UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2018
Commission File No. 0-28998
ELBIT SYSTEMS LTD.
(Exact name of registrant as specified in its charter and translation of registrant’s name into English)
Israel
(Jurisdiction of incorporation or organization)
Advanced Technology Center, Haifa 3100401, Israel
(Address of principal executive offices)
Joseph Gaspar
c/o Elbit Systems Ltd.
P.O. Box 539
Advanced Technology Center
Haifa 3100401
Israel
Tel: 972-77-294-6404
Fax: 972-77-294-6944
E-mail: j.gaspar@elbitsystems.com
(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:
Ordinary Shares, nominal value 1.0 New Israeli Shekels per share
(Title of Class)
The NASDAQ Global Select Market
(Name of each Exchange on which registered)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Not Applicable
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Not Applicable
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: 42,753,182 Ordinary Shares.
Indicate by check mark whether 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
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 and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted 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 and post such
files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange
Act (Check One).
Large accelerated filer
Non-accelerated filer
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.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included
in this filing.
U.S. GAAP
International Financial Reporting
Standards as issued by the International
Accounting Standards Board
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow.
Item 17
Item 18 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
Cautionary Statement with Respect to Forward-Looking Statements
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
Item 17.
Item 18.
Item 19.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees.
Major Shareholders and Related Party Transactions
Financial Information.
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures About Market Risk
Description of Securities Other than Equity Securities
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds.
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
Page
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2
2
3
13
29
30
52
69
70
71
72
88
90
90
90
90
91
92
92
92
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94
General Disclosure Standards
PART I
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, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements
relate to our current plans, estimates, strategies, goals and beliefs 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 “believe”, "estimate," “project”,
“expect”, “will likely result”, “strategy”, “plan”, “may”, “should”, “will”, “would”, “will be”, “will continue”, “will likely
result” and similar expressions, and the negatives thereof. Forward-looking statements are based on management’s current
expectations, estimates, projections and assumptions, 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:
•
•
•
•
•
•
•
•
the scope and length of customer contracts;
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;
differences in anticipated and actual program performance, including the ability to perform under long-
term fixed-price contracts;
the impact on our backlog from export restrictions by the Government of Israel;
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 and avoid, withstand and/or recover from cyber attacks on
our systems;
1
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•
•
•
the effect of competitive products, technology and pricing;
our ability to attract, incentivize and retain key employees;
changes in applicable tax rates;
fluctuations in foreign currency exchange 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. 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.
2
Item 3.
Key Information.
Selected Financial Data
The following selected consolidated financial data of the Company as of and for the years ended December 31,
2014, 2015, 2016, 2017 and 2018 are derived from our audited consolidated financial statements, including our audited
consolidated financial statements as of December 31, 2017 and 2018, and for each of the years ended December 31, 2016, 2017
and 2018, which appear in Item 18 in this annual report on Form 20-F. You should read the audited consolidated financial
statements appearing in Item 18 together with the selected financial data set forth below. (For more information regarding
GAAP and non-GAAP financial data see Item 5. Operating and Financial Review and Prospects.)
Years Ended December 31,
(U.S. dollars in millions, except for per share amounts)
2018
2016
2014
2015
2017
$ 3,107.6
2,210.5
897.1
243.4
239.4
145.7
—
628.5
268.6
(20.2)
0.2
248.6
46.2
4.5
206.9
(4.4)
202.5
$ 3,260.2
2,294.9
965.3
255.8
271.0
151.4
(17.6)
660.6
304.7
(23.7)
(1.7)
279.3
(45.6)
5.2
238.9
(1.9)
237.0
$
$ 3,377.8
2,374.8
1,003.0
265.1
280.2
133.3
—
678.6
324.4
(34.5)
(5.1)
284.8
(55.6)
11.4
240.6
(1.5)
239.1
$ 3,683.7
2,707.5
976.2
287.4
281.0
160.3
(45.4)
683.3
292.8
(44.1)
(11.4)
237.3
(26.4)
(2.2)
208.7
(1.9)
206.7
$
$
$
$
$
$
4.74
—
4.74
4.74
—
4.74
$
$
$
$
5.54
—
5.54
5.54
—
5.54
5.59
—
5.59
5.59
—
5.59
$
$
$
$
4.84
—
4.84
4.84
—
4.84
Income Statement Data:
Revenues
Cost of revenues
Gross profit
Research and development expenses, net
Marketing and selling expenses
General and administrative expenses
Gain from changes in holdings
Total operating expenses
Operating income
Financial expenses, net
Other income, net
Income before taxes on income
Taxes on income
Equity in net earnings of affiliated companies and partnerships
Net income
Less: net income attributable to non-controlling interests
Income attributable to Elbit Systems’ shareholders
Earnings per share:
Basic net earnings per share
Continuing operations
Discontinued operations
Total
Diluted net earnings per share
Continuing operations
Discontinued operations
Total
$ 2,958.2
2,133.2
825.0
228.0
216.5
139.6
(6.0)
578.1
246.9
(47.5)
0.1
199.5
25.6
5.5
179.4
(8.4)
171.0
$
$
$
$
$
4.01
—
4.01
4.01
—
4.01
3
$
$
$
$
$
As of December 31,
(U.S. dollars in millions, except for per share amounts)
2018
2016
2014
2017
2015
Balance Sheet Data:
Cash, cash equivalents, short-term bank deposits and
marketable securities
Working capital
Long-term deposits, marketable securities and other
receivables
Long-term trade and unbilled receivables
Property, plant and equipment, net
Total assets
Long-term debt
Series A Notes, net of current maturities
Capital stock
Elbit Systems shareholders’ equity
Non-controlling interests
Total equity
306
626
18
213
442
332
645
16
152
450
245
527
16
190
474
173
522
38
295
496
225
369
43
297
687
4,021
4,124
4,352
4,715
6,451
221
294
272
1,227
12
1,239
166
227
274
1,391
8
1,399
—
171
274
1,560
7
1,567
120
125
274
1,708
10
1,718
468
56
276
1,832
22
1,854
Number of outstanding ordinary shares of NIS 1 par value
(in thousands)
Dividends paid per ordinary share with respect to the
applicable year
42,685
42,730
42,746
42,751
42,753
$
1.28
$
1.44
$
1.60
$
1.76
$
1.76
Risk Factors
General Risks Related to Our Business and Market
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 military or other 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 geo-political events and macro-economic conditions that are beyond our control. Reduction or elimination of
government spending under our contracts would cause a negative effect on our revenues, results of operations, cash flow and
financial condition.
Certain of our contracts may be terminated for convenience of the customer. Our contracts with governments
often contain provisions permitting termination for convenience of the customer. Our subcontracts with non-governmental
prime contractors sometimes contain similar provisions permitting termination for the convenience of the prime contractors. In
a minority of contracts with such customers, an early termination for convenience would not entitle us to reimbursement for a
proportionate share of our fee or profit for work still in progress.
We depend on governmental approval of our exports. Our international sales, as well as our international
procurement of skilled human resources, technology and components, depend largely on export license approvals from the
governments of Israel, the U.S. and other countries. If we 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, revenues, assets,
liabilities and results of operations. (See Item 4. Information on the Company – Governmental Regulation.)
4
We are subject to government procurement and anti-bribery 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.) Failure to comply with these rules and regulations could result in
the modification, termination or reduction of the value of our contracts, the assessment of penalties and fines against us, or our
suspension or debarment from government contracting or subcontracting for a period of time, all of which could negatively
impact our results of operations and financial condition. We are engaged in activities in certain markets considered to be high
risk from an anti-bribery compliance perspective, and investigations by government agencies in a number of countries,
including Israel and the U.S., in the anti-bribery area are increasingly prevalent.
We face other 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, which could harm our business, financial condition and results of
operations. In addition to the other risks from international operations set forth elsewhere in these Risk Factors, some of the
risks of doing business internationally include international trade sanctions, imposition of tariffs and other trade barriers and
restrictions. Imposition of import restrictions or tariffs by any government could lead to retaliatory actions by other countries
with broad effects in many industries and economies internationally. Broad-based international trade conflicts 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 and increasing instances of terrorism worldwide. Some of these risks may be affected by Israel’s overall political
situation. (See “Risks Related to Our Israeli Operations” below.)
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 2S and 17.)
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), Euros, Brazilian
reals, Australian dollars and Indian rupees, and we incur a substantial amount of our 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 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 financial condition and
financial results. (See below “Risks Related to Our Israeli Operations – Changes in the U.S. Dollar – NIS Exchange Rate” and
Item 5. Operating and Financial Review and Prospects – Impact of Inflation and Exchange Rates.)
We operate in a competitive industry. The markets in which we participate are highly competitive and
characterized by technological change. If we are unable to improve existing systems and products and develop new systems and
technologies in order to meet evolving customer demands, our business could be adversely affected. In addition, our
competitors could introduce new products with innovative capabilities, which could adversely affect our business. 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.
Due to consolidation in our industry, we are more 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. Failure to maintain good business relations with these major contractors could negatively impact our
business.
5
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 a 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 2T (Significant Accounting Policies - Revenue Recognition).) The costs most likely
to fluctuate under our fixed price contracts relate to internal design and engineering efforts. However, we do not believe
changes in the market costs of particular commodities that may be 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 would have a negative effect on our results of operations, financial position 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 2T
(Significant Accounting Policies - Revenue Recognition).) 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 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 may experience production delays 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 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. The foregoing risks could
have a material adverse effect on our operating results.
We may be affected by failures of our prime contractors. We often act as a subcontractor, and a failure of our
prime contractor to meet its obligations may affect our ability to receive payments under our subcontract.
Undetected problems in our products could impair our financial results and give rise to potential product
liability claims. If there are defects in the design, production or testing of our or our subcontractors’ products and systems,
including our products sold for public safety purposes in the homeland security area, we could face substantial repair,
replacement or service costs, potential liability and damage to our reputation. 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, results of operations and financial condition.
Our future success depends on our ability to develop new offerings and technologies. The markets we serve are
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. Accordingly, our future success will require that we:
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•
identify emerging technological trends;
identify additional uses for our existing technology to address customer needs;
develop 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 will need to 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
receiving the contract 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 impact on our business, results of
operations, financial condition and cash flows.
Our business depends on proprietary technology that may be infringed. 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
patents, trade secrets, copyrights and trademarks, together with 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 technology may be limited because:
•
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•
intellectual property laws in certain jurisdictions may be relatively ineffective;
detecting infringements and enforcing proprietary rights 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 intellectual property rights; and
•
competitors may register patents in technologies relevant to our business areas.
In addition, various parties 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, results of operation or
financial condition.
7
A cyber or security breach or disruption or failure in a computer system could adversely affect us. Our
operations depend on the continued and secure functioning of our computer and communications systems and the protection of
information stored in computer databases maintained by us and, in certain circumstances, by third parties. Such systems and
databases are subject to breach, damage, disruption or failure from, among other things, cyber attacks and other unauthorized
intrusions, power losses, telecommunications failures, earthquakes, fires and other natural disasters.
We have been subject to attempted cyber attacks and face ongoing threats to our computer and communications
systems and databases of unauthorized access, computer hackers, computer viruses, malicious code, cyber crime, organized
cyber attacks and other security problems and system disruptions. In particular, we may be targeted by experienced computer
programmers and hackers (including those sponsored by foreign governments or terrorist organizations) who may attempt to
penetrate our cyber security defenses and damage or disrupt our computer and communications systems and misappropriate or
compromise our intellectual property or other confidential information or that of our customers.
Governmental and other end users and customers are increasingly requiring us to meet specific computer system
cyber protection and information assurance requirements and standards as a condition for us to receive customer program-
related information. We devote significant resources to maintain and upgrade 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, 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,
financial condition and results of operations.
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 drawdown against advance payment guarantees if we were to default under the applicable contract.
In addition, some customers require that the payment period under the contract 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, if we are required to provide significant financing for our programs, this could result in increased leverage on our
balance sheet. (See Item 4. Information on the Company – Financing Terms.)
We are subject to buy-back obligations. A number of our international programs require us to meet “buy-back”
obligations. (See Item 5. Operating and Financial Review and Prospects – Off Balance Sheet Transactions.) Should we, or the
local companies we contract with, be unable to meet such obligations we may be subject to contractual penalties, and our
chances of receiving further business from the applicable customers could be reduced or, in certain cases, eliminated.
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.
We would be adversely affected if we are unable to retain key employees. Our success depends in part on key
management, scientific and technical personnel and our continuing ability to attract and retain highly qualified personnel. There
is competition for the services of such personnel. The loss of the services of key personnel, and the failure to attract highly
qualified personnel in the future, may have a negative impact on our business. Moreover, our competitors may hire and gain
access to the expertise of our former employees.
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 which 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, or any related tax interest or
penalties that could significantly affect our income tax expense for the period in which the settlements take place. In addition,
as we operate in multiple jurisdictions throughout the world, our tax returns are periodically audited or subject to review by
both domestic and foreign authorities. Increases in our effective tax rates from the above factors could have a material adverse
effect on our financial results and cash flows.
8
The Organization for Economic Cooperation and Development has introduced the base erosion and profit shifting
(BEPS) project. The BEPS project contemplates changes to numerous international tax principles, as well as national tax
incentives, and these changes, if adopted by individual countries, could adversely affect our provision for income taxes.
Recently enacted tax legislation in the United States may impact our business. On December 22, 2017, the U.S.
President signed into law federal tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act
provides for significant and wide-ranging changes to the U.S. Internal Revenue Code. Among a number of significant changes
to the current U.S. federal income tax rules, the Tax Cuts and Jobs Act reduced the marginal U.S. corporate income tax rate
from 35% to 21%, limited the deduction for net interest expense, shifted the United States toward a more territorial tax system
and imposed new taxes to combat erosion of the U.S. federal income tax base. Our financial statements for the year ended
December 31, 2018 reflect the effects of the Tax Cuts and Jobs Act based on current guidance. However, there are uncertainties
and ambiguities in the application of certain provisions of the Tax Cuts and Jobs Act, and as a result we made certain judgments
and assumptions in the interpretation thereof. The U.S. Treasury Department and the Internal Revenue Service may issue
further guidance on how the provisions of the Tax Cuts and Jobs Act will be applied or otherwise administered that differs from
our current interpretation. In addition, the Tax Cuts and Jobs Act could be subject to potential amendments and technical
corrections, any of which could materially lessen or increase certain adverse impacts of the legislation on us. As we further
analyze the impact of the Tax Cuts and Jobs Act and collect relevant information, we may make adjustments to the provisional
amounts.
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 as a result of future acquisitions of companies. We have faced and may face future 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 negatively impact our results of operations.
We face acquisition and integration risks. From time to time we make equity or asset acquisitions and
investments in companies and technology ventures such as our 2018 acquisitions of IMI Systems Ltd. (IMI) and Universal
Avionics Systems Corporation. 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.) Such acquisitions involve risks and uncertainties such as:
• our pre-acquisition due diligence may fail to identify material risks;
• significant acquisitions may negatively impact our 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;
• we may fail to achieve the strategic objectives, cost savings and other benefits expected from acquisitions;
•
the technologies acquired may not prove to be those needed to be successful in our markets or may not have
adequate intellectual property rights protection;
• we may assume significant liabilities 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 to retain key employees of the acquired businesses;
•
the attention of senior management may be diverted from our existing operations;
9
• 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.
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 financial condition and results of operation.
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. We may also be unable
to obtain antitrust approvals for certain acquisitions as our operations expand. Failure to obtain such governmental approvals
could negatively impact our future business and prospects.
Our 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 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 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 and homeland security industries; (iv) general market or economic 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.
Being a foreign private issuer exempts us from certain SEC requirements. As a foreign private issuer within the
meaning of rules promulgated under the U.S. Securities and Exchange Act of 1934 (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 will receive less information about our company and trading in
our shares by our affiliates than would be provided to shareholders of a domestic U.S. company, and our shareholders will be
afforded less protection under the U.S. federal securities laws than would be afforded to shareholders of a domestic U.S.
company.
We have a major shareholder with significant influence over certain matters requiring shareholder approval.
Federmann Enterprises Ltd. (FEL) owns approximately 46% of our ordinary shares, directly and indirectly. Therefore, subject
to shareholder approval special majority requirements under 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 who are not External Directors. Michael Federmann, who serves as the chair of our board of directors, is (through
entities in 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 ordinary shares owned by FEL. (See below - Item
6. Directors, Senior Management and Employees - Board Practices - Appointment of Directors and - External Directors and
Item 10. Additional Information - Approval of Certain Transactions and - Provisions Relating to Major Shareholders.)
We have risks related to our issuance of Series A Notes under an Israeli debt offering. We face various risks
relating to our issuance of Series A Notes (the Notes). (See Items 5. Operating and Financial Review and Prospects - Liquidity
and Capital Resources - Israeli Debt Offering.) This includes the risk that we may not be able to maintain in the future the
rating level assigned to the Notes.
10
We have risks related to the inherent limitations of internal control systems. Despite our internal control
measures, we may still be subject to financial reporting errors or even fraud, which may not be detected. 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 design of a control system must reflect the fact
that there are resource constraints, and the benefit of controls must be relative to their costs. Implementation of changes or
updates to our control systems may encounter unexpected difficulties. 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.)
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. An ongoing state of hostility, varying in degree and intensity,
has caused security and economic problems for Israel. We cannot predict whether or when such armed conflicts or other
hostilities may occur or the extent to which such events may impact us. For a number of years there have been continuing
hostilities between Israel and the Palestinians. This includes hostilities with the Islamic movement Hamas in the Gaza Strip,
which have adversely affected the peace process and at times resulted in armed conflicts. Such hostilities have negatively
influenced Israel’s economy as well as impaired Israel’s relationships with several other countries. Israel also faces threats from
Hezbollah militants in Lebanon, as well as Iranian forces in Syria and from terrorist-affiliated groups in the Sinai Peninsula.
The government of Iran, which is believed to be developing nuclear weapons, is extremely hostile to Israel and influences
extremists groups such as Hamas and Hezbollah. Moreover, some of Israel’s neighboring countries have recently undergone or
are undergoing significant political changes. These political, economic and military conditions in Israel and the Middle East
could have a material adverse effect on our business, financial condition, results of operations and future growth.
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 and others doing business with Israel, as well as with Israeli companies or with
Israeli-owned companies operating in other countries. Also, over the past several years there have been calls in various
countries and international organizations to reduce trade with Israel. 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 “General
Risks Related to Our Business and Market.” There can be no assurance that restrictive laws, policies or practices directed
towards Israel or Israeli businesses will not have an adverse impact on our business.
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 “General Risks Related to Our Business and Market.” Any of the foregoing circumstances could have an
adverse effect on our operations.
Israel’s economy may become unstable. From time to time Israel’s economy may experience inflation or
deflation, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. 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. Reoccurrence of previous destabilizing factors could make it more difficult for
us to operate our business as we have in the past and could adversely affect our business.
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 government of Israel 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.
11
Israeli law regulates acquisition of a controlling interest in Israeli defense industries. Israeli legislation
regarding the domestic defense industry requires Israeli government approval of an acquisition of a 25% or more equity interest
(or a smaller percentage that constitutes a “controlling interest”) in companies such as Elbit Systems. Such approval may be
subject to additional conditions relating to transfers of ownership. This could limit the ability of a potential purchaser to acquire
a significant interest in our shares Such restrictive conditions can also apply to Israeli defense companies we acquire, such as
IMI. (See Item 4. Information on the Company – Governmental Regulation – Approval of Israeli Defense Acquisitions.)
Israel has stringent export control regulations. Israeli law regulates the export of defense products and systems
and “dual use” items (items that are typically sold in the commercial market but that may also be used in the defense market). If
government approvals required under these laws and regulations are not obtained, or if authorizations previously granted are
not renewed or canceled, our ability to export our products from Israel could be negatively impacted, thus causing a reduction
in our revenues and a potential material negative impact on our financial results. (See Item 4. Information on the Company –
Governmental Regulation – Israeli Export Regulations.)
We may rely on certain Israel “home country” corporate governance practices which may not afford
stockholders 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 for domestic U.S. issuers.
As described in Item 16G. Corporate Governance, in March 2018 we informed NASDAQ that we have elected to follow certain
procedures permitted under the Israeli Companies Law instead of the Nasdaq Listing Rules, which require a listed company to
obtain shareholder approval for the establishment of an equity-based compensation plan. Under this “home country practice”
exception provided in Nasdaq 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 Listing Rules of the Nasdaq Stock Market 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 adult male and certain female citizens and permanent residents are obligated to perform annual military
reserve duty up to a specified age. They also may be called to active duty at any time under emergency circumstances, which
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 outside 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. Additionally, 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.)
12
Item 4.
Information on the Company.
Business Overview
Major Activities
We are an international high technology company engaged in a wide range of programs throughout
the world. 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 support
services.
Our major activities include:
• military aircraft and helicopter systems;
•
•
•
•
commercial aviation systems and aerostructures;
unmanned aircraft systems and unmanned surface vessels;
electro-optic and countermeasures systems;
land vehicle systems;
• munitions;
•
•
command, control, communications, computer,intelligence, surveillance and reconnaissance
(C4ISR) and cyber systems;
electronic warfare and signal intelligence systems; and
•
commercial cyber security products and other commercial activities.
