SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
□ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2021
Commission File No. 0-28998
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ELBIT SYSTEMS LTD.
(Exact name of Registrant as specified in its charter)
|(Translation of Registrant’s name into English)|
|(Jurisdiction of incorporation or organization)|
Advanced Technology Center, Haifa 3100401, Israel
(Address of principal executive offices)
Yaacov Kagan, E-mail: email@example.com, Tel. 972-77-294-6663, Fax:972-4-8316659
Advanced Technology Center, P.O. Box 539 , Haifa 3100401, Israel
(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|
|Ordinary Shares, nominal value |
1.0 New Israeli Shekel per share
|ESLT||The NASDAQ Global Select Market|
Securities registered or to be registered pursuant to Section 12(g) of the Act.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
| (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. 44,255,563 Ordinary Shares.
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.
|Large accelerated filer||☒||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 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
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
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.
☒ Yes □ No
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
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 fact. 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 budgeting priorities;
•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, such as the recent conflict between Russia and Ukraine;
•global or national health considerations, including the outbreak of pandemic or contagious disease, such as the ongoing coronavirus (Covid-19) pandemic;
•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;
•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;
•inventory write-downs and possible liabilities to customers from program cancellations due to political relations between Israel and countries where our customers may be located; and
•the outcome of legal and/or regulatory proceedings.
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.
Item 3. Key Information.
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.
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 problems and system disruptions carried out by different threat actors. In particular, we are targeted by experienced computer programmers and hackers, including those sponsored by or acting for foreign governments or terrorist organizations. Such programmers and hackers may attempt to penetrate or circumvent our advanced cyber security defenses, obtain data and damage or disrupt our digital environment in order to misappropriate or compromise our intellectual property or other proprietary or protected information or that of our customers and other business partners. These attempts may increase in connection with the recent conflict between Russia and Ukraine.
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 for us to receive customer program-related information and enter into business contracts. We devote significant resources to configure, operate, maintain, monitor, upgrade and continuously 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, due to the complex and evolving nature of the cyber security risk landscape, we may still face system failures, data breaches, loss of intellectual property and interruptions in our operations, which 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 the coronavirus pandemic. International health epidemics from communicable diseases, such as the coronavirus (Covid-19) pandemic, may materially impair our operations. We continually assess the potential impact of the Covid-19 pandemic on our operations, including on our employees, customers, suppliers and logistics/transport providers. In addition, we monitor the possible impact of governmental actions being taken to curtail the spread of the virus, such as roll-out of vaccinations, instructions regarding testing and quarantine of individuals, restrictions on holding of large-scale events, workplace restrictions and international travel guidance. We evaluate short-term and potential medium- and long-term impacts of the pandemic on the defense, homeland security and commercial aviation markets and continue to see a certain slow-down in our commercial aviation business as compared to prior to the pandemic. We also monitor the impact of the Covid-19 pandemic on our industry and on governmental priorities and budgets, both in Israel and worldwide, as well as the pandemic's macro-economic implications, including disrupted transportation networks and global supply chains, which have led to shortages of electronics and other components, increased costs and extended lead times. Although we generally have been able to continue our business activities as of the date of this annual report, we cannot presently estimate the future impact of Covid-19 on our results and business activities. The continued spread of the disease and the emergence of new variants could prevent our employees, customers, supply chain and other business partners from conducting normal activities, potentially resulting in cessation, reduction or delay of business either voluntarily or by governmental mandate and 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. There is 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 of losing knowledge and expertise through the loss of key employees. 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 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 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 price adjustments or write-downs;
•we may not integrate newly-acquired businesses and operations in an efficient and cost-effective manner;
•relocation or combination of facilities of acquired businesses may be more costly or time consuming than planned;
•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 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 tax or regulatory compliance issues, such as anti-corruption and environmental compliance, that may result in our incurring successor liability;
•we may fail in identifying or transferring some of the assets that are required for the operation of the acquired business 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 if we acquire a significant interest in a publicly traded company; and
•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 could adversely impact the acquisition's value.
We cannot assure 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.
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. If a supplier stops delivery of such components, finding another source could result in added cost 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. As mentioned above under “Our operations may be negatively impacted by the coronavirus pandemic”, the pandemic has resulted in a general increase of these risks and their impact on global supply chains, especially because a worldwide shortage of certain components poses a risk to our reliance on certain sources for such components. Although we are working to mitigate such risks, we cannot eliminate all potential impacts to our business. In addition, although we do not generally source components from Russia or Ukraine, the recent conflict between those countries may cause further constraints on our supply chain as well as an increase in certain raw materials and energy costs as a result of trade sanctions and economic disruption. The foregoing disruptions 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 could impair our financial results and give rise to potential product liability or breach of contract claims. If there are defects in the design, production or testing of our or our subcontractors’ products and systems, including our products sold for safety purposes in the homeland security and commercial aviation areas, or if the cyber protection measures included in our products do not operate as intended, we could face substantial repair, replacement or service costs, potential liability and damage to our reputation. Similar issues could arise if we fail to timely implement our manufacturing processes. 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. We may not be able to obtain product liability or other insurance to fully cover such risks, and our efforts to implement appropriate design, testing and manufacturing processes for our products or systems may not be sufficient to prevent such occurrences, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
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, which number 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 worker 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.
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 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 needs;
•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.
We need to continually invest significant financial resources to pursue these goals, and there can be no assurance that adequate financial resources will continue to be available to us 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 may lack sufficient demand or experience technological problems or production delays. Our customers frequently require demonstration of working prototypes prior to awarding contracts for new programs or require short delivery schedules which may cause us to purchase long-lead items or material in advance of the contract award, without any certainty of receiving the award. Moreover, due to the design complexity of our products, we may experience delays in developing and introducing new products. Such delays could 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 that are beyond our control. Reduction or elimination of government spending under our contracts could cause a material adverse effect on our business, 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, including travel restrictions and supply chain issues as a result of the Covid-19 pandemic, 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 could have negative consequences on the demand for our products and services outside Israel. 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” below). While our business in Russia and Ukraine is very limited, an escalation or expansion of the conflict could affect additional regions and increase the volatility of global economic conditions, which could, in turn, affect our business. As of the date of this annual report we are unable to predict the impact of such conflict on the global economy or 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.
We face 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 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. This 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, or to meet our Industrial Participation or offset obligations, we could be subject to contractual penalties 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 in competition 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 by our customers for various reasons, including for their convenience. In some cases, termination would eliminate our right to payment under the contract and could cause a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.
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 could be 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 may 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, financial condition, results of operations and cash flow. See below “Risks Related to Our Israeli Operations – 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 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 most likely to fluctuate under our fixed price contracts relate to internal design and engineering efforts and system or product certification processes. However, we do not believe that changes in the market costs of particular commodities used in the production of our products are likely to present a material risk to our costs. To the extent we underestimate the costs to be incurred in any fixed-price contract, we could experience a loss on the contract, which 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 level of sales typically is not guaranteed. If the anticipated contract is not awarded or if sales do not occur at the level anticipated, we may not be able to recover our non-recurring or pre-contract costs, which 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 may experience significant fluctuations in year-to-year and quarter-to-quarter financial results. 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. 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.
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 because of 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 the customer delays 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 bank credits and loans, including our B, C and D notes listed on the Tel-Aviv Stock Exchange (TASE) (see Item 5. Operating and Financial Review and Prospects – Financial Resources and Israeli Debt Offering), 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, merger and acquisition 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 under those agreements, which can 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.
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 override of 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 sometimes have risks relating to financing for our programs. A number of our major projects require us to arrange, or to provide, guarantees in connection with the customer’s financing of the 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 we default 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.
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 2017 (informally titled the Tax Cuts and Jobs Act) introduced a number of significant changes to the U.S. federal income tax rules. More recently, members of the U.S. Congress and the administration of U.S. President Joseph Biden attempted to enact legislation to change or repeal parts of current U.S. income tax law. 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 most recently the new Global Minimum Tax rules (GLOBE) (referred to as “Pillar 2”) set to take effect in certain countries as early as 2023. In February 2022, the Council of the European Union updated its grey list countries, that included the addition of Israel and nine other countries. 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. We currently believe that we were not a PFIC with respect to our 2021 taxable year and expect that we will not be a PFIC for the current taxable year or in the reasonably foreseeable future. However, this conclusion 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 may be 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.
We may be adversely affected by increases in inflation rates. Rising inflation may put upward pressure on interest rates, increase our exposure to currency exchange risks and cause an increase in our expenses, mainly related to costs of supplies and human resources, which could in turn adversely affect our business.
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, whether directly or indirectly, could result in the modification, termination or reduction of the value of our contracts, 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 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 approval of exports. Our international sales, as well as our international procurement of skilled human resources, technology, software and hardware, depend largely on export authorizations from the governments of Israel, the U.S. and other countries. See Item 4. Information on the Company – Governmental Regulation. If we, our customers or our suppliers fail to obtain material approvals in the future, or if material approvals previously obtained are revoked or expire and are not renewed due to factors such as changes in political conditions 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.
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 impact use of our products or our manufacturing processes, due to environmental protection, health or safety considerations, including those related to climate change. These changes include 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 may affect us and change our methods of operation , such as those related to greenhouse gas emissions. 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 may be made contingent on additional environmental, health and safety conditions and costs. If we were to violate or become liable under environmental, health and safety laws and regulations, including with respect to our manufacture, testing or handling of munitions and explosives, as a result of our inability to obtain permits, 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.
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 intellectual property (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, various parties register patents in technologies relevant to our business areas and may 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 the use or sale of certain of our products, liable for damages and required to obtain licenses, which may not be available on reasonable terms, any of which may have a material adverse impact on our business, reputation, financial condition, results of operation and cash flow.
Our acquisitions are subject to governmental approvals. Most countries require local governmental approval of acquisitions of domestic defense and homeland security-related businesses, which approval may be denied, or subject to unfavorable conditions, if the local government determines 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.
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.
Other Risks Related to Our Business
Our business involves risks that may not be adequately covered by insurance. Our business involves the development and production of products and systems for government agencies and other customers around the world. These products and systems can involve new technologies that are not fully tested. 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 financial condition, results of operations and cash flows. 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.
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 worldwide; (viii) the level of national or international hostilities; and (ix) the general geo-political environment.
We have a major shareholder with significant influence over certain matters requiring shareholder approval. As of the date of this annual report, Federmann Enterprises Ltd. (FEL) owns approximately 44.2% 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 certain matters requiring shareholder approval, including the election of directors. Michael Federmann, who serves as the chair 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
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 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. 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.
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. 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 could have a material adverse effect on our business, reputation, financial condition, results of operation 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 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. Over the last three years Israel has undergone four elections, with the most recent election held in March 2021. 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 operation 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, military conflicts, civil and political unrest and budgetary constraints. 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 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. Changes in the Israeli economy, as well as 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 operation 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 notified us that it 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, several discussions have taken place between Elbit Systems and the IMOD about the terms and contents of the order. 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.
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 in 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 (as described below) 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 provide less protection than is accorded to investors under the Nasdaq Listing Rules applicable to domestic U.S. issuers. See Item 16G – Corporate Governance.
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. They also may be called to active military duty at any time under emergency circumstances. These military service obligations could have a disruptive impact on our workforce.
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.
Item 4. Information on the Company.
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 it incorporated by reference in this annual report.
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);
•electro-optic, night vision and countermeasures systems;
•land vehicle systems;
•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.
Principal Market Environment
Notwithstanding the recent impact of the Covid-19 pandemic on governmental priorities worldwide, including a slow-down in the commercial aviation market, budgets for defense and homeland security have remained relatively stable in most of our markets. The recent conflict between Russia and Ukraine has resulted in calls for increased defense budgets in Europe and elsewhere, while also increasing instability in the global economy. The nature of military and homeland security requirements in recent years, including low intensity conflicts and ongoing terrorist activities, tensions with countries such as Iran, as well as increased focus on leaner but more technically advanced forces, has resulted in increasing demand for technological solutions that incorporate digital transformation, including artificial intelligence, Big Data analytics, robotics, automation and information assurance. There has also been continued demand in the areas of C4ISR systems, cyber-defense systems, network centric information systems, intelligence gathering systems, border and perimeter security systems, unmanned aircraft systems, unmanned surface vessels, remote controlled systems, precision munitions, vehicle survivability and protection systems, space and satellite-based defense capabilities and homeland security solutions. 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 each 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.
