66,127) | (1.2) | (52,765) | (1.0) | |||||||||||||||||||||||||||||
| R&D expenses, net | 424,420 | 7.1 | 435,650 | 7.9 | 395,087 | 7.5 | |||||||||||||||||||||||||||||
| Marketing and selling expenses | 359,141 | 6.0 | 326,020 | 5.9 | 291,751 | 5.5 | |||||||||||||||||||||||||||||
| General and administrative expenses | 330,285 | 5.5 | 313,047 | 5.7 | 267,362 | 5.1 | |||||||||||||||||||||||||||||
| Other operating income, net | — | — | (68,918) | (1.3) | (14,660) | (0.3) | |||||||||||||||||||||||||||||
| 1,113,846 | 18.6 | 1,005,799 | 18.2 | 939,540 | 17.8 | ||||||||||||||||||||||||||||||
| Operating income | 369,108 | 6.2 | 367,484 | 6.7 | 418,508 | 7.9 | |||||||||||||||||||||||||||||
| Financial expenses, net | (137,827) | (2.3) | (51,364) | (0.9) | (40,393) | (0.8) | |||||||||||||||||||||||||||||
| Other income (expenses), net | (4,787) | (0.1) | (23,562) | (0.4) | 5,336 | 0.1 | |||||||||||||||||||||||||||||
| Income before taxes on income | 226,494 | 3.8 | 292,558 | 5.4 | 383,451 | 7.3 | |||||||||||||||||||||||||||||
| Taxes on income | (22,913) | (0.4) | (24,131) | (0.4) | (131,387) | (2.5) | |||||||||||||||||||||||||||||
| 203,581 | 3.4 | 268,427 | 5.0 | 252,064 | 4.8 | ||||||||||||||||||||||||||||||
| Equity in net earnings of affiliated companies and partnerships | 12,275 | 0.2 | 7,042 | 0.1 | 22,599 | 0.4 | |||||||||||||||||||||||||||||
| Net income | $ | 215,856 | 3.6 | $ | 275,469 | 5.1 | $ | 274,663 | 5.2 | ||||||||||||||||||||||||||
| Less – net income attributable to non-controlling interests | (725) | — | (21) | — | (313) | — | |||||||||||||||||||||||||||||
| Net income attributable to the Company’s shareholders | $ | 215,131 | 3.6 | $ | 275,448 | 5.1 | $ | 274,350 | 5.2 | ||||||||||||||||||||||||||
| Diluted net earnings per share: | $ | 4.82 | $ | 6.18 | $ | 6.20 | |||||||||||||||||||||||||||||
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2023 Compared to 2022
The following is an overview for 2023 compared to 2022. A discussion of our results of operations for 2022 compared to 2021 may be found on pages 43-50 of our annual report on Form 20-F filed May 1, 2023 on the EDGAR database of the U.S. Securities and Exchange Commission.
Revenues
Our sales are primarily to governmental entities and prime contractors under government defense and homeland security programs. Accordingly, the level of our revenues is subject to governmental budgetary constraints.
Our consolidated revenues in 2023 were $5,974.7 million, as compared to $5,511.5 million in 2022.
Aerospace revenues increased by 8% in 2023, as compared to 2022, mainly due to the increase in training and simulation projects in Europe, UAS projects in Asia Pacific and Europe and offset by the lower level of PGM deliveries in Asia Pacific.
C4I and Cyber revenues increased by 6% year-over-year mainly due to C4I projects in Asia Pacific.
ISTAR and EW revenues increased by 13% in 2023, as compared to 2022, mainly due to EW and EO projects in Europe, and increase in Countermeasure Systems deliveries, mainly in Asia.
Land revenues increased by 12% in 2023, as compared to 2022, mainly due to the increase in artillery and weapon station sales in Europe, ammunition in Israel and Artillery Systems for customers in the other territory.
Elbit Systems of America revenues were similar year-over-year.
The following table sets forth our distribution of revenues by geographical regions ($ millions):
| Year Ended December 31, 2023 | % | Year Ended December 31, 2022 | % | ||||||||||||||||||||
| Israel | 1,167.2 | 19.5 | 1,071.9 | 19.4 | |||||||||||||||||||
| North America | 1,417.7 | 23.7 | 1,489.7 | 27.0 | |||||||||||||||||||
| Europe | 1,776.4 | 29.7 | 1,243.6 | 22.6 | |||||||||||||||||||
| Asia-Pacific | 1,263.8 | 21.2 | 1,405.5 | 25.5 | |||||||||||||||||||
| Latin America | 120.7 | 2.0 | 119.9 | 2.2 | |||||||||||||||||||
| Other | 228.9 | 3.9 | 180.9 | 3.3 | |||||||||||||||||||
Total revenues | 5,974.7 | 100.0 | 5,511.5 | 100.0 | |||||||||||||||||||
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Cost of Revenues and Gross Profit
Cost of revenues in 2023 was $4,491.8 million (75.2% of revenues), as compared to $4,138.3 million (75.1% of revenues) in 2022.
Our major components of cost of revenues are (i) wages and related benefits costs, (ii) subcontractors and material consumed and (iii) manufacturing and other expenses. The amounts and percentages of those components in 2023 and 2022 were as follows:
Wages and related benefits costs in 2023 constituted approximately 36% of cost of revenues, as compared to 39% in 2022. The total cost of wages and related benefits in 2023 was approximately $1,671 million, as compared to $1,598 million in 2022. The increase in wages and related benefit costs was mainly a result of exchange rate changes during 2023 in the value of the NIS relative to the U.S. dollar, as well as the growth of our workforce by permanent employees, to support the increase in the Company's activity, and by temporary employees to temporarily replace our employees that were mobilized during the “Swords of Iron” war.
Subcontractors and material consumed costs in 2023 constituted approximately 52% of cost of revenues, as compared to 54% in 2022. The total amount of subcontractors and material consumed costs in 2023 was approximately $2,389 million, as compared to approximately $2,252 million in 2022.
Manufacturing and other expenses were similar year-over-year. The total cost of manufacturing and other expenses in 2023 was approximately $425 million, as compared to approximately $367 million in 2022.
In 2023, our cost of revenues included an increase in inventories of approximately $140 million in work-in-progress and finished goods inventories, as compared to an increase of approximately $26 million in work-in-progress and finished goods inventories in 2022.
Cost of revenues in 2023 include expenses of approximately $18 million of inventory write-off related to discontinuing activities of a subsidiary. Cost of revenues in 2022 included expenses of approximately $35 million related to the effect of the significant increase in the Company’s share price on employees’ stock price linked compensation.