Many of these major activities have a number of common and related elements. 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
We operate primarily in the defense and homeland security arenas. There have been recent increased
budgetary allocations in these areas in the U.S. and certain European countries, as well as reduced budgetary
allocations in certain Latin American and other countries. The nature of military and homeland security actions in
recent years, including low intensity conflicts and ongoing terrorist activities, as well as budgetary pressures to
focus on leaner but more technically advanced forces, have caused a shift in the defense and homeland security
priorities for many of our major customers. As a result we believe there is a continued demand in the areas of
C4ISR systems, network centric information systems, intelligence gathering systems, border and perimeter
security systems, unmanned aircraft systems (UAS), unmanned surface vessels (USVs), remote controlled
systems, precision munitions, vehicle survivability and protection systems, cyber-defense systems, space and
satellite based defense capabilities and homeland security solutions. There is also 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 individual 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. We are experienced in
providing “systems of systems”, which enables us to provide overall solutions in a range of areas to meet our
customers’ comprehensive defense, homeland security and safety needs.
13
Company History
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.
Elbit Systems Ltd. is a corporation domiciled and incorporated in Israel where we operate in
accordance with the provisions of the Israeli Companies Law – 1999 (the Companies Law).
Trading Symbols and Address
Our shares are traded on the Nasdaq Global Select Market (Nasdaq), under the symbol “ESLT”, and
on the Tel-Aviv Stock Exchange (TASE).
Our main offices are in the Advanced Technology Center, Haifa 3100401, Israel, and our main
telephone number at that address is (972-77-2945315) . 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 on Form 20-F.
Our principal offices in the United States are the headquarters of Elbit Systems of America, LLC at
4700 Marine Creek Parkway, Fort Worth, Texas 76179-6969, and the main telephone number at that address is
817-234-6799.
Revenues
In recent years we have achieved the highest level of defense-related revenues of any Israeli-based
company. The table below shows our consolidated revenues by major areas of operations for the years ended
December 31, 2016, 2017 and 2018:
2016
2017
(U.S. dollars in millions)
2018
Airborne systems
C4ISR systems
Land systems
Electro-optic systems
Other (mainly non-defense engineering and production services)
Total
$
$
1,242
1,221
408
276
113
3,260
$
$
1,272
1,145
504
341
116
3,378
$
$
1,470
1,130
649
334
101
3,684
The following table provides our consolidated revenues by geographic region, expressed as a
percentage of total revenues for the years ended December 31, 2016, 2017 and 2018:
Israel
North America
Europe
Asia-Pacific
Latin America
Others
2016
2017
2018
(U.S. dollars in millions)
22%
25%
20%
25%
6%
2%
22%
25%
23%
20%
6%
5%
20%
27%
20%
21%
5%
7%
14
Subsidiary Organizational Structure
Our beneficial ownership interest in our major subsidiaries and investees 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.
Elbit Systems of America
Elbit Systems of America, LLC (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
and Boca Raton, Florida. Elbit Systems of America also has a 50% interest in a joint venture with Collins
Aerospace, a unit of United 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 major operational facilities has engineering and manufacturing capabilities.
Elbit Systems of America’s facilities in Alabama and Texas 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.
Elop. Based in Rehovot, Israel, Elbit Systems Electro-Optics Elop Ltd. (Elop) designs, engineers,
manufactures and supports a wide range of electro-optic systems and products mainly for defense, space and
homeland security applications for customers worldwide.
ESLC. Headquartered in Netanya, Israel, Elbit Systems Land and C4I Ltd. (ESLC) is engaged in the
worldwide market for land-based systems and products for armored and other military vehicles, artillery and
mortar systems, C4ISR systems, cyber intelligence solutions, homeland security solutions, data links and radio
communication systems and equipment.
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.
IMI. Based in Ramat HaSharon, Israel, IMI Systems Ltd. (IMI) is engaged in the design and
manufacture of a wide range of precision munitions and armored vehicle survivability and protection systems for
defense and homeland security applications.
15
Merger, 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 enables us to benefit from the synergy of our overall capabilities while at the same time
focus on local requirements.
During 2018 and the beginning of 2019, we continued to invest resources in these activities
including investing in, and the acquisition of, companies and businesses in Israel, North America, South America
and Europe. See Item 18. Financial Statements - Notes 1C and 6B. We continue to actively pursue acquisition
and investment opportunities that meet our strategic goals and acquisition criteria in key markets.
In April 2018, we completed the acquisition of the assets and operations of the privately-owned U.S.
company Universal Avionics Systems Corporation (Universal) for a purchase price of approximately $120 million.
Headquartered in Tucson, Arizona, and operating in several facilities across the U.S., Universal is a developer and
manufacturer of commercial avionics systems for the retrofit and forward-fit market, for a wide range of fixed-wing
and rotary-wing aircraft types. Universal’s solutions include flight management systems, displays, communication
systems, complete cockpit solutions and additional advanced commercial avionics systems, which are complementary
to Elbit Systems’ commercial enhanced flight vision systems and head-up display product lines. Following the
acquisition, Universal’s business continues to operate as a wholly-owned U.S. subsidiary of Elbit Systems. See Item
18. Financial Statements - Note 1C(1).
During 2018, we continued to participate as a potential purchaser in the tender process
administered by the Israeli Government for the privatization and sale of IMI, an Israeli company engaged
primarily in the design and manufacture of a wide portfolio of advanced munitions as well as armored vehicle
survivability and protection systems. In November 2018, we completed the acquisition of 100% of the ownership
interest in IMI from the Israeli Government, for a total purchase price of approximately $495 million.
Approximately $106 million of the purchase price are deferred payments payable in part at the end of 2020 and
part at the end of 2022. Approximately $27 million of the purchase price is contingent consideration subject to
IMI achieving agreed upon performance goals, and which is payable upon IMI's achievement of such goals. As
part of our obligations related to the acquisition, we are required to evacuate certain of IMI's current premises in
Israel over specified periods, and we will be entitled to receive from the Israeli Government premises evacuation
grants and reimbursement of expenses, upon achieving specified milestones in connection with the relocations. A
summary of the IMI acquisition agreements is attached as an exhibit to this annual report. See also Item 18.
Financial Statements - Note 1C(3).
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 interrelated manner and
on a project-oriented basis. This means that contracts are frequently performed by more than one operating
subsidiary or division within the Company, on the basis of the multiple skills and available resources that may be
needed or appropriate for the contract. Thus, the involvement of a particular operating subsidiary or division in the
performance of a contract is not a function of management’s review of such subsidiary’s or division’s operating
results for purposes of allocation of resources within the Company.
Military Aircraft and Helicopter Systems
We supply advanced airborne systems and products to leading military aircraft manufacturers and
end users designed to enhance operational capabilities and extend aircraft life cycles. Our airborne systems
provide a range of solutions 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 aircraft and helicopter upgrade
programs, we integrate advanced electronic, communication, navigation, electro-optic and EW systems. 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.
16
Our military fixed-wing aircraft and helicopter systems and products include a broad range of
avionic systems, such as integrated flight deck systems, mission management computers, displays, digital maps
and digital recorders. Our portfolio also includes airborne electro-optic systems such as head-up displays,
airborne intelligence gathering systems, precision guidance systems, aircraft structural components and a range of
aircraft tactical, virtual, appended and embedded trainers and simulators.
We design and supply advanced helmet mounted systems (HMS), including helmet mounted
displays for fixed-wing aircraft and rotary aircraft pilots. These systems and displays include tracking and display
systems for day and night flying. Our systems measure the pilot’s line-of-sight, slave applicable systems to the
target, identify target location and bring displays to the pilot’s eye level. We supply our HMS as part of our
upgrade programs and on a stand-alone basis. Through our 50% joint venture with Collins Aerospace (see above
“Subsidiary Organizational Structure – Elbit Systems of America”), we are a leader in HMS for fighter aircraft.
The customers and end users for our military fixed-wing aircraft and helicopter programs include a
wide range of air forces and other governmental defense and homeland security forces worldwide, as well as
major fixed-wing aircraft and helicopter manufacturers.
Commercial Aviation Systems and Aerostructures
We provide a range of systems and products for the commercial and business aviation market that
are employed on fixed-wing aircraft and commercial helicopters. We also produce aerostructure products that are
installed on commercial aircraft. Our portfolio of systems in the business aviation, commercial helicopter and air
transport areas includes 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 beans and winglets. Customers for our business
aviation, air transport and commercial helicopters systems and products include major fixed-wing aircraft and
helicopter manufacturers and operators around the world.
UAS (Unmanned Aircraft Systems) and USVs (Unmanned Surface Vessels)
We design and supply integrated UAS (sometimes referred to as remote piloted vehicles or RPVs)
for a range of applications and UAS training systems with capabilities to simulate payload performance,
malfunctions and ground control station operation. We design and supply command and control ground station
elements, engines, data links, stabilized electro-optic payloads and electronic intelligence (ELINT) and
communications intelligence (COMINT) payloads that can be adapted for various types of UAS. Our UAS
technology has also been applied to our USV activities, where we are developing USVs for a range of naval
applications. We perform development, supply, lease and support services and training activities relating to UAS
and USVs. Customers for our UAS and USVs include armed forces and other governmental and non-
governmental organizations around the world.
Electro-Optic and Countermeasures Systems
We design and manufacture electro-optic-based solutions for space, air, land and sea applications.
Our electro-optic products include laser and thermal imaging systems, head-up displays, countermeasure systems
and ISR systems, including payloads for space, airborne, naval and land-based missions. Our products in this area
also include ground integrated sights and homeland security solutions. We are one of the few companies in the
world that has engineering capability and facilities in-house in all major areas of electro-optics. Also, in the space
area, we maintain in-house Israel’s national space electro-optics infrastructure.
Our portfolio of electro-optic systems and products includes forward looking infrared (FLIR)
systems for night observation, laser range-finders and laser radars, stabilized payloads, electro-optic-based ISR
systems and directional IR countermeasure (DIRCM) 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,
fiber optic intrusion detection systems and transportation protection systems. Our customers include armed forces
of numerous governments, major defense contractors, homeland security agencies, critical infrastructure
authorities and owners of VIP aircraft.
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Land Vehicle Systems
We upgrade and modernize tanks, other combat vehicles and artillery platforms, both as a prime
contractor and as a systems supplier to leading platform manufacturers. Our land vehicle and platform solutions
cover 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 including main battle tanks, medium and light tanks, light armored vehicles, armored personnel carriers,
wheeled vehicles and artillery platforms. We develop and supply cutting edge armored vehicle survivability and
protection systems. We offer a range of artillery and mortar solutions. We also develop and supply unmanned
ground vehicles and robotic devices for a variety of land based missions. 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 (for land and naval platforms), unmanned ground
vehicles, combat vehicle C4I systems, targeting systems, artillery gun and mortar systems, driver thermal vision
systems, life support systems, auxiliary power units and hydraulic systems. We are engaged in land vehicle
systems programs, from comprehensive vehicle modernization programs, to standalone system supply to vehicle
manufacturers to life cycle support programs. Customers for our land vehicle systems include armed forces and
homeland security agencies, as well as major military vehicle manufacturers around the world.
Munitions
Following our recent acquisition of IMI (see above "Mergers, Acquisitions and Divestitures"), we
develop and manufacture a diverse range of advanced munitions for land, air and sea applications for defense and
homeland security forces. Our munitions portfolio includes 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 flame products to protect aircraft
against the threat of air-to-air and air-to-ground heat-seeking missiles. Customers for our munitions products
include armed forces and homeland security agencies around the world.
C4I and Cyber Systems
We produce land, airborne and naval C4I and cyber intelligence systems providing networked
combat solutions ranging from the lower combat echelons up to the highest command levels. We supply our
systems as part of turn-key solutions as well as on a standalone basis. Our solutions cater to all types of military
combatants as well as to homeland security forces and first responders, and can be integrated into military and
other types of land, air and sea platforms, providing comprehensive net-centric solutions for low intensity
conflicts, counter-terror activities and other types of military challenges. We provide a wide range of advance
communications and network solutions for land, navy and air force applications, supporting a full range of
military video, data and voice network needs. Our systems provide cyber intelligence solutions to diverse law
enforcement agencies and intelligence organizations as well as cyber solutions to the defense and homeland
security domains.
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 and which support joint operations for all force
echelons. Our portfolio also includes 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 and tactical battle company training systems. In the cyber intelligence
area we supply a comprehensive suite of solutions providing intelligence and law enforcement agencies with 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. Our radio and communications
portfolio enables deployment of a full military network for the complete range of scenarios and terrain. 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.
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We perform programs under which 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 customers include
cross-domain forces and a wide range of governmental agencies worldwide.
EW and SIGINT Systems
We supply multi-spectral EW self-protection suites and systems for airborne, ground and naval
platforms, including advanced electronic countermeasure (ECM) systems for radar, missiles and communication
and electronic support measure (ESM) solutions, including missile warning systems, laser warning systems and
radar warning receivers. We also furnish SIGINT systems, including ELINT, COMINT and direction finding
systems, designed for air, ground and naval platforms and applications, as well as counter-drone systems.
Our portfolio in the EW and SIGINT areas includes protection, intelligence and communications
solutions for air, ground and naval 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 rotor platforms. In addition, we
provide ESM for threat identification. We also provide SIGINT systems for tactical and strategic intelligence
gathering including ELINT and ECM 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. Customers for our EW, SIGINT and
COMINT systems include governmental armed forces and homeland security agencies as well as major defense
contractors.
Commercial Cyber Protection Products and Other Commercial Activities
We provide commercial cyber protection products to enable commercial enterprises to rapidly detect
advanced cyber threats, protect critical infrastructures, automate security operations center workflows and train
cyber security staff. Our solutions utilize machine learning, Big Data and continuous technology advancements.
Customers include a range of commercial, financial and industrial enterprises.
We also engage in a range of other technologies for commercial applications and activities. Our
current commercial activities, in addition to the activities described under “Commercial Aviation Systems and
Aerostructures” above, include, among others, medical diagnostic equipment, automotive night vision
enhancement equipment, smart glasses for sports applications and super capacitor energy sources and fuel cells
for transportation applications.
Property, Plant and Equipment
Facilities Owned or Leased by the Company
Owned
Leased
(1)
(2)
Israel(1)
U.S.(2)
2,816,000 square feet
6,574,000 square feet
808,000 square feet
787,000 square feet
Other Countries(3)
1,097,000 square feet
525,000 square feet
Includes offices, development and engineering facilities, manufacturing facilities, maintenance
facilities, hangar facilities and landing strips in various locations in Israel. IMI's facilities are located
in several facilities throughout Israel, of which 641,211 square feet are owned and 4,247,539 square
feet are leased.
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 Texas, New Hampshire and Alabama are located on owned
land totaling approximately 129 acres. 318,570 square feet of the leased facilities are sublet to a third
party. In addition, there is a 942,344 square feet ground lease, of which 629,910 square feet are
sublet to a third party. Universal's facilities are located in Arizona, Washington, Georgia and Kansas,
of which 174,000 square feet are owned and 125,000 are leased.
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(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 $88
million. We believe that our current facilities are adequate for our operations as now conducted.
Governmental Regulation
Government Contracting Regulations. We operate under laws, regulations, administrative rules and
other legal requirements governing defense and other government contracts, mainly in Israel and the United
States. Some of these legal requirements carry major penalty provisions for non-compliance, including
disqualification from participating in future contracts. In addition, our participation in governmental procurement
processes in Israel, the United States and other countries is subject to specific regulations governing the conduct
of the process of procuring defense and homeland security contracts, including increasing requirements in the area
of cyber production and information assurance.
Israeli Export Regulations. Israel’s defense export policy regulates the sale of a number of our
systems and products. 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 2018, 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 military technical data and technical services to Israel and other countries is subject to
applicable approvals of the U.S. government under the U.S. International Traffic in Arms Regulations (ITAR) and
the U.S. Export Administration Regulations (EAR). Such approvals are typically in the form of an export license,
and for defense technology or services in the form of a technical assistance agreement (TAA). Other U.S.
companies wishing to export defense products or military related services and technology to our Israeli and other
non-U.S. entities are also required to obtain such export licenses and TAAs. Such approvals apply to U.S. origin
data required by our non-U.S. entities to perform work for U.S. programs. Licenses are also required for Israeli
nationals assigned to work in defense-related technical areas at our U.S. affiliated companies. An application for
an export license or a TAA requires disclosure of the intended sales of the product and the use of the technology.
Pursuant to export control reform initiatives in the U.S., a greater part of Elbit Systems of America’s and our U.S.
suppliers’ activities are becoming subject to control under the EAR, and some of Universal Avionics products are
subject to export control under the EAR. The U.S. government may deny an export authorization if it determines
that a transaction is counter to U.S. policy or national security. Other governments’ export regulations also affect
our business from time to time, particularly with respect to end user restrictions of our suppliers’ governments.
Approval of Israeli Defense Acquisitions
The Israeli Defense Entities Law (Protection of Defense Interests) establishes conditions for the
approval of an acquisition or transfer 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 Economy Minister. Although no such order for Elbit Systems has
been issued as of the date of this annual report on Form 20-F, it is assumed that Elbit Systems and most of our
Israeli subsidiaries will be designated as “defense entities” under the law and that the Israeli Government will
issue such an order regarding our applicable Israeli companies. Prior to our acquisition of IMI (see above "Recent
Mergers, Acquisition and Divestitures"), the Israel 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 entities” by the Defense Minister with respect to
Israeli law governing various aspects of defense security arrangements.
20
Orders to be issued under the Israeli Defense Entities Law will also establish other 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 25% or more of the voting securities or a smaller
percentage of shares that grant “means of control.” Means of control for purposes of the law include the right to
control the vote 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; and (4) subject a defense entity’s entering into international joint ventures and transferring certain
technology to the approval of the IMOD.
Approval of U.S. and Other Defense Acquisitions. Many countries in addition to Israel also 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 and National Security Act (FINSA). Under FINSA, 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). In August 2018, the U.S. Government enacted the Foreign
Investment Risk Review Modernization Act, which expands the scope of CFIUS' activities.
“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 50%
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. 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 requirements. Such regulations also include provisions relating to the avoidance of human trafficking
and counterfeit parts in the supply chain.
Anti-Bribery 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 Organization for Economic Cooperation and Development (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 an anti-bribery compliance program, including specific procedures, record
keeping and training.
Munitions Regulations. Sales of certain types of munitions produced by IMI are subject to various
domestic laws and international conventions.
21
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. 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.
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 or safety impact.
Buy-Back
As part of their standard contractual requirements for defense programs, several of our customers
include “buy-back” 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 and transfer of know-how. (For further information about
buy-back obligations, see Item 5. Operating and Financial Review and Prospects – Off-Balance Sheet
Transactions.)
Financing Terms
Types of Financing. There are several types of financing terms applicable to our defense 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, have recourse to us in the event of a default in payment by our customers. 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 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.)
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Performance Guarantees. A number of projects require us to provide performance guarantees in an
amount equal to a percentage of the contract price. In certain cases we also provide guarantees related to the
performance of buy-back 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 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 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 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.
Intellectual Property
Patents, Trademarks and Trade Secrets. We own hundreds of living patent families including
patents and applications registered or filed in Israel, the United States, the European Patent Office and other
countries. 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, development
processes and production 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 – General Risks Related
to Our Business and Market.)
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 IDF. This
generally includes the right to disclose the information to third parties, including other defense contractors that
may be our competitors. When the IMOD funds research and development, it usually acquires rights in the data
developed under such funding. We often may retain a non-exclusive license for such inventions. The Israeli
government usually is entitled to receive royalties on export sales in relation to sales resulting from government
financed development. However, if only the product is purchased without development effort, we normally retain
the principal rights to the technology. Sales of our products to the U.S. government and some other customers are
subject to similar conditions. Subject to applicable law, regulations and contract requirements, we attempt to
maintain our intellectual property rights and provide customers with the right to use the technology only for the
specific project under contract.
Licensing. There are relatively few cases where we manufacture under license. Such licenses
typically apply to the use of technologies that are the result of collaboration with academic institutions or where
we are manufacturing another company’s product in accordance with that company’s specifications. In such cases,
the licensor typically is entitled to royalties or other types of compensation. In some cases where we have
acquired business lines we obtain a royalty free license to use the applicable technology for specified applications.
We also obtain licenses to use software tools in our engineering and development activities and utilize open source
software licenses in projects where such use is appropriate. Occasionally, we license parts of our intellectual
property to customers 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 use certain of our intellectual property
relating to our training and simulation systems.
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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.
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. More than 50% of our total workforce is engaged in research,
development and engineering.
Our companies in Israel have collectively been awarded the Israel Defense Prize twelve times,
recognizing extraordinary contributions to defense technological innovations.
Our customers, the Israel Innovation Authority in the Ministry of Economy and Industry (formerly
Office of Chief Scientist) and other R&D granting authorities sometimes participate in our R&D funding. We also
invest in our 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,
2016, 2017 and 2018.
2016
2017
(U.S. dollars in millions)
2018
Total Investment
Less Participation*
Net Investment
$
$
291.7
(36.0)
255.7
$
$
301.4
(36.3)
265.1
$
$
317.7
(30.3)
287.4
* See above “Government Rights in Data” and see below – “Conditions in Israel – Israel Innovation Authority
and Investment Center Funding.”
Manufacturing
We manufacture and assemble our systems and products at our operational facilities in Israel, the
U.S., Europe, Brazil and Australia and at the facilities of certain of our subsidiaries in other countries. These
facilities contain warehouses, electronic manufacturing areas, mechanical workshops, final assembly and test
stations with test equipment. We also have supporting infrastructure including fully automated surface mount
technology lines and clean rooms for electro-optic components, solid state components integration, environmental
testing and final testing, including space simulation and thermal chambers. We also have computerized logistics
systems for managing manufacturing and material supply. A number of our manufacturing activities are provided
on a shared services basis by several of our in-house centers of excellence.
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.