The table below shows our consolidated revenues by major areas of operations for the years ended December 31, 2019, 2020 and 2021:
(U.S. dollars in millions)
|Airborne systems||$||1,617 ||$||1,650 ||$||2,006 |
|C4ISR systems||1,162 ||1,146 ||1,372 |
|Land systems||1,228 ||1,259 ||1,255 |
|Electro-optic systems||374 ||476 ||453 |
|Other (mainly non-defense engineering and production services)||127 ||132 ||193 |
|Total||$||4,508 ||$||4,663 ||$||5,279 |
The following table provides our consolidated revenues by geographic region, expressed as a percentage of total revenues for the years ended December 31, 2019, 2020 and 2021:
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 investee 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 major areas of activities often in collaboration 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, San Antonio, Texas, Merrimack, New Hampshire, Talladega, Alabama, Roanoke, Virginia, Boca Raton, Florida and De Leon 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”. 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 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.
In April 2021, Elbit Systems of America concluded the acquisition of Sparton Corporation (Sparton), a supplier of systems supporting undersea warfare for the U.S. Navy and allied military forces. A subsidiary of Elbit Systems of America and Sparton, Sparton De Leon Springs, LLC (Sparton De Leon Springs) 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 De Leon Springs produces sonobuoys, which support the U.S. Navy’s anti-submarine warfare efforts and 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 De Leon Springs, Elbit Systems or Elbit Systems of America, govern the affairs of Sparton De Leon 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.
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 2021 and the beginning of 2022, we continued to invest resources in these activities including investing in, and the acquisition of, companies and businesses, primarily in Israel and North America. This included, among others, the acquisition by Elbit Systems of America of Sparton (see above – “Subsidiary Organizational Structure –
Elbit Systems of America”) and the acquisition of BAE Systems Rokar International Ltd., an Israeli-based company specializing in the development, manufacture, integration and support of high-end GPS receivers and guidance systems for advanced defense applications. See Item 18. Financial Statements - Notes 1D and 6. Both acquisitions were part of our long-term growth strategy. We continue to actively pursue acquisition and investment opportunities that meet our strategic goals and acquisition criteria in key markets.
In addition, we engaged in divestiture activities of certain non-material businesses, such as the sale by Elbit Systems UK Ltd. of the Power and Control business of its subsidiary Ferranti Technologies Ltd. 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.
Current Business Operations
We generally operate and manage the major activities described below in an inter-related manner and on a project-oriented basis. This means that contracts are frequently performed by more than one operating subsidiary within the Company, on the basis of the multiple skills, technologies and available resources that may be needed or appropriate for the contract. Thus, the involvement of a particular operating subsidiary in the performance of a contract is not a function of management’s review of such subsidiary’s operating results for purposes of allocation of resources within the Company.
In each of the major activities described below we engage in development, production, service and support activities. The customers and end users of our systems, products and services primarily include a wide range of armed forces, governmental defense and homeland security agencies, first responders, defense platform manufacturers and operators, as well as major defense contractors around the world. We supply product solutions ranging from individual equipment, subsystems and systems to entire platforms and networks. Our service solutions range from spare parts, maintenance and repair, to a broad range of training activities and operation of flight schools.
Military Aircraft and Helicopter Systems. Our portfolio of military aircraft and helicopter systems includes advanced airborne systems and products that enhance operational capabilities and extend aircraft life cycles, ranging from a single sensor to an entire cockpit avionics suite. We integrate our systems on fixed and rotary-wing, eastern and western, new and mature 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, precision guidance systems, aircraft structural components, nano-satellites and a range of aircraft tactical, virtual, appended and embedded trainers and simulators. We also design and supply advanced helmet-mounted systems, including helmet-mounted displays for fixed-wing aircraft and rotary-wing aircraft pilots. We support life cycle extension of our customers’ fleets and supply logistic support services for airborne platforms, including repair and maintenance centers, spare parts, training and operation of flight schools.
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. In addition, we provide aerostructure products such as pressurized and non-pressurized doors, composite beams and winglets.
UAS (Unmanned Aircraft Systems). Our portfolio of unmanned aircraft systems includes integrated UAS (sometimes referred to as remote piloted vehicles, or RPVs) in various categories for a range of applications as well as UAS training systems. The systems include airborne platforms, ground control stations, communications 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. We perform development, supply, lease and support services and training activities relating to UAS.
Electro-Optic and Countermeasures Systems. Our portfolio of electro-optic and countermeasures systems includes a range of electro-optic-based solutions including forward looking infrared (IR) systems for night observation, laser range-finders and laser designators, stabilized payloads, electro-optic-based intelligence, surveillance and reconnaissance (ISR) systems, directional IR countermeasure systems as well as multiple vision-enhancing solutions for military forces using image intensifier tubes and systems. We also supply panchromatic and multi-spectral cameras and telescopes for space applications. In the homeland security area our electro-optic products and systems include surveillance systems, safe city projects, facility perimeter security products, electronic fences and high-power laser systems and solutions.
Naval Systems. Our portfolio of systems and products for naval applications include unmanned surface vehicles, naval EW systems, underwater acoustic systems, shipboard combat management systems, naval weapons stations, naval communications systems, anti-submarine warfare sonobouys, munitions for naval vessels and naval training systems.
Land Vehicle Systems. We upgrade and modernize tanks, other combat vehicles and artillery platforms, with solutions covering the entire combat vehicle spectrum, from complete modernization, to system supply to maintenance depots and life cycle support services. Our systems are operational on a full range of tracked and wheeled combat vehicles. In addition, we supply training systems for tanks and fighting vehicles. Our portfolio of systems and products for land vehicles includes fire control systems, electric gun and turret drive systems, laser warning and threat detection systems, survivability and protection systems, manned and unmanned turrets, remote controlled weapon stations, combat vehicle C4I systems, targeting systems, artillery gun and mortar systems, driver thermal vision systems, life support systems, auxiliary power units and hydraulic systems.
Munitions. Our munitions portfolio includes a diverse range of advanced munitions for defense and homeland security forces, including precision guided rockets, long-range precise air-to-ground missiles, high-penetration bombs and an array of high performance ammunition solutions for artillery, tanks and mortars. We also manufacture a full range of small-caliber ammunition for the defense, homeland security and law enforcement markets. In addition, we produce chaff and flare products to protect aircraft against the threat of air-to-air and anti-aircraft heat-seeking missiles.
C4I and Cyber Systems. Our portfolio of C4I and cyber systems includes a range of C4I and cyber intelligence systems providing networked combat solutions catering to all types of military combatants as well as to intelligence agencies, homeland security forces, law enforcement agencies and first responders. We provide a range of C4I battle management systems, soldier-mounted systems and radio and communications systems utilizing our cloud-based open architecture platform, interoperable with a variety of applications and connecting all elements on the network. Our portfolio of systems and products in the C4ISR area includes digital army “system of systems” for net-centric connectivity throughout a multi-domain battlefield, battle management systems, observation and ground reconnaissance systems, ruggedized computing for platforms and soldiers, software design kits for mapping capabilities, ground smart display units, military IT systems, autonomous solutions and tactical battle company training systems. In the cyber intelligence area we supply a comprehensive suite of solutions providing real-time and actionable intelligence to the operational field. Our communications portfolio includes secured HF, VHF and UHF radio and communication systems and products, software-defined radios, integrated radio communication systems, satellite-on-the-move solutions and data link solutions. In the homeland security area, we supply integrated land and coastal border C4I surveillance systems, broadband communication systems, cyber intelligence solutions, border control systems, safe and smart city solutions, emergency and first responders communications systems and homeland security and emergency response training and simulation systems.
EW and SIGINT Systems. Our portfolio in the EW and SIGINT areas includes protection, intelligence and communications solutions for a range of military applications. We offer EW self-protection suites, including radio frequency, radar warning receivers and laser warning systems, for all airborne platform types. We also offer IR-based missile warning systems for advanced combat aircraft, as well as for other fixed-wing and rotary-wing platforms, and electronic support measures solutions for threat identification. We also provide SIGINT systems for tactical and strategic intelligence gathering including ELINT and electronic countermeasures for naval, ground and airborne applications, COMINT and communication jamming systems, counter-improvised explosive devices jamming systems for ground forces and cyber protection capabilities. We also supply radar solutions. In addition, we produce counter-drone systems, and we develop command and control systems and simulators for anti-ballistic missiles.
Other Commercial Activities. In addition to the activities described under “Commercial Aviation Systems and Aerostructures” above, we also engage in a range of technologies for commercial applications and activities, typically through wholly or partially-owned subsidiaries focusing on a particular product or technology areas. Examples of such areas are commercial cyber training systems and medical instrumentation.
Property, Plant and Equipment
Facilities Owned or Leased by the Company (square feet)
(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, Florida, Alabama and Virginia. The facilities in New Hampshire, Florida and Alabama are located on owned land totaling approximately 109 acres. In addition, there is a 711,000 square feet ground lease in Texas. In 2021, Elbit Systems of America acquired Sparton. which owns a 178,500 square feet facility in Florida and leases two facilities in Pennsylvania and Illinois, of 62,400 square feet. Universal Avionics Systems Corporation's facilities are located in Arizona, Washington and Georgia, of which 166,000 square feet are owned and 83,000 are leased.
(3)Includes offices, design and engineering facilities and manufacturing facilities in Europe, Latin America 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 $160 million. We believe that our current facilities are adequate for our operations as now conducted.
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 2021, 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 approvals 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 military related services and technology to our Israeli and other non-U.S. entities, to perform work for U.S. programs or to work with U.S. contractors in third countries. Employment of Israeli nationals assigned to work in defense-related technical areas by our U.S. affiliated companies 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 also is 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” is to occur through an order to be issued jointly by the Israeli Prime Minister, Defense Minister and Minister of Finance. No such order for Elbit Systems has been issued as of the date of this annual report. However, in the first quarter of 2021, the IMOD notified us that it 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, several discussions took place between Elbit Systems and the IMOD about the terms and contents of the order.
Orders to be issued under the Israeli Defense Entities Law may establish various conditions and restrictions. It is anticipated that in the case of a publicly traded company such as Elbit Systems, Israeli government approval will be required for acquisition of a specific percentage of shares or voting rights 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 domestic production and development capacities.
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.
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).
“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 55% of the total cost of all components in the product. However, a Memorandum of Agreement between the United States and Israeli governments waives 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 decreased in recent years, requiring that the funds be used in U.S. dollars. However, 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 procurements 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 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.
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.
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.
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.
Antitrust Laws. Antitrust 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. During 2021 and the beginning of 2022, our operations were also subject to national, state and local regulations relating to protecting against the Covid-19 pandemic.
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.
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 achievement of 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. Financing arrangements may extend beyond the term of the contract’s performance. 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. 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.
Advance Payment Guarantees. In some cases where we receive advances prior to incurring contract costs or making deliveries, the customer may require 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.
Private Finance Initiatives (PFI). Some of our projects operate under PFI or similar financing arrangements where we provide long-term financing arrangements or facilities, with the repayment generally made based on the project’s cash flow. PFI projects can be structured in several ways. PFI projects may require us to pledge project-related equity, provide guarantees and enter into relatively complex financial and other agreements. Such financing is usually medium or long-term and may be raised either through banks or institutional lenders and carries various financial risks, covenants and exposures. In addition, PFI projects may require us to draw upon our equity base and borrowing capacities and may significantly affect our liquidity and increase our financial leverage. In recent years we have been involved in several PFI-type projects in Israel and Europe, as well as private-public-partnership financing projects, and we expect to continue to participate in such projects.
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. 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 to require 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.