Changes from 2022 to 2023 in our cost of revenues and cost of revenues components, were not material. We did not identify any developing trends in cost of revenues that we believe are likely to have a material impact on our future operations other than the continued changes in the NIS against the U.S. dollar, which could have an impact mainly on our labor costs,the impact of “Swords of Iron” war, including disrupted transportation networks and global supply chains, increased costs and extension of lead times.
Gross profit for the year ended December 31, 2023 was $1,483.0 million (24.8% of revenues), as compared to $1,373.3 million (24.9% of revenues) in the year ended December 31, 2022.
Research and Development (R&D) Expenses
We continually invest in R&D in order to maintain and further advance our technologies, in accordance with our long-term plans, based on our estimate of future market needs. Our R&D costs, net of participation grants, include costs incurred for independent research and development and bid and proposal efforts and are expensed as incurred.
Gross R&D expenses in 2023 totaled $502.6 million (8.4% of revenues), as compared to $501.8 million (9.1% of revenues) in 2022.
Net R&D expenses (after deduction of third party participation) in 2023 totaled $424.4 million (7.1% of revenues), as compared to $435.7 million (7.9% of revenues) in 2022.
Marketing and Selling Expenses
We are active in developing new markets and pursue at any given time various business opportunities according to our plans.
Marketing and selling expenses in 2023 were $359.1 million (6.0% of revenues), as compared to $326.0 million (5.9% of revenues) in 2022.
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General and Administration (G&A) Expenses
G&A expenses in 2023 were $330.3 million (5.5% of revenues), as compared to $313.0 million (5.7% of revenues) in 2022. G&A expenses in 2023 include $34 million expenses related to a write-off of an uncollectible balance of contract assets under a discontinued project.
Other Operating Income, Net
Other operating income, net in 2022 amounted to $68.9 million resulted mainly from capital gains related to the sale of buildings and investments by subsidiaries in Israel and in the United Kingdom and a grant received by a subsidiary in Israel.
Operating Income
Our operating income in 2023 was $369.1 million (6.2% of revenues), as compared to $367.5 million (6.7% of revenues) in 2022.
Financial Expense, Net
Net financing expenses in 2023 were $137.8 million, as compared to $51.4 million in 2022. The financial expenses in 2023 were higher mainly as a result of the significant increase in interest rates.
Other Expenses, Net
Other expenses, net were $4.8 million in 2023, as compared to $23.6 million in 2022. Other expenses, net in 2023 resulted mainly from revaluation of holdings in affiliated companies and expenses related to non-service costs of pension plans.
Taxes on Income
Our effective tax rate represents a weighted average of the tax rates to which our various entities are subject. Taxes on income in 2023 were $22.9 million (effective tax rate of 10.1%), as compared to $24.1 million (effective tax rate of 8.2%) in 2022. The tax expenses in 2022 and 2023 were affected by tax benefits related to adjustments for prior years following tax settlements in some of the Company's subsidiaries in Israel with Israeli tax authorities in 2022 and 2023.
Company’s Share in Earnings of Affiliated Entities
The entities, in which we hold 50% or less in shares or voting rights (affiliates) and are therefore not consolidated in our financial statements, operate in complementary areas to our core business activities, including electro-optics and airborne systems.
In 2023, we had income of $12.3 million from our share in earnings of affiliates, as compared to $7.0 million in 2022.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests in 2023 was $0.7 million, as compared to $0.0 million in 2022.
Net Income and Earnings Per Share (EPS)
As a result of the above, net income in 2023 was $215.1 million (3.6% of revenues), as compared to net income of $275.4 million (5.1% of revenues) in 2022. The diluted EPS was $4.82 in 2023, as compared to $6.18 in 2022. Diluted net earnings per share in 2023 were reduced by approximately $0.90 as a result of the expenses (net of tax) related to the write-off of inventory and contract assets. The number of shares used for computation of diluted EPS in the years ended December 31, 2023 and 2022 were 44,592,000 and 44,581,000 shares, respectively.
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Segment Reporting
Revenues
The Company has five reportable segments: Aerospace, C4I and Cyber, ISTAR and EW, Land and ESA (see Item 4. Information on the Company – Business Overview - Segments above, “Segment Disclosure” below and Item 18. Financial Statements - Notes 1, 2AC and 23).
The following table presents information about the Company’s reported segments revenues for the periods indicated:
| Year Ended December 31, 2023 | % | Year Ended December 31, 2022 | % | Year Ended December 31, 2021 | % | ||||||||||||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||||||||||||||
| External customers | $ | 1,613.2 | 27.0 | $ | 1,471.1 | 26.7 | $ | 1,281.4 | 24.3 | ||||||||||||||||||||||||||
| Intersegment revenue | 260.1 | 262.1 | 301.9 | ||||||||||||||||||||||||||||||||
| 1,873.3 | 28.6 | 1,733.2 | 28.5 | 1,583.3 | 27.1 | ||||||||||||||||||||||||||||||
| C4I and Cyber | |||||||||||||||||||||||||||||||||||
| External customers | 668.4 | 11.2 | 631.3 | 11.5 | 590.1 | 11.2 | |||||||||||||||||||||||||||||
| Intersegment revenue | 52.7 | 47.1 | 34.6 | ||||||||||||||||||||||||||||||||
| 721.1 | 11.0 | 678.4 | 11.2 | 624.7 | 10.7 | ||||||||||||||||||||||||||||||
| ISTAR and EW | |||||||||||||||||||||||||||||||||||
| External customers | 996.9 | 16.7 | 882.2 | 16.0 | 888.2 | 16.8 | |||||||||||||||||||||||||||||
| Intersegment revenue | 182.5 | 163.4 | 138.1 | ||||||||||||||||||||||||||||||||
| 1,179.4 | 18.0 | 1,045.6 | 17.2 | 1,026.3 | 17.6 | ||||||||||||||||||||||||||||||
| Land | |||||||||||||||||||||||||||||||||||
| External customers | 1,241.0 | 20.8 | 1,075.8 | 19.5 | 1,028.1 | 19.5 | |||||||||||||||||||||||||||||
| Intersegment revenue | 65.2 | 92.7 | 88.8 | ||||||||||||||||||||||||||||||||
| 1,306.2 | 20.0 | 1,168.5 | 19.2 | 1,116.9 | 19.1 | ||||||||||||||||||||||||||||||
| ESA | |||||||||||||||||||||||||||||||||||
| External customers | 1,455.2 | 24.4 | 1,451.1 | 26.3 | 1,490.7 | 28.2 | |||||||||||||||||||||||||||||
| Intersegment revenue | 9.7 | 5.6 | 2.1 | ||||||||||||||||||||||||||||||||
| 1,464.9 | 22.4 | 1,456.7 | 23.9 | 1,492.8 | 25.5 | ||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||
| Total revenues (external customers and intersegment) for reportable segments | $ | 6,544.9 | $ | 6,082.4 | $ | 5,844.0 | |||||||||||||||||||||||||||||
| Less - Intersegment revenue | (570.2) | (570.9) | (565.5) | ||||||||||||||||||||||||||||||||
| Total | $ | 5,974.7 | 100.0 | $ | 5,511.5 | 100.0 | $ | 5,278.5 | 100.0 | ||||||||||||||||||||||||||
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2023 Compared to 2022
Our consolidated revenues increased by 8% to $5,974.7 million in 2023 from $5,511.5 million in 2022.