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Environmental Compliance
As part of overall Company policy, we are committed to environmental, health and safety standards
in all aspects of our operations. This includes all regulatory requirements as well as compliance with ISO-14001
and OSHAS-1800 standards. We also conduct a number of measures on an ongoing basis to promote
environmentally friendly operational practices, including measures to reduce electrical, fuel and water
consumption and to increase recycling. There are no material environmental issues that affect the Company’s use
of our facilities. See also “Social Sustainability” below.
Seasonality
Although revenues may sometimes increase towards the end of a fiscal year, no material portion of
the Company’s business is considered to be seasonal. The timing of revenue recognition is based on several
factors. (See Item 5. Operating and Financial Review and Prospects – General – Critical Accounting Policies and
Estimates – Revenue Recognition.)
Supply Chain
We conduct supply chain activities that consist of procurement, logistics and planning at most of our
operational facilities. We use a “hybrid” operating model that combines global commodities categories
management with divisional supply chain management. This model facilitates levering economy of scale,
develops centers of excellence and reduces supply chain risks. We generally are not dependent on single sources
of supply. We manage our inventory according to project requirements. In some projects, specific major
subcontractors are designated by the customer. Raw materials used by us are generally available from a range of
suppliers internationally, and the prices of such materials are generally not subject to significant volatility. We
monitor the on-time delivery and the quality of our contractors and encourage them to continuously improve their
performance. We also require our suppliers to adhere to our Supplier Code of Conduct and to comply with a range
of procurement compliance standards, including those relating to the avoidance of human trafficking, counterfeit
parts and conflict minerals.
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. 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 and management tools,
assists us in providing high quality and on-time implementation of projects. We are in the process of implementing
a “One-ERP” (enterprise resource planning) system, with a goal of consolidating uniform best practices for
quality and operations across the organization. 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), AS9115 for software, ISO-14001, OHSAS 18001, FAA Part 145 and
European Aviation Safety Agency (EASA) Part 145 for maintaining civil products and Part 21 G for production of
civil products. Most of our operational sites in Israel are also certified for ISO-27001 (Information Security
Management System). Representatives of our customers generally test our products before acceptance. A number
of our customers have authorized us to conduct acceptance testing of our products on their behalf.
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Quality certifications applicable to defense products of Elbit Systems of America’s operating units
include certifications for CMMI Level 3 of the SEI, ISO-9001, AS9100 (certified for revision D) and compliance
with NATO AQAP requirements. In the area of commercial aviation Elbit Systems of America’s operating units
hold EASA certification as well as a variety of FAA certifications 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
13485:2003, 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.
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,
which procures all equipment for the IDF. 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 that allows it
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. Often we enter into cooperation agreements
with other companies for such opportunities.
Competition
We operate in a competitive environment for most of our projects, systems and products.
Competition is based on product and program performance, price, reputation, reliability, life cycle costs, overall
value to the customer, responsiveness to customer requirements and the ability to respond to rapid changes in
technology. In addition, our competitive position sometimes is affected by specific requirements in particular
markets.
Continuing consolidation in the defense industry has affected competition. In addition, many major
prime contractors are increasing their in-house capabilities. These factors have decreased the number but
increased the relative size and resources of our competitors. We adapt to market conditions by adjusting our
business strategy to changing market conditions.
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Competitors in the sale of some of our products to the government of Israel include Israel Aerospace
Industries and Rafael Advanced Defense Systems among others. From time to time we also cooperate with some
of our competitors on specific projects. 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, Collins Aerospace, L-3 Communications, Thales, Airbus, Leonardo, Saab,
Harris, Textron, FLIR Systems, Orbital ATK, AeroVironment, Rhode and Schwartz, Rheinmetall, Kongsberg,
Safran, CMC, CAE, Aselsan, Bharat Electronics, Cubic and Verint. Many of these competitors have greater
financial, marketing and other resources than ours. We also compete in the worldwide defense and homeland
security markets with numerous smaller companies. In addition, we compete with a range of companies in the
commercial avionics and commercial cyber protection markets. In certain cases we also engage in strategic
cooperative activities with some of our competitors.
Overall, we believe we are able to compete on the basis of our systems development and
technological expertise, our systems’ operationally-proven performance and our policy of offering customers
overall solutions to technological, operational and financial needs.
Major Customers
Sometimes, our revenues from an individual customer account for more than 10% of our revenues in
a specific year. Our only such customer during the last three years was the IMOD, which accounted for 18% in
2016, 19% in 2017 and 13% in 2018.
Ethics
We conduct our business activities and develop Company policies based on a firm commitment to
ethical practices. In addition to our Code of Conduct (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 area where we have a policy of zero tolerance for corruption. Our
compliance program also includes ongoing training and enforcement. We also expect our supply chain to follow
ethical practices. Our Code of Conduct, Anti-Bribery and Corruption Compliance Policy, Supplier Code of
Conduct and other related compliance policies are published on our website www.elbitsystems.com. We are
active in a number of international organizations relating to ethics and compliance.
Social Sustainability
We place importance on sustainability and social responsibility to the communities in which we live
and work. This is consistent with our policy of emphasizing ethical business practices. Our 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 promote
numerous other community support activities, including involvement on a national level in major charitable
organizations in Israel and the U.S. We place emphasis on best practices in corporate governance, ethical conduct
and fair employment practices. We also pursue continuous improvement of our operations from an environmental
perspective and have a policy of combating human trafficking and avoiding the use of “conflict minerals” in our
supply chain. These activities support our involvement as active members in leading sustainability and ethics
organizations. We periodically publish a Sustainability Report, available on our website, detailing our activities in
the areas of corporate responsibility, ethics, environmental initiatives and community-related activities.
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Conditions in Israel
Political, Military and Economic Risks. Our operations in Israel are subject to several potential
political, military and economic risks. (See Item 3. Key Information – Risk Factors – Risks Related to Our Israeli
Operations.)
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 and Industry (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 – 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 some provisions of collective bargaining agreements between the Histadrut – General Federation
of Labor in Israel and the Coordination Bureau of Economic Organizations, which includes the Industrialists’
Association. These labor laws and collective bargaining provisions mainly concern the length of the work day,
minimum daily wages for professional workers, insurance for work-related accidents, procedures for dismissing
certain employees, determination of severance pay, employment of “manpower” employees and other conditions
of employment.
Severance Pay. Under Israeli law, our Israeli companies are required to make severance payments to
terminated Israeli employees, other than in some cases of termination for cause. 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 premiums to insurance companies under approved plans and to
pension funds. The deposits presented in the balance sheet include profits accumulated to the balance sheet date.
The amounts deposited may be withdrawn only after fulfillment of the obligations under the Israeli laws relating
to severance pay. However, Elbit Systems and our Israeli subsidiaries have entered into agreements with some of
our employees implementing Section 14 of the Severance Payment Law, which agreements relate to the treatment
of severance pay. (See Item 18. Financial Statements – Note 2R).
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, 2018, the payments to the
National Insurance Institute were equal to approximately 19.5% of wages, subject to a cap if an employee’s
monthly wages exceed a specified amount. The employee contributes approximately 61.5%, and the employer
contributes approximately 38.5%.
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Enforcement of Judgments
Israeli courts may enforce U.S. and other foreign jurisdiction final executory judgments for
liquidated amounts in civil matters, obtained after due process before a court of competent jurisdiction. 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.
None.
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Item 5.
Operating and Financial Review and Prospects.
The following discussion and analysis should be read together with our audited consolidated financial
statements and notes appearing in Item 18 below.
General
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Item 18. Financial Statements – Note 2.
Our results of operations and financial condition are based on our consolidated financial statements, which are
presented in conformity with United States generally accepted accounting principles (U.S. GAAP). The preparation of the
consolidated financial statements requires management to select accounting policies, and to make estimates. assumptions and
judgments that involve the accounting policies described below that affect the amounts reported in the consolidated financial
statements. Significant changes in assumptions and/or conditions and changes in our critical accounting policies could
materially impact our operating results and financial condition.
We believe our most critical accounting policies relate to:
• Revenue Recognition.
• Business Combinations.
•
Impairment of Long-Lived Assets and Goodwill.
• Useful Lives of Long-Lived Assets.
•
•
•
Income Taxes.
Stock-Based Compensation Expense.
Post-employment Benefits Liabilities
Revenue Recognition
We generate revenues primarily from fixed-price long-term contracts involving the design, development,
manufacture and integration of defense systems and products. In addition, to a lesser extent, we provide non-defense systems
and products as well as support and services for our systems and products.
Revenues from our contracts are principally recognized using the Financial Accounting Standards Board
(FASB), Accounting Standards Codification (ASC) ASC 606. We assess contractual arrangements at inception according to
the five-step model of ASC 606. 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.
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 (i.e., a gross margin at
a narrow range).
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For most of our long-term contracts, where our performance does not create an asset with an alternative use, we
recognize revenue over time as we perform because of continuous transfer of control to the customer. This continuous transfer
of control to the customer is supported by 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 recognizes 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 the substantially all of
the remaining benefits from, the products and services).
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 contracts or a service performance obligation, which is distinct from the 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, maintenance contracts, training and similar activities. Revenue from service contracts or performance
obligations were less than 10% of total revenues in each of the fiscal years 2018, 2017 and 2016. (For additional information
see Item 18. Financial Statements - Note 2T).
In 2018, we adopted ASC 606 using the modified retrospective method effective as of January 1, 2018.
Accordingly, for comparative periods prior to 2018, a majority of the Company's revenues was recognized under the contract
method of accounting, and sales and profits were recorded on each contract using the percentage-of-completion method of
accounting, primarily using units-of-delivery. Under the units-of-delivery method, revenue is recognized based upon the
number of units delivered during a period, and the contract price and expenditures are recognized as cost allocable to the
delivered units. For further description of the adoption of ASC 606 and the impacts of adoption on the financial statements for
the period ended December 31, 2018, see Item 18. Financial Statements - Notes 2T and 2AE.
Business Combinations
In accordance with ASC 805, “Business Combinations”, we allocate the purchase price of acquired companies to
the tangible and intangible assets acquired and liabilities assumed, as well as to IPR&D and contingent consideration, 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 engage third-party appraisal firms to assist management in determining the fair values of certain assets
acquired and liabilities assumed. Determining the fair values of certain assets acquired and liabilities assumed requires
judgment and often involves the use of significant estimates and assumptions, mainly with respect to intangible assets.
Management makes estimates of fair value based upon market participants’ assumptions believed to be reasonable. These
estimates are based on historical experience and information obtained from the management of the acquired companies, and
although such estimates are deemed to be consistent with market participants’ highest and best use of the assets in the
principal or most advantageous market, they are inherently uncertain. While there are a number of different methods for
estimating the value of intangible assets acquired, the primary method used is the discounted cash flow approach. Some of the
more significant estimates and assumptions inherent in the discounted cash flow approach include projected future cash flows,
including their timing, a discount rate reflecting the risk inherent in the future cash flows and a terminal growth rate. We also
estimate the expected useful lives of the intangible assets, which requires judgment and can impact our results of operations.
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or
actual results.
To the extent intangible assets are assigned longer useful lives, there may be less amortization expense recorded
in a given period. Because we operate in industries which are extremely competitive, the value of our intangible assets and
their respective useful lives are exposed to future adverse changes, which can result in an impairment charge to our results of
operations.
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Impairment of Long-Lived Assets and Goodwill
Our long-lived assets, including identifiable property, plant and equipment and intangible assets, are reviewed for
impairment in accordance with ASC 360-10-35, “Property, Plant and Equipment Subsequent Measurement”, whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by the asset. If an asset is determined to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds its fair value. Fair value of non-financial assets is determined
based on market participant assumptions. For each of the years ended December 31, 2016, 2017 and 2018, no material
impairment of long-lived assets was identified. (See Item 18. Financial Statements - Note 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. In 2018
we wrote off impairment of approximately $23 million as a result of revaluation of investments in affiliated companies and
intangible assets. For each of the two years ended December 31, 2017, no material impairment of goodwill or other long-live
assets was identified. (See Item 18. Financial Statements - Note 2Q 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.)
32
Income Taxes
We record income taxes using the asset and liability approach, whereby deferred tax assets and liability account
balances are determined based on differences between financial reporting and tax bases of assets and liabilities and of
operating losses and credit carry-forwards, and are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. We record a valuation allowance, if necessary, to reduce deferred tax assets to amounts
that are more likely than not to be realized. We have considered future taxable income on a jurisdiction by jurisdiction basis
and used prudent and feasible tax planning strategies and other available evidence in determining the need for a valuation
allowance. In the event we were to determine that we would be able to realize these deferred income tax assets in the future,
we would adjust the valuation allowance, which would reduce the provision for income taxes.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which,
additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite
our belief that our tax return positions are in accordance with applicable tax laws. As part of the determination of our tax
liability, management exercises considerable judgment in evaluating tax positions taken by us in determining the income tax
provision and establishes reserves for tax contingencies in accordance with ASC 740 “Income Taxes” guidelines. We adjust
these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change
of an estimate based on new information. To the extent that the final tax outcome of these matters is different from the
amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is
made. During 2016, 2017 and 2018, 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 currently undergoing tax audits by the Israeli
Tax Authority. 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 2W and 18.)
Stock-Based Compensation Expense
We account for equity based compensation in accordance with ASC 718 “Compensation - Stock Based
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 Phantom Bonus Retention Plan, based on estimated fair values. (See Item 18. Financial Statements - Notes 2Z and 22.)
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 of the Company's subsidiaries' employees, mainly in Israel and in the U.S. (some of whom have already
left the Company), have defined benefit pension plans for their retirement, which are controlled 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. Some employees of a subsidiary in Israel are entitled to early retirement if they meet certain
conditions, including age and seniority 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.
33
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 increases or decreases) the
carrying amount of our post-employment benefit obligations and plan assets. (See Item 18. Financial Statements - Notes 2S
and 17).
Governmental Policies
Governmental policies and regulations applicable to defense contractors, such as cost accounting and audit,
export control, procurement solicitation and anti-bribery rules and regulations, could have a material impact on our operations.
(See Item 3. Risk Factors – General Risks Related to Our Business and Market 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 controls over
financial reporting. (See Item 15. Controls and Procedures – Management’s Annual Report on Internal Control Over Financial
Reporting.)
Recent Accounting Pronouncements
See Item 18. Financial Statements – Note 2AE.
Long-Term Arrangements and Commitments
Government Funding of Development. Elbit Systems and certain Israeli subsidiaries partially finance our
research and development expenditures under programs sponsored by the Israel Innovation Authority (IIA) in the Ministry of
Economy and Industry (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% – 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 2V).
Lease Commitments. The future minimum lease commitments of the Company under various non-cancelable
operating lease agreements for property, motor vehicles and office equipment as of December 31, 2018 were as follows: $65.5
million for 2019, $49.1 million for 2020, $28.3 million for 2021, $21.0 million for 2022 and $11.4 million for 2023 and
thereafter. (See below “Contractual Obligations”.)
Bank Covenants. In connection with bank credits and loans, including performance guarantees issued by banks
and bank guarantees in order to secure certain advances from customers, Elbit Systems and certain subsidiaries are obligated
to meet certain financial covenants. (See below “Liquidity and Capital Resources – Financial Resources”.) Such covenants
include requirements for shareholders’ equity, current ratio, operating profit margin, tangible net worth, EBITDA, interest
coverage ratio and total leverage. (See Item 18. Financial Statements – Note 21F.) As of December 31, 2017 and 2018, the
Company met all financial covenants.
Bank and Other Financial Institution Guarantees. As of December 31, 2018 and 2017, guarantees in the
aggregate amount of approximately $1,895 million and $1,399 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.
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Purchase Commitments. As of December 31, 2018 and 2017, we had purchase commitments of approximately
$1,775 million and $1,592 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 2018
See Item 4. Information on the Company – Mergers, Acquisitions and Divestitures and see below "Acquisition of
IMI and Reorganization of Company Businesses".
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, 2018 was $9,399 million, of which 61% was for orders outside Israel.
Our backlog of orders as of December 31, 2017 was $7,561 million, of which 73% was for orders outside Israel.
Approximately 64% of our backlog as of December 31, 2018 is scheduled to be performed during 2019 and 2020. The
majority of the 36% balance is scheduled to be performed in 2021 and 2022. Backlog information and any comparison of
backlog as of different dates may not necessarily represent an indication of future sales.
Trends
Trends in the defense and homeland security areas in which we operate have been impacted by the nature of
recent conflicts and terrorism activities throughout the world, increasing the focus of defense forces on low intensity conflicts,
homeland security and cyber warfare. Such trends have been impacted by the conflicts in Crimea and Syria and with ISIS and
other terrorist organizations as well as by tensions with North Korea and Iran. 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.
In the defense and homeland security markets, there is an increasing demand for products and systems in the
areas of airborne systems, C4ISR and unmanned vehicles. Accordingly, in recent years we have been placing more emphasis
on airborne systems, C4ISR, information systems, intelligence gathering, situational awareness, precision guidance and
munitions, all weather and day/night operations, border and perimeter security, UAS, other unmanned vehicles, cyber-defense,
training and simulation, space and satellite-based defense capabilities and homeland security systems. Many governments are
increasing their budgets in 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
emerging trends.
35
The continuing trend of consolidation in the defense and homeland security 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. We adapt to evolving market conditions by adjusting our business strategy. Our business strategy also
anticipates increased competition in the defense and homeland security markets due to declining budgets in certain countries
such as a number of countries in Latin America. However, we believe there have been recent indications of enhanced defense
and homeland security budgets in the U.S. and in certain European countries. 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.
Our future success is 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.
Acquisition of IMI and Reorganization of Company Businesses
On November 25, 2018, we completed the acquisition of IMI. The financial results of IMI were included in our
consolidated reports commencing the date of the acquisition. See above Item 4. Information on the Company - Mergers,
Acquisitions and Divestitures and Item 18. Financial Statements - Note 1C(3).
Following the completion of the acquisition and the below described reorganization, we recorded in the fourth
quarter of 2018 expenses of $69.5 million, of which $66.6 million were recorded in Cost of Revenues and the balance in Other
Expenses, net. The expenses included mainly inventory write-offs and employee-related costs. Those expenses were eliminated
in the non-GAAP results due to their non-recurring nature.
We reorganized a number of our activities in connection with the IMI acquisition. This reorganization included,
among other measures, the establishment of two business divisions:
- The Land Systems Division, which focuses on land-based systems, including military vehicle systems, artillery
systems and the IMI activities; and
- The C4I and Cyber Division, which focuses on command & control, radio, communication, homeland security
and cyber intelligence activities.
This reorganization is intended to improve the synergy within the Company with respect to the acquired activities
and better address market requirements and customer support. We believe that the acquisition of IMI and the reorganization will
positively affect our future business.
36
Summary of Operating Results
The following table sets forth our consolidated statements of operations for each of the three years ended
December 31, 2018 (*).
Year ended December 31,
(in thousands of U.S. dollars except per share data)
2018
2017
2016
$
%
$
%
$
$ 3,683,684
100.0
$ 3,377,825
100.0
$ 3,260,219
2,707,505
976,179
317,690
(30,338)
287,352
281,014
160,348
(45,367)
683,347
292,832
(44,061)
(11,449)
237,322
(26,445)
210,877
(2,222)
$
208,655
(1,917)
73.5
26.5
8.6
(0.8)
7.8
7.6
4.4
(1.2)
18.6
7.9
(1.2)
(0.3)
6.4
(0.7)
5.7
(0.1)
7.4
(0.1)
2,374,775
1,003,050
301,382
(36,322)
265,060
280,246
133,314
—
678,620
324,430
(34,502)
(5,082)
284,846
(55,585)
229,261
11,361
$
240,622
(1,513)
70.3
29.7
8.9
(1.1)
7.8
8.3
3.9
—
20.1
9.6
(1.0)
(0.2)
8.4
(1.6)
6.8
0.3
6.6
—
2,294,934
965,285
291,749
(35,957)
255,792
271,037
151,353
(17,575)
660,607
304,678
(23,742)
(1,735)
279,201
(45,617)
233,584
5,224
$
238,808
%
100.0
70.4
29.6
8.9
(1.1)
7.8
8.3
4.6
(0.5)
20.3
9.3
(0.7)
(0.1)
8.6
(1.4)
7.2
0.2
7.3
$
206,738
5.6
$
239,109
7.1
$
236,909
7.3
(1,899)
(0.1)
Total revenues
Cost of revenues
Gross profit
Research and development (R&D)
expenses
Less – participation
R&D expenses, net
Marketing and selling expenses
General and administrative expenses
Other operating income, net
Operating income
Financial expenses, net
Other income, net
Income before taxes on income
Taxes on income
Equity in net earnings of affiliated
companies and partnerships
Net income
Less – net income attributable to non-
controlling interests
Net income attributable to the
Company’s shareholders
Diluted net earnings per share:
$
4.84
$
5.59
$
5.54
(*)
In 2018 we adopted the new revenue recognition accounting standard ASC 606, using the modified retrospective
approach. the financial results of 2018 in compliance with ASC 606. Financial results for the years 2016 and 2017
are presented in conformity with amounts previously disclosed under the prior revenue recognition standard, ASC
605, see above "Revenue Recognition" and Item 18. Financial Statements - Notes 2T and 2AE.
37
2018 Compared to 2017
Revenues
Our sales are primarily to governmental entities and prime contractors under government defense and homeland
security programs. Accordingly, the level of our revenues is subject to governmental budgetary constraints.