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. 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. Approximately 50% 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 30 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, 2019, 2020 and 2021.
|(U.S. dollars in millions)||2019||2020||2021|
|Total Investment||$||368.7 ||$||428.2 ||$||447.9 |
|Net Investment||$||331.8 ||$||359.7 ||$||395.1 |
*See above “Governmental Customers' Rights in Data” and see below – “Conditions in Israel – Israel Innovation Authority and Investment Center Funding”.
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 the process 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. Utilizing extensive monitoring activities during the Covid-19 pandemic, we were able to maintain manufacturing continuity, keeping employees safe while following governmental regulations.
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.
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.
We conduct supply chain activities that consist of procurement, logistics and planning at most of our operational facilities. We use a “hybrid” operating model that combines global procurement categories management as well as unified global logistics and planning strategies throughout the Company's facilities around the world. This model facilitates levering economies of scale, develops centers of excellence and reduces supply chain cycle times and risks. We generally are not dependent on single sources of supply. We use supplier performance and risk management tools, monitor suppliers' on-time delivery and quality and encourage them to continuously improve their performance. We source our materials and manage our inventory according to project requirements (“make to project”). In some projects, specific subcontractors are designated by the customer. The raw materials we use are generally available from a range of suppliers internationally. The costs of transportation and some of the raw materials have experienced greater volatility during the Covid-19 pandemic than has historically been the case. We monitor the on-time delivery and the quality of our supply chain and encourage them to continuously improve their performance. We also require our supply chain 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.
Customer Satisfaction and Quality Assurance
We invest in continuous improvement of processes, with emphasis on prevention of deficiencies, 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 and are enhancing and expanding such processes on an ongoing basis. Our processes are based on a cutting edge tool case and CAD-CAM tools. This infrastructure, together with well-defined development methodology, application life cycle management tools as well as various management methods and applications, assists us in providing high quality and on-time implementation of projects. We are advancing in the process of implementing a new ERP system, with a 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 Execution System (MES), to enhance our production efficiency, as well as “Industry 4.0” readiness. 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 and Part 21 G for production of civil products. All of our operational sites in Israel are also certified for ISO-27001 (Information Security Management System) and for ISO-27032 and ISO-27035 for cyber security. 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.
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, DCMA 8210.1C, EASA-145 certification as well as a variety of FAA Supplemental Type Certifications (STCs) including FAA Part 21 approval and 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 one or two-year warranty for our systems and products following delivery to, or installation by, the customer. In some cases we offer longer warranty periods. We accrue for 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. Marketing 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 De Leon 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.
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.
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 Boeing, Lockheed Martin, Northrop Grumman, Raytheon, General Dynamics, BAE Systems, L-3 / Harris, Thales, Airbus, Leonardo, Saab, Textron, Teledyne Technologies, AeroVironment, Rohde & Schwarz, Rheinmetall, Kongsberg, Safran, Hensoldt, CMC, CAE, Aselsan, Bharat Electronics, Cubic and Cognyte. 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.
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 15% in 2019, 21% in 2020 and 18% in 2021, and the U.S. government, which accounted for 18% in 2019, 22% in 2020 and 21% in 2021.
Environmental, Social and Governance (ESG) Practices
Policy. We place importance on 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 publish a bi-annual ESG - Sustainability Report, available on our website, detailing our ESG-related activities, including our progress towards achieving ESG-related goals.
Environmental, Health and Safety Compliance. As part of our overall ESG policy, 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 electrical, fuel, water and paper consumption, to increase recycling and to incorporate environmental protection measures in our manufacturing processes (see “Manufacturing” above). Among our various activities in 2021, we launched a collaboration with S'energy Renewable Energy for the installation and management of power generation and energy storage units at several of our sites in Israel in order to increase the volume of electricity generated from renewable energy and improve energy consumption management. We also increased the number of our hybrid and electrical vehicles used by the Company and our employees.
We utilize a global EHS management system and internal audits and surveys to address risk analysis, regulatory compliance and policy updates. In 2021, we participated for the second time in the Carbon Disclosure Project and published for the second time an EHS report summarizing key elements of our EHS 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 Audit and Financial Statements Review Committee and our Board.
In addition to our Code of Business Conduct and Ethics (Ethics Code) (see Item 16.B) 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 active in a number of international organizations relating to ethics and compliance.
Fair Labor Practices and Human Rights. Our ESG policy addresses 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 in May 2021, 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, including a number of measures adopted to protect the health and safety of our workforce during the Covid-19 pandemic.
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, non-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 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. In 2021, we adapted a number of activities in order to continue community support during the Covid-19 pandemic.
Conditions in Israel
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 also is 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 etc.), 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 2R 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, 2021, 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%.
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. This enforcement is made according to the private international law rules currently applicable in Israel, which recognize and enforce similar Israeli judgments, provided that:
•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. The usual practice in Israel in an action to recover an amount in a non-Israeli currency is for the Israeli court to provide for payment of the equivalent amount in Israeli currency at the exchange rate in effect on the judgment date. 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.
Item 4A. Unresolved Staff Comments.
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.
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:
•Impairment of Long-Lived Assets and Goodwill;
•Useful Lives of Long-Lived Assets;
•Stock-Based Compensation Expense; and
•Post-employment Benefits Liabilities.
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.
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 2021, 2020 and 2019. For additional information see Item 18. Financial Statements – Note 2S.
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.
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, 2019, December 31, 2020 and December 31, 2021, no material impairment of long-lived assets was identified. See Item 18. Financial Statements – Notes 1D 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, 2021, no material impairment of goodwill was identified. See Item 18. Financial Statements - Note 2P for additional information.
In 2020 and 2019, we wrote off impairment of approximately $4.4 million and $3.7 million, respectively, as a result of revaluation of investments in affiliated companies. In 2021, no impairment was identified. See Item 18. Financial Statements - Notes 2I and 6 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.
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 2019, 2020 and 2021, 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, 2021, 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, cash-based awards linked to the share price and 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.
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 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. 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 2AD.
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.
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, 2021 were as follows: $88.9 million for 2022, $75.8 million for 2023, $52.7 million for 2024, $44.7 million for 2025, $40.4 million for 2026 and $263.2 million for 2027 and thereafter. See Item 18. Financial Statement 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 “Liquidity and Capital Resources – 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. As of December 31, 2020 and 2021, the Company met all applicable financial covenants.
Bank and Other Financial Institution Guarantees. As of December 31, 2021 and 2020, guarantees in the aggregate amount of approximately $3,018 million and $2,471 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, 2021 and 2020, we had purchase commitments of approximately $3,180 million and $2,626 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, as well as 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 2021
See Item 4. Information on the Company – Mergers, Acquisitions and Divestitures.
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, 2021 was $13,661 million, of which 72% was for orders outside Israel. Our backlog of orders as of December 31, 2020 was $11,024 million, of which 65% was for orders outside Israel. Approximately 60% our backlog as of December 31, 2021 is scheduled to be performed during 2022 and 2023. The rest of the 40% balance is scheduled to be performed in 2024, 2025 and thereafter. Backlog information and any comparison of backlog as of different dates may not necessarily represent an indication of future sales.
Trends in the defense and homeland security areas in which we operate have been impacted by the nature of conflicts and terrorism activities in recent years throughout the world, increasing the focus of defense forces on low intensity conflicts, homeland security and cyber warfare. There has also been a trend of many armed forces to focus more on airborne, naval and intelligence forces and less on traditional ground forces activities, and there is an increasing demand for products and systems that incorporate artificial intelligence, Big Data analytics, automation, robotics and information assurance, as well as continuing demand in the areas of airborne systems,C4ISR and unmanned vehicles. Many governments have recently increased their budgets in defense and homeland security, including an increasing focus on protection of territorial waters and in the area of cyber-defense. Our customers are also increasing requirements to their supply chains in the area of cyber protection and information assurance. We believe that our core technologies and abilities will enable us to take advantage of many of these trends.
The recent conflict between Russia and Ukraine has increased tensions in Europe and throughout the world. This could result in further increases in defense spending in Europe and elsewhere, although as of the date of this annual report, we cannot asses the full impact of the conflict.
The continuing trend of consolidation in the defense, homeland security and commercial aviation industries has affected competition. This consolidation has decreased the number but increased the relative size and resources of our competitors. There is also an increasing trend of many of our defense customers to require that part of the work be done by local companies in the customer's country, through Industrial Participation / offset, technology transfer or other arrangements. We adapt to evolving market conditions by adjusting our business strategy. We believe in our ability to compete on the basis of our systems development, technological expertise, operationally-proven performance and policy of offering customers overall solutions to technological, operational and financial needs and at the same time enhancing the industrial capabilities in certain of our customers’ countries.
Over the last two years the Covid-19 pandemic has impacted global supply chains and caused temporary disruptions to the commercial avionics market. This resulted in our incurring approximately $60 million in non-cash expenses in the third quarter of 2020 relating to our commercial aviation activities. To date, we have not been materially impacted by global supply chain slowdowns, and we have seen recent improvements in our commercial avionics activities that were temporarily reduced as a result of the impact of the pandemic.
We are also witnessing growing competition in hiring and retaining employees, mainly in the management, engineering, scientific and technical sectors. We are investing increasing efforts to maintain our ability to recruit and retain key employees.
Our future success is also dependent on our ability to meet our customers’ expectations and anticipate emerging customer needs. We must continue to successfully perform on existing programs, as past performance is an important selection criterion for new competitive awards. We also must anticipate customer needs so as to be able to develop working prototypes in advance of program solicitations and to meet customer's cyber protection requirements. This requires us to anticipate future technological and operational trends in our marketplace and efficiently engage in relevant research and development efforts.
Summary of Operating Results
The following table sets forth our consolidated statements of operations for each of the three years ended December 31,2021.
(in thousands of U.S. dollars except per share data)
| ||Year Ended December 31, 2021||%||Year Ended December 31, 2020||%||Year Ended December 31, 2019||%|
|Revenues||$||5,278,521 ||100.0 ||$||4,662,572 ||100.0 ||$||4,508,400 ||100.0 |
|Cost of revenues||3,920,473 ||74.3 ||3,497,465 ||75.0 ||3,371,933 ||74.8 |
|Gross profit||1,358,048 ||25.7 ||1,165,107 ||25.0 ||1,136,467 ||25.2 |
|Research and development (R&D) expenses||447,852 ||8.5 ||428,198 ||9.2 ||368,652 ||8.2 |
|Less – participation||(52,765)||(1.0)||(68,453)||(1.5)||(36,895)||(0.8)|
|R&D expenses, net||395,087 ||7.5 ||359,745 ||7.7 ||331,757 ||7.4 |
|Marketing and selling expenses||291,751 ||5.5 ||290,703 ||6.2 ||301,400 ||6.7 |
|General and administrative expenses||267,362 ||5.1 ||223,935 ||4.8 ||214,749 ||4.8 |
|Other operating income, net||(14,660)||(0.3)||(34,963)||(0.7)||(33,049)||(0.7)|
| ||939,540 ||17.8 ||839,420 ||18.0 ||814,857 ||18.1 |
|Operating income||418,508 ||7.9 ||325,687 ||7.0 ||321,610 ||7.1 |
|Financial expenses, net||(40,393)||(0.8)||(71,270)||(1.5)||(69,072)||(1.5)|
|Other expenses, net||5,336 ||0.1 ||7,408 ||0.2 ||(6,243)||(0.1)|
|Income before taxes on income||383,451 ||7.3 ||261,825 ||5.6 ||246,295 ||5.5 |
|Taxes on income||(131,387)||(2.5)||(36,443)||(0.8)||(19,414)||(0.4)|
| ||252,064 ||4.8 ||225,382 ||4.8 ||226,881 ||5.0 |
|Equity in net earnings of affiliated companies and partnerships||22,599 ||0.4 ||12,604 ||0.3 ||1,774 ||— |
|Net income||$||274,663 ||5.2 ||$||237,986 ||5.1 ||$||228,655 ||5.1 |
|Less – net income attributable to non-controlling interests||(313)||— ||(328)||— ||(798)||— |
|Net income attributable to the Company’s shareholders||$||274,350 ||5.2 ||$||237,658 ||5.1 ||$||227,857 ||5.1 |
|Diluted net earnings per share:||$||6.20 || ||$||5.38 || ||$||5.20 || |
2021 Compared to 2020
The following is an overview for 2021 compared to 2020. A discussion of our results of operations for 2020 compared to 2019 may be found on pages 35-38 of our annual report on Form 20-F filed March 24, 2021 on the EDGAR database of the U.S. Securities and Exchange Commission.