Revenue by Segments.
Aerospace revenues increased by 8% in 2023 as compared to 2022, mainly due to training and simulation revenues in Europe and UAS revenues in Asia Pacific and Europe, partially offset by lower PGM sales.
C4I and Cyber revenues increased by 6% year-over-year mainly due to C4I revenues in Asia Pacific.
ISTAR and EW revenues increased by 13% in 2023, as compared to 2022, mainly due to sales of Electronic Warfare and Electro-Optic systems in Europe, and countermeasure systems sales.
Land revenues increased by 12% in 2023 as compared to 2022, mainly due to the increase in artillery and weapon station sales in Europe and ammunition and munitions sales in Israel.
ESA revenues were similar year-over-year.
2022 Compared to 2021
Our consolidated revenues increased by 4% to $5,512 million in 2022 from $5,279 million in 2021 Revenue by Segments.
Aerospace revenues increased by 9%, to $1,733 million in 2022 from $1,583 million in 2021, mainly due to Training and Simulation and UAS sales.
C4I and Cyber revenues increased by 9%, to $678 million in 2022 from $625 million in 2021, mainly due to growth in radio and naval command & control systems sales.
ISTAR and EW revenues increased by 2%, to $1,046 million in 2022 from $1,026 million in 2021, mainly due to armored vehicle systems, night vision and target acquisition systems sales.
Land revenues increased 5%, to $1,169 million in 2022 from $1,117 million in 2021, mainly due to airborne precision munitions sales.
ESA revenues decreased by 2%, to $1,456 million in 2022 from $1,493 million in 2021, mainly due to lower medical instrumentation and military avionics' sales partially offset by growth of night vision sales and one quarter of Sparton sales.
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Operating Income
The following tables present information about the Company’s reported segments operating income for the periods indicated:
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||||||||||
| Aerospace | $ | 125.4 | $ | 106.8 | $ | 129.2 | |||||||||||
| C4I and Cyber | 50.7 | 49.0 | 44.4 | ||||||||||||||
| ISTAR and EW | 134.9 | 49.1 | 66.0 | ||||||||||||||
| Land | 80.6 | 28.6 | 35.6 | ||||||||||||||
| ESA | (4.7) | 75.0 | 124.3 | ||||||||||||||
| Segment operating income | 386.9 | 308.5 | 399.5 | ||||||||||||||
| Unallocated corporate income (expense) | (17.8) | (9.9) | 4.3 | ||||||||||||||
| Other operating income | — | 68.9 | 14.7 | ||||||||||||||
| Operating income | $ | 369.1 | $ | 367.5 | $ | 418.5 | |||||||||||
2023 Compared to 2022
Aerospace operating income in 2023 was $125.4 million and 6.7% of Aerospace segment revenues, compared to $106.8 million and 6.2% of segment revenues in 2022. The $18.6 million increase in operating income was mainly due to increased revenues and positive program mix.
C4I and Cyber operating income in 2023 was $50.7 million and 7.0% of C4I and Cyber segment revenues, compared to $49.0 million and 7.2% of segment revenues in 2022.
ISTAR and EW operating income in 2023 was $134.9 million and 11.4% of ISTAR and EW segment revenues, compared to $49.1 million and 4.7% of segment revenues in 2022. The $85.8 million increase in operating income was mainly due to increased revenues and positive program mix.
Land operating income in 2023 was $80.6 million and 6.2% of Land segment revenues, compared to $28.6 million and 2.4% of segment revenues in 2022. The $52.0 million increase in operating income was mainly due to increased revenues, positive program mix and progress in the operational transformation of IMI.
ESA operating loss in 2023 was $4.7 million and 0.3% of ESA segment revenues, compared to $75.0 million and 5.1% of segment revenues in 2022. The $79.7 million decrease in operating income was mainly due to the write-off of $52 million non-cash expenses related to the closing of an underperforming subsidiary with limited synergies and to contract assets related to a discontinued project managed under the subsidiary, as well as negative program mix.
2022 Compared to 2021
Aerospace operating income in 2022 was $106.8 million and 6.2% of Aerospace segment revenues, compared to $129.2 million and 8.2% of segment revenues in 2021. The $22.4 million decrease in operating income was mainly due to increased employee compensation expenses and negative program mix.
C4I and Cyber operating income in 2022 was $49.0 million and 7.2% of C4I and Cyber segment revenues, compared to $ 44.4 million and 7.1% of segment revenues in 2021. The $4.6 million increase in operating income was mainly due to the increase in revenues partially offset by increased employee compensation expenses.
ISTAR and EW operating income in 2022 was $49.1 million and 4.7% of ISTAR and EW segment revenues, compared to $66.0 million and 6.4% of segment revenues in 2021. The $16.9 million decrease in operating income was mainly due to increased employee compensation expenses and negative program mix.
Land operating income in 2022 was $28.6 million and 2.4% of Land segment revenues, compared to $35.6 million and 3.2% of segment revenues in 2021. The $7.0 million decrease in operating income was mainly due to increased employee compensation expenses.
50
ESA operating income in 2022 was $75.0 million and 5.1% of ESA segment revenues, compared to $124.3 million and 8.3% of segment revenues in 2021. The $49.3 million decrease in operating income was mainly due to the decrease in Covid-19 medical instrumentation sales that peaked in 2021, supply chain disruptions and negative program mix.
Other operating income was $ 68.9 million 2022 compared to $14.7 million in 2021 and included capital gains related to the sales of buildings and investments by subsidiaries in Israel and the UK as well as a facility evacuation grant received by a subsidiary in Israel. Other operating income in 2021 resulted mainly from a capital gain related to the sale of a building by a subsidiary in Israel.
Cash Flow
Our operating cash flow is affected by the cumulative cash flow generated from our 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, as well as the timing of payments made by us in connection with the performance of the project. The receipt of payments usually relates to specific events during the project, while expenses are ongoing. As a result, our cash flow may vary from one period to another. Our policy is to invest our cash surplus mainly in interest bearing deposits, in accordance with our projected needs.