The following table sets forth our revenue distribution by areas of operation:
Airborne systems
C4ISR systems
Land systems
Electro-optic systems
Other (mainly non-defense engineering and production
services)
Total
Year ended December 31,
2018
$ millions
1,470.1
1,130.1
649.1
333.9
100.5
%
39.9
30.7
17.6
9.1
2.7
2017
$ millions
1,272.1
1,144.8
503.9
341.2
115.8
3,683.7
100.0
3,377.8
%
37.7
33.9
14.9
10.1
3.4
100.0
Our consolidated revenues in 2018 were $3,683.7 million, as compared to $3,377.8 million in 2017.
The leading contributors to our revenues were the airborne systems and C4ISR systems areas of operation. The
increase in revenues in the airborne systems area of operation was primarily due to increased sales of commercial avionics
equipment in the U.S. of a new subsidiary that was acquired in the second quarter of 2018. Revenues from land systems
increased primarily due to an increase in sales of land electronic warfare systems and armored vehicle systems in Europe and
the revenues of IMI that was acquired in November 2018.
The following table sets forth our distribution of revenues by geographical regions:
Israel
North America
Europe
Asia-Pacific
Latin America
Other
Total
Year ended December 31,
2018
$ millions
740.2
979.2
737.1
791.8
192.4
243.0
3,683.7
%
20.1
26.6
20.0
21.5
5.2
6.6
100.0
2017
$ millions
%
741.9
827.6
764.0
670.5
193.4
180.4
3,377.8
22.0
24.5
22.6
19.8
5.7
5.4
100.0
The increase in North America was mainly a result of higher sales of airborne systems as well as the revenues of
a new U.S. subsidiary acquired in the second quarter of 2018 in the area of commercial avionics. The increase in Asia-Pacific
was mainly a result of higher sales of tank fire control systems and UAS. The increase in the Other geographical region was
mainly due to an increase in sales of UAS, artillery and command and control systems.
38
Cost of Revenues and Gross Profit
Cost of revenues in 2018 was $2,707.5 million (73.5% of revenues), as compared to $2,374.8 million (70.3% of
revenues) in 2017.
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 (including depreciation and amortization). The amounts and
percentage of those components in 2018 and 2017 were as follows:
Wages and related benefits costs in 2018 constituted 40% of cost of revenues, as compared to 42% of cost of
revenues in 2017. The total cost of wages and related benefits in 2018 was approximately $1,110 million, as compared to $978
million in 2017. The increase in wages and related benefit costs was mainly a result of exchange rate changes during 2018 in
the value of the NIS relative to the U.S. dollar as a result of hedging transactions that we had in 2018 with respect to lower
exchange rates as well as the increased workforce as a result of the addition of employees in subsidiaries acquired in 2018.
Subcontractors and material consumed costs in 2018 constituted 47% of cost of revenues, similar to that in 2017.
The total amount of subcontractors and material consumed costs in 2018 was approximately $1.3 billion, as compared to
approximately $1.1 billion in 2017.
Manufacturing and other expenses in 2018 constituted 10% of cost of revenues, as compared to 11% in 2017.
The total cost of manufacturing and other expenses in 2018 was approximately $263 million, as compared to approximately
$251 million in 2017.
In 2018, our cost of revenues included an increase in inventories of approximately $30 million in work-in-
progress and finished goods inventories, as compared to a decrease of approximately $38 million in work-in-progress and
finished goods inventories in 2017.
Changes from 2017 to 2018 in our cost of revenues and cost of revenues components (except the $66.6 million
in expenses related to the acquisition of IMI) 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.
Gross profit for the year ended December 31, 2018 was $976.2 million (26.5% of revenues), as compared to
$1,003.1 million (29.7% of revenues) in the year ended December 31, 2017.
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 2018 totaled $317.7 million (8.6% of revenues), as compared to $301.4 million (8.9% of
revenues) in 2017.
Net R&D expenses (after deduction of third party participation) in 2018 totaled $287.4 million (7.8% of
revenues), as compared to $265.1 million (7.8% of revenues) in 2017.
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 2018 were $281.0 million (7.6% of revenues), as compared to $280.2 million
(8.3% of revenues) in 2017.
39
General and Administration (G&A) Expenses
G&A expenses in 2018 were $160.3 million (4.4% of revenues), as compared to $133.3 million (3.9% of
revenues) in 2017. The lower level of general and administration expenses in 2017 was mainly a result of revaluation of
liabilities related to assets and activities acquired in prior years, net of a decrease in wages and benefits as a result of the
changes in the employee phantom option plan expenses.
Other Operating Income (Net)
Other operating income, net for the year ended December 31, 2018 amounted to $45.4 million. The amount
reflects net gains related to the valuation of shares in two of our Israeli subsidiaries in the commercial cyber and medical
instrumentation areas due to third party investments.
Operating Income
Our operating income in 2018 was $292.8 million (7.9% of revenues), as compared to $324.4 million (9.6% of
revenues) in 2017. The lower level of operating income in 2018 was mainly due to the decrease in the gross profit as a result
of the expenses related to the acquisition of IMI, as well as the decrease in G&A expenses during 2017 as a result of
revaluation of liabilities related to assets and activities acquired in prior years.
Financial Expense (Net)
Net financing expenses in 2018 were $44.1 million, as compared to $34.5 million in 2017. Financial expenses in
2017 were relatively low mainly due to gains from exchange rate differences.
Other Expenses, net
Other Expenses, net were $11.4 million in 2018 , as compared to $5.1 million in 2017. Other expenses in 2018
included impairment of investments in two of our affiliated Israeli companies.
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 2018 were $26.4 million (effective tax rate of 11.1%), as compared to $55.6 million
(effective tax rate of 19.5%) in 2017. Taxes on income in 2017 included an amount of $10.9 million related to deferred tax
asset adjustments resulting from the tax reform in the U.S. The effective tax rates in 2018 and 2017 were also affected by prior
years adjustments of $2.6 million and $4.3 million, respectively. The adjustments were mainly related to tax settlements. 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. 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 $17.1 million and $15.8 million,
respectively, in 2018 and 2017, 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 2018, we had loss of $2.2 million from our share in earnings of affiliates, as compared to income of $11.4
million in 2017. The loss in 2018 was mainly a result of a $9.7 million impairment of an investment in an affiliated company.
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests in 2018 was $1.9 million, as compared to $1.5 million in
2017.
40
Net Income and Earning Per Share (EPS)
As a result of the above, net income in 2018 was $206.7 million (5.6% of revenues), as compared to net income
of $239.1 million (7.1% of revenues) in 2017. The diluted EPS was $4.84 in 2018, as compared to $5.59 in 2017.
The number of shares used for computation of diluted EPS in the year ended December 31, 2017 and 2018 was
42,753,000 shares.
2017 Compared to 2016
Revenues
The following table sets forth our revenue distribution by areas of operation:
Airborne systems
C4ISR systems
Land systems
Electro-optic systems
Other (mainly non-defense engineering and production
services)
Total
Year ended December 31,
2017
$ millions
1,272.1
1,144.8
503.9
341.2
115.8
3,377.8
%
37.7
33.9
14.9
10.1
3.4
100.0
2016
$ millions
1,242.3
1,220.9
408.0
276.0
113.0
%
38.1
37.4
12.5
8.5
3.5
3,260.2
100.0
Our consolidated revenues in 2017 were $3,377.8 million, as compared to $3,260.2 in 2016.
The leading contributors to our revenues were the airborne systems and C4ISR systems areas of operation. The
decrease in the C4ISR area of operation was primarily due to a decline in sales of command and control systems and
unmanned aircraft systems (UAS) in Latin America. Revenues from land systems increased due primarily to an increase in
sales of land electronic warfare systems and armored vehicle systems in Europe. Revenues in electro-optic systems increased
mainly due to an increase in sales of reconnaissance systems and night vision systems in Asia-Pacific and directional infra-red
countermeasure (DIRCM) systems in other geographic regions.
The following table sets forth our distribution of revenues by geographical regions:
Israel
North America
Europe
Asia-Pacific
Latin America
Other
Total
Year ended December 31,
2017
$ millions
741.9
827.6
764.0
670.5
193.4
180.4
3,377.8
%
22.0
24.5
22.6
19.8
5.7
5.4
100.0
2016
$ millions
%
709.5
827.5
640.8
801.6
212.8
69.8
3,260.2
21.8
25.3
19.7
24.6
6.5
2.1
100.0
The increase in Europe was mainly a result of higher sales of armored vehicle systems and radio systems. The
decrease in Asia-Pacific was mainly a result of lower sales of tank fire control systems and UAS. The decrease in Latin
America was mainly a result of decreased sales of command and control systems. The increase in the “Other” geographical
region was mainly due to an increase in sales of UAS and DIRCM systems.
41
Cost of Revenues and Gross Profit
Cost of revenues in 2017 was $2,374.7 (70.3% of revenues), as compared to $2,294.9 million (70.4% of
revenues) in 2016.
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 (including depreciation and amortization). The amounts and
percentage of those components in 2017 and 2016 were as follows:
Wages and related benefits costs in 2017 constituted 42% of cost of revenues, as compared to 38% of cost of
revenues in 2016. The total cost of wages and related benefits in 2017 was approximately $978 million, as compared to $874
million in 2016. The increase in wages and related benefit costs was mainly a result of the 9.8% appreciation during 2017 in
the value of the NIS relative to the U.S. dollar (since the NIS payments to our Israeli work force are translated into U.S.
dollars for financial reporting purposes) as well as the increased workforce.
Subcontractors and material consumed costs in 2017 constituted 47% of cost of revenues, similar to that in 2016.
The total amount of subcontractors and material consumed costs in 2017 was approximately $1.1 billion, similar to that in
2016.
Manufacturing and other expenses in 2017 constituted 15% of cost of revenues, as compared to 14% in 2016.
The total cost of manufacturing and other expenses in 2017 was approximately $345 million, as compared to approximately
$319 million in 2016.
In 2017, our cost of revenues included a decrease in inventories of approximately $38 million in work-in-
progress and finished goods inventories, as compared to a decrease of approximately $62 million in work-in-progress and
finished goods inventories in 2016.
Changes from 2016 to 2017 in our cost of revenues and cost of revenues components were not material. We did
not identify any developing trends in cost of revenues that we believe are likely to have a material impact on our future
operations other than the continued changes in the NIS against the U.S. dollar, which could have an impact mainly on our
labor costs.
Gross profit for the year ended December 31, 2017 was $1003.0 million (29.7% of revenues), as compared to
$965.3 million (29.6% of revenues) in the year ended December 31, 2016.
Research and Development (R&D) Expenses
Gross R&D expenses in 2017 totaled $301.4 million (8.9% of revenues), as compared to $291.7 million (8.9% of
revenues), in 2016.
Net R&D expenses (after deduction of third party participation) in 2017 totaled $265.1 million (7.8% of
revenues), as compared to $255.8 million (7.8% of revenues) in 2016.
Marketing and Selling Expenses
Marketing and selling expenses in 2017 were $280.2 million (8.3% of revenues), as compared to $271.0 million
(8.3% of revenues) in 2016.
General and Administration (G&A) Expenses
G&A expenses in 2017 were $133.3 million (3.9% of revenues), as compared to $151.4 million (4.6% of
revenues) in 2016. The significant decrease in general and administration expenses in 2017 was mainly a result of revaluation
of liabilities related to assets and activities acquired in prior years, net of an increase in wages and benefits as a result of the
changes in the NIS - U.S. dollar exchange rate.
42
Other Operating Income (Net)
Other operating income, net for the year ended December 31, 2016 amounted to $17.6 million. The amount
reflects net gains related to the valuation of shares in two of our Israeli subsidiaries in the energy and automotive areas due to
third party investments.
Operating Income
Our operating income in 2017 was $324.4 million (9.6% of revenues), as compared to $304.7 million (9.3% of
revenues) in 2016. The improvement in the operating income in 2017 was due to the increase in the gross profit, as well as the
decrease in G&A expenses during 2017.
Financial Expense (Net)
Net financing expenses in 2017 were $34.5million, as compared to $23.7 million in 2016. Financial expenses in
2016 were relatively low mainly due to gains from exchange rate differences.
Other Expense (Net)
Other Expense, net in 2017 amounted $5.1 millions, as compared to $1.7 millions in 2016.
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 2017 were $55.6 million (effective tax rate of 19.5%), as compared to $45.6 million
(effective tax rate of 16.3%) in 2016. Taxes on income in 2017 included an amount of $10.9 million related to deferred tax
asset adjustments resulting from the tax reform in the U.S. The effective tax rates in 2017 and 2016 were also affected by
prior years adjustments of $4.3 million and $18.6 million, respectively. The adjustments were mainly related to tax
settlements. 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. 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 $15.8 million and $16.1 million,
respectively, in 2017 and 2016, significantly influencing our effective tax rates.
Company’s Share in Earnings of Affiliated Entities
In 2017, we had income of $11.4 million from our share in earnings of affiliates, as compared to income of $5.2
million in 2016. The increase in 2017 was a result of higher revenues and better profitability in some of our affiliated
companies.
Net Income and Earning Per Share (EPS)
As a result of the above, net income in 2017 was $239.1 million (7.1% of revenues), as compared to net income
of $236.9 million (7.3% of revenues) in 2016. The diluted EPS was $5.59 in 2017, as compared to $5.54 in 2016.
The number of shares used for computation of diluted EPS in the year ended December 31, 2017 was 42,753,000
shares, as compared to 42,752,000 shares in the year ended December 31, 2016.
Israeli Debt Offering
In June 2010, Elbit Systems completed a public offering in Israel on the TASE of NIS 1.1 billion (approximately
$283 million) Series A Notes (the Series A Notes). The Series A Notes were offered and sold pursuant to a shelf prospectus
filed in May 2010 with the Israeli Securities Authority and the TASE. The shelf prospectus expired in 2012. In 2012, under
the framework of the shelf prospectus, Elbit Systems completed both an additional public offering on the TASE and a private
placement in Israel to Israeli institutional investors, of new Series A Notes, for an aggregate consideration of approximately
NIS 926 million (approximately $249 million). All Series A Notes formed a single series.
43
We account for the outstanding principal amount of our Series A Notes as long-term liability, in accordance with
ASC 470, “Debt”, with current maturities classified as short-term liabilities. Debt issuance costs are capitalized and reported
as deferred financing costs, which are amortized over the life of the Series A Notes using the effective interest rate method. As
of December 31, 2018, the value of the Series A Notes was $112.1 million, less $59.7 million in current maturities and a fair
value adjustment of $3.8 million from cross-currency interest rate swaps.
The Series A Notes are payable in ten equal annual installments on June 30 of each of the years 2011 through
2020. The Series A Notes bear a fixed interest rate of 4.84% per annum, payable on June 30 and December 30 of each of the
years through 2020 (the first interest payment was made on December 30, 2010, and the last interest payment will be made on
June 30, 2020). (See Item 18. Financial Statements – Note 16.)
The Series A Notes (principal and interest) are in NIS and are not linked to any currency or index. The Series A
Notes are unsecured, non-convertible and do not restrict our ability to issue additional notes of any class or distribute
dividends in the future. There are no covenants on the Series A Notes.
The Series A Notes are listed for trading on the TASE. However, the Series A Notes are not registered under
the U.S. Securities Act of 1933, as amended (the Securities Act), and may not be offered or sold in the United States or
to U.S. Persons (as defined in Regulation “S” promulgated under the Securities Act) without registration under the
Securities Act or an exemption from the registration requirements of the Securities Act.
We also entered into ten-year cross currency interest rate swap transactions in order to effectively hedge the
effect of interest and exchange rate differences resulting from the NIS Series A Notes that were issued in 2010 and the
additional Series A Notes that were issued in 2012. Under the cross currency interest rate swaps, we receive fixed NIS at a rate
of 4.84% on NIS 2 billion and pay floating six-month USD LIBOR plus an average spread of 1.84% on $524 million, which
reflects the U.S. dollar value of the Series A Notes on the specific dates the transactions were consummated. Both the debt and
the swap instruments pay semi-annual interest on June 30 and December 31. The purpose of these swap transactions was to
convert the NIS fixed rate Series A Notes into USD LIBOR (6 months) floating rate obligations. As a result of these
agreements, we are currently paying an effective interest rate of six-month LIBOR (2.88% at December 31, 2018) plus an
average of 2.05% on the principal amount, as compared to the original 4.84% fixed rate. The above transactions qualify for
fair value hedge accounting. (See also Item 11. Quantitative and Qualitative Disclosures about Market Risk.)
Cash Flows
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.
2018
Our net cash flow generated from operating activities in 2018 was approximately $192 million, resulting mainly
from our net income and an increase in non-cash operating items of $126 million, an increase in trade and other payables of
approximately $90 million and an increase of approximately $153 million in advances received from customers, offset by an
increase in short and long-term trade receivables of approximately $89 million and an increase in inventories of approximately
$117 million.
Net cash flow used in investment activities in 2018 was approximately $593 million, which was used mainly for
the purchase of property, plant and equipment in the amount of $102 million, acquisition of subsidiaries in the amount of
$504 million and investments in affiliated companies in the amount of $8 million, offset by proceeds from the sale of fixed
assets of $4 million and proceeds from the net sale of short-term deposits and marketable securities in the amount of $20
million.
44
Net cash flow used for financing activities in 2018 was approximately $454 million, which was used mainly for
repayment of Series A Notes in the amount of $56 million and payment of dividends in the amount of $75 million. Proceeds
from new short and long-term loans were approximately $585 million.
2017
Our net cash flow generated from operating activities in 2017 was approximately $101 million, resulting mainly
from our net income and an increase in non-cash operating items of $140 million, an increase in trade and other payables of
approximately $63 million and an increase of approximately $30 million in advances received from customers, offset by an
increase in short and long-term trade receivables of approximately $315 million and an increase in inventories of
approximately $60 million.
Net cash flow used in investment activities in 2017 was approximately $116 million, which was used mainly for
the purchase of property, plant and equipment in the amount of $108 million, acquisition of subsidiaries in the amount of $25
million and investments in affiliated companies in the amount of $5 million, offset by proceeds from the sale of fixed assets of
$6 million, proceeds from the net sale of short-term deposits and marketable securities in the amount of $6 million and the sale
of an investment in the amount of $12 million.
Net cash flow used for financing activities in 2017 was approximately $52 million, which was used mainly for
repayment of Series A Notes in the amount of $56 million, payment of dividends in the amount of $75 million and repayment
of long-term loans in the amount of $167 million. Proceeds from new short and long-term loans were approximately $246
million.
2016
Our net cash flow generated from operating activities in 2016 was approximately $208 million, resulting mainly
from our net income and an increase in non-cash operating items of $104 million and an increase in trade and other payables
of approximately $253 million, offset by an increase in short and long-term trade receivables of approximately $297 million
and a decrease in advances received from customers of approximately $83 million.
Net cash flow used in investment activities in 2016 was approximately $116 million, which was used mainly for
the purchase of property, plant and equipment in the amount of $124 million and investments in affiliated companies in the
amount of $19 million, offset by proceeds from the net sale of short-term deposits and marketable securities in the amount of
$12 million and the sale of real estate in the amount of $16 million.
Net cash flow used for financing activities in 2016 was approximately $167 million, which was used mainly for
repayment of Series A Notes in the amount of $56 million, payments of dividends in the amount of $68 million and
repayment of long-term loans in the amount of $48 million.
Financial Resources
The financial resources available to us include profits, collection of accounts receivable, advances from
customers and 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
loan and credit agreements. Such covenants include requirements for shareholders’ equity, current ratio, operating profit
margin, tangible net worth, EBITDA, interest coverage ratio and total leverage. As of December 31, 2017 and 2018, the
Company met all financial covenants.
On December 31, 2018, we had total borrowings from banks and public institutions in the amount of $676.4
million in short and long-term loans, of which most of the $470 million in long-term loans mature in 2020. On December 31,
2018, we also had $1,895 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. In addition, at December
31, 2018, we had $112 million in outstanding debt under our Series A Notes, including $56 million maturing in 2019. On
December 31, 2018, we had a cash balance amounting to $208 million. We believe that we also have the ability to raise funds
on the capital market and through expansion of our credit lines. (See above “Israeli Debt Offering”.)
45
As of December 31, 2018, we had working capital of $369 million and a current ratio of 1.13. We believe that
our working capital and cash flow from operations are sufficient to support our current requirements and financial covenants.
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 – General Risk Related to Our Business and Market.
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, 2018 and 2017, see Item 18. Financial Statements
– Note 17.) At December 31, 2018, our employee benefit liabilities were $737 million, of which we had severance funds of
$279 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, 2018 and the subsequent fiscal year (see above
“Financial Resources”). Our anticipated capital expenditures (which include mainly the purchase of equipment, buildings and
an enhancement to our Enterprise Resource Planning (ERP) system) as of December 31, 2018 are somewhat higher than those
as of December 31, 2017, 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.)
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.
46
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, 2018, 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, 2018 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 Israeli currency 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 – Risks Relating to
Our Israeli Operations.)
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 2016, the
inflation rate was approximately a negative 0.2%, and the NIS strengthened against the U.S. dollar by approximately 1.5%. In
2017, the inflation rate was approximately a positive 0.4%, and the NIS strengthened against the U.S. dollar by approximately
9.8%. In 2018, the inflation rate was approximately a 0.8% and the NIS depreciated against the U.S. dollar by approximately
8.1%. 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, 2018 by forward contracts. On December 31, 2018, we had forward contracts for the
sale and purchase of Euro, GBP and various other currencies totaling approximately $646 million ($517 million in Euros, $30
million in GBP and the balance of $99 million in other currencies).