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.
The following table sets forth our revenue distribution by areas of operation:
| ||Year Ended December 31, 2021||%||Year Ended December 31, 2020||%|
|Airborne systems||2,005.8 ||37.9 ||1,650.4 ||35.4 |
|C4ISR systems||1,371.5 ||26.0 ||1,145.7 ||24.6 |
|Land systems||1,254.7 ||23.8 ||1,258.9 ||27.0 |
|Electro-optic systems||452.9 ||8.6 ||475.9 ||10.2 |
|Other (mainly non-defense engineering and production services)||193.6 ||3.7 ||131.7 ||2.8 |
|Total||5,278.5 ||100.0 ||4,662.6 ||100.0 |
Our consolidated revenues in 2021 were $5,278.5 million, as compared to $4,662.6 million in 2020.
The majority of the revenues in 2021 were in the airborne systems and C4ISR systems areas of operation. The increase in revenues in the area of airborne systems was mainly a result of sales of airborne precision guided munitions in Asia-Pacific. The growth in revenues in the C4ISR area of operation was mainly due to the revenues of Sparton, a U.S. subsidiary acquired and consolidated from the second quarter of 2021.
The following table sets forth our distribution of revenues by geographical regions:
| ||Year Ended December 31, 2021||%||Year Ended December 31, 2020||%|
|Israel||1,094.7 ||20.7 ||$||1,106.4 ||23.7 |
|North America||1,608.6 ||30.5 ||1,500.6||32.2 |
|Europe||884.5 ||16.8 ||819.0 ||17.6 |
|Asia-Pacific||1,443.5 ||27.3 ||961.8||20.6 |
|Latin America||126.7 ||2.4 ||140.1||3.0 |
|Other||120.5 ||2.3 ||134.7 ||2.9 |
|Total||5,278.5 ||100.0 ||4,662.6||100.0 |
The increase in North America in 2021 was mainly a result of higher sales of airborne systems and Sparton's products, as well as growth in sales of medical instrumentation. The increase in revenues from Asia-Pacific was mainly due to sales of airborne precision guided munitions.
Cost of Revenues and Gross Profit
Cost of revenues in 2021 was $3,920.5 million (74.3% of revenues), as compared to $3,497.5 million (75.0% of revenues) in 2020.
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 2021 and 2020 were as follows:
Wages and related benefits costs in 2021 constituted approximately 39% of cost of revenues, the same percentage as in 2020. The total cost of wages and related benefits in 2021 was approximately $1,538 million, as compared to $1,379 million in 2020. The increase in wages and related benefit costs was mainly a result of exchange rate changes during 2021 in the value of the NIS relative to the U.S. dollar, as well as the increased workforce as a result of the addition of employees in subsidiaries acquired in the second quarter of 2021.
Subcontractors and material consumed costs in 2021 constituted approximately 56% of cost of revenues, as compared to 50% in 2020. The total amount of subcontractors and material consumed costs in 2021 was approximately $2,185 million, as compared to approximately $1,751 million in 2020.
Manufacturing and other expenses in 2021 constituted 8% of cost of revenues, the same percentage as in 2020. The total cost of manufacturing and other expenses in 2021 was approximately $317 million, as compared to approximately $268 million in 2020.
In 2021, our cost of revenues included an increase in inventories of approximately $116 million in work-in-progress and finished goods inventories, as compared to an increase of approximately $15 million in work-in-progress and finished goods inventories in 2020.
Cost of revenues in 2020 included non-cash expenses of approximately $60 million related to impairment of assets and inventory write-offs due to the impact of Covid-19 on our commercial aviation business.
Changes from 2020 to 2021 in our cost of revenues and cost of revenues components (except the expenses of $60 million related to Covid-19 in 2020 ), 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, and the impact of Covid-19 macro-economic implications, including disrupted transportation networks and global supply chains, which have led to shortages of electronics and other components, increased costs and extension of lead times.
Gross profit for the year ended December 31, 2021 was $1,358.0 million (25.7% of revenues), as compared to $1,165.1 million (25.0% of revenues) in the year ended December 31, 2020.
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 2021 totaled $447.9 million (8.5% of revenues), as compared to $428.2 million (9.2% of revenues) in 2020.
Net R&D expenses (after deduction of third party participation) in 2021 totaled $395.1 million (7.5% of revenues), as compared to $359.7 million (7.7% of revenues) in 2020.
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 2021 were $291.8 million (5.5% of revenues), as compared to $290.7 million (6.2% of revenues) in 2020.
General and Administration (G&A) Expenses
G&A expenses in 2021 were $267.4 million (5.1% of revenues), as compared to $223.9 million (4.8% of revenues) in 2020. The increase in general administrative expenses in 2021 was mainly as a result of general and administrative expenses related to the acquisition and consolidation of Sparton in the Company's results from the second quarter of 2021.
Other Operating Income, Net
Other operating income, net for the year ended December 31, 2021 amounted to $14.7 million, as compared to $35.0 million in 2020. Other operating income in 2021 resulted mainly from a capital gain related to the sale of a building by a subsidiary in Israel. Other operating income in 2020 was mainly a result of a capital gain related to the sale and lease back of buildings by a subsidiary in the U.S.
Our operating income in 2021 was $418.5 million (7.9% of revenues), as compared to $325.7 million (7.0% of revenues) in 2020, which included non-cash expenses of approximately $60 million related to impairment of assets and inventory write-offs due to Covid-19's impact.
Financial Expense, Net
Net financing expenses in 2021 were $40.4 million, as compared to $71.3 million in 2020. Financial expenses, net in 2021 included a gain from changes in fair value of financial assets of approximately $18.8 million. Financial expenses, net in 2021 and 2020 included expenses of approximately $10.2 and $33.4 million, respectively, related to revaluation of lease liabilities and exchange rate differences.
Other Income (Expenses), Net
Other income, net was $5.3 million in 2021, as compared to other income, net of $7.4 million in 2020. Other income, net in 2021 and 2020, resulted mainly from revaluation of holdings in affiliated companies, net of 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 2021 were $131.4 million (effective tax rate of 34.3%), as compared to $36.4 million (effective tax rate of 13.9%) in 2020. Taxes on income in 2021 included an amount of approximately $80.0 million related to the release of exempt earnings from Approved Enterprises and Privileged Enterprises in Israel (Exempt Earnings). Taxes on income in 2020 were reduced by a tax benefit related to adjustments of $7.2 million for prior years following a tax settlement of the Company and some of its subsidiaries in Israel with Israeli tax authorities. The change in the effective tax rate was also affected by the mix of the tax rates in the various jurisdictions in which the Company’s entities generate taxable income and other income that is not part of taxable income mainly related to non-cash items such as impairment of assets. We continued to enjoy a lower effective Israeli tax rate, the benefits of an “Approved and Privileged Enterprise” and other tax benefits, which resulted in savings of $36.0 million and $25.6 million, respectively, in 2021 and 2020, significantly influencing our effective tax rates.
Company’s Share in Earnings (Losses) 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 2021, we had income of $22.6 million (0.4% of revenues) from our share in earnings of affiliates, which included a gain of approximately $10.3 million related to the sale of our shares in an affiliated company, as compared to $12.6 million (0.3% of revenues) in 2020.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests in 2021 was $0.3 million, as compared to $0.3 million in 2020.
Net Income and Earnings Per Share (EPS)
As a result of the above, net income in 2021 was $274.4 million (5.2% of revenues), as compared to net income of $237.7 million (5.1% of revenues) in 2020. The diluted EPS was $6.20 in 2021, as compared to $5.38 in 2020.
The numbers of shares used for computation of diluted EPS in the years ended December 31, 2021 and 2021 were 44,278,000 and 44,215,000 shares, respectively.
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.
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 the amount of approximately $575 million, and new 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.
Our net cash flow provided by operating activities in 2020 was approximately $279 million, resulting mainly from an increase in advances received from customers of approximately $359 million, an increase of approximately $144 in trade and other payables and an increase in non-cash operating items of $116 million, offset by an increase in short and long-term trade receivables of approximately $508 million and an increase in inventories of approximately $70 million.
Net cash flow used in investing activities in 2020 was approximately $23 million, which was used mainly for the purchase of property, plant and equipment in the amount of $132 million, offset by proceeds from the sale of an investment of approximately $44 million and proceeds from the sale of fixed assets of $72 million.
Net cash flow used in financing activities in 2020 was approximately $198 million, which was provided mainly by proceeds from new long-term loans of approximately $202 million and proceeds of short-term bank credit and loans of approximately $104 million, offset by repayment of Series A Notes in the amount of $56 million, repayment of long-term loans in the amount of $370 million and payment of dividends in the amount of $78 million.
Our net cash flow used for operating activities in 2019 was approximately $53 million, resulting mainly from an increase in short and long-term trade receivables of approximately $268 million, an increase in inventories of approximately $56 million and a decrease of approximately $175 million in advances received from customers, offset by an increase in non-cash operating items of $101 million and an increase in trade and other payables of approximately $116 million.
Net cash flow used in investing activities in 2019 was approximately $107 million, which was used mainly for the purchase of property, plant and equipment in the amount of $138 million, acquisition of subsidiaries and business operations in the amount of $357 million and investments in affiliated companies in the amount of $9 million, offset by proceeds from premises evacuation grants of $345 million, proceeds from the sale of fixed assets of $37 million and proceeds from the net sale of short-term deposits in the amount of $15 million.
Net cash flow provided by financing activities in 2019 was approximately $173 million, which was provided mainly by proceeds from new long-term loans of approximately $350 million and issuance of shares in the amount of $185 million, offset by repayment of Series A Notes in the amount of $56 million, repayment of long-term loans in the amount of $243 million and payment of dividends in the amount of $63 million.
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 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. As of December 31, 2021 and 2020, the Company met all applicable financial covenants.
On December 31, 2021, we had total borrowings from banks in the amount of $391 million in short and long-term loans and $600 million in Series B, C and D Notes. On December 31, 2021, we also had $3,018 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, 2021, we had a cash balance amounting to $259 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 2020, we filed a shelf prospectus with the Israeli Security Authority and the TASE (the Shelf Prospectus). The Shelf Prospectus is valid for a period of two years and 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.
As of December 31, 2021, we had working capital of $956 million and a current ratio of 1.24.
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 should be 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.
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 environment in each country. For our pension and other post-retirement benefit assumptions at December 31, 2021 and 2020, see Item 18. Financial Statements – Note 17. On December 31, 2021, our employee benefit liabilities were $884 million, of which we had severance funds of $301 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, 2021 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, 2021 are somewhat higher than those as of December 31, 2020, due to an anticipated increase in expenditures for buildings, ERP enhancements 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 Debt Offering
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:
Face Value (NIS)
Annual Interest Rate (%)
June 30, 2029
June 30, 2029
Changes in the New Israeli Shekel / U.S. dollar exchange rate
June 30, 2035
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.
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, 2021, 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, 2021 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 of Market Risks. 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.
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. For example, in 2019, the inflation rate was approximately a positive 0.6%, and the NIS strengthened against the U.S. dollar by approximately 7.8%. In 2020, the inflation rate was approximately a negative 0.7% and the NIS strengthened against the U.S. dollar by approximately 7% .In 2021, the inflation rate was approximately a positive 2.8%, and the NIS strengthened against the U.S. dollar by approximately 3.3%. 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, 2021 by forward contracts. On December 31, 2021, we had forward contracts for the sale and purchase of Euro, GBP and various other currencies totaling approximately $1,841 million ($1,400 million in Euro, $172 million in GBP and the balance of $269 million in other currencies).