In general, subsidiaries are able to transfer cash dividends, loans or advances to Elbit Systems and among themselves, subject to corporate policy and tax considerations in their applicable jurisdiction and subject to management commitment not to distribute tax exempt earnings. Such tax considerations have not had in the past, and are not anticipated to have, a material impact on our ability to meet our obligations.
2023
Our net cash flow provided by operating activities in 2023 was approximately $114 million, resulting mainly from an increase in trade and other payables of approximately $175 million, and the increase in non cash operating items of $178 million. Offset by the increase in inventories of approximately $352 million and an increase in trade receivables and contract assets of approximately $97 million.
Net cash flow used in investing activities in 2023 was approximately $211 million, which was used mainly for the purchase of property, plant and equipment in the amount of $187 million and acquisitions of subsidiaries in the amount of $10 million.
Net cash flow provided by financing activities in 2023 was approximately $83 million, which was provided mainly from the issuance of Commercial paper in the amount of $314 million and short-term credit and loans in the amount of $147 million, offset by repayment of long-term loans in the amount of $246 million, payment of dividends in the amount of $89 million, and repayment of Series B, C and D Notes in the amount of $62 million.
2022
Our net cash flow provided by operating activities in 2022 was approximately $240 million, resulting mainly from an increase in advances received from customers of approximately $192 million, a decrease of approximately $97 million in trade and other receivables and an increase in non-cash operating items of $104 million, offset by a decrease in trade and other payables of approximately $123 million and an increase in inventories of approximately $305 million.
Net cash flow used in investing activities in 2022 was approximately $152 million, which was used mainly for the purchase of property, plant and equipment in the amount of $205 million, and acquisitions of subsidiaries in the amount of $63 million, offset by proceeds from the sale of a subsidiary and an investment of approximately $93 million and proceeds from the sale of fixed assets of $25 million.
Net cash flow provided by financing activities in 2022 was approximately $136 million, which was used for repayment of long-term loans in the amount of $122 million, payment of dividends in the amount of $87 million, and repayment Series B, C, and D Notes, in an amount of approximately $65 million, offset by new long and short term loan of approximately $139 million.
51
2021
Our net cash flow provided by operating activities in 2021 was approximately $417 million, resulting mainly from an increase in advances received from customers of approximately $618 million, an increase of approximately $105 million in trade and other payables and an increase in non-cash operating items of $183 million, offset by an increase in short and long-term trade receivables of approximately $430 million and an increase in inventories of approximately $336 million.
Net cash flow used in investing activities in 2021 was approximately $588 million, which was used mainly for the purchase of property, plant and equipment in the amount of $189 million and acquisitions of subsidiaries in the amount of $446 million, offset by proceeds from the sale of an investment of approximately $16 million and proceeds from the sale of fixed assets of $26 million.
Net cash flow provided by financing activities in 2021 was approximately $151 million, which was provided mainly by proceeds from issuance of Series B, C and D Notes, in an amount of approximately $575 million, and proceeds of long-term loans of approximately $476 million, offset by repayment of long-term loans in the amount of $536 million, repayment of short-term bank credit and loans in the amount of $285 million and payment of dividends in the amount of $79 million.
Financial Resources
The financial resources available to us include profits, collection of accounts receivable, proceeds from the issuance of external indebtedness, advances from customers and the government of Israel and other third parties’ programs such as the Israel Innovation Authority and development grants. In addition, we have access to bank credit lines and financing in Israel and abroad based on our capital, assets and activities.
Elbit Systems and some subsidiaries are obligated to meet various financial covenants set forth in our respective loans, Series B, C and D Notes, Israeli Commercial Paper and credit agreements. Such covenants include inter alia, requirements for shareholders’ equity, current ratio, operating profit margin, tangible net worth, EBITDA, interest coverage ratio, total leverage, equity and net financial debt. In respect of each of the 12 month periods ending December 31, 2022 and 2023, the Company was in material compliance with its loan obligations.
On December 31, 2023, we had total borrowings from banks in the amount of approximately $316 million in short and long-term loans, commercial paper in the amount of approximately $314 million and approximately $407 million in Series B, C and D Notes intended for general corporate purposes. On December 31, 2023, we also had $4,358 million in guarantees issued on our behalf by banks and other financial institutions, mainly in respect of advance payment and performance guarantees provided in the regular course of business. On December 31, 2023, we had a cash balance amounting to $197 million ans short-term bank deposits of approximately $11 million. We believe that we also have the ability to raise additional funds in the capital market and through expansion of our credit lines. In September 2023, we filed a shelf prospectus with the Israeli Security Authority and the TASE (the Shelf Prospectus). The Shelf Prospectus provides a framework for us to raise funds from time to time in Israel through the offering and sale of various debt and equity securities. The shelf prospectus would typically be effective for two years, unless extended with the consent of the Israeli Securities Authority.
As of December 31, 2023, we had working capital of $684 million and a current ratio of 1.14.
We believe that our current cash balances, cash generated from operations, lines of credit and financing arrangements will provide sufficient resources to meet our operational needs for at least the next fiscal year. However, our ability to borrow funds from the banking system may be impacted by the global financial and liquidity situation. See Item 3. Risk Factors – Financial-Related Risks.
For further information on the level, maturity and terms of our borrowings, see Item 18. Financial Statements – Notes 12, 15 and 16.
We believe our cash balance, amounts available under lines of credits, cash flows from operating activities and our ability to access external capital resources is sufficient to satisfy existing short-term and long-term commitments and plans as well as provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year.
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Pensions and Other Post-Retirement Benefits. We account for pensions and other post-employment arrangements in accordance with ASC 715 “Compensation – Retirement Benefits”. Accounting for pensions and other post-retirement benefits involves judgment about uncertain events, including estimated retirement dates, salary levels at retirement, mortality rates, rates of return on plan assets, determination of discount rates for measuring plan obligations, healthcare cost trend rates and rates of utilization of healthcare services by retirees. These assumptions are based on the economic environment in each country. For our pension and other post-retirement benefit assumptions at December 31, 2023 and 2022, see Item 18. Financial Statements – Note 17. On December 31, 2023, our employee benefit liabilities were $510 million, of which we had severance funds of $207 million set aside to satisfy potential obligations.