47
We also use forward exchange hedging contracts and options strategies in order to limit our exposure to
exchange rate fluctuation associated with payroll expenses, mainly incurred in NIS. These include forward contracts with
notional amount of approximately $598 million to purchase NIS maturing in 2019. (See also Item 11. Quantitative and
Qualitative Disclosure of Market Risks.) As of December 31, 2018, an unrealized net loss of approximately $5 million was
included in accumulated other comprehensive income. As of December 31, 2018, all of the forward contracts are expected to
mature during the years 2019 – 2023.
Regarding the measures taken to reduce the foreign currency exchange rate impact on our Series A Notes see
above “Liquidity and Capital Resources – Israeli Debt Offering.”
The table below presents the balance of the derivative instruments held in order to limit the exposure to exchange
rate fluctuations as of December 31, 2018 and is presented in millions of U.S. dollar equivalent terms:
Forward
Buy US$ and Sell:
Euro
GBP
NIS
Other various currencies
Forward
Sell US$ and Buy:
Euro
GBP
NIS
Other various currencies
*
Notional amount information is based on the foreign exchange rate at year end.
Notional
Amount*
Unrealized
Gain (Loss)
414.1
23.6
—
57.3
18.6
0.5
—
2.3
Notional
Amount*
Unrealized
Gain (Loss)
102.5
6.7
598.2
41.5
(4.6)
(0.1)
(15.4)
(2.7)
48
Contractual Obligations
1. Long-Term Debt Obligations(1)
2. Series A Notes(1)
3. Interest payment(2)
4. Operating Lease Obligations(3)
5. Purchase Obligations(3)
6. Other Long-Term Liabilities Reflected on the Company’s
Balance Sheet under U.S. GAAP(4)
7. Other Long-Term Liabilities(5)
Total
Up to
1 year
3
56
22
73
1,335
—
—
1,489
4-5 years
2-3 years
(U.S. dollars in millions)
4
—
—
35
55
463
56
4
80
277
—
—
880
—
—
94
More than
5 years
—
—
—
88
108
—
—
196
(1)
(2)
(3)
(4)
The above includes derivative instruments defined as hedge accounting - see Item 18. Financial Statements -
Note 2Y.
All our long-term debt borrowings and Series A Notes bear interest at variable rates, which are indexed to
LIBOR (plus a fixed spread). For long-term fixed rate borrowings (mainly Series A Notes) we use variable
interest rate swaps, effectively converting our long-term fixed rate borrowings to long-term variable rate
borrowings indexed to LIBOR. (See also Item 18. Financial Statements - Notes 15 and 16.) To estimate the
scheduled interest payments related to Series A Notes, we applied the future expected interest rates that were
used for calculating the fair value of our interest rate swap at the balance sheet date. To estimate the scheduled
interest payments related to our other long-term debt obligations we used the LIBOR (plus a fixed spread)
interest rates that were effective at the balance sheet date. The majority of our long-term debt obligations are
scheduled to be repaid within a period of two - three years.
For further description of the Purchase Obligations see above “Long-Term Arrangements and Commitments –
Purchase Commitments” and see Item 18. Financial Statements – Notes 21D and 21G.
The obligation amount does not include an amount of $737 million of pension and employee termination
liabilities. See Item 18. Financial Statements – Notes 2R and 17. The obligation amount also does not include an
amount of $60 million of tax reserve related to uncertain tax positions. See Item 18. Financial Statements – Note
18.
(5)
See below “Off-Balance Sheet Transactions.”
Off-Balance Sheet Transactions
Buy-Back
In connection with projects in certain countries, Elbit Systems and some of our subsidiaries have entered and
may enter in the future into “buy-back” or “offset” 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.
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
economics of scale by managing our buy-back activities from an overall corporate perspective. The buy-back rules and
regulations, as well as the underlying contracts, may differ from one country to another. The ability to fulfill the buy-back
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 or through “swap” transaction among various countries’ buy-back authorities.
49
We do not commit to buy-back 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 buy-back commitments
become effective. Buy-back 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 buy-back requirements. In some cases we provide guarantees
in connection with the performance of our buy-back obligations.
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 – General Risks Related to Our Business and Market.)
At December 31, 2018, we had outstanding buy-back obligations totaling approximately $1.4 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, significant effects of
retroactive tax legislation and changes in accounting guidance and other items 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.
50
Reconciliation of GAAP (Audited) to
Non-GAAP (Unaudited) Supplemental Financial Data
(U.S. dollars in millions, except for per share amounts)
Years Ended December 31,
2017
2016
2018
GAAP gross profit
Adjustments:
Amortization of purchased intangible assets
Expenses related to IMI acquisition
Non-GAAP gross profit
Percent of revenues
GAAP operating income
Adjustments:
Amortization of purchased intangible assets
Expenses related to IMI acquisition
Gain from change in holdings
Non-GAAP operating income
Percent of revenues
GAAP net income attributable to Elbit Systems’ shareholders
Adjustments:
Amortization of purchased intangible assets
Impairment of investments
Gain from changes in holdings
Expenses related to IMI acquisition
Tax effect and other tax items*
Non-GAAP net income attributable to Elbit Systems’ shareholders
Percent of revenues
GAAP diluted net EPS
Adjustments, net
Non-GAAP diluted net EPS
976.2
1003.1
965.3
19.1
66.6
22.2
—
1,061.9
1,025.3
31.2
—
996.5
28.8%
30.4%
30.4%
292.8
324.4
304.7
26.5
66.8
(45.4)
340.7
28.6
—
—
353.0
41.2
—
(17.6)
328.3
9.2%
10.5%
9.9%
206.7
239.1
236.9
26.5
17.6
(45.4)
66.8
(8.1)
264.1
28.6
—
—
—
6.2
273.9
41.2
2.5
(16.4)
(3.9)
(6.1)
254.2
7.2%
8.1%
7.8%
5.59
0.59
6.18
5.54
0.87
6.41
5.54
0.41
5.95
*
Tax effect in 2017 includes $10.9 million related to the tax reform in the U.S.
51
Item 6.
Directors, Senior Management and Employees.
Directors and Executive Officers
Board of Directors (Board)
Our directors as of March 15, 2019 are as follows:
Name
Michael Federmann (Chair)
Rina Baum
Yoram Ben-Zeev
David Federmann (Vice Chair)
Dr. Yehoshua Gleitman (External Director)
Dov Ninveh
Professor Ehood (Udi) Nisan
Dalia Rabin (External Director)
Professor Yuli Tamir
__________________
* was not a member of the Board from April - October 2013
Age
Director
Since
75
73
74
44
69
71
51
68
65
2000
2001
2014
2007
2010
2000*
2016
2010
2015
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 2019. The term of office for Yehoshua Gleitman as an External Director
expires in March 2020, and the term of office for Dalia Rabin as an External Director expires in November 2019.
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 46% of the Company’s outstanding ordinary shares. FEL
also has ownership interests in Dan Hotels Ltd. (Dan Hotels), an Israeli hotel chain, in Freiberger Compound Materials
GmbH (Freiberger), a German company engaged in the supply of materials for the semi-conductor industry, as well as in
several financial, real estate and venture capital investments. Mr. Federmann serves as chair of the board of directors of
Dan Hotels. He serves as the president of the Israel - Germany 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). 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.
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. 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 an L.L.B.
degree in law from the Hebrew University.
52
Yoram Ben-Zeev. Yoram Ben-Zeev serves on the board 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 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 the 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 Committee, the 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 in 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 (the technology transfer company of Ben-Gurion
University) and several other private companies. David Federmann is the son of the Board chair. Mr. Federmann holds a
bachelor’s degree in mathematics and philosophy from New York University.
Dr. Yehoshua Gleitman (External Director). Dr. Yehoshua (Shuki) Gleitman has served since 2001 as the
managing partner of Platinum VC, a venture capital firm. He currently serves as the chair of the board of directors of
Capital Point Ltd., of GLK Investment and Management Company Ltd., of GIBF - Guangzhou Israel Bio Tech Fund and
of Teuza - A Fairchild Technology Venture Ltd., and is a director of G Medical Innovations Holdings Ltd., a company
incorporated in the Cayman Islands. From 2000 until 2005, he was the chief executive officer and a director of SFKT Ltd.
From 1997 until 1999, Dr. Gleitman was the chief executive officer of Ampal-American Israel Corporation. Prior to that
he served in various senior management positions in the Israeli government and in Israeli industry, including as director
general and chief scientist of the Israel Ministry of Industry and Trade, chair of the U.S.-Israel Industrial R&D
Foundation, joint chair of the U.S.-Israel Science and Technology Commission, managing director of AIMS Ltd., vice
president and general manager of Elop Electro-Optic Industries Ltd.’s (Elop) marine and aerial operations and head of the
Laser Branch of the Israel Ministry of Defense. Dr. Gleitman serves as the honorary consul general of Singapore to Israel.
Dr. Gleitman holds bachelor of science, master of science and PhD degrees in physical chemistry from the Hebrew
University. Dr. Gleitman serves as the chair of the Audit Committee and the 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.
Dov Ninveh. Dov Ninveh has served as chief financial officer and a manager in FEL since 1994 and as the
general manager of Heris Aktiengesellschaft since 2012. He serves as a member of the board of directors of Dan Hotels,
Etanit and Freiberger. Mr. Ninveh served as a director of 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 a member of the board of Bezalel Academy of Art and chair of its finance
committee, and an External Director of Harel Insurance Finance Services Ltd., and Rekah Pharmaceutical Industry Ltd. 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 from 1999 until 2002
as the CEO of the Jerusalem Development Authority. Prof. Nisan holds bachelor’s and master’s degrees in economics and
business administration, and a PhD in economics and public policy from the Hebrew University. Prof. Nisan serves as a
member of the Audit Committee and the Financial Statements Review Committee of the Board. He is considered by the
Board to have accounting and financial expertise under the Companies Law.
53
Dalia Rabin (External Director). Dalia Rabin is the chair of the Yitzhak Rabin Center, a national institute
dedicated to ensuring that the legacy of former Prime Minister and Minister of Defense Yitzhak Rabin continues to impact
Israeli society through experiential educational programming, a national archive and a museum. Before that, Mrs. Rabin
was a member of the Israeli Government from 1999 until 2002. She is the president of the Center for Arbitration and
Dispute Resolution and a member of the board of directors of Peilim Investment Portfolio Management Company Ltd.
Mrs. Rabin was elected to the Knesset on the Center Party Ticket in 1999 and acted as chair of the Ethics Committee. She
also served on the Constitution, Law and Justice Committee; the Committee for the Advancement of the Status of Women;
the State Control Committee; and the Committee for the Advancement of the Status of the Child. In 2001, Mrs. Rabin was
appointed Deputy Minister of Defense. She resigned in 2002 to head the Rabin Center. Prior to her election to the
Knesset, Mrs. Rabin served as the legal advisor of the professional associations of the General Federation of Labor (the
Histadrut). She also served for fourteen years in the Tel-Aviv District Attorney’s Office in the Civil Division, specializing
in labor law. Mrs. Dalia Rabin holds an L.L.B degree from Tel-Aviv University. Mrs. Rabin serves as the chair of the
Compensation Committee of the Board and as a member of the Audit Committee, the Financial Statements Review
Committee and the Corporate Governance and Nominating Committee.
Professor Yuli Tamir. Prof. Yuli Tamir has served since 2010 as the President of Shenkar College, a public
college in Ramat-Gan, Israel. Before that, 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 of science 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 Committee and the Financial Statements Review Committee of
the Board.
54
Executive Officers
Our executive officers, the President and CEO and the Executive Vice Presidents who report to the President and
CEO) as of March 15, 2019 are as follows:
Name
Bezhalel Machlis
Elad Aharonson
Jonathan Ariel
David Block Temin
Haim Delmar
Joseph Gaspar
Zeev Gofer
Dr. Shelly Gordon
Ran Kril
Edgar Maimon
Avi Mizrachi
Ilan Pacholder
Yuval Ramon
Yoram Shmuely
Yehuda Vered
Yehoshua Yehuda
Age
56
President and Chief Executive Officer
Position
45
62
63
49
70
66
58
48
64
61
64
53
58
61
52
Executive Vice President and General Manager – ISTAR Division
Executive Vice President and Chief Legal Officer
Executive Vice President, Chief Compliance Officer and Senior Counsel
Executive Vice President and General Manager - C4I and Cyber Division
Executive Vice President and Chief Financial Officer
Executive Vice President – Strategic and Business Development - North
America
Executive Vice President – Human Resources
Executive Vice President - International Marketing and Business
Development
Executive Vice President and General Manager – EW and SIGINT Elisra
Division
Executive Vice President - Business Development - Israel and Southeast
Asia
Executive Vice President – Mergers and Acquisitions and Financing
Executive Vice President and Chief Operating Officer
Executive Vice President and General Manager – Aerospace Division
Executive Vice President and General Manager – Land Division
Executive Vice President - 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 and general manager – land and C4I division, after serving as
corporate vice president and general manager – land systems and C4I since 2004. In 2003, he served as corporate vice
president and 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.
Elad Aharonson. Elad Aharonson has served as Executive Vice President and General Manager - ISTAR
Division since 2015. From 2011 until his current appointment, he served as executive vice president and general manager
- UAS Division, after serving as vice president - UAV systems since 2009. He joined Elbit Systems in 2004 and held
various senior program management positions relating to UAS. Prior to that, Mr. Aharonson served as an officer in the
IDF holding command positions in the Artillery Branch and in the Ground Forces’ UAV unit. Mr. Aharonson holds an
L.L.B. degree in law and a bachelor’s degree in business administration from the Hebrew University.
55
Jonathan Ariel. Jonathan Ariel has served as Executive Vice President and Chief Legal Officer since 2012,
after serving as senior vice president and general counsel since 2008. He joined Elbit Systems in 1996 and has held
several positions within the legal department, including vice president and 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
an L.L.B degree in law from Tel-Aviv University and is admitted to the Israeli Bar.
David Block Temin. David Block Temin has served as Executive Vice President, Chief Compliance Officer
and Senior Counsel since 2012, after serving as executive vice president, chief legal officer and chief compliance officer
since 2008. Prior to that he served as corporate vice president and general counsel since 2000 and as general counsel
since 1996. From 1987 to 1996, he was a legal advisor to Elbit Ltd. Prior to that, Mr. Block Temin was an attorney with
law firms in New York City. Mr. Block Temin received a juris doctor degree as well as a master of arts degree in
international relations from Stanford University and holds a bachelor of arts degree in political science from the
University of Maryland. He is admitted to the Israeli bar.
Haim Delmar. Haim Delmar was appointed Executive Vice President and General Manager – C4I and
Cyber Division in November 2018, after serving as senior vice president for C4ISR & HLS in the land & C4I division
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 the 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. He 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.
Zeev Gofer. Zeev Gofer has served as Executive Vice President – Strategic and Business Development –
North America since 2009. From 2008 until his current appointment he was executive vice president – business
development and marketing, after serving as corporate vice president – business development and marketing since 2003.
He previously served as corporate vice president and as co-general manager – aircraft and helicopter upgrades and
systems from 2000 until 2003. From 1999 until 2000, he was vice president – aircraft upgrades and airborne systems
division, having served as division manager since 1996. He joined Elbit Ltd. in 1982 and held various management
positions, including director of the aircraft upgrade division, director of a major aircraft upgrade program, director of
avionics system engineering and technical manager of the Lavi aircraft avionics program. Mr. Gofer holds bachelor’s and
master of science degrees in electronic engineering from the Technion and a master of science of management degree
from the Polytechnic University of New York.
Dr. Shelly Gordon. Dr. Shelly Gordon was appointed as Executive Vice President - Human Resources
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 vice president for marketing and sales in the
aerospace division, after serving as the aerospace division’s vice president for sales and contracts since 2007. He joined
Elbit Systems in 1997 and held various senior positions in the marketing, sales and finance departments of the aerospace
division. 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.
56
Edgar Maimon. Edgar Maimon has served as Executive Vice President and General Manager – EW and
SIGINT Elisra Division since 2013. From 2005 until his current appointment Mr. Maimon served as vice president of
marketing and business development at Elbit Systems EW and SIGINT – Elisra Ltd. (Elisra). He joined Elisra in 2004.
Prior to that Mr. Maimon served for 26 years in the IAF, where he retired with the rank of colonel. He served as the head
of the IAF’s C4I systems engineering department and held several additional senior positions in the IAF. Mr. Maimon
holds a bachelor of science degree in electronic engineering from Ben Gurion University.
Avi Mizrachi. Avi Mizrachi was appointed Executive Vice President - Business Development - Israel and
Southeast Asia in January 2017, after serving as executive vice president - business development - Southeast Asia since
2014. He joined Elbit Systems in 2013 as a senior vice president in the corporate marketing department. Prior to that, Mr.
Mizrachi completed 33 years of service in the IDF, retiring with the rank of major general. From 2009 to 2012, he served
as the commander of the IDF’s Central Command. Prior to that he held a number of senior command positions including
head of the Technology and Logistics Branch and commander of the IDF’s Ground Forces. Mr. Mizrachi holds a bachelor
of arts degree in computer science and business administration from Pace University in New York and is a graduate of the
Harvard University Business School’s Advanced Management Program.
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 and Chief Operating Officer in 2015.
From 2014 until his current appointment, he served as vice president - corporate operations. Prior to that, 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.
Yoram Shmuely. Yoram Shmuely has served as Executive Vice President and General Manager – Aerospace
Division since 2013, after serving as executive vice president and co-general manager of the aerospace division since
2008. Mr. Shmuely served as corporate vice president and co-general manager – airborne and helmet systems since 2003.
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 division. 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 and General Manager – Land
Division since November 2018, after serving as executive vice president and general manager of the land and C4I division
since 2013. From 2009 until 2013, Mr. Vered served as executive vice president – service solutions as well as vice
president – marketing for the land and C4I division. Prior to that, since 2004 he served as chief financial officer and vice
president for contracts and sales of the land and C4I division. Mr. Vered joined Elbit Systems in 2003 as vice president for
contracts and sales and chief financial officer – ground, C4I and battlefield systems. 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 MBA from Ben Gurion University and is a graduate of the Harvard
University Business School’s Advanced Management Program.
57
Yehoshua Yehuda. Yehoshua (Shuki) Yehuda was appointed as Executive Vice President and Chief
Technology Officer in 2016. 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.
President and CEO of Elbit Systems of America
Elbit Systems of America’s President and CEO reports to the board of directors of Elbit Systems of America
in accordance with the provisions of the Special Security Agreement with the U.S. Department of Defense. (See Item 4.
Information on the Company – U.S. Subsidiaries.) Raanan Horowitz has served as President and CEO of Elbit Systems of
America since 2007. He served as executive vice president and general manager of EFW from 2001 until his current
appointment. From 1991 until 2001, Mr. Horowitz held various management positions with EFW and other U.S.
subsidiaries of the Company. From 1989 to 1991, he served as a senior program manager for Elbit Ltd. Mr. Horowitz
previously served on the executive committee of the board of governors of the Aerospace Industries Association and was
previously a member of the national board of directors of the Leukemia and Lymphoma Society. Mr. Horowitz holds an
MBA from the Seidman School of Business of Grand Valley State University in Allendale, Michigan. He also holds a
master of science degree in electrical engineering and a bachelor of science degree in mechanical engineering from Tel-
Aviv University.
Compensation of Directors and Executive Officers
Compensation Policy
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, releases
from liability, indemnification and insurance, severance and all other employment benefits (Employment Terms).
The Companies Law also requires that an adopted compensation policy be reviewed from time to time by
the compensation committee and the board of directors of the company, to ensure its alignment with the company’s goals,
work plan and other policies from a long-term perspective, as well as the compensation policy’s appropriateness to the
company considering, among other factors, the company’s risk management policy and the company’s size and nature of
operations.
In addition, pursuant to the Companies Law, a compensation policy needs to be re-approved every three
years by the board of directors, following the recommendation of the compensation committee, and by the company’s
shareholders, by a Special Uninterested Majority (as defined below). In the event that the compensation policy is not
approved by the shareholders by a Special Uninterested Majority, the board of directors may nonetheless approve it,
provided that the compensation committee and the board of directors, following further discussion of the matter and for
specified reasons, determine that the approval of the compensation policy is in the best interests of the company.
Special Uninterested Majority means the majority of the votes properly cast at the Meeting either in person,
by proxy or by a voting instrument, provided that: (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
who participate in the vote, in person, by proxy or by a voting instrument vote to approve it (abstentions will not be taken
into account) or (b) the total number of votes of the shareholders referred to in (a) above that are voted against the
proposed resolution does not exceed two percent (2%) of the company’s total voting rights. (For the definition Personal
Interest see Item 10. Additional Information - Approval of Certain Transactions - Personal Interest and Extraordinary
Transactions.)
At the Shareholders’ Extraordinary General Meeting held on April 11, 2018, our shareholders, following a
favorable recommendation of the Compensation Committee of the Board (the Compensation Committee) and the approval
of the Board as a whole, approved a compensation policy (the Compensation Policy) applicable to Employment Terms
and arrangements with our Office Holders.
58
In accordance with the provisions of the Companies Law as set forth above, the Compensation Policy will
be in effect for a three-year period or as otherwise may be mandated from time to time by the Companies Law.
The Companies Law requires that we obtain the approval of the Compensation Committee and the Board as
a whole for each Employment Terms arrangement with an Office Holder. In addition, the Companies Law requires that
we also obtain the approval of our shareholders for any Employment Terms arrangement with our CEO, a director or any
other Office Holder where the Employment Terms are not consistent with our Compensation Policy or with respect to
Employment Terms arrangements with any Office Holder that is considered a controlling shareholder or such Office
Holder’s “Relative”. (For the definition of Relative see Item 10. Additional Information - Approval of Certain
Transactions - Approval of Employment Terms of Office Holders). Except with respect to Employment Terms of a
director, such shareholder approval requires a Special Uninterested Majority.