As of December 31, 2021, an unrealized net gain of approximately $71 million was included in accumulated other comprehensive income. As of December 31, 2021, all of the forward contracts are expected to mature during the years 2022 – 2026.
The table below presents the balance of the derivative instruments held in order to limit the exposure to exchange rate fluctuations as of December 31, 2021 and is presented in millions of U.S. dollar equivalent terms:
|Forward||Notional Amount*||Unrealized Gain (Loss)|
|Buy US$ and Sell:|| || |
|Euro||872.8 ||50.3 |
|GBP||166.0 ||2.7 |
|Other various currencies||247.8 ||3.0 |
|Forward||Notional Amount*||Unrealized Gain (Loss)|
|Sell US$ and Buy:|| || |
|GBP||6.3 ||— |
|NIS||894.0 ||28.4 |
|Other various currencies||20.8 ||1.2 |
*Notional amount information is based on the foreign exchange rate at year end.
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” or industrial participation agreements, required by a number of our customers as a condition to our obtaining orders for our products and services. 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, a number of countries are increasing such activities in order to enhance local industry involvement 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/offset 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. Risk Factors – Financial-Related Risks.
On December 31, 2021, we had outstanding Industrial Participation obligations totaling approximately $1.79 billion that extend through 2028.
Non-GAAP Financial Data
The following non-GAAP financial data 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 by facilitating more meaningful comparisons of our financial results over time. Such non-GAAP information is used by our management to make strategic decisions, forecast future results and evaluate our current performance. However, 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.
The non-GAAP financial data below includes reconciliation adjustments regarding non-GAAP gross profit, operating income, net income and diluted EPS. In arriving at non-GAAP presentations, companies generally factor out items such as those that have a non-recurring impact on the income statements, various non-cash items, including significant exchange rate differences, significant effects of retroactive tax legislation, changes in accounting guidance and other items and financial transactions not considered to be part of regular ongoing business, which, in management’s judgment, are items that are considered to be outside the review of core operating results. In our non-GAAP presentation, we made certain adjustments as indicated in the table below.
These non-GAAP measures 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 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.
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, 2021||Year Ended December 31, 2020||Year Ended December 31, 2019|
|GAAP gross profit||1,358.0||1,165.1||1,136.5|
|Adjustments:|| || || |
|Amortization of purchased intangible assets||26.7 ||22.7 ||22.0 |
|Covid-19 related expenses and write-offs||— ||56.0 ||— |
|Expenses related to acquisitions||— ||— ||55.0 |
|Impairment of long-lived assets||— ||3.4 ||— |
|Non-GAAP gross profit||1,384.7 ||1,247.2 ||1,213.5 |
|Percent of revenues||26.2 ||%||26.7 ||%||26.9 ||%|
|GAAP operating income||418.5||325.7||321.6|
|Adjustments:|| || || |
|Amortization of purchased intangible assets||47.0 ||39.4 ||36.1 |
|Covid-19 related expenses and write-offs||— ||56.6 ||— |
|Impairment of long-lived assets||— ||3.4 ||— |
|Expenses related to acquisitions||— ||— ||55.0 |
|Gain from change in holdings||(1.2)|
|Non-GAAP operating income||450.8 ||390.1 ||379.7 |
|Percent of revenues||8.5 ||%||8.4 ||%||8.4 ||%|
|GAAP net income attributable to Elbit Systems’ shareholders||274.4 ||237.7 ||227.9 |
|Adjustments:|| || || |
|Amortization of purchased intangible assets||47.0 ||39.4 ||36.1 |
|Covid-19 related expenses and write-offs||— ||56.6 ||— |
|Expenses related to acquisitions||55.0 |
|Gain from changes in holdings||— ||— ||(1.2)|
|Revaluation of investment measured under fair value option||(17.3)||(20.8)||(8.3)|
|Impairment of investments||— ||7.9 ||3.7 |
|Non-operating foreign exchange losses||10.6 ||33.4 ||24.6 |
Tax effect and other tax items*
|Non-GAAP net income attributable to Elbit Systems’ shareholders||367.6 ||318.5 ||297.8 |
|Percent of revenues||7.0 ||%||6.8 ||%||6.6 ||%|
|GAAP diluted net EPS||6.20 ||5.38 ||5.20 |
|Adjustments, net||2.10 ||1.82 ||1.59 |
|Non-GAAP diluted net EPS||8.30 ||7.20 ||6.79 |
* Tax effect in 2021 includes an adjustment of approximately $80 million for a one-time tax expense related to release of Exempt Earnings.
Item 6. Directors, Senior Management and Employees.
Directors and Executive Officers
Board of Directors
Our directors as of March 15, 2022 are as follows:
|Michael Federmann (Chair)||78||2000|
|Noaz Bar Nir (External Director)||58||2020|
|Yoram Ben Zeev||77||2014|
|David Federmann (Vice Chair)||47||2007|
|Professor Ehood (Udi) Nisan||54||2016|
|Bilha (Billy) Shapira (External Director)||69||2019|
|Professor Yuli Tamir||68||2015|
* 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 2022. The first three-year term of office for Bilha (Billy) Shapira as an External Director expires in November 2022, and the first three-year term of office for Noaz Bar Nir as an External Director expires in August 2023.
Michael Federmann. Michael Federmann has served as chair of the Board since 2000. Since 2002 he has served as chair and CEO of Federmann Enterprises Ltd. (FEL), a privately-owned Israeli company in which Mr. Federmann has held managerial positions since 1969. FEL, directly and through subsidiaries, holds a diversified portfolio of investments, including ownership of approximately 44.2% 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, as well as several financial, real estate and venture capital investments. Mr. Federmann also serves as chair of the board of directors of Dan Hotels. 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 is the father of David Federmann, the vice chair of the Board. Mr. Federmann holds a bachelor’s degree in economics and political science from the Hebrew University of Jerusalem (the Hebrew University), which has also awarded him an honorary doctorate in philosophy.
Noaz Bar Nir. (External Director). Noaz Bar Nir has served as a director of Remedor Biomed Ltd., a company specializing in advanced treatment of wounds since 2018 (and he also served as a director from 2016 to 2017) and of Radio Ashams FM Ltd., a regional radio station located in northern Israel. From 2018 until the end of 2020, he served as a director of Genefron Ltd., a company in the field of genomic-based personal medicine. Since 2019, Mr. Bar Nir has served as a business consultant for various private and public entities in the areas of medicine and tourism and is a lecturer on health systems management in the Netanya Academic College. 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. Mr. Bar Nir serves as chair of the Audit and Financial Statements Review Committee of the Board and as a member of the Compensation Committee and the Corporate Governance and Nominating Committee of the Board. 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 for investments of FEL and since 1986 has served as a director and as general manager of Unico Investment Company Ltd. and of Uni-bit Insurance Agency (1983) Ltd. She serves as a director of Dan Hotels and Etanit Building Products Ltd. (Etanit) and holds other managerial positions with investee companies of FEL. Mrs. Baum holds a law degree (LL.B) from the Hebrew University.
Yoram Ben Zeev. Yoram Ben Zeev serves as an External Director of Kardan Real Estate Ltd., as well as on the boards of several non-profit organizations in Israel. He served as Israel’s ambassador to the Federal Republic of Germany from 2007 until 2012. Prior to that, he served for 26 years in various senior positions in the Israel Ministry of Foreign Affairs (MFA), including as deputy general director, head of the North America Division and senior member of the directorate. Among other positions held during his service in the MFA, Mr. Ben Zeev served as Israel’s Consul General to the West Coast in the United States, political advisor to the president of the State of Israel, special coordinator to the Middle East peace process, advisor to prime minister Ehud Barak for the Camp David Peace Conference, chair of the MFA’s Steering Committee - Foreign Service Strategic and Functional Planning and of the Israel-Canada Annual Strategic Forum and member of the MFA’s Nomination Committee. Mr. Ben Zeev has been the recipient of special awards for his diplomatic service from both the U.S. House of Representatives and the president of the Federal Republic of Germany. Mr. Ben Zeev holds a bachelor’s degree in middle eastern studies, political science and international relations from the Hebrew University and a master’s degree in middle eastern studies from Tel-Aviv University. Mr. Ben Zeev serves as the chair of the Corporate Governance and Nominating Committee of the Board and as a member of the Audit and Financial Statements Review Committee and the Compensation Committee of the Board.
David Federmann. David Federmann has served as vice chair of the Board since 2015. He has served in various management capacities at FEL since 2000. He 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, chair of the Board. Mr. Federmann holds a bachelor’s degree in mathematics and philosophy from New York University.
Dov Ninveh. Dov Ninveh served as chief financial officer and a manager of FEL from 1994 until 2020 and as the general manager of Heris Aktiengesellschaft from 2012 until September 2021. He serves as a member of the board of directors of Dan Hotels, Etanit and Freiberger. Mr. Ninveh served as a director of Elop Electro-Optic Industries Ltd. (Elop) from 1996 until 2000. From 1989 to 1994, he served as deputy general manager of Etanit. Mr. Ninveh holds a bachelor of science degree in economics and management from the Israel Institute of Technology (the Technion).
Professor Ehood (Udi) Nisan. Prof. Ehood (Udi) Nisan is a professor in the School of Public Policy and Government of the Hebrew University. He is an External Director of Harel Insurance Finance Services Ltd. and Rekah Pharmaceutical Industry Ltd. He is also a member of the board of Bezalel Academy of Art and chair of its finance committee. From 2014 until 2021, he served as a member of the board of the Jerusalem Biblical Zoo. From 2013 to 2016, he was the chair of the board of directors of Delek, The Israel Fuel Corporation Ltd. From 2009 to 2011, Prof. Nisan was the director of the budgets department of the Israeli Ministry of Finance, and from 2007 to 2009, he served as the director of the Government Companies Authority. Prior to that, he served in various executive positions in the Israeli Ministry of Finance and served as a member and chair of several government and public committees, including as the CEO of the Jerusalem Development Authority from 1999 until 2002. Prof. Nisan holds bachelor’s and master’s degrees in economics and business administration, and a PhD in public economics and policy from the Hebrew University. During 2006 - 2007, Prof. Nisan completed his post-doctoral studies at Harvard University's Kennedy School, where he was also a Senior Fellow in 2011 - 2012. Prof. Nisan serves as a member of the Audit and Financial Statements Review Committee of the Board. 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.
Bilha (Billy) Shapira (External Director). Mrs. Bilha (Billy) Shapira serves as a member of the board of governors and the audit committee of the Azrieli College of Engineering, the Jerusalem Transportation Master Plan Team, the boards of several non-profit organizations in Israel and the board of governors of the Hebrew University. She is also a consultant for TABI Learning Technologies Ltd., a start-up company in the field of pedagogical instruments for students with learning and sensory integration disorders. From 2018 until 2020, she was the head of the Israeli branch of Helmholtz Association of German Research Centers, a German association with centers worldwide that promotes research collaboration between German institutions and industries and foreign academic institutions, industrial entities and governmental research bodies. From 2009 until 2017, Mrs. Shapira served as vice president and CEO of the Hebrew University and as the CEO of VERA - the Association of Heads of Universities in Israel. Prior to that, she served for 36 years in various management capacities in the Hebrew University. Mrs. Shapira holds a bachelor’s degree in Russian studies and international relations and a master’s degree in administration and public policy from the Hebrew University. Mrs. Shapira serves as chair of the Compensation Committee of the Board and is a member of the Audit and Financial Statements Review Committee and the Corporate Governance and Nominating Committee of the Board. She is considered by the Board to have professional competence under the Companies Law.