Material Commitments for Capital Expenditures. We believe that we have adequate sources of funds to meet our material commitments for capital expenditures for the fiscal year ending December 31, 2023 and the subsequent fiscal year (see above “Financial Resources”). Our anticipated capital expenditures (which include mainly the purchase of equipment, buildings and enhancements to our ERP system) as of December 31, 2023 are somewhat higher than those as of December 31, 2022, due to an anticipated increase in expenditures for buildings and certain other expenses. We plan to pay for such anticipated capital expenditures using cash from operations. See also Item 18. Financial Statements – Consolidated Statements of Cash Flows and Note 10.
Israeli Series B, C and D Notes
In July 2021, Elbit Systems completed a public notes offering on the TASE of NIS 1.9 billion (equal to approximately $575 million at the time of the offering) Series B, C and D Notes. The Notes were offered and sold pursuant to the Shelf Prospectus filed in 2020 with the Israeli Securities Authority.
Details of the Notes are as follows:
Tranche | Face Value (NIS) | Maturity | Annual Interest Rate (%) | Adjustments | ||||||||||
Series B | 1,500,000,000 | June 30, 2029 | 1.08 | None | ||||||||||
Series C | 200,000,000 | June 30, 2029 | 2.12 | Changes in the New Israeli Shekel / U.S. dollar exchange rate | ||||||||||
Series D | 200,000,000 | June 30, 2035 | 2.67 | Changes in the New Israeli Shekel / U.S. dollar exchange rate | ||||||||||
The Series B, C and D Notes are unsecured and non-convertible. The offering was made exclusively in Israel to residents of Israel only.
The proceeds of the offering are intended for general corporate purposes, which may include, among others, financing of the Company’s operating and investment activities, mergers and acquisitions and payments of outstanding debt under its credit facilities.
Following the completion of the Notes offering, we entered into cross-currency interest rate swap transactions in order to effectively hedge the effect of interest and exchange rate differences resulting from the Series B Notes that are not adjusted in accordance with changes in the NIS/ U.S dollar exchange rate. Under the cross-currency interest rate swaps, the Series B Notes were adjusted to the changes of the NIS to the U.S. dollar and paid a fixed U.S. dollar interest rate of 1.92% per annum.
During 2023 and 2022 the company paid installments of Notes B,C and D in the amount of approximately $65 million per year.
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Israeli Commercial Paper
In August 2023, Elbit Systems completed an issuance in Israel of U.S. Dollar denominated commercial paper in an amount of approximately $300 million par value, followed by an additional amount of approximately $15 million par value in September 2023, bearing an annual interest of the three-months SOFR interest rate and an additional 1% (the Issuance).
The commercial paper is for a term of 90 days, which may be extended by additional periods of 90 days, up to a maximum period of five years, and is also subject to early repayment at the request of an investor with seven business days' notice, or at the Company's discretion, with a twenty-one days prior notice. The commercial paper is not listed on any stock exchange. The proceeds of the Issuance are intended for diversification of the Company's financing sources and for its ongoing operations.
Impact of Inflation and Exchange Rates
Functional Currency. Our reporting currency is the U.S. dollar, which is also the functional currency for most of our consolidated operations. A majority of our sales are made outside of Israel in non-Israeli currency, mainly U.S. dollars, as well as a majority of our purchases of materials and components. A significant portion of our expenses, mainly labor costs, are in NIS. Some of our subsidiaries have functional currencies in Euro, GBP, Brazilian reals, Australian dollars and other currencies. Transactions and balances originally denominated in U.S. dollars are presented in their original amounts. Transactions and balances in currencies other than the U.S. dollar are remeasured in U.S. dollars according to the principles set forth in ASC 830 “Foreign Currency Matters”. Exchange gains and losses arising from remeasurement are reflected in financial expenses, net, in the consolidated statements of income.
Market Risks and Variable Interest Rates
Market risks relating to our operations result mainly from changes in interest rates and exchange rates. We use derivative instruments to limit exposure to changes in exchange rates in certain cases. We also typically enter into forward contracts in connection with transactions where long-term contracts have been signed and that are denominated in currencies other than U.S. dollars or NIS. We also enter from time to time into forward contracts and other hedging instruments related to NIS based on market conditions.
We use financial instruments and derivatives in order to limit our exposure to risks arising from changes in exchange rates and to mitigate our exposure to effects of changes in foreign currency rates and interest rates. The use of such instruments does not expose us to additional exchange rate risks since the derivatives are held against an asset (for example, excess assets in Euros). Our policy in utilizing these financial instruments is to protect the dollar value of our cash and cash equivalent assets rather than to serve as a source of income.
In the context of our overall treasury policy, specific objectives apply to the management of financial risks. These objectives are disclosed under the headings below “NIS/U.S. Dollar Exchange Rates”, “Inflation and Currency Exchange Rates” and “Foreign Currency, Derivatives and Hedging”.
On December 31, 2023, our liquid assets were comprised of bank deposits and short and long-term investments. Our deposits and investments earn interest based on variable interest rates, and their value as of December 31, 2023 was therefore exposed to changes in interest rates. Should interest rates either increase or decrease, such change may affect our results of operations due to changes in the cost of the liabilities and the return on the assets that are based on variable rates.
NIS/U.S. Dollar Exchange Rates. We attempt to manage our financial activities in order to reduce material financial losses in U.S. dollars resulting from the impact of inflation and exchange rate fluctuations on our non-U.S. dollar assets and liabilities. Our income and expenses in NIS are translated into U.S. dollars at the prevailing exchange rates as of the date of the transaction. Consequently, we are affected by changes in the NIS/U.S. dollar exchange rates. We entered into other derivative instruments to limit our exposure to exchange rate fluctuations, related mainly to payroll expenses incurred in NIS. See Item 11. Quantitative and Qualitative Disclosure About Market Risk. The amount of our exposure to the changes in the NIS/U.S. dollar exchange rate may vary from time to time. See Item 3. Key Information – Risk Factors – Financial-Related Risks.
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Inflation and Currency Exchange Rates
The U.S. dollar cost of our operations in Israel is influenced by any increase in the rate of inflation in Israel that is not fully offset by the devaluation of the NIS in relation to the U.S. dollar. Unless inflation in Israel is offset by a devaluation of the NIS, such inflation may have a negative effect on the profitability of contracts where Elbit Systems or any of our Israeli subsidiaries receives payment in U.S. dollars, NIS linked to U.S. dollars or other foreign currencies, but incurs expenses in NIS linked to the CPI. Inflation in Israel and currency fluctuations may also have a negative effect on the profitability of fixed-price contracts where we receive payments in NIS.