Under certain circumstances described in the Companies Law, if the Employment Terms of an Office Holder
who is not a director or a controlling shareholder, that requires shareholder approval as described above, are not approved
by the shareholders by the required Special Uninterested Majority, and provided that the company is not a “Public
Pyramid Held Company” as defined in the Companies Law, the compensation committee and the board of directors may
nonetheless approve such Employment Terms provided that the compensation committee and the board of directors,
following further discussion of the matter and for specified reasons, determine that the approval of such Employment
Terms is in the best interests of the company. (For further information see Item 10. Additional Information - Approval of
Certain Transactions - Approval of Employment Terms of Office Holders).
In addition, pursuant to the Companies Law, changes determined by the compensation committee not to be
material to the existing Employment Terms of an Office Holder who is not a director or a controlling shareholder, require
only the approval of the compensation committee.
In accordance with the requirements of the Companies Law, our shareholders, following the respective
recommendations of the Compensation Committee and the Board, approved, by the Special Uninterested Majority: (i) the
Employment Terms of our CEO, Mr. Bezhalel Machlis, at the Shareholders' Extraordinary General Meeting held on
March 8, 2016, (ii) the grant of options to our CEO by PO Cell Tech Ltd. (a privately-held Israeli commercial company in
which we hold an interest) at the Shareholders' Extraordinary General Meeting held on April 11, 2018, (iii) the grant to
our CEO of options under our new 2018 - Equity Incentive Plan for Executive Officers (see below “Share Ownership -
Elbit Systems Stock Option Plan”) at the Shareholders' Extraordinary and Annual General Meeting held on October 18,
2018, and (iv) the grant to our CEO by Cyberbit Ltd. (a privately-held Israeli commercial company in which we hold an
interest) at the Shareholders' Extraordinary General Meeting held on March 6, 2019.
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 Employment Terms of Office Holders and Item 16G. -
Corporate Governance.
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, 2018:
All directors (consisting of 9 persons)
All executive officers (consisting of 17 persons)
Salaries,
Directors’ Fees
Commissions and
Bonuses
Pension,
Retirement and
Similar Benefits
(U.S. dollars in thousands)
$
$
499 (1)
$
11,142 (2)(3)(4) $
—
1,371
59
(1) Directors Fees
In accordance with the Compensation Policy and with the Israeli Companies Regulations (Relief from Related Parties'
Transactions), 5760-2000, in meetings held on September 4, 2018, the Compensation Committee and the Board as a
whole approved payment to the Company's directors, including to Michael Federmann and David Federmann (who
each may be considered a direct or indirect controlling shareholder of the Company), 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 NIS 111,115 (equal to
approximately $30,814) and a per meeting fee of NIS 4,275 (equal to approximately $1,186), which reflect the above
mentioned fee levels, linked to the Israeli consumer price index.
(2) 2012 Phantom Bonus Retention Plan
(i) In 2012, our Board approved a “Phantom” Bonus Retention Plan for Senior Officers (the 2012 Phantom Plan).
The purpose of the 2012 Phantom Plan is to provide an incentive to retain applicable senior officers of Elbit
Systems and certain of our subsidiaries by strengthening the alignment of the 2012 Phantom Plan recipients’
financial interests with those of the Company and our shareholders. Under the 2012 Phantom Plan, phantom
bonus units were granted to executive officers within the framework of three consecutive yearly tranches, each
such tranche comprised of an equal number of units which entitle the recipient the right to receive the financial
benefit (Unit Benefits) deriving from increases in the value of the Company’s shares during the applicable
periods, subject to certain restrictions. Unit Benefits are calculated separately for each tranche. The Unit Benefits
accrual period for each tranche is three years from the respective grant date of the applicable bonus units.
(ii) At the end of each year during the Unit Benefits accrual period for each tranche, the Company calculates the value
of each Unit Benefit for such year (the Unit Benefits Value). The Unit Benefits Value is the difference between:
(i) the basic value for that year - i.e. the average closing price on the TASE of the Company’s shares for the thirty
(30) trading days preceding the beginning of the respective year, and (ii) the year-end value for said year - i.e. the
average closing price on the TASE of the Company’s shares for the thirty (30) trading days preceding the end of
the relevant year.
(iii) The accrued Unit Benefits Value for each yearly tranche is the sum of the first year Unit Benefits Value, the
second year Unit Benefits Value and the third year Unit Benefits value for that tranche. Because of certain
conditions in the 2012 Phantom Plan, the Unit Benefits Value for a particular year of a tranche may be zero or
only part of the calculated Unit Benefits Value for that year. The aggregate maximum Unit Benefits Value of a unit
granted for the full three years of a tranche may not exceed 100% of the basic value determined for that tranche
for its first year. Except in certain circumstances described in the 2012 Phantom Plan, the accrued Unit Benefits
Value of a tranche is paid to the recipient at the end of the third year of the respective tranche.
(iv) Except as otherwise provided in the 2012 Phantom Plan, entitlement to receipt of benefits is conditioned on the
recipient remaining an employee of the Company. The benefits received under the 2012 Phantom Plan are subject
to tax at the regular personal income tax rates.
(v) We recorded amounts of approximately $8.9 million and $0.4 million in 2017 and 2018, respectively, as
compensation costs related to grants to our executive officers under the 2012 Phantom Plan. See Item 18.
Financial Statements – Note 22G.
(3) 2018 - Equity Incentive Plan for Executive Officers
We recorded an amount of approximately $1.4 in 2018 as compensation costs related to options granted to our
Executive Officers under our 2018 Equity Incentive Plan for Executive Officers. (See below "Share Ownership - Elbit
Systems’ Stock Option Plans - 2018 - Equity Incentive Plan for Executive Officers" and Item 18. Financial Statements
Notes 22B and 22C).
60
(4) Other Compensation
In addition to payment of monthly salary and annual bonus, our executive officers are entitled to reimbursement of
travel and certain other expenses in a manner similar to other employees.
Office Holders of the Company, including our directors and executive officers, are covered by our D&O liability
insurance policy and are entitled to indemnification in accordance with our Articles of Association and pursuant to an
indemnification letter as approved by our shareholders. (See Item 10. Additional Information - Exemption, Insurance and
Indemnification of Directors and Officers - Exemption, Insurance and Indemnification Under the Companies Law.)
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, 2018. All amounts specified are in terms of cost to the Company as recorded in our financial
statements.
Compensation for each of the specified executive officers 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 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 3.606 which represents the average weighted U.S. dollar - NIS exchange rate for the date of payments for each of the
months during 2018 (Average Exchange Rate).
(2) Bonus Costs. Bonus Costs represent bonuses (annual, managerial evaluation and/or special, as the case may
be) recorded in connection with the Office Holders with respect to the year ended December 31, 2018. U.S. dollar
amounts indicated for Bonus Costs are based on the Average Exchange Rate .
(3) Phantom Bonus Costs. Phantom Bonus Costs are costs recorded with respect to the year ended December
31, 2018 related to the value of benefits under tranches of phantom bonus units granted to the Office Holders under our
2012 Phantom Bonus Retention Plan (see above “Aggregate Compensation to Directors and Officers - Table - Note (2)”
and Item 18. Financial Statements - Note 22G.) Benefits under the 2012 Phantom Plan cover tranches payable over three
years.
(4) Stock Option Costs. Stock Option Costs are costs recorded with respect to the year ended December 31,
2018 related to the 2018 Equity Incentive Plan for Executive Officers (see above “Aggregate Compensation to Directors
and Officers - Table - Note (3)", below "Share Ownership - Elbit Systems’ Stock Option Plans - 2018 - Equity Incentive
Plan for Executive Officers" and Item 18. Financial Statements - Notes 22B and 22C). Such Stock Option Costs also
relate to stock options in start-up entities or similar ventures established by the Company (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). The five most highly compensated Office Holders in 2018 were as follows (U.S. dollar
amounts in thousands):
(1) Bezhalel Machlis - President and CEO. Compensation costs recorded for Mr. Machlis in 2018 included: $890 in
Salary Costs, $1,078 in Bonus Costs, $150 in Phantom Bonus Costs and $252 in Stock Options Costs.
(2) Joseph Gaspar - Executive Vice President and Chief Financial Officer. Compensation costs recorded for Mr.
Gaspar in 2018 included: $725 in Salary Costs, $169 in Bonus Costs and $186 in Stock Options Costs.
(3) Yoram Shmuely - Executive Vice President and General Manager - Aerospace Division. Compensation costs
recorded for Mr. Shmuely in 2018 included: $687 in Salary Costs, $139 in Bonus Costs and $141 in Stock
Option Costs.
(4) Yehuda Vered - Executive Vice President and General Manager - Land Division. Compensation costs recorded
for Mr. Vered in 2018 included: $559 in Salary Costs, $127 in Bonus Costs and $169 in Stock Option Costs.
61
(5) Elad Aharonson - Executive Vice President and General Manager - ISTAR Division. Compensation costs
recorded for Mr. Aharonson in 2018 included: $495 in Salary Costs, $106 in Bonus Costs and $137 in Stock
Option Costs.
Board Practices
Appointment of Directors
Our directors, who are not External Directors, are elected by the shareholders at the annual general
shareholders meeting. They hold office until the conclusion of the next annual general shareholders meeting, which is held
at least once every calendar year but not more than 15 months after the previous annual general shareholders meeting.
Between annual general shareholders meetings our Board may appoint new directors to fill vacancies. The External
Directors are elected at a general shareholders meeting as described under “External Directors” below. Our Articles of
Association authorize a maximum of 17 directors, a minimum of five directors and, unless otherwise 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: Dr. Gleitman 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 shareholders meeting of a
company whose shares are publicly traded, at which the election of a director is to be considered, will not be held unless
the nominee has declared to the company that he or she complies with the above-mentioned requirements, and the details
of his or her applicable qualifications are provided, and in case such nominee is an “Independent Director” as defined in
the Companies Law (see below), that such nominee has also declared that he or she complies with the independence
criteria 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 also each have declared
that he or she complies with the criteria of an Independent Director 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 therein, and provided such director has
been designated as such by the audit committee. The Audit Committee has designated Mr. Ben-Zeev, Prof. Nisan and
Prof. Tamir as Independent Directors under the Companies Law.
The terms of office of Dr. Gleitman and Mrs. Rabin, 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 October 2018. There are no service contracts or similar arrangements with any director
that provide for benefits upon termination of directorship.
Nasdaq’s director independence and related rules applicable to boards of directors apply to Elbit Systems.
Under these rules, our Board is required to meet the Nasdaq director independence criteria. Also applicable are certain
other rules regarding independent directors serving on a director nomination committee and the manner for approving the
compensation to Elbit Systems’ CEO. Directors on our Board are recommended for appointment or election by the
Board’s Corporate Governance and Nominating Committee. (See below “Corporate Governance and Nominating
Committee.”)
62
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. 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.
External Directors
Under the Companies Law publicly held Israeli companies are required to appoint at least two “External
Directors.” Among other requirements, for each publicly held 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):
(A) if that person is not a Relative 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, 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:
(1) the applicable company;
(2) the controlling shareholder of the applicable company or any of his or her relatives on the date of
appointment; or
(3) 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
(B) if and so long as:
(1) 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
(2) such position or business activities does not impair that person’s ability to serve as a director; and
(C) if and so long as:
(1) 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 (A) above, even if such
relationship is not on a regular basis other than a negligible relationship; and
(2) 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
63
(D) 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
(E) 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 “dual 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 any or 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 and 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 the parameters specified in the relevant regulations of the Companies Law.
A director has “professional competence” if he or she (1) 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 (2) has at least five years experience in any of
the following positions or five years accumulated experience in two or more of them:
(i) a senior position in the business management of any corporate entity with a substantial scope of
business;
(ii) a senior public office or a senior position in the public service sector; or
(iii) 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:
(i)
is recommended for re-election by one or more shareholders holding at least 1% of all voting rights of
the relevant company;
(ii) is recommended for re-election by the board of directors of the relevant company; or
(iii) 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 “dual listed” may stand for re-
election for additional terms of up to three years each beyond the first three terms, provided that (i) the audit committee
and the board as a whole have 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, (ii) his or her election was approved by the company's shareholders’ by a Special Uninterested Majority (as
defined in the Companies Law) and (iii) 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.
64
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 of the Board must include at least one External
Director, and all External Directors must be members of the Audit Committee and the Compensation Committee.
Dr. Gleitman and Mrs. Rabin currently serve as our Board’s External Directors. At the Shareholders'
Extraordinary General Meeting held on March 6, 2019 our shareholders approved, by the required Special Uninterested
Majority, the appointment of Dr. Gleitman as an External Director for an additional term of office beyond the first three
terms, which additional term ends in March 2020. The term of office of Mrs. Rabin ends in November 2019. Dr. Gleitman
was determined by the Board to have “financial and accounting expertise” under Israeli law, and Mrs. Rabin was
determined by the Board to have the applicable “professional competence” to serve as an External Director.
Audit Committee. Dr. Gleitman (chair), Mr. Ben-Zeev, Prof. Nisan, Mrs. Rabin and Prof. Tamir are members
of the Audit Committee. In accordance with the Companies Law, an audit committee must consist of at least three
directors qualified to serve as members of an audit committee under the Companies Law, including all External Directors,
and must be comprised of a majority of directors meeting certain independence criteria of the Companies Law. The chair
of the audit committee must be an External Director. In accordance with the applicable Nasdaq rules and those of the
SEC, Elbit Systems Audit Committee must be comprised solely of independent directors, as defined by said rules. The
Audit Committee operates in accordance with an Audit Committee Charter that provides the framework for its oversight
functions consistent with Israeli and U.S. legal and regulatory requirements. All of the members of the Audit Committee
meet the independent criteria of the Companies Law and have been determined to be independent as defined by the
applicable Nasdaq rules and those of the SEC. The Audit Committee meets from time to time in executive sessions and
also conducts annual assessments of the sufficiency of its Charter and of the Committee’s compliance with its obligations.
(See Item 16A. Audit Committee – Financial Expert and Item 16D. Exemptions from the Listing Standards for Audit
Committees.)
Financial Statements Review Committee
Dr. Gleitman (chair), Mr. Ben-Zeev, Prof. Nisan, Mrs. Rabin and Prof. Tamir are members of the Board’s
Financial Statements Review Committee. Pursuant to the Israeli Companies Regulations the financial reports of a public
company such as Elbit Systems may be brought for discussion and approval of the board only after such committee has
discussed and formulated recommendations to the board in connection with:
(1)
the valuations and estimates used in connection with the financial statements;
(2)
the internal controls related to financial reporting;
(3)
the completeness and appropriateness of disclosure in the financial statements;
(4)
the accounting policy adopted and accounting treatment applied in the material matters of the company;
and
(5)
valuations, including the assumptions and estimates underlying them, on which data in the financial
statements is provided.
The Financial Statements Review Committee must consist of at least three members, the chair of the
committee must be an External Director, and the majority of its members must be directors who meet certain
independence requirements of the Companies Law, and, among other criteria, all of its members must be able to read and
understand financial statements, with at least one of the independent members having “financial and accounting
expertise” (as defined above). Dr. Gleitman and Prof. Nisan have been determined by the Board to have “financial and
accounting expertise”.
65
Compensation Committee
Mrs. Rabin (chair), Mr. Ben Zeev and Dr. Gleitman are members of the Board’s Compensation Committee.
Pursuant to the Companies Law (see above “Compensation to Directors and Executive Officers - Compensation Policy”),
the compensation committee of a public company, such as Elbit Systems, is required to consist of at least three members,
and all of the external directors must be members of the committee (one of which to be appointed as the chairperson) and
constitute the majority thereof. The remaining members must be directors who qualify to serve as members of the audit
committee as defined in the Companies Law and whose compensation is in accordance with the compensation
requirements applicable to the External Directors. All of our Compensation Committee members have been determined to
be eligible to be members of a compensation committee in accordance with the Companies Law and also have been
determined to be independent as defined by the applicable Nasdaq rules and those of the SEC.
In addition to its other roles, under the Companies Law the compensation committee of a public company
such as Elbit Systems is required:
(1) to recommend to the board of directors the compensation policy for the company’s Office Holders to be
adopted by the company and to recommend to the board of directors, once every three years, regarding
any extension or modifications of the current compensation policy that had been approved for a period
of more than three years;
(2) from time to time to recommend to the board of directors any updates required to the compensation
policy and examine the implementation thereof;
(3) to determine, with respect to the company’s Office Holders, whether to approve their Employment
Terms; and
(4) in certain situations described in the Companies Law, to determine whether to exempt the approval of
Employment Terms of a candidate for the position of CEO of the company from the requirement to
obtain shareholder approval.
According to the Companies Law, Employment Terms of a public company’s Office Holders must be
approved by the compensation committee and the board as a whole. In addition, with respect to Employment Terms of the
CEO, a director or any Office Holder where the Employment Terms are not consistent with an approved compensation
policy or for an Office Holder that is also considered a controlling shareholder (or such controlling shareholder’s
Relative), approval by the company’s shareholders is also required in accordance with the applicable majority
requirements of the Companies Law. (For definition of the term Relative see Item 10. Additional Information - Approval
of Certain Transactions - Personal Interest and Extraordinary Transactions). For further information see above
“Compensation of Directors and Executive and Executive Officers - Compensation Policy”; Item 10. Additional
Information – General Provisions of Israeli Law and Related Provisions of Articles of Association – Office Holders; and
Item 10. Additional Information - Approval of Certain Transactions - Approval of Employment Terms of Office Holders).
Our Compensation Committee operates in accordance with a Compensation Committee Charter that
provides the framework for its oversight functions consistent with Israeli and U.S. legal and regulatory requirements,
including with the amended compensation committee listing rules of the Nasdaq.
Corporate Governance and Nominating Committee. Mr. Ben Zeev (chair), Dr. Gleitman and Mrs. Rabin
are members of the Board’s Corporate Governance and Nominating Committee. This Committee operates in accordance
with a Corporate Governance and Nominating Committee Charter that specifies its oversight functions consistent with
Israeli and U.S. legal and regulatory requirements. The role of the Corporate Governance and Nominating Committee is to
assist the Board in fulfilling its responsibilities with respect to the qualification of candidates to become Board members
and to monitor compliance with corporate governance requirements applicable to Board members. All of the members of
the Corporate Governance and Nominating Committee have been determined to be independent as defined by the
applicable Nasdaq rules and those of the SEC. A nominee to our Board must have such experience in business or financial
matters as would make such nominee an asset to the Board. In recommending director candidates, our Corporate
Governance and Nominating Committee takes into consideration such factors as it deems appropriate based on our current
needs. These factors may include: professional and personal ethics and integrity; business, professional and industry
knowledge, sophistication and contacts; the ability to make informed and independent judgments on a wide range of
66
issues; relevant skills and experience demonstrated through business, professional, charitable or civic affairs; and the
candidate’s ability to devote the required time and effort to serve on our Board. (See Item 16.G. Corporate Governance.)
Board Committee Membership
Audit Committee:
Yehoshua Gleitman
(chair)
Yoram Ben-Zeev
Ehood Nisan
Dalia Rabin
Yuli Tamir
Financial Statements
Review Committee:
Yehoshua Gleitman
(chair)
Yoram Ben-Zeev
Ehood Nisan
Dalia Rabin
Yuli Tamir
Board and Committee Meetings
Corporate Governance
and Nominating
Committee:
Compensation
Committee:
Yoram Ben Zeev
(chair)
Yehoshua Gleitman
Dalia Rabin
Dalia Rabin
(chair)
Yoram Ben Zeev
Yehoshua Gleitman
The Board meets quarterly and at other times during the year as necessary to conduct its activities. The Audit
Committee and Financial Statement Review Committee each meet at least quarterly, and the Compensation Committee
and Corporate Government and Nominating Committee each meet at least annually. Each of the committees also meets at
additional times during the year as may be necessary to carry out its functions. The Financial Statement Review
Committee meets at least quarterly in executive sessions, and the Board and the other committees meet in executive
sessions periodically. During 2018, the average attendance for Board members at Board and committee meetings was
approximately 98%.
Employees
Number of Employees. Most of our employees are based in Israel, and we have a significant number of
employees in the United States. The total number of employees worldwide and the number of employees in the U.S. at the
end of 2016, 2017 and 2018 were as follows:
2018
2017
2016
Total
Employees
U.S.
Employees
16,149
12,781
12,470
2,001
1,450
1,425
Employment Contracts. The majority of our Israeli employees have individual employment contracts.
However, by law some employees receive rights under a number of general collective bargaining agreements and under
Israeli employment laws. See Item 4. Information on the Company – Conditions in Israel – Israeli Labor Laws. We
believe our overall relationship with our employees is satisfactory.
Collective Bargaining Agreements. In Israel, several of our wholly-owned subsidiaries are each parties to
collective bargaining agreements covering a portion of their employees. A total of approximately 5,060 employees in
Israel are covered by such agreements that extend for various periods ranging from 2019 - 2027. Approximately 200 of
the employees at Elbit Systems of America’s operations are covered by collective bargaining agreements in effect through
various periods through April 2021.
67
Share Ownership
Elbit Systems’ Stock Option Plans
2018 - Equity Incentive Plan for Executive Officers
On February 27, 2018 our Board approved the 2018 Equity Incentive Plan for Executive Officers (the Plan). The
purpose of the Plan is to link the compensation and benefits of our Executive Officers with the future growth and success
of the Company and its affiliates and with long-term shareholder value. Our Board has also approved the appointment of
our Compensation Committee as the administrator of the Plan.