Professor Yuli Tamir. Prof. Yuli Tamir has served as the President of Beit Berl, a multidisciplinary college near Kfar Saba, Israel, since 2020. From 2010 until 2020, she served as the President of Shenkar College, a public college in Ramat-Gan, Israel. From 2006 until 2009, she served as Israel’s Minister of Education. Prof. Tamir also served as the Minister of Immigration from 1999 until 2001. She was a deputy speaker of the Knesset and a member of the Finance Committee, the Education Committee and the Security and Foreign Affairs Committee. Prof. Tamir is a founding member of the Israeli peace movement “Peace Now”. She served as the chair of the Association of Civil Rights in Israel and was a member of the political committee of the Women’s Lobby. She was a professor at Tel-Aviv University and a scholar-in-residence at Princeton University, Harvard University, the University of Pennsylvania, the European University in Florence, the Central European University in Budapest and the Blavatnik School of Government in Oxford. Prof. Tamir is the recipient of numerous academic awards. Prof. Tamir holds a bachelor's degree in biology and a master’s degree in political science from the Hebrew University and a PhD in political philosophy from Oxford University. Prof. Tamir serves as a member of the Audit and Financial Statements Review Committee of the Board.
Our executive officers, which are the President and CEO, and the Executive Vice Presidents who report to the President and CEO, as of March 15, 2022, are as follows:
|Bezhalel Machlis||59||President and Chief Executive Officer|
|Jonathan Ariel||65||Executive Vice President – Chief Legal Officer|
|Boaz Cohen||57||Executive Vice President – Marketing and Business Development North America|
|Haim Delmar||52||Executive Vice President – General Manager C4I and Cyber |
|Joseph Gaspar||73||Executive Vice President – Chief Financial Officer|
|Dr. Shelly Gordon||61||Executive Vice President – Chief Human Resources Officer|
|Ran Kril||51||Executive Vice President – International Marketing and Business Development|
|Ilan Pacholder||67||Executive Vice President – Mergers and Acquisitions and Financing|
|Yuval Ramon||56||Executive Vice President – Chief Operating Officer|
|Oren Sabag||48||Executive Vice President – General Manager ISTAR and EW|
|Yoram Shmuely||61||Executive Vice President – General Manager Aerospace |
|Yehuda Vered||64||Executive Vice President – General Manager Land |
|Yehoshua Yehuda||55||Executive Vice President – Strategy and Chief Technology Officer|
Bezhalel Machlis. Bezhalel Machlis has served as the Company’s President and CEO since 2013. From 2008 until 2012, he served as executive vice president - general manager land and C4I, after serving as corporate vice president - general manager land systems and C4I since 2004. In 2003, he served as corporate vice president - general manager ground, C4I and battlefield systems. From 2000 until 2002, he served as vice president – battlefield and information systems. Mr. Machlis joined Elbit Ltd. in 1991 and held various management positions in the battlefield and information systems area. Prior to that, he served as an artillery officer in the IDF, where he holds the rank of colonel (reserves). Mr. Machlis holds a bachelor of science degree in mechanical engineering and a bachelor of arts degree in computer science from the Technion and an MBA from Tel-Aviv University. He is a graduate of Harvard University Business School’s Advanced Management Program.
Jonathan Ariel. Jonathan Ariel has served as Executive Vice President - Chief Legal Officer since 2012, after serving as senior vice president - general counsel since 2008. He joined Elbit Systems in 1996 and has held several positions within the legal department, including vice president - general counsel of Elop. Prior to joining Elbit Systems, Mr. Ariel served as a legal advisor both in-house and in private law firms in Israel and the U.S. Mr. Ariel holds a law degree (LL.B.) from Tel-Aviv University. He is admitted to the Israeli Bar.
Boaz Cohen. Boaz Cohen was appointed Executive Vice President - Marketing and Business Development North America in February 2021. Prior to that, since 2013 he served as senior vice president - land systems. After retiring from the IDF as a colonel in the Armored Corps in 2007, Mr. Cohen joined Elbit Systems and held various management positions in the land and C4I areas. Mr. Cohen holds a bachelor of arts degree in management and economics from Haifa University and is a graduate of Harvard University Business School's Advanced Management Program.
Haim Delmar. Haim Delmar was appointed Executive Vice President - General Manager C4I and Cyber in 2018, after serving as senior vice president - C4ISR and HLS since 2009. Mr. Delmar joined Elbit Systems in 1993 and held various engineering and management positions in the battlefield and information systems area. From 2000 until 2004, he served in executive positions at Utopy Inc. and Mobilitec Inc. in the telecommunication and data mining fields, returning to Elbit Systems in 2004. Mr. Delmar holds a bachelor of science degree in computer engineering from the Technion and is a graduate of Harvard University Business School’s Advanced Management Program.
Joseph Gaspar. Joseph Gaspar was appointed as an Executive Vice President in 2008 and has served as Chief Financial Officer since 2001. In September, 2021, he was appointed as Senior Executive Vice President – Business Management, with such appointment effective as of April 1, 2022. Mr. Gaspar was appointed as a corporate vice president in 2000 and served as corporate vice president – strategy, technology and subsidiaries from 2000 until 2001. From 1996 until 2000, he held the position of corporate vice president - marketing and business development of Elop. Mr. Gaspar joined Elop in 1975 and held several management positions, including vice president and general manager of Elop’s optronics product division and co-manager of an Elop subsidiary in the United States. Mr. Gaspar holds a bachelor of science degree from the Technion in electronic engineering with advanced studies in digital signal processing and communication.
Dr. Shelly Gordon. Dr. Shelly Gordon was appointed as Executive Vice President - Chief Human Resources Officer shortly after joining Elbit Systems in 2015. From 2012 until joining Elbit Systems, she headed executive education at the Interdisciplinary Center Herzilya. From 2005 until 2012, Dr. Gordon served as vice president - organizational development and talent management at Amdocs Limited and served as vice president - human resources at Elite Confectionary Ltd. from 2000 until 2005. Prior to that, she worked as an independent consultant with management teams and senior managers, leading major transformations in varied organizations and industries. Dr. Gordon received a bachelor’s degree in education and art from the Hebrew University, a bachelor’s degree in psychology from Tel-Aviv University and a doctorate in management studies from the University of Hertfordshire in the U.K.
Ran Kril. Ran Kril was appointed as Executive Vice President - International Marketing and Business Development in 2015. From 2013 until his current appointment, he served as aerospace vice president - marketing and sales, after serving as aerospace vice president - sales and contracts since 2007. He joined Elbit Systems in 1997 and held various senior positions in aerospace's marketing, sales and finance departments. Mr. Kril holds a bachelor of science degree in economics and management from the Technion and a master of science of management degree from the Polytechnic University of New York.
Ilan Pacholder. Ilan Pacholder has served as Executive Vice President – Mergers and Acquisitions since 2009, in addition to his position as Executive Vice President – Financing to which he was appointed in 2008. From 2008 until 2015, he also served as executive vice president - offset. During 2007, he served as vice president and chief financial officer of Tadiran Communications Ltd. Mr. Pacholder served as corporate secretary and vice president – finance and capital markets of Elbit Systems from 2003 until 2006. From 2001 until 2003, he served as vice president – finance. Mr. Pacholder joined Elbit Ltd. in 1994 and held various senior positions in the finance department. Prior to joining Elbit Ltd. he served as the chief financial officer for Sanyo Industries in New York. Before that Mr. Pacholder worked for Bank Leumi in New York and held the position of vice president in the international and domestic lending departments. Mr. Pacholder holds a bachelor of arts degree in accounting and economics from Queens College in New York and an MBA in finance and investments from Adelphi University.
Yuval Ramon. Yuval Ramon was appointed Executive Vice President - Chief Operating Officer in 2015. From 2014 until his current appointment, he served as vice president - corporate operations. From 1998 - 2013, he served in a number of management positions in Elbit Systems of America, including as senior vice president of operations, site lead at the Merrimack operations and director of sales and contracts for the Fort Worth operations. He joined Elbit Systems in 1994 as a sales and contract manager. Mr. Ramon holds a bachelor of science degree in industrial engineering and economics from the Technion.
Oren Sabag. Oren Sabag was appointed Executive Vice President - General Manager ISTAR and EW in January 2022. In February 2021, he was appointed executive vice president – co-general manager ISTAR and EW, after serving as C4I and cyber senior vice president - radios and secure communications since 2014. From 2011 to 2013, he served as vice president for engineering - land and C4I. Mr. Sabag joined Elbit in 1998 and held various engineering and management positions. Mr. Sabag holds a bachelor of science degree in computer engineering from the Technion and an MBA in business management from Haifa University.
Yoram Shmuely. Yoram Shmuely has served as Executive Vice President - General Manager Aerospace since 2013, after serving as executive vice president - co-general manager aerospace since 2008. From 2003 to 2007, Mr. Shmuely served as corporate vice president - co-general manager airborne and helmet systems. He served as corporate vice president and general manager – helmet-mounted systems from 2000 until 2003. From 1998 until 2000, he was vice president – helmet-mounted systems. From 1996 until 1998, he served as president of a U.S. subsidiary of Elbit Systems. Mr. Shmuely joined Elbit Ltd. in 1990 and served as director of Elbit Ltd.’s helmet-mounted display business. He served as a fighter aircraft pilot in the IAF. Mr. Shmuely holds a bachelor of science degree in electronic engineering from the Technion.
Yehuda Vered. Yehuda (Udi) Vered has served as Executive Vice President - General Manager Land since 2018, after serving as executive vice president - general manager land and C4I since 2013. From 2009 until 2013, Mr. Vered served as executive vice president – service solutions as well as vice president – marketing land and C4I. From 2004 to 2008, he served as land and C4I chief financial officer and vice president for contracts and sales. Mr. Vered joined Elbit Systems in 2003 as ground, C4I and battlefield systems vice president - contracts and sales and chief financial officer. Before that, he served as an aircrew officer in the IAF, where he holds the rank of colonel (reserves). Mr. Vered holds a bachelor of arts degree in management and economics from Tel-Aviv University, an M.B.A from Ben Gurion University and is a graduate of Harvard University Business School’s Advanced Management Program.
Yehoshua Yehuda. Yehoshua (Shuki) Yehuda was appointed as Executive Vice President - Strategy and Chief Technology Officer in 2020. From 2016 until his current appointment, he served as executive vice president - chief technology officer. From 2008 until his current appointment, he served as Elisra’s vice president and chief technology officer as well as general manager - radar solutions business unit. Prior to that he served in a number of management positions in Elisra, which he joined in 2000. Prior to joining Elisra, Mr. Yehuda served as an officer in the IDF, holding command positions in the Intelligence Corps. Mr. Yehuda holds a bachelor of science degree in electrical engineering from Tel-Aviv University and a master of science degree in neural computation from the Hebrew University. He is a graduate of Harvard University Business School’s Advanced Management Program.
Recent Developments in our Executive Officers
On September 1, 2021, Elbit Systems announced that Joseph Gaspar would become Senior Executive Vice President – Business Management and that Dr. Yaacov (Kobi) Kagan, then serving as Deputy General Manager and Senior Vice President – Finance and Control of Elbit Systems Land, would replace Mr. Gaspar as Executive Vice President – Chief Financial Officer. These appointments are effective as of April 1, 2022.
Below is a biographical summary of Dr. Kagan.
Dr. Kobi Kagan. Dr. Kobi Kagan was appointed as Executive Vice President – Chief Financial Officer, effective as of April 1, 2022. He was appointed in 2018 as deputy general manager and senior vice president – finance and control in Elbit Systems Land, and from 2010 to 2018 he served as Elbit Systems Land and C4I‘s vice president - finance and control. Dr. Kagan joined Elbit Systems in 2008 as a sales director at Elbit Systems Land and C4I. Prior to that, Dr. Kagan served for 26 years in the Israeli Navy, where he holds the rank of a naval captain (reserves), and in the IMOD, in a variety of positions, including the Head of the Navy’s budget department. Dr. Kagan holds a bachelor of arts degree in economics and business administration, an MBA in business administration and a PhD in economics from Bar-Ilan University, and is a graduate of Harvard University Business School's Advanced Management Program.
Compensation of Directors and Executive Officers
Pursuant to the Companies Law, a public company such as Elbit Systems is required to adopt a compensation policy regarding the terms of office and employment of its Office Holders (as defined in the Companies Law) (generally Elbit Systems’ directors and executive officers), including compensation, equity-based awards, exemption from liability, indemnification and insurance, severance and all other benefits (Employment Terms).