In the past, our profitability was negatively affected when inflation in Israel (measured by the change in the CPI from the beginning to the end of the calendar year) exceeded the devaluation of the NIS against the U.S. dollar and at the same time we experienced corresponding increases in the U.S. dollar cost of our operations in Israel. In 2023, the inflation rate was approximately a positive 3%, and the NIS weakened against the U.S. dollar by approximately 3.1%. In 2022, the inflation rate was approximately a positive 5.3%, and the NIS weakened against the U.S. dollar by approximately 13.2%. There can be no assurance that we will not be materially adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind increases in inflation in Israel.
A devaluation of the NIS in relation to the U.S. dollar also has the effect of decreasing the dollar value of any of our assets that consist of NIS or accounts receivable denominated in NIS, unless such assets or accounts receivable are linked to the U.S. dollar. Such a devaluation also has the effect of reducing the U.S. dollar amount of any of our liabilities that are payable in NIS, unless such payables are linked to the U.S. dollar. On the other hand, any increase in the value of the NIS in relation to the U.S. dollar will have the effect of increasing the U.S. dollar value of any unlinked NIS assets as well as the U.S. dollar amount of any unlinked NIS liabilities and expenses.
Foreign Currency, Derivatives and Hedging
While our functional currency is the U.S. dollar, we also have some non-U.S. dollar or non-U.S. dollar linked exposure to currencies other than NIS. These are mainly non-U.S. dollar customer debts, payments to suppliers and subcontractors as well as obligations in other currencies, assets or undertakings. Some subcontractors are paid in local currency under prime contracts where we are paid in U.S. dollars. The exposure on these transactions has not been in amounts that are material to us. However, when we view it economically advantageous, due to anticipated uncertainty in the applicable foreign exchange rates, we seek to minimize our foreign currency exposure by entering into hedging arrangements, obtaining periodic payments upon the completion of milestones, obtaining guarantees and security from customers and sharing currency risks with subcontractors.
A significant part of our future cash flows that will be denominated in currencies other than the NIS and the U.S. dollar were covered as of December 31, 2023 by forward contracts. On December 31, 2023, we had forward contracts for the sale and purchase of Euro, GBP and various other currencies totaling approximately $2,233 million ($1,808 million in Euro, $133 million in GBP and $292 million in other currencies). See also Item 18. Financial Statements – Consolidated Statements Note 19D.
As of December 31, 2023, an unrealized net loss of approximately $51.6 million was included in accumulated other comprehensive income. As of December 31, 2023, all of the forward contracts are expected to mature during the years 2024 – 2028.
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The table below presents the balance of the derivative instruments held in order to limit the exposure to exchange rate fluctuations as of December 31, 2023 and is presented in millions of U.S. dollar equivalent terms:
| Forward | Notional Amount* | Unrealized Gain (Loss) | ||||||||||||
| Buy US$ and Sell: | ||||||||||||||
| Euro | 1,400.1 | (3.0) | ||||||||||||
| GBP | 81.1 | 1.9 | ||||||||||||
| Other various currencies | 285.5 | (8.5) | ||||||||||||
| Forward | Notional Amount* | Unrealized Gain (Loss) | ||||||||||||
| Sell US$ and Buy: | ||||||||||||||
| Euro | 407.8 | (19.4) | ||||||||||||
| GBP | 52.3 | (0.1) | ||||||||||||
| NIS | 1,783.0 | (1.7) | ||||||||||||
| Other various currencies | 6.2 | — | ||||||||||||
*Notional amount information is based on the foreign exchange rate at year end.
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Off-Balance Sheet Transactions
Offset / Industrial Participation
In connection with projects in certain countries, Elbit Systems and some of our subsidiaries have entered and may enter in the future into “Industrial Participation” or “offset” agreements, required by a number of our customers as a condition to our obtaining orders for our products and services, or as an important consideration for award. These agreements are customary in our industry and are designed to facilitate economic flow back (buy-back) and/or technology transfer to businesses or government agencies in the applicable country. As a result of the Covid-19 pandemic, the conflict between Russia and Ukraine and other geopolitical events, a number of countries are increasing such activities in order to enhance local industry involvement and independence in defense procurement and to have a positive impact on the local economy.
These commitments may be satisfied by our placement of direct work or vendor orders for supplies and/or services, transfer of technology, investments or other forms of assistance in the applicable country. We attempt to leverage economies of scale by managing our Industrial Participation activities from an overall corporate perspective. The Industrial Participation rules and regulations, as well as the underlying contracts, may differ from one country to another. The ability to fulfill the Industrial Participation obligations may depend, among other things, on the availability of local suppliers with sufficient capability to meet our requirements and which are competitive in cost, quality and schedule. In certain cases, our commitments may also be satisfied through transactions conducted by other parties, including but not limited to our suppliers, or through “swap” transaction among various countries’ Industrial Participation authorities. Our Industrial Participation activities are conducted in accordance with our anti-bribery and corruption compliance policies.
We do not commit to Industrial Participation agreements until orders for our products or services are definitive, but in some cases the orders for our products or services may become effective only after our corresponding Industrial Participation commitments become effective. Industrial Participation programs generally extend at least over the relevant commercial contract period and may provide for penalties in the event we fail to perform in accordance with Industrial Participation requirements. In some cases we provide guarantees in connection with the performance of our Industrial Participation obligations.
We have developed dedicated Industrial Participation management tools and procedures and work to continuously improve our infrastructure in order to efficiently meet our obligations. However, should we be unable to meet such obligations we may be subject to contractual penalties, our guarantees may be drawn upon and our chances of receiving additional business from the applicable customers could be reduced or, in certain cases, eliminated. See Item 3. Key Information – Risk Factors – Financial-Related Risks.
As of December 31, 2023, we had outstanding Industrial Participation obligations totaling approximately $2.50 billion that extend through 2033. See Item 18. - Financial Statements - Note 21B.
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Non-GAAP Financial Data
The following non-GAAP financial data, including Adjusted gross profit, Adjusted operating income, Adjusted net income, and Adjusted diluted earnings per share, is presented to enable investors to have additional information on our business performance as well as a further basis for periodical comparisons and trends relating to our financial results. We believe such data provides useful information to investors and analysts by facilitating more meaningful comparisons of our financial results over time. The non-GAAP adjustments exclude amortization expenses of intangible assets related to acquisitions that occurred mainly in prior periods, capital gains related primarily to the sale of investments, restructuring activities, uncompensated costs related to the “Swords of Iron” war, non-cash stock based compensation expenses, re-evaluations of investments in affiliated companies, non-operating foreign exchange gains or losses, one-time tax expenses, and the effect of tax on each of these items. We present these non-GAAP financial measures because management believes they supplement and/or enhance management’s, analysts’ and investors’ overall understanding of the Company’s underlying financial performance and trends and facilitate comparisons among current, past, and future periods.