Under the Plan, the Company may allocate to its Israeli resident Executive Officers, subject to receipt of
approvals as required under Israeli Law, up to 1,000,000 options (the Options) to be exercised using a “Net-Exercise
Mechanism”, which entitles the recipients to exercise the Options for an amount of shares reflecting only the benefit
factor.
The Options are granted under the provisions of Section 102 of the Israeli Income Tax Ordinance [New Version]
of 1961 as may from time to time be amended, with respect to the “capital gain tax route”, as well as in compliance with
the Israeli Income Tax Rules (Tax Relief in Issuance of Shares to Employees) 2003, as amended from time to time,
The exercise price of an Option is denominated in U.S. dollars and is the higher of:
(a)
the average of the closing share price of Elbit Systems ordinary shares on the TASE, during the period of
thirty (30) trading days preceding the date on which our Board approves the granting of the respective
Options (Date of the Board Resolution) converted into the U.S. Dollars by applying the average
representative U.S. dollar - NIS exchange rate during such thirty (30) trading days period; or
(b)
the closing share price of our ordinary shares on the TASE on the last trading date preceding the Date of
the Board Resolution, converted into the U.S. Dollars by applying the representative U.S. dollar - NIS
exchange rate.
The grant date of Options to a recipient is determined to be the later of (the Grant Date):
(i)
the Date of the Board Resolution;
(ii)
the first trading day after a period of thirty (30) days has elapsed from the date the Plan is filed with the
Israeli Tax Authorities; or
(iii) where applicable, the date on which any additional corporate approvals required by Israeli law in
connection with the Plan have been obtained.
Granted Options vest as follows: forty percent (40%) on the second anniversary of the Grant Date, with the
remaining sixty percent (60%) of the Options vesting twenty percent (20%) each on the third, fourth and fifth anniversary
of the Grant Date. respectively.
The Plan includes customary terms such as adjustments for capital modifications (reverse stock split, stock split,
etc.), rights offering restructuring (split, merger, etc.), and the like. Under the Plan, the vesting of granted Options may be
accelerated by the recipient in case his or her employment is terminated by the Company without cause within a period of
twelve (12) months following any change of control over the Company. The Plan also allows, subject to approvals of the
Compensation Committee and the Board, acceleration, continued vesting and exercisability of the Options, as well as
post-termination exercise periods, in case of termination of employment without cause, or as a result of death or disability.
Israeli law does not require approval by our Company’s shareholders for an equity incentive plan such as the
Plan. In compliance with Nasdaq Rule 5615(a)(3) allowing a foreign private issuer to follow its home country practice in
lieu of certain requirements of Nasdaq’s 5600 series of corporate governance rules, we provided the Nasdaq with a legal
opinion of an independent Israeli law firm confirming the above (See Item 16.G - Corporate Governance). On March 20,
2018, the Company filed with the SEC a form S-8 (No. 333-223785) for the registration under the U.S Securities Law of
the underlying shares that may be issued upon exercise of Options under the Plan.
68
Item 7.
Major Shareholders and Related Party Transactions.
Major Shareholders
Percentages
As of March 15, 2019, we had 42,753,182 ordinary shares outstanding. The following table sets forth specific
information as of March 15, 2019, to the best of our knowledge, concerning:
•
•
beneficial ownership of more than 5% of our outstanding ordinary shares; and
the number of ordinary shares beneficially owned by all of our executive officers and directors as a group.
Name of Beneficial Owner
Federmann Enterprises Ltd.
99 Hayarkon Street
Tel-Aviv, Israel(2)
Heris Aktiengesellschaft
c/o 99 Hayarkon Street
Tel-Aviv, Israel
All executive officers and directors as a group (25 persons)
Amount Owned
Percent of
Ordinary Shares(1)
19,580,342 (3)
3,836,458
6,075
(3)
(4)
45.8%
8.97%
0.01%
(1) Based on 42,753,182 ordinary shares outstanding as of March 15, 2019, which excludes 1,408,921 ordinary
shares held by us as treasury shares.
(2) Federmann Enterprises Ltd. (FEL) owns our ordinary shares directly and indirectly through Heris
Aktiengesellschaft (Heris), which is controlled by FEL. FEL is controlled by Beit Federmann Ltd. (BFL).
BFL is controlled by Beit Bella Ltd. (BBL) and Beit Yekutiel Ltd. (BYL). Michael Federmann is the
controlling shareholder of BBL and BYL. He is also the chair of Elbit Systems’ Board and the chair of the
board and the chief executive officer of FEL. Therefore, Mr. Federmann controls, directly and indirectly, the
vote of ordinary shares owned by Heris and FEL.
In connection with FEL’s purchase of our ordinary shares in 2004 and 2006, FEL obtained loans from two
Israeli banks. As security for the loans, FEL pledged an aggregate of 4,300,000 of our ordinary shares to the
banks.
(3) The 19,580,342 shares held by FEL includes the 3,836,458 shares held by Heris.
(4) This amount does not include any ordinary shares that may be deemed to be beneficially owned by Michael
Federmann as described in footnote (2) above.
Rights in Shares, Significant Changes in Shareholders and Controlling Shareholders
Our controlling shareholders have the same rights as other holders of our ordinary shares. (See also Item 10.
Additional Information – Provisions Relating to Major Shareholders. With respect to the Company’s repurchase of our ordinary
shares see Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.)
69
There are no changes in shareholdings by our controlling shareholders (FEL) in the last three years as indicated
below:
March 15, 2019
March 15, 2018
March 15, 2017
Shares Owned
19,580,342
% of Shares
Owned
45.80%
Shares Owned
19,580,342
% of Shares
Owned
45.80%
Shares Owned
19,580,342
% of Shares
Owned
45.80%
FEL
As of March 15, 2019, approximately 11% of our outstanding ordinary shares were held in the United States by
approximately 154 shareholders of record registered on the books of our transfer agent.
We are not aware of any arrangement which may result in a change in control of the Company.
Related Party Transactions
Transactions with Affiliated Companies. In the ordinary course of business, some of our subsidiaries and
affiliates engage in business activities with each other. The purchases among our related parties are made at prices and on terms
equivalent to those used in transacting business with unrelated parties under similar conditions. The sales among our related
parties in respect to government defense contracts are made on the basis of costs incurred. (See Item 10. Additional Information
– General Provisions of Israeli Law and Related Provisions of Articles of Association – Approval of Certain Transactions.)
Transactions with Office Holders. See Item 10. Additional Information – General Provisions of Israeli Law and
Related Provisions of Articles of Association - Office Holders; Item 10. Additional Information – General Provisions of Israeli
Law and Related Provisions of Articles of Association - Approval of Certain Transactions - Approval of Transactions; and Item
10. Additional Information – General Provisions of Israeli Law and Related Provisions of Articles of Association - Approval of
Certain Transactions - Approval of Employment Terms of Office Holders.
Item 8.
Financial Information.
Consolidated Statements and Other Financial Information
See Item 18. Financial Statements.
Export Sales
Export sales constitute a significant portion of our sales. In 2018, export sales were approximately $2.94 billion,
constituting approximately 80% of our total sales. (For further information regarding the allocation of our revenues by
geographic region see Item 5. Operating and Financial Review and Prospects – 2018 Compared to 2017 – Revenues.)
Legal Proceedings
The Company is involved in various legal proceedings from time to time. For a discussion of our significant legal
proceedings see Item 18. Financial Statements - Note 21C.
Dividend Distributions
We do not have an established dividend policy. (Regarding declarations of dividends out of certain tax-exempt
income see below Item 10. Additional Information – Taxation – Investment Law.) Our Articles of Association provide that the
Board may approve dividend payments to shareholders out of surplus earnings as permitted by applicable law. We have
consistently paid a quarterly dividend to our shareholders.
70
Our aggregate quarterly dividend payments for the last three full fiscal years were as follows:
2016
2017
2018
$
$
$
1.60 per share
1.76 per share
1.76 per share
Other than any significant event that may be described in this annual report, there have not been any significant
changes since December 31, 2018.
Item 9.
The Offer and Listing.
Share Listings and Trading Prices
Our ordinary shares are listed on the TASE and are quoted on Nasdaq under the symbol “ESLT”.
The high and low sale prices for our ordinary shares for the five most recent fiscal years are:
2014
2015
2016
2017
2018
Nasdaq
TASE(*)
High
Low
High
Low
$
$
$
$
$
64.66
89.87
104.70
152.65
149.73
$
$
$
$
$
54.36
58.63
80.24
99.96
109.81
$
$
$
$
$
64.26
90.22
104.53
152.67
147.89
$
$
$
$
$
53.19
59.04
80.25
99.61
110.34
The high and low quarterly sale prices for our ordinary shares for the two most recent full financial years and the
next subsequent quarter are:
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
First Quarter (through March 15, 2019)
Nasdaq
TASE(*)
High
Low
High
Low
$
$
$
$
$
$
$
119.55
127.16
146.62
152.65
149.89
124.10
135.49
126.19
$
$
$
$
$
$
99.96
113.14
122.22
131.35
116.90
109.83
112.72
109.81
135.01
$
113.58
$
$
$
$
$
$
$
118.66
126.07
147.28
152.67
147.89
126.21
135.49
126.80
$
$
$
$
$
$
99.61
110.83
122.90
130.98
116.68
110.34
113.49
107.57
134.85
$
113.02
71
The monthly high and low sale prices of our ordinary shares for the most recent six months are:
September 2018
October 2018
November 2018
December 2019
January 2019
February 2019
Nasdaq
TASE(*)
High
Low
High
Low
$
$
$
$
$
$
135.49
129.00
125.06
126.19
125.23
135.01
$
$
$
$
$
$
124.67
116.06
115.09
109.81
113.58
123.01
$
$
$
$
$
$
135.49
129.43
125.16
126.80
125.16
134.85
$
$
$
$
$
$
126.85
117.41
113.56
107.57
113.02
122.72
(*) The closing prices of our ordinary shares on the TASE have been translated into U.S. dollars using the daily representative
rate of exchange of the NIS to the U.S. dollar as published by the Bank of Israel for the applicable day of the high/low amount
in the specified period.
Item 10.
Additional Information.
General Provisions of Israeli Law and Related Provisions of Articles of Association
Israeli Companies Registrar. We are registered with the Israeli Companies Registrar. The registration number
issued to us by the Companies Registrar is 52-004302-7.
The Companies Law and Restated Articles of Association. The Companies Law is the basic corporation law
governing Israeli publicly and privately held companies. The Companies Law mandates that specific provisions be included in
an Israeli company’s articles of association, which are included in Elbit Systems’ Restated Articles of Association (the Articles
of Association).
Purpose. Elbit Systems’ purpose, as described in Article 3 of the Articles of Association, includes any objectives
permitted by law.
Appointment and Removal of Directors. See Item 6. Directors, Senior Management and Employees – Directors
and Executive Officers – Board of Directors.
Internal Auditor. Publicly held Israeli companies are required to appoint an internal auditor. The main role of the
internal auditor is to examine whether the company’s activities are conducted in accordance with the law, with integrity and
pursuant to orderly business procedures. The internal auditor operates in accordance with the internal audit provisions of a
written audit committee charter that provides the framework for the committee’s oversight of the internal auditor’s functions,
consistent with applicable Israeli and U.S. laws and regulations.
Office Holders
An Office Holder is defined as a director, general manager, chief business manager, deputy general manager, vice
general manager, any other person who fulfills these functions without regard to that person’s title and any other manager
directly subordinate to the general manager. Under the Companies Law, the general manager of a corporation has authority
equivalent to that of a president or chief executive officer of a U.S. corporation. For such purposes, our general manager is
Bezhalel Machlis, our President and Chief Executive Officer. Each person listed as a director or executive officer in Item 6.
Directors - Senior Management and Employees - Directors and Executive Officers, is an Office Holder of Elbit Systems.
72
The Companies Law specifies the fiduciary duties that an Office Holder owes to a company, which consist of a
duty of care and a duty of loyalty. Under the Companies Law, an Office Holder’s loyalty duty includes the general duty to act
in good faith and for the benefit of the company, avoiding any conflict of interest between the Officer Holder’s position in the
company and his or her personal affairs. The loyalty duty also includes avoiding any competition with the company and any
exploitation of a business opportunity of the company in order to receive personal advantage for the Office Holder or others.
Also, the Office Holder is required to disclose to the company any information or documents relating to the company’s affairs
that the Office Holder has received due to his or her position as an Office Holder. Under the Companies Law voting agreements
among directors or a director’s failure to exercise independent judgment while voting are considered breaches of loyalty duty.
The duty of care requires, among others, that an Office Holder acts in a way that a reasonable Office Holder would act in the
same position and under similar circumstances. This includes the duty to utilize reasonable means to obtain information
regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and
all other relevant information.
Some members of our Board are also directors of FEL or companies controlled by FEL. Therefore, in the event of
an issue or transaction between Elbit Systems and any of those companies, those individuals who are affiliated with both of the
applicable companies will be excluded from any decisions concerning such issue or transaction. In addition, an issue or
transaction with any of such companies also requires authorization in accordance with the requirements of the Companies Law.
(See below “Approval of Certain Transactions” and “Provisions Relating to Major Shareholders”.)
Arrangements in connection with the Employment Terms (see Item 6. Directors, Senior Management and
Employees - Compensation of Executive Officers and Directors - Compensation Policy) of Elbit Systems’ Office Holders
require special authorizations. (See below “Approval of Certain Transactions - Approval of Employment Terms of Office
Holders”.)
Other transactions with Office Holders and affiliates may also require authorization in accordance with the
requirements of the Companies Law. (See below “Approval of Certain Transactions”.)
Approval of Certain Transactions
Approval Procedures. The Companies Law requires that certain transactions, actions and arrangements, mainly
with related parties including Office Holders, be approved as provided for in the Companies Law and in a company’s articles of
association and in many cases by the audit committee or the compensation committee and by the board of directors. In some
cases shareholder approval is also required.
Personal Interest and Extraordinary Transactions. The Companies Law requires that an Office Holder or a
controlling shareholder (see “Provisions Relating to Major Shareholders” below) of a publicly traded company immediately
disclose (and no later than the first board meeting at which the transaction is discussed) any Personal Interest (as defined
below) that he or she may have and all related material information known to him or her, in connection with any existing or
proposed transaction of the company. A person with a Personal Interest in any such transaction that is brought for approval of
the audit committee or board of directors may not be present at the meeting where the transaction is being deliberated or
approved (unless the chair of the audit committee or the board, as the case may be, determines that such person’s presence at
the meeting is required for presentation of the relevant transaction) and, in case such person is a director, he or she may not vote
on the matter, unless a majority of the members of the audit committee or of the board of directors (as the case may be) have a
Personal Interest in the approval of the relevant transaction, in which case the directors having such Personal Interest may be
present and may participate in the vote. In the event that the relevant transaction is a transaction other than an "Extraordinary
Transaction" (as defined below) in which an Office Holder has a personal interest, and the majority of the members of the board
of directors have a "Personal Interest" in such transaction, the approval of the shareholders is also required.
In accordance with the Companies Law:
“Personal Interest” means a personal benefit, gain or other interest derived by the shareholder (or a Relative or
related entity, as described below) from approving the respective act or transaction. Any benefit or interest arising solely from
holding a company’s shares is not considered such a personal benefit or other interest under the Companies Law. Such personal
benefit and other interest includes any personal benefit or other interest of:
(i) a shareholder’s Relative (as defined below);
(ii) any entity in which a shareholder or any of his or her Relatives either:
73
(a) holds 5% or more of such entity’s issued share capital or voting rights;
(b) has the right to appoint a director to such entity’s board of directors or the chief executive officer thereof;
or
(c) is a member of such entity’s board of directors or serves as the chief executive officer thereof; or
(iii) anyone voting by proxy or granting a proxy on behalf of such a shareholder with respect to the applicable
transaction, whether the proxy holder has discretion to vote or not.
An "Extraordinary Transaction" is a transaction:
(i) other than in the ordinary course of business;
(ii) other than on market terms; or
(iii) likely to have a material impact on the company’s profitability, assets or liabilities.
“Relative” means any of the following:
(i) a spouse, brother, sister, parent, grandparent or child;
(ii) the child, brother, sister or parent of a spouse of a person mentioned in (i); or
(iii) the spouse of any of the persons mentioned in (i) or (ii).
Approval of Transactions
In accordance with the Companies Law the transactions specified below require the following approvals, provided
always that such transaction is for the benefit of the company:
(1) approval of the board of directors - a transaction with an Office Holder, other than arrangements in
connection with Employment Terms, or a transaction in which an Office Holder has a Personal Interest,
where the audit committee has determined that such transaction is not an Extraordinary Transaction, unless
the company’s articles of association provide otherwise;
(2) approval of both the audit committee and the board of directors:
(i)
a transaction with an Office Holder, other than arrangements in connection with Employment Terms,
or a transaction in which an Office Holder has a Personal Interest, where the audit committee has
determined such transaction to be an Extraordinary Transaction;
(ii)
a material action or arrangement that may otherwise be considered a breach of fiduciary duty by an
Office Holder;
(iii)
an Extraordinary Transaction of a public company with its controlling shareholder or with another
person in which the controlling shareholder has a Personal Interest, including a private offering in
which the controlling shareholder has a Personal Interest, as well as an agreement of a public company
with its controlling shareholder or his or her Relatives, directly or indirectly, including through a
company controlled by him or her, regarding the grant of services to the applicable company or
regarding the terms of service and/or employment of the controlling shareholder or his or her
Relatives, as the case may be;
(3) approval of both the compensation committee and the board of directors - an arrangement regarding
Employment Terms of an Office Holder or of a controlling shareholder or his or her Relatives as Office
Holders or employees of the company.
74
Except for certain exemptions specified under the Companies Law, the transactions and arrangements described
above may also require shareholder approval, including, where applicable, by a Special Uninterested Majority. In addition, the
Companies Law requires re-approval every three years with respect to some of the matters referred to above. Re-approval when
applicable is required by the audit committee or the compensation committee, as the case may be, the board of directors and,
except for certain specific exemptions, by the shareholders. (See below "Exemption, Insurance and Indemnification of
Directors and Officers - Insurance and Indemnification of Directors and Officers under the Articles of Association" and also
"Provisions Relating to Major Shareholders".)
Under the Companies Law, the audit committee of a publicly held company such as Elbit Systems is also
required to determine whether to carry out competitive procedures or other procedures before any engagement in a transaction
with a controlling shareholder or in which a controlling shareholder has a Personal Interest.
Approval of Employment Terms of Office Holders
In accordance with the Companies Law (see Item 6. Directors, Senior Managers and Employees - Compensation
of Directors and Executive Officers - Compensation Policy), approval by both the compensation committee and the board of
directors is required for all arrangements regarding Employment Terms of an Office Holder. In addition, the Companies Law
requires that we also obtain the approval of our shareholders for any Employment Terms arrangement with (i) our CEO; (ii) a
director; (iii) any other Office Holder where the Employment Terms are not consistent with an approved compensation policy
or (iv) an Office Holder that is also considered a controlling shareholder (or his or her Relative). Except with respect to
Employment Terms of a director, such shareholder approval requires a Special Uninterested Majority. (See Item 6. Directors,
Senior Managers and Employees - Compensation of Directors and Executive Officers - Compensation Policy).
In accordance with the Companies Law, the compensation committee may determine that an arrangement in
connection with Employment Terms of a candidate for the position of the CEO of a public company is exempt from the
approval by the shareholders of the company, provided that: (i) the CEO candidate is “independent” based on criteria set forth
in the Companies Law; (ii) the compensation committee determines, based on detailed reasons, that bringing the arrangement to
the approval of the shareholders may compromise completing the arrangement; and (iii) the Employment Terms are consistent
with the company’s approved compensation policy.
In addition, pursuant to the Companies Law, in special cases the compensation committee and the board of
directors may approve Employment Terms of an Office Holder (other than a director or a controlling shareholder, but including
the CEO) that requires the approval of the shareholders as specified above, even if the shareholders do not approve such
Employment Terms, provided that:
(1) both the compensation committee and the board of directors re-discussed the relevant Employment Terms
and decided to approve them despite the shareholders’ objection, based on detailed reasons; and
(2) the company is not a “Public Pyramid Held Company”. A “Public Pyramid Held Company” is a public
company that is controlled by another public company (including by a company that only issued debentures
to the public), which is also controlled by another public company (including a company that only issued
debentures to the public) that has a controlling shareholder.
Changes of the terms of a current arrangement regarding Employment Terms of an Office Holder (other than a
director or a controlling shareholder) require only the approval of the compensation committee, if the compensation committee
has determined that such changes are not material.
For further information see above “General Provisions of Israeli Law and Related Provisions of Articles of
Association - Office Holders” and Item 6. Directors, Senior Management and Employees - Compensation of Executive Officers
and Directors - Compensation Policy.
75
Exemption, Insurance and Indemnification of Directors and Officers
Exemption, Insurance and Indemnification under the Companies Law
Under the Companies Law, an Israeli company may not exempt an Office Holder from liability with respect to a
breach of his or her duty of loyalty, but may exempt in advance an Office Holder from his or her liability to the company, in
whole or in part, with respect to a breach of his or her duty of care, provided that a relevant provision is included in the
company’s articles of association. However, a company may not exempt in advance a director from his or her liability to the
company with respect to a breach of duty of care in connection with a distribution made by the company.