In addition, pursuant to the Companies Law, every three years a compensation policy needs to be re-approved by the board of directors, following the recommendation of the compensation committee, and re-approved by the company’s shareholders, by a Special Uninterested Majority. Special Uninterested Majority means the affirmative vote of a majority of the voting power in the company present at the respective meeting either in person, by proxy or by a voting instrument, and voting on the respective resolution, provided that, either: (a) such majority includes a majority of the shareholders who are not controlling shareholders of the company and do not have a “Personal Interest” in the approval of the respective resolution (disregarding abstentions) or (b) the total number of shares of the shareholders referred to in (a) above that are voted against the approval of the proposed resolution does not exceed two percent (2%) of the total voting rights in the company. For the definition of Personal Interest see Item 10. Additional Information - Approval of Certain Transactions - Personal Interest and Extraordinary Transactions.
At the Extraordinary General Meeting of Shareholders held on April 7, 2021 (the April 2021 General Meeting), our shareholders, following a favorable recommendation of the Compensation Committee of the Board (the Compensation Committee) and the approval of the Board, approved an amended compensation policy applicable to Employment Terms and arrangements with our Office Holders (the Compensation Policy) . For further information, please see the Compensation Policy filed as Exhibit 4.3 to this annual report on Form 20-F.
In accordance with the provisions of the Companies Law as set forth above, the Compensation Policy is in effect for a three-year period ending in April 2024 or as otherwise may be mandated from time to time by the Companies Law. For further information about the approval of Employment Terms of our Office Holders, see Item 10. Additional Information - Approval of Certain Transactions - Approval of Employment Terms of Office Holders.
Compensation of Directors and Executive Officers
Aggregate Compensation to Directors and Executive Officers
The following table sets forth the aggregate compensation costs for all of our directors and executive officers as a group for the fiscal year ended December 31, 2021: (U.S. dollars in thousands)*
|Salaries, Directors’ Fees Commissions and Bonuses|| ||Pension, Retirement and Similar Benefits|
|All directors (consisting of 9 persons) ||$||580 ||$||— |
|All executive officers (consisting of 16 persons) ||$||13,407 ||$||1,707 |
*For information regarding the value of phantom units and equity awards to the directors and executive officers, see below “2018 Phantom Bonus Retention Plan” and “2018 Equity Incentive Plan for Executive Officers and Equity Plans in Other Entities”.
In accordance with the Compensation Policy and with the Israeli Companies Regulations (Relief from Related Parties’ Transactions), 5760-2000, the Compensation Committee and the Board approved payment to the Company's directors (including to Michael Federmann who may be considered a direct or indirect controlling shareholder of the Company, and his son David Federmann), in accordance with maximum regulatory rates payable to External Directors under Israeli law for companies similarly classified based on their shareholding equity, which rates are also paid to the Company’s External Directors, as well as reimbursement of expenses in accordance with Israeli law and the Company’s procedures, which are also paid to the Company’s External Directors. As a result, each of the Company’s directors is and will be entitled to an annual fee of approximately NIS 112,550 (equal to approximately $34,850 ) and a per meeting fee of approximately NIS 4,330 (equal to approximately $1,340), which reflect the above mentioned fee levels, linked to the Israeli consumer price index.
2018 Phantom Bonus Retention Plan
In 2018, our Board approved a “Phantom” Bonus Retention Plan for Senior Managers (the 2018 Phantom Plan). The purpose of the 2018 Phantom Plan is to strengthen the alignment of the interests of certain senior managers with those of the Company and its subsidiaries, and their willingness to continue to work at the Company and its subsidiaries, in order to advance the Company’s growth and profitability, through the creation of a long-term incentive for senior managers.
Under the 2018 Phantom Plan, phantom bonus units (2018 Plan Units) were granted to senior managers with three yearly tranches, each tranche comprised of a number of units which entitle the recipient the right to receive the financial benefit deriving from increases in the value of the Company’s shares during the applicable periods, based on the mechanism specified in the 2018 Phantom Plan. 2018 Plan Units are calculated separately for each tranche, and the total accrual period for each tranche is three years from the respective determination date of the applicable 2018 Plan Units.
At the end of the twelve-month period during the 2018 Plan Units accrual period for each tranche (Yearly Calculation Period), the Company calculates the annual benefit amount of the 2018 Plan Units for such Yearly Calculation Period (Annual Benefit Amount) by multiplying the number of 2018 Plan Units included in the tranche by the difference between (i) the initial value, i.e. the average of the closing share prices of a Company share on the TASE, during the period of thirty (30) trading days preceding the beginning of the respective period, and (ii) the year-end value of the respective Yearly Calculation Period, i.e. the average of the closing share prices of a Company share on the TASE, during the period of thirty (30) trading days preceding the end of the relevant Yearly Calculation Period; provided such amount is positive.
The accrued benefit amount for the 2018 Plan Units (Accrued Benefit Amount) in each yearly tranche is the sum of all three Annual Benefit Amounts. Except in certain circumstances described in the 2018 Phantom Plan, the Accrued Benefit Amount of a tranche is paid to the recipient following the end of the third Yearly Calculation Period of the respective tranche, provided that the recipient remains an employee of the Company. The benefits received under the 2018 Phantom Plan are subject to taxation at ordinary personal income tax rates.
The 2018 Phantom Plan is not specifically intended for our executive officers, however some of our current executive officers have 2018 Plan Units that were granted to them prior to their nomination as executive officers. We recorded an amount of approximately $0.3 million in 2021, as compensation costs related to grants made prior to 2021 to our executive officers under the 2018 Phantom Plan. No 2018 Plan Units were granted to executive officers in 2021. See Item 18. Financial Statements – Note 22.
2018 Equity Incentive Plan for Executive Officers and Equity Plans in Other Entities
In 2018, our Board approved the 2018 Equity Incentive Plan for Executive Officers (the 2018 Option Plan). See below “Share Ownership – Elbit Systems’ Stock Option Plans – 2018 Equity Incentive Plan for Executive Officers”. In 2021 we granted 525,000 options to executive officers under the 2018 Option Plan, at an exercise price of $134.34 per option, with an expiration date of July 7, 2026. In 2021 we recorded an amount of approximately $5.3 million as compensation costs related to options granted to our executive officers under the 2018 Option Plan. See Item 18. Financial Statements Note 22.
In 2021, we recorded an amount of approximately $0.2 million as compensation costs related to options granted to our executive officers in start-up entities or similar ventures under their plans (whether by allocation of options by the start-up entities themselves or by allocation of shares or options to purchase shares of such start-up entities which are held by the Company) (Options in Other Entities).
Elbit Systems has implemented an annual pay-for-performance bonus plan (Annual Bonus) based on pre-determined criteria that aims to align and unify our executive officers in reaching Elbit Systems’ short and long-term goals. Annual Bonuses are, therefore, a strictly pay-for-performance element, as payout eligibility and levels are determined based on financial, business and operational results, as applicable, as well as individual performance. Payment of the Annual Bonus is also subject to the fulfillment of preconditions as described in our Compensation Policy. Our executive officers may also be granted from time to time other cash bonuses which are discretionary, subject to required approvals. For additional information see the Compensation Policy filed as Exhibit 4.3 to this annual report.
In addition to payment of monthly salary, bonuses and options, our executive officers are entitled to reimbursement of travel and certain other expenses in a manner similar to other employees and other benefits as described in our Compensation Policy.
Office Holders of the Company, including our directors and executive officers, are also covered by our D&O liability insurance policy and are entitled to indemnification in accordance with our Restated Articles of Association (the Articles of Association) and pursuant to an indemnification letter as approved by our shareholders. At the April 2021 General Meeting, our shareholders, following the favorable recommendation of our Compensation Committee and the approval of our Board, approved providing an exemption letter to each of our existing and future directors and to our CEO. For additional information, see Item 10. Additional Information – Exemption, Insurance and Indemnification of Directors and Officers.
Compensation of Five Most Highly Compensated Office Holders
The following describes the compensation of our five most highly compensated Office Holders with respect to the year ended December 31, 2021. All amounts specified are in terms of cost to the Company as recorded in our financial statements.
Compensation for each of the specified Office Holders is indicated in terms of the following types of compensation costs:
(1) Salary Costs. Salary Costs include gross salary and, if and to the extent applicable to a respective Office Holder, social and other benefits such as vacation days, sick days, convalescence pay, monthly remuneration for a study fund, contributions made by the Company on behalf of the Office Holders to an insurance policy or a pension fund, contributions by the Company on behalf of the Office Holders towards work disability insurance, retirement and termination of service benefits and other benefits such as company car and communication costs. U.S. dollar amounts indicated for Salary Costs are based on the exchange rate of 3.23, which represents the average weighted U.S. dollar – NIS exchange rate for the date of payments for each of the months during 2021 (Average Exchange Rate).
(2) Bonus Costs. Bonus Costs represent bonuses (Annual Bonuses, managerial evaluation and/or special bonuses, as the case may be) recorded in connection with the Office Holders with respect to the year ended December 31, 2021. U.S. dollar amounts indicated for Bonus Costs are based on the Average Exchange Rate.
(3) Stock Option Costs. Stock Option Costs are costs recorded with respect to the year ended December 31, 2021 related to the 2018 Option Plan. See above “Aggregate Compensation to Directors and Officers – 2018 Equity Incentive Plan for Executive Officers and Equity Plans in Other Entities” and below “Share Ownership – Elbit Systems’ Stock Option Plans – 2018 Equity Incentive Plan for Executive Officers” and Item 18. Financial Statements – Notes 22C and 22D. Such Stock Option Costs also relate to Options in Other Entities. See above “Aggregate Compensation to Directors and Executive Officers – 2018 Equity Incentive Plan for Executive Officers and Equity Plans in Other Entities”.
The five most highly compensated Office Holders in 2021 were as follows (U.S. dollar amounts in thousands):
(1)Bezhalel Machlis – President and CEO. Compensation costs recorded for Mr. Machlis in 2021 included: $2,172 in Salary Costs, $1,850 in Bonus Costs and $1,403 in Stock Option Costs.
At the April 2021 General Meeting, our shareholders, following the favorable recommendation of our Compensation Committee and approval of the Board, approved amending the employment terms of Mr. Machlis. Such amendment includes, among other provisions, a grant of Options under the 2018 Equity Plan and the grant of an exemption letter. For further information see below “Board Practices – Compensation Committee”, “Share Ownership – Elbit Systems’ Stock Option Plan”, Item 10. Additional Information - General Provisions of Israeli Law and Related Provisions of Articles of Association – Office Holders and Approval of Certain Transactions – Approval of Employment Terms of Office Holders and Item 16G. - Corporate Governance.
(2) Joseph Gaspar – Executive Vice President - Chief Financial Officer. Compensation costs recorded for Mr. Gaspar in 2021 included: $959 in Salary Costs, $646 in Bonus Costs and $496 in Stock Option Costs.
(3) Yoram Shmuely – Executive Vice President - General Manager Aerospace. Compensation costs recorded for Mr. Shmuely in 2021 included: $838 in Salary Costs, $335 in Bonus Costs and $603 in Stock Option Costs.
(4) Yehuda Vered – Executive Vice President - General Manager Land. Compensation costs recorded for Mr. Vered in 2021 included: $741 in Salary Costs, $159 in Bonus Costs and $619 in Stock Option Costs.
(5) Ran Kril – Executive Vice President - International Marketing and Business Development. Compensation costs recorded for Mr. Kril in 2021 included: $495 in Salary Costs, $256 in Bonus Costs and $444 in Stock Option Costs.
Appointment of Directors
Our directors, other than our External Directors, are elected by the shareholders at the annual general meeting of shareholders. Their term of office is until the conclusion of the next annual general meeting of shareholders, which is held at least once every calendar year but not more than 15 months after the previous annual general meeting of shareholders. According to our Articles of Association, the approval of our shareholders at a general meeting is generally required to remove any of our directors from office. Between annual general meetings of shareholders our Board may appoint new directors to fill vacancies. The External Directors are elected at a general meeting of shareholders as described under “External Directors” below. Our Articles of Association authorize a maximum of 17 directors, a minimum of five directors and, unless otherwise determined by our Board or approved by our shareholders, the number of directors will be nine.