For the year ended December 31, 2023, we revised our non-GAAP measures to remove "COVID-19 related expenses and write-offs". We have also included adjustments related to restructuring activities of a subsidiary, uncompensated costs relating to the "Swords of Iron" war and stock-based compensation exemptions. Restructuring of a subsidiary's activities are non-recurring expenses related to the write-off of inventory due to the closing of an underperforming subsidiary with limited synergies to the Company. Uncompensated labor costs are certain employment-related expenses incurred by the Company, in respect of its employees that were mobilized for reserve duty in "Swords of Iron" war, which were above the statutory ceiling for refund.
Specifically, management uses Adjusted gross profit, Adjusted operating income, and Adjusted net income attributable to the Company’s shareholders to measure the ongoing gross profit, operating profit and net income performance of the Company because the measure adjusts for more significant non-recurring items, amortization expenses of intangible assets relating to prior acquisitions, and non-cash expense which can fluctuate year to year.
We believe Adjusted gross profit, Adjusted operating income, and Adjusted net income attributable to the Company’s shareholders are useful to existing shareholders, potential shareholders and other users of our financial information because they provide measures of the Company’s ongoing performance that enable these users to perform trend analysis using comparable data.
Management uses Adjusted diluted earnings per share to evaluate further adjusted net income attributable to the Company’s shareholders while considering changes in the number of diluted shares over comparable periods.
We believe adjusted diluted earnings per share is useful to existing shareholders, potential shareholders and other users of our financial information because it also enables these users to evaluate adjusted net income attributable to Company’s shareholders on a per-share basis.
The non-GAAP measures used by the Company are not based on any comprehensive set of accounting rules or principles. We believe that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with our results of operations, as determined in accordance with GAAP, and that these measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
Investors are cautioned that, unlike financial measures prepared in accordance with GAAP, non-GAAP measures may not be comparable with the calculation of similar measures for other companies. They should consider non-GAAP financial measures in addition to, and not as replacements for or superior to, measures of financial performance prepared in accordance with GAAP.
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Reconciliation of GAAP (Audited) to
Non-GAAP (Unaudited) Supplemental Financial Data
(U.S. dollars in millions, except for per share amounts)
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||||||||||
| GAAP gross profit | 1,483.0 | 1,373.3 | 1,358.0 | ||||||||||||||
| Adjustments: | |||||||||||||||||
Amortization of purchased intangible assets (*) | 27.3 | 31.7 | 26.7 | ||||||||||||||
Restructuring of a subsidiary's activities | 17.5 | — | — | ||||||||||||||
| Uncompensated labor costs related to "Iron Swords" war | 4.3 | — | — | ||||||||||||||
Stock based compensation | 1.8 | 1.6 | 0.8 | ||||||||||||||
| Non-GAAP gross profit | 1,533.9 | 1,406.6 | 1,385.5 | ||||||||||||||
| Percent of revenues | 25.7 | % | 25.5 | % | 26.2 | % | |||||||||||
| GAAP operating income | 369.1 | 367.5 | 418.5 | ||||||||||||||
| Adjustments: | |||||||||||||||||
Amortization of purchased intangible assets (*) | 43.9 | 49.2 | 47.0 | ||||||||||||||
Restructuring of a subsidiary's activities | 17.5 | — | — | ||||||||||||||
| Stock based compensation | 12.1 | 10.5 | 5.3 | ||||||||||||||
Capital gain | — | (31.5) | (14.7) | ||||||||||||||
| Non-recurring gain related to grants | — | (28.6) | — | ||||||||||||||
Uncompensated labor costs related to " Swords of Iron" war | 6.1 | — | — | ||||||||||||||
| Non-GAAP operating income | 448.7 | 367.1 | 456.1 | ||||||||||||||
| Percent of revenues | 7.5 | % | 6.7 | % | 8.6 | % | |||||||||||
| GAAP net income attributable to Elbit Systems’ shareholders | 215.1 | 275.4 | 274.4 | ||||||||||||||
| Adjustments: | |||||||||||||||||
Amortization of purchased intangible assets (*) | 43.9 | 49.2 | 47.0 | ||||||||||||||
Restructuring of a subsidiary's activities | 17.5 | — | — | ||||||||||||||
Stock based compensation | 12.1 | 10.5 | 5.3 | ||||||||||||||
| Capital gain | — | (20.5) | (24.9) | ||||||||||||||
| Revaluation of investment measured under fair value option | 3.0 | 10.2 | (17.3) | ||||||||||||||
Non-recurring gain related to grants | — | (28.6) | — | ||||||||||||||
| Non-operating foreign exchange losses | 12.0 | (10.5) | 10.6 | ||||||||||||||
| Uncompensated labor costs related to "Iron Swords" war | 6.1 | — | — | ||||||||||||||
Tax effect and other tax items (**) | (10.9) | (6.3) | 77.7 | ||||||||||||||
| Non-GAAP net income attributable to Elbit Systems’ shareholders | 298.8 | 279.4 | 372.8 | ||||||||||||||
| Percent of revenues | 5.0 | % | 5.1 | % | 7.1 | % | |||||||||||
| GAAP diluted net EPS | 4.82 | 6.18 | 6.20 | ||||||||||||||
| Adjustments, net | 1.88 | 0.09 | 2.22 | ||||||||||||||
| Non-GAAP diluted net EPS | 6.70 | 6.27 | 8.42 | ||||||||||||||
(*) While amortization of acquired intangible assets is excluded from the measures, the revenue of the acquired companies is reflected in the measures and the acquired assets contribute to revenue generation.
(**) Stock based compensation is excluded from the measures since the expense is non cash. The Company has adjusted its stock based compensation expenses for previous periods as well.
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Item 6. Directors, Senior Management and Employees.
Directors and Executive Officers
Board of Directors
Our directors as of March 15, 2024 are as follows:
| Name | Age | Director Since | |||||||||
David Federmann (Chair) | 49 | 2007 | |||||||||
Ehud (Udi) Adam | 66 | 2023 | |||||||||
| Noaz Bar Nir (External Director) | 59 | 2020 | |||||||||
| Rina Baum | 78 | 2001 | |||||||||
Michael Federmann | 80 | 2000 | |||||||||
Tzipi Livni | 65 | 2023 | |||||||||
| Dov Ninveh | 76 | 2000* | |||||||||
| Professor Ehood (Udi) Nisan | 56 | 2016 | |||||||||
| Bilha (Billy) Shapira (External Director) | 71 | 2019 | |||||||||
__________________
* was not a member of the Board from April to October 2013
The term of office of each director, other than the External Directors, expires at the conclusion of the annual general shareholders meeting to be held during 2024, unless any director’s office is vacated earlier in accordance with the provisions of the Companies Law and the Company’s Articles of Association. The second three-year term of office for Bilha (Billy) Shapira as an External Director expires in November 2025, and the second three-year term of office for Noaz Bar Nir as an External Director expires in August 2026.