To the extent specifically allowed by the company’s articles of association, the Companies Law permits a
company to obtain an insurance policy covering liabilities of Office Holders resulting from their actions in fulfilling their roles
as Office Holders, in any of the following instances:
(i)
breach of the Office Holder’s duty of care to the company or to another person;
(ii) breach of the Office Holder’s duty of loyalty to the company, to the extent that the Office Holder acted in
good faith and had reasonable basis to believe that the act would not prejudice the interests of the company;
or
(iii)
monetary liabilities imposed on the Office Holder for the benefit of another person.
The Israeli Securities Law – 1968 (Securities Law) also permits such an insurance policy to cover a payment
which an Office Holder is obligated to make to an injured party as set forth in the relevant sections of the Securities Law as
well as expenses incurred by an Office Holder in connection with certain proceedings that are specified in the Securities Law,
including reasonable litigation expenses (including attorneys’ fees), provided that a relevant provision is included in the
company’s articles of association.
Under the Companies Law, a company may indemnify an Office Holder against monetary liabilities and expenses
imposed on or incurred by the Office Holder as a result of an act done by virtue of his or her role as an Office Holder for the
following matters:
(i) financial liability imposed on the Office Holder in favor of another person pursuant to a judgment, including
a judgment in the course of settlement arrangements or an arbitrator’s award approved by a court;
(ii) reasonable litigation expenses, including attorneys’ fees, incurred by the Office Holder in an investigation or
proceeding that has concluded without an indictment being filed and without any monetary liabilities being
imposed on the Office Holder in lieu of criminal proceedings or has concluded without the filing of any
indictment but with the imposition of monetary liability in lieu of criminal proceedings in an offence that
does not require proof of criminal intent or in connection with a monetary sanction; and
(iii) reasonable litigation expenses, including attorneys’ fees, incurred by the Office Holder or imposed by a court
in a proceeding instituted against the Office Holder by the company, on its behalf or by any other person, or
in connection with criminal proceedings in which the Office Holder was acquitted, or as a result of a
conviction for an offense that does not require proof of criminal intent.
Under the Companies Law, a company may indemnify an Office Holder in respect of certain liabilities, either in
advance of an event or following an event. If a company undertakes to indemnify an Office Holder in advance of an event, the
indemnification, pursuant to (i) above, must be limited to foreseeable events in light of the company’s actual activities at the
time the company undertook such indemnification and also limited to amounts or criteria determined by the board of directors
as reasonable under the circumstances, and the undertaking to indemnify will specify any such events, amounts or criteria.
In addition, a company may indemnify an Office Holder in respect of payments that the Office Holder is obligated
to make to an injured party as set forth in the relevant sections of the Securities Law, including reasonable litigation expenses
(including attorneys’ fees). These indemnifications are subject to the inclusion of relevant provisions in the company’s articles
of association.
76
A company may not indemnify an Office Holder or enter into an insurance contract that would provide coverage
for, or exempt an Office Holder from, liability to the company with respect to any of the following:
(1) a breach of duty of loyalty, except indemnification or insurance that provides coverage for a breach of a duty
of loyalty to the company while acting in good faith and having reasonable basis to believe that such act
would not prejudice the interests of the company;
(2) a willful or reckless breach of duty of care, other than mere negligence;
(3) an act done with the intent to unlawfully realize a personal gain;
(4) a fine, monetary penalty or forfeiture imposed upon such Office Holder; or
(5) certain monetary liabilities that are set forth in the Securities Law.
Insurance and Indemnification of Directors and Officers under the Articles of Association
In accordance with and subject to the provisions of the Companies Law and the Securities Law, Elbit Systems’
Articles of Association allow for directors and officers liability insurance, in respect of a liability or payment imposed on a
director or officer as a result of an act carried out by such person in his or her capacity as a director or officer. This insurance
may cover:
(1) a breach of his or her duty of care to Elbit Systems or to another person;
(2) a breach of his or her duty of loyalty to Elbit Systems, provided that the director or officer acted in good faith
and had reasonable basis to assume that his or her act would not harm the interests of Elbit Systems;
(3) a financial obligation imposed on him or her in favor of another person;
(4) a payment that he or she is obligated to pay to an injured party as set forth in the relevant sections of the
Securities Law;
(5) expenses incurred by him or her in connection with certain administrative proceedings specified in the
Securities Law, including reasonable litigation expenses (including attorneys’ fees); or
(6) any other event for which insurance of a director or officer is or may be permitted.
In addition, in accordance with and subject to the Companies Law and the Securities Law, Elbit Systems’ Articles
of Association permit indemnification, retroactively or in advance, of a director or officer against liability, payment or expense
imposed on or incurred by him or her as a result of an act carried out in his or her capacity as a director or officer, that may
include:
(1) a monetary liability imposed on the director or officer or paid by him or her in favor of a third party under a
judgment, including a judgment by way of compromise or a judgment of an arbitrator approved by a court;
provided however, that in case such undertaking is granted in advance it will be limited to events which, in
the Board’s opinion, are foreseeable in light of the Elbit Systems’ actual activities at the time of granting the
obligation to indemnify, and to a sum or under criteria as the Board deems reasonable under the
circumstances, and the undertaking to indemnify will specify the aforementioned events and sum or criteria;
(2) a payment imposed on him or her in favor of an injured party in the circumstances specified in the Securities
Law;
77
(3) reasonable litigation expenses (including attorneys’ fees), incurred by a director or officer as a result of an
investigation or proceeding conducted against him or her by an authority authorized to conduct such
investigation or procedure, provided that such investigation or procedure: (i) concludes without the filing of
an indictment against the director or officer and without imposition of monetary payment in lieu of criminal
proceedings; or (ii) concludes with imposing on the director or officer a monetary payment in lieu of criminal
proceedings, provided that the alleged criminal offense in question does not require proof of criminal intent
or was incurred by the director or officer in connection with a monetary sanction imposed by the Companies
Law or the Securities Law;
(4) expenses incurred by a director or a officer in connection with certain administrative proceedings set forth in
the Securities Law, including reasonable litigation expenses (including attorneys’ fees);
(5) reasonable litigation expenses (including attorneys’ fees), expended by the director or officer or imposed on
him or her by the court for:
(i)
proceedings issued against him or her by or on Elbit Systems’ behalf or by a third party;
(ii)
criminal proceedings from which the director or officer was acquitted; or
(iii)
criminal proceedings in which he or she was convicted of an offense that does not require proof of
criminal intent; or
(6) any other liability or expense for which it is or may be permissible to indemnify a director or an officer.
The Articles of Association permit the grant of similar indemnification to any person acting on behalf or at the
request of Elbit Systems as a director or officer of another company in which Elbit Systems is directly or indirectly a
shareholder or has any other interest. However, any indemnification so granted by Elbit Systems may not exceed 25% of Elbit
Systems’ consolidated shareholders equity as reflected in our most recent consolidated financial statements published prior to
the date of the indemnification payment.
In November 2011, Elbit Systems’ Audit Committee, Board and shareholders approved the grant to members of
our Board, including to Messrs. Michael Federmann and David Federmann (who may each be considered a direct or indirect
controlling shareholder of the Company), of indemnification letters reflecting the above conditions and limitations. Similar
letters were also approved by the Audit Committee and the Board for indemnification of Office Holders of Elbit Systems who
are not directors.
According to the Companies Law, the granting by a public company, such as Elbit Systems, of an indemnification
letter to an Office Holder who may be considered as a direct or indirect controlling shareholder of that company, requires re-
approval every three years by the company’s compensation committee, the board of directors and the company’s shareholders.
The indemnification letters originally granted to Michael Federmann and David Federmann in November 2011 were last re-
approved by our shareholders on November 30, 2017, at the Annual General Meeting of Shareholders, for an additional period
of three years commencing on December 1, 2017.
Elbit Systems' Compensation Policy allows Elbit Systems to purchase, from time to time during the term of the
Compensation Policy, directors and officers (D&O) liability insurance; provided that the coverage limit will not exceed $150
million and that the insurance policy terms, as well as the premium paid, will reflect current market conditions with respect to
the Company and the nature of its operations and will not exceed $1 million for each such insurance policy. In accordance with
the Israeli Companies Regulations (Relief from Related Parties’ Transactions), 5760-2000, the inclusion of Michael Federmann
and David Federmann (who may be considered direct or indirect controlling shareholders of the Company) and of Bezhalel
Machlis, our President and CEO, in any D&O liability insurance policy requires the approval of our Compensation Committee
that with respect to the D&O insurance policy applicable to each of them (i) the terms of the policy are either less favorable or
similar to those applicable with respect to other Office Holders of the Company, (ii) is purchased on market terms and (iii) the
purchase thereof will not have a material effect on the Company’s profitability, assets or obligations.
78
In respective meetings held on January 28, 2019, our Compensation Committee and our Board approved the
purchase of a D&O liability insurance policy which complies with the provisions of our Compensation Policy and further
approved the inclusion therein of Michael Federmann and David Federmann (who may be considered direct or indirect
controlling shareholders of the Company) and of Bezhalel Machlis, our President and CEO, in accordance with the
requirements of the Israeli Companies Regulations (Relief from Related Parties’ Transactions), 5760-2000. As of March 15,
2019, the D&O policy’s limit of liability was $100 million, and the annual premium was $488,650.
Rights, Preferences and Restrictions of Shares
Elbit Systems currently has one type of share, this being ordinary shares. The share capital of Elbit Systems is NIS
80,000,000 divided into 80,000,000 ordinary shares of NIS 1 nominal (par) value each, of which 42,753,182 ordinary shares
were issued and outstanding as of March 15, 2019. All issued and outstanding ordinary shares are fully paid and non-
assessable.
Each ordinary share entitles its owner to receive notices of, to attend and to cast one vote at, a general meeting of
shareholders.
Our Articles of Association do not grant shareholders any rights to share in our profits other than through
dividends. Subject to Israeli law, dividends may be declared by our Board and paid to the shareholders according to their
respective rights. In the event that we were to go into liquidation, any surplus remaining after the payment of liabilities would
be distributed to the shareholders in proportion to the amount paid by each on account of the nominal value of the shares paid.
No account is taken of any premiums paid in excess of the nominal value.
Our Board may make calls upon shareholders in respect of sums unpaid on their shares. Our Articles of
Association contain no provisions which discriminate against any existing or future shareholder as a result of the number of
shares such shareholder holds.
A change of Elbit Systems’ share capital, by way of increasing the share capital, creation of new shares or
cancellation of unissued registered shares (if there is no undertaking to allot such shares), requires a change to our Articles of
Association and as such requires the vote of a special majority of the shareholders participating in a general meeting of
shareholders (see “General Meetings of Shareholders” below.)
If at any time our share capital is divided into different classes of shares, we may change the rights of shareholders
by way of a resolution at a general meeting of shareholders, subject to the consent of the shareholders of the class whose rights
are being impaired by the proposed change or subject to the adoption of a resolution by a special majority of the general
meeting of the shareholders of such class, all of which would be subject to other terms if and as provided by the terms of
issuance of a particular class of shares.
Our ordinary shares do not have pre-emptive rights.
General Meetings of Shareholders
An annual general meeting of our shareholders must be held once in each year and not later than 15 months after
the preceding annual general meeting.
Any general meeting that is not an annual general meeting is defined as an extraordinary general meeting. All
shareholders are entitled to attend any annual or extraordinary general meeting and vote at general meetings in person, by proxy
or through the Israeli Securities Authority’s electronic voting system. Notice of an annual or extraordinary general meeting may
be sent by us by personal delivery or by sending it by prepaid registered mail. Such notice may be sent by cablegram, telex,
facsimile or other electronic means provided confirmation is made by registered mail as stated above and should be sent to
shareholders at the address in our records.
79
Our Board may convene an extraordinary general meeting when and as it sees fit. In addition the Board must,
according to statute, convene an extraordinary general meeting if it receives a demand to do so from either: (i) at least two
directors; (ii) at least one quarter of the members of the Board; or (iii) one or more shareholders who hold: (A) an aggregate of
at least 5% of our issued share capital and at least 1% of all voting rights; or (B) at least 5% of the Company’s issued voting
shares, and in such case the extraordinary meeting must be held not more than 56 days from the submission date of such request
to the Board and not later than 35 days from the applicable notice to shareholders described below. Any demand by a person or
persons, as described in (i), (ii) and/or (iii) of this paragraph, who demands that an extraordinary general meeting be convened,
must be made in writing and sent to our registered office.
Subject to the provisions of our Articles of Association, as well as applicable law and regulations, including
applicable laws and regulations of any stock market on which our shares are listed, notice of an annual general meeting and of
an extraordinary general meeting must be sent at least 21 days (and in some cases at least 35 days) in advance to all
shareholders recorded in our shareholders registry. Such notice must include the place, date and hour of the meeting, the agenda
for the meeting, the proposed resolutions and instructions for proxy voting.
The quorum required for a meeting of shareholders, except in the case of certain extraordinary meetings convened
in special circumstances, consists of at least two shareholders present in person or by proxy or other voting instrument and
holding or representing between them at least one-third of the voting power. The chair of our Board generally presides at our
shareholders’ meetings. A meeting adjourned for lack of a quorum will be adjourned to the same day in the following week, at
the same time and place, or to the day, time and place that the Board determines, with notice to the shareholders. At the
reconvened meeting, if a quorum is not present within one-half hour from the time appointed for holding the adjourned
meeting, the required quorum then is two shareholders, present in person or by proxy or other voting instrument, representing at
least 10% of the voting power. Nasdaq Listing Rule 5620(c) provides that a company listed on the Nasdaq Global Select
Market should have a quorum requirement for shareholder meetings of at least one-third of the company’s outstanding common
voting stock. As described above, our general quorum requirement is consistent with the Nasdaq Listing Rule. However, in the
case of an adjourned meeting, our Articles of Association, consistent with what is permissible under the Companies Law,
provide for a 10% quorum requirement.
In general, subject to the Companies Law, ordinary resolutions in a general meeting require approval of a majority
of the votes cast at the general meeting, whether in person or by proxy. (For information as to the required majority for the
approval of related party transactions, see “Provisions Relating to Major Shareholders” below. For information as to the
required majority for the approval of certain transactions with Office Holders of a public company, see “Approval of Certain
Transactions - Approval of Transactions” and “Approval of Employment Terms” above). However, under our Articles of
Association, certain resolutions require a special majority of at least 67% of all votes properly cast at a general meeting,
without taking into account abstentions.
Limitations on Non-Israeli Shareholders
No limitations exist or are imposed by Israeli law or our constituent documents with regard to the rights of non-
Israeli shareholders or shareholders not resident in Israel to hold or exercise voting rights except for shareholders who are
subjects of countries that are enemies of the State of Israel. (For a description of Israeli regulations relating to acquisitions of a
controlling interest in Israeli “defense entities” see Item 4. Information on the Company – Governmental Regulation –
Approval of Israeli Defense Acquisitions.)
Change of Control
Subject to certain exceptions, the Companies Law provides that a merger requires approval both by the board of
directors and by the shareholders of each of the merging companies. In approving a merger, the board of directors must
determine that there is no reasonable expectation that, as a result of the merger, the merged company will not be able to meet its
obligations to its creditors. Creditors may seek a court order to enjoin or delay the merger if there is an expectation that the
merged company will not be able to meet its obligations to its creditors. A court may also issue other instructions for the
protection of the creditors’ rights in connection with a merger.
Under the Companies Law, an acquisition of shares in a public company must be made by means of a tender offer
to all shareholders if, as a result of the acquisition, the purchaser would hold 25% or more of the company’s voting rights
(where no other shareholder holds 25% or more) or 45% or more of the company’s voting rights (where no other shareholder
holds 45% or more). This rule does not apply to a purchase of shares by way of a “private offering” in certain circumstances
provided under the Companies Law. (For information regarding Israeli law applicable to acquisition of Israeli “defense entities”
see Item 4. Information on the Company – Governmental Regulations – Approval of Israeli Defense Acquisitions.)
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Provisions Relating to Major Shareholders
We are required by law to maintain a separate registry of shareholders that hold 5% or more of either our issued
shares or voting rights.
Under the Companies Law, the disclosure requirements with respect to the disclosure of a Personal Interest that
apply to an Office Holder also apply to a controlling shareholder of a public company. A controlling shareholder is a
shareholder who has the ability to direct the activities of a company, including a shareholder that holds 25% or more of the
voting rights if no other shareholder owns more than 50% of the voting rights in the company, but excluding a shareholder
whose power derives solely from his or her position as a director of the company or any other position with the company.
Except for certain specified exemptions under the Companies Law, audit committee approval is required for
extraordinary transactions, as defined by criteria established by the audit committee, with a controlling shareholder or in which
a controlling shareholder has a Personal Interest, including a private offering in which the controlling shareholder has a
Personal Interest, and an engagement of a public company with a controlling shareholder or his or her Relative, directly or
indirectly, including through a company controlled by such person, regarding the grant of services to the applicable company
(and regarding his or her Employment Terms if the controlling shareholder is an employee of the company but he or she is not
an Office Holder). If the controlling shareholder is an Office Holder, his or her Employment Terms must be approved by the
compensation committee, the board of directors and the shareholders of the company, in that order. Such shareholder approval
requires a Special Uninterested Majority. (For further information see above "Approval of Certain Transactions".)
In addition, the Companies Law requires that, except for certain exemptions, transactions with a controlling
shareholder whose terms are for a period of more than three years must be re-approved in same manner for every three-year
period.
Also, under the Companies Law, each shareholder has a duty to act in good faith in exercising his or her rights and
fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his or her power in the
company, such as in certain shareholder votes. In addition, specified shareholders have a duty of fairness toward the company.
These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine
the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the
power to appoint or to prevent the appointment of an Office Holder or has any other power, beyond that of other shareholders,
with respect to the company.
Borrowing Power
Our Articles of Association grant broad powers to the Board to have us borrow, repay borrowings, make
guarantees and grant security interests in borrowings.
Exchange Controls and Other Limitations Affecting Security Holders
Non-residents of Israel may freely hold and trade our ordinary shares under general and specific permits issued
under the Israeli Currency Control Law, 1978 (the Currency Control Law). Our Memorandum of Association and Articles of
Association do not restrict the ownership of ordinary shares by non-residents of Israel. Neither the Memorandum of Association
and Articles of Association nor Israeli law restrict the voting rights of non-residents.
Under the general permit given pursuant to the Currency Control Law, non-residents of Israel who buy our
ordinary shares inside or outside of Israel with any foreign currency are able to receive a number of types of distributions in
freely repatriable U.S. dollars or specified other currencies. These distributions include dividends, proceeds from the sale of
shares and any amounts payable in the event of the dissolution, liquidation or winding-up of Elbit Systems.
Taxation
General
The following is a summary of some aspects of the current tax law applicable to companies in Israel, with special
reference to its effect on Elbit Systems and our Israeli subsidiaries, and government programs from which Elbit Systems and
some of our Israeli subsidiaries benefit.
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The following also contains a discussion of specified Israeli and U.S. tax consequences to our shareholders. It also
contains a discussion of the Israeli tax consequences to holders of our Series A Notes. See Item 5. Operating and Financial
Review and Prospects – Liquidity and Capital Resources – Israeli Debt Offering. The Series A Notes are not registered for
trading in the U.S. and may not be sold in the U.S. without registration or compliance with Regulation “S” under the Securities
Act. Therefore, we have not included a discussion of U.S. tax consequences to holders of the Series A Notes. To the extent that
the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, there can be no
assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not
intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax
considerations.
Elbit Systems’ income tax liability in Israel is based on our unconsolidated earnings and such earnings of our
Israeli-based subsidiaries. It is determined in NIS and not in U.S. dollars. Tax liability of non-Israeli subsidiaries is determined
according to the laws of their respective countries of residence. As a result, the tax provision in Elbit Systems’ consolidated
financial statements does not directly relate to income reported on these statements.
General Corporate Tax in Israel
Generally, Israeli companies were subject to corporate tax on taxable income and capital gains at the rate of 24%
and 25% for the tax years 2017 and 2016, respectively. The corporate tax rate effective as of January 1, 2018 is 23%.
Under the Israeli Tax Ordinance, 1961 (the Ordinance) transfer pricing rules require that cross-border transactions
between related parties be carried out implementing an arm’s-length principle and reported and taxed accordingly.
A portion of our Israeli operations have been granted “Approved Enterprise”, “Privileged Enterprise” and
“Preferred Enterprise” status, as described under “Investment Law” below. These operations are subject to taxation at reduced
rates applicable to those types of enterprises. We cannot assure that Elbit Systems or our Israeli subsidiaries will continue to
qualify for such benefits, or benefits under the Law for Encouragement of Industry, in the future. We also cannot assure that we
will continue to qualify as an Approved Enterprise, Privileged Enterprise or Preferred Enterprise, or that the benefits described
above will be available in the future. See further Item 18. Financial Statements - Note 18A(3).
Industry Encouragement. Under the Law for the Encouragement of Industry (Taxes), 1969, a company qualifies
as an “Industrial Company” if it is resident in Israel and at least 90% of its income (determined in Israeli currency) in a given
tax year, with some exceptions, comes from “Industrial Enterprises” owned by that company. An Industrial Enterprise is
defined as an enterprise whose primary activity in a particular tax year is industrial manufacturing activity. We believe Elbit
Systems qualifies as an Industrial Company. See further Item 18. Financial Statements - Note 18A(2).
Investment Law. The Israeli Law for the Encouragement of Capital Investments, 1959 (the Investment Law)
provides tax benefits to companies that make capital investments in eligible fixed assets. Under the Investment Law, subject to
applicable conditions, companies could apply to receive “Approved Enterprise”, “Privileged Enterprise” or "Preferred
Enterprise” status, each of which provides various tax benefits. See Item 18. Financial Statements - Note 18A.
Tax on IP-based Income. On December 29, 2016, Israel enacted a tax law