The Companies Law requires the board of directors of a public company, after considering the company’s type and size and the scope and complexity of its activities, to determine the minimum number of directors on the board having “financial and accounting expertise” as defined in the Companies Law. Our Board has adopted a policy pursuant to which it will include a minimum of two directors having financial and accounting expertise as defined under the Companies Law. Currently our Board has two directors who are considered by the Board to have financial and accounting expertise: Mr. Bar Nir and Prof. Nisan. In addition, the Companies Law provides that a person will not be elected and will not serve as a director in a public company if he or she does not have the required qualifications and the ability to dedicate an appropriate amount of time for the performance of his or her director position in the company, taking into consideration, among other factors, the special needs and size of the company. A general meeting of shareholders of a company whose shares are publicly traded, at which the election of a director is to be considered, will not be held, and a director will not be elected, unless:
(1) the nominee has declared to the company that he or she complies with the above-mentioned requirements;
(2) the details of his or her applicable qualifications are provided;
(3) in case such nominee is an “Independent Director” as defined in the Companies Law (see below), the nominee has also declared that he or she complies with the independence criteria under the Companies Law; and
(4) in case such nominee is an External Director, the nominee has declared that he or she complies with the requirements for External Directors provided under the Companies Law.
Each of our elected directors has declared to our Board that he or she complies with the required qualifications under the Companies Law for appointment as a member of our Board, detailing his or her applicable qualifications, and that he or she is capable of dedicating the appropriate amount of time for the performance of his or her role as a member of our Board. In addition, Mr. Ben Zeev, Prof. Nisan and Prof. Tamir have each declared, and our Audit and Financial Statements Review Committee has determined, that he or she complies with the criteria of an Independent Director under the Companies Law, and each of Mr. Bar Nir and Mrs. Shapira has declared that he or she complies with the External Director requirements under the Companies Law.
In addition to the External Directors, under the Companies Law and regulations thereunder, a director in a company such as Elbit Systems, who qualifies as an independent director under the relevant non-Israeli rules relating to independence standards, such as the Nasdaq director independence criteria, may be considered an Independent Director pursuant to the Companies Law if such director meets certain conditions listed in the regulations, and provided such director has been designated as such by the audit committee. The Audit and Financial Statements Review Committee has designated Mr. Ben Zeev, Prof. Nisan and Prof. Tamir as Independent Directors under the Companies Law.
The terms of office of Mrs. Shapira and Mr. Bar Nir, the current External Directors on our Board, expire as described under “External Directors” below. The other seven current directors were appointed at the annual general meeting of shareholders held in December 2021. There are no service contracts or similar arrangements with any director that provide for benefits upon termination of directorship.
We are subject to Nasdaq rules relating to the composition and practices of our Board. Among other things, these rules require that a majority of our directors be “independent” as defined in the applicable Nasdaq rules and that our Audit and Financial Statements Review Committee, our Compensation Committee and our Corporate Governance and Nominating Committee each be composed exclusively of such independent directors. We comply with these Nasdaq requirements because (a) of our nine directors, the following five directors are independent under Nasdaq rules: Noaz Bar Nir, Yoram Ben Zeev, Professor Ehood (Udi) Nisan, Bilha (Billy) Shapira and Professor Yuli Tamir and (b) our Audit and Financial Statements Review Committee, our Compensation Committee and our Corporate Governance and Nominating Committee are each composed exclusively of directors who are independent under the Nasdaq rules. Nominees for appointment or election as a director are recommended by the Board’s Corporate Governance and Nominating Committee. See below “Corporate Governance and Nominating Committee”.
Substitute Directors. The Articles of Association provide that any director may appoint another person to serve as a substitute director. A substitute director must be qualified under the Companies Law to serve as a substitute of the relevant director, and, under the Companies Law, in case the substituted director is an Independent Director as defined in the Companies Law, the substitute director must also comply with the requirements of the Companies Law for Independent Directors, and a substitute for an External Director must comply with the requirements of the Companies Law for External Directors and also have the same type of financial and accounting expertise or professional competence as the director he or she replaces. If his or her appointment is for more than one meeting it will be subject to the approval of the Board. Such person may not act as a substitute director for more than one director at the same time. In addition, a Board committee member may not substitute for another Board committee member in meetings of the applicable committee. The same rules, including compensation, will apply to a substitute director as to the director who appointed him or her, and the substitute director may participate in Board and Board committee meetings in the same manner as the appointing director (subject to any applicable independence criteria). Subject to the Companies Law, a director who has appointed a substitute director may revoke the appointment at any time. In addition, the office of a substitute director will be vacated at any time that the office of the director who appointed the substitute is vacated for any reason. Any appointment or revocation of the appointment of a substitute director will be made by notice in writing to the substitute director and Elbit Systems. The appointment or revocation, as the case may be, will become effective on the later of the date of receipt of the above notice or the date fixed in the notice. Appointing a substitute director will not release the appointing director from his/her liabilities, taking into account the applicable circumstances.
Under the Companies Law public companies are required to appoint at least two External Directors. Among other requirements, for each public company such as Elbit Systems that is considered to have a controlling shareholder, a person may serve as an External Director if he or she meets the following requirements (the Affiliation Requirements):
(1) if that person is not a Relative (for definition of the term “Relative” see Item 10. Addtional Information – Approval of Certain Transactions – Personal Interest and Extraordinary Transactions) of the controlling shareholder of that company and if that person (and each of that person’s Relatives, partners and employers), or any person to whom he or she is subordinated (directly or indirectly), or any entity controlled by that person, did not have, on the date of the person's appointment or at any time during the two years preceding that person’s appointment as an External Director, any “Affiliation” (as defined in the Companies Law) with any of:
(i) the applicable company;
(ii) the controlling shareholder of the applicable company or any of his or her Relatives on the date of appointment; or
(iii) any entity controlled, on the date of such appointment or at any time within the preceding two years, by the applicable company or by the controlling shareholder of the applicable company; and
(“Affiliation” means (subject to certain exceptions provided in regulations promulgated under the Companies Law): (a) an employment relationship, (b) a business or professional relationship maintained on a regular basis (excluding insignificant relationships), (c) control and (d) service as an office holder, excluding a director appointed in order to serve as an External Director of a company that is about to offer its shares in an Initial Public Offering.)
(2) if and so long as:
(i) no conflict of interest exists or may exist between that person’s role as a member of the board of directors of the respective company and that person’s other positions or business activities; and
(ii) such position or business activities does not impair that person’s ability to serve as a director; and
(3) if and so long as:
(i) that person and each of that person’s Relatives, partners and employers, or any person to whom he or she is subordinated directly or indirectly or any entity controlled by that person has no business or professional relationships with any of the persons or entities mentioned in (1) above, even if such relationship is not on a regular basis (other than a negligible relationship); and
(ii) no other consideration except as permitted under the Companies Law is paid to that person in connection with that person’s position as a director in the relevant company; and
(4) if that person serves also as a member of the board of directors of another company, none of the External Directors of that other company serves at the same time as a member of the board of directors of the respective company; and
(5) if that person is not an employee of a securities authority or a stock exchange in Israel.
In general, at least one External Director must have financial and accounting expertise, and the other External Director(s) must have professional competence as described below. However, in companies such as Elbit Systems that are “dually listed” (for example traded on a stock exchange in both Israel and the U.S.), if one or more other directors who meet the independence criteria applicable to members of the audit committee under the foreign applicable law (including stock exchange rules) have been determined by the board of directors to have financial and accounting expertise then it is permissible for all of the External Directors to have only “professional competence” as described below.
Under the relevant regulations of the Companies Law, a director has financial and accounting expertise if he or she, based on his or her education, experience and qualifications, is highly skilled in respect of, and understands, business accounting matters and financial statements in a manner that enables him or her to have an in-depth understanding of the company’s financial statements and to stimulate discussion with respect to the manner in which the financial data is presented. The evaluation of the financial and accounting expertise of a director is to be made by the board of directors taking into account, inter alia, the parameters specified in the relevant regulations of the Companies Law.
A director has “professional competence” if he or she (a) has an academic degree in either economics, business administration, accounting, law or public administration or an academic degree or other advanced degree in the company’s main area of business or in a field relevant to such position, or (b) has at least five years' experience in any of the following positions or five years accumulated experience in two or more of them:
(1) a senior position in the business management of any corporate entity with a substantial scope of business;
(2) a senior public office or a senior position in the public service sector; or
(3) a senior position in the field of activity of the company.
The evaluation of the professional competence of a director is to be made by the board of directors.
According to the Companies Law and our Articles of Association, our External Directors serve for a three-year term following which they may stand for up to two additional terms of three years each. Re-election of an External Director for each additional period, beyond the first period, requires that he or she meets the Affiliation requirements and that he or she:
(1) is recommended for re-election by one or more shareholders holding at least 1% of all voting rights of the relevant company, and has no affiliations as listed in Section 245(a1)(1)(c) of the Companies Law;
(2) is recommended for re-election by the board of directors of the relevant company; or
(3) proposes his or her nomination; and
in each case, the nomination is approved by the general meeting of shareholders of the relevant company with the applicable majority requirements as provided by the Companies Law.
In addition, External Directors in companies such as Elbit Systems that are “dually listed” may stand for re-election for additional terms of up to three years each beyond the first three terms, provided:
(1) the audit committee and the board have each determined that in light of such External Director’s expertise and unique contribution to the work of the board and its committees, his or her nomination for an additional term of office is in the best interest of the company;
(2) his or her election was approved by the company's shareholders’ by a Special Uninterested Majority, provided that, in this regard, (a) a Personal Interest, excludes a Personal Interest that does not result from such shareholder’s relations with the controlling shareholder and (b) the External Director has no affiliations as listed in Section 245(a1)(1)(c) of the Companies Law); and
(3) the term of office of the respective External Director and the reasons of the audit committee and the board for the extension of the term were presented to the company's shareholders prior to their approval.
Our Articles of Association allow the External Directors of the Company to be elected to more than three terms of service. According to the Companies Law, any committee authorized to exercise powers of the Board must include at least one External Director, and all External Directors must be members of the Audit and Financial Statements Review Committee and the Compensation Committee.
Mrs. Shapira and Mr. Bar Nir currently serve as our Board’s External Directors. The first three-year term of office of Mrs. Shapira ends in November 2022. The first three-year term of office of Mr. Bar Nir ends in August 2023. Mr. Bar Nir was determined by the Board to have financial and accounting expertise under Israeli law, and Mrs. Shapira was determined by the Board to have the applicable “professional competence” to serve as an External Director.
Audit and Financial Statements Review Committee.
Pursuant to Sections 114 and 171(e) of the Companies Law, the Companies Regulations (Provisions and Terms for the Approval Process of the Financial Statements) – 5770 - 2010 (the Financial Statements Regulations), and Rule 5605(c)(1) of the Nasdaq Stock Market Inc. Market Place Rules (the Nasdaq rules), the Company has established an audit and financial statements review committee (the Audit and Financial Statements Review Committee) as a standing committee of its Board. In accordance with the requirements of the Companies Law and Financial Statements Regulations, the committee may act as either an “audit committee” or “financial statements review committee”. Together, in these two frameworks, the Audit and Financial Statements Review Committee performs the duties required under the Nasdaq Rules and the Companies Law to be performed by an “audit committee”, as well as the duties required under the Companies Law and the Financial Statements Regulations to be performed by a “financial statements review committee”.
Currently, Mr. Bar Nir (chair), Mr. Ben Zeev, Prof. Nisan, Mrs. Shapira and Prof. Tamir are members of the Audit and Financial Statements Review Committee. Mr. Ninveh is an observer in the meetings where the committee acts as a financial statements review committee.
SEC and Nasdaq rules require that our Audit and Financial Statements Review Committee be composed solely of independent directors and that at least one member of such committee be financia