David Federmann. David Federmann has served as chair of the Board since August 2023, after serving as vice chair of the Board since 2015. He has served in various management capacities at Federmann Enterprises Ltd. (FEL), a privately-owned Israeli company, since 2000. FEL, directly and through subsidiaries, holds a diversified portfolio of investments, including ownership of approximately 44.03% of the Company’s outstanding shares. FEL also has ownership interests in Dan Hotels Ltd. (Dan Hotels), an Israeli hotel chain, Freiberger Compound Materials GmbH (Freiberger), a German company engaged in the supply of materials for the semi-conductor industry, and several financial, real estate and venture capital investments. David Federmann currently serves as chair of the board of Freiberger and as a member of the boards of directors of Dan Hotels, BGN Technologies Ltd. (the technology transfer company of Ben-Gurion University), and several other private companies. David Federmann is the son of Michael Federmann, who may be considered our controlling shareholder. Mr. Federmann holds a bachelor’s degree in mathematics and philosophy from New York University.
Ehud (Udi) Adam. Ehud (Udi) Adam has served as a strategic consultant to various public and private companies in the technology sector since June 2020. From 2016 until May 2020, Mr. Adam served as director general of the Israeli Ministry of Defense. Since 2020, Mr. Adam has served as a director of Arma Ferrea Ltd., a company that develops and manufactures reactive armor systems, and as a director of Arma Kinetica Ltd., a company in the field of kinetic energy solutions. Since 2020, he has also served as chair of the board of Armalux Ltd., a company that engages in the field of laser systems and, since 2022, as chair of the board of Ecology for Protected Community Ltd., a company that employs people with special needs to collect electronic waste. Since 2021, Mr. Adam has served as the chair of a public committee of the Geophysical Institute of Israel and, since 2011, as president of “Midor Ledor”, a non-profit community association. In 2016, Mr. Adam served as chair of the board of IMI Systems Ltd., formerly an Israeli government owned defense company later acquired by the Company. Mr. Adam served in the Israeli Defense Forces (IDF) for 31 years, where he holds the rank of major general (reserves), and served as head of the Technological and Logistics Directorate and as head of the Northern Command. Mr. Adam holds a bachelor of arts degree in political science and government from Bar-Ilan University in Ramat Gan, Israel and a master’s degrees in military and strategic leadership from Ecole de Guerre Paris. Mr. Adam serves as chair of the Company’s Corporate Governance and Nominating Committee and as a member of the Company's Compensation Committee and the Audit and Financial Statements Review Committee.
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Noaz Bar Nir. (External Director). Mr. Bar Nir has served as a business consultant for various private and public entities in the areas of medicine and tourism since 2019 and is a lecturer on health systems management in the Netanya Academic College. Noaz Bar Nir has served since 2022 as a director of Yad Ben-Zvi, a research institute established to promote Zionist educational and cultural activities. He also served as a director of Remedor Biomed Ltd., a company specializing in advanced treatment of wounds, from 2016 to 2017 and from 2018 to 2023, and of Radio Ashams FM Ltd., a regional radio station located in northern Israel, since 2019. From 2018 until the end of 2022, he served as a director of Genefron Ltd., a company in the field of genomic-based personal medicine. From 2017 to 2018, Mr. Bar Nir served as CEO of Clalit Health Services Ltd. (Clalit), Israel’s largest health organization, and as chair of the boards of Clalit’s subsidiaries S.L.H Medical Services Ltd., Mor – The Institution of Medical Information Ltd. and Clalit - Medical Engineering Ltd. From 2009 to 2017, he served in various senior executive positions and as chair of several companies in the fields of health and tourism, including as chief executive officer of the Israel Hotel Association from 2015 to 2017, as CEO of Harokeah Ltd., a network of pharmacies from 2014 to 2015, as chair of the board of Shfayim Hotel Ltd. and Shfayim Park Ltd. from 2013 to 2015 and as director general of the Israeli Ministry of Tourism from 2009 to 2013. Prior to that, Mr. Bar Nir held various financial positions, including as chief financial officer of Clalit from 2002 to 2008, and as head of the budgets, economics and cost accounting department of Clalit from 1996 to 2002. From 1991 to 1995, he held several positions in the Israeli Ministry of Finance. From 2005 to 2007 he served as a member of the investments committee of Clal Pension and Gemel Ltd. In addition, from 1993 to 2017, he served as a director in several entities, including among others Dikla Insurance Company Ltd. Mr. Bar Nir holds a bachelor’s degree in economics and an MBA, with proficiencies in financing, information systems and accounting, from the Hebrew University of Jerusalem, Israel. Mr. Bar Nir serves as chair of the Company's Audit and Financial Statements Review Committee and as a member of the Company's Compensation Committee and the Corporate Governance and Nominating Committee. He is considered by the Board to have accounting and financial expertise under the Companies Law and is designated as an audit committee financial expert in accordance with SEC rules.
Rina Baum. Rina Baum is vice president of FEL and has served as a director and CEO of Uni-bit Insurance Agency (1983) Ltd. since 1990. She currently serves as a director of Dan Hotels and as chairman and director of Etanit Building Products Ltd. (Etanit). She also holds other managerial positions with investee companies of FEL. Mrs. Baum holds a law degree (LL.B) from the Hebrew University.
Michael Federmann. Michael Federmann served as chair of the Board between 2000 and August 2023. Since 2002 he has served as chair and CEO of FEL, where he held managerial positions since 1969. Mr. Federmann also serves as a director of Dan Hotels and of Freiberger. He serves as the president of the Germany - Israel Chamber of Industry and Commerce, was awarded the Order of Merit of the Federal Republic of Germany and is an Honorary Commander of the Order of the British Empire (CBE). Michael Federmann may be considered our controlling shareholder and is the father of David Federmann, the chair of the Board. Mr. Federmann holds a bachelor’s degree in economics and political science from the Hebrew University, which has also awarded him an honorary doctorate in philosophy.
Tzipi Livni. Tzipi Livni has served as an external director of Bezeq the Israeli Telecommunication Corp. Ltd., the largest telecommunications company in Israel, and as a director of its subsidiaries – Bezeq International Ltd., Yes TV and Communications Services Ltd. and Pelephone Communications Ltd., each since April 2021. Mrs. Livni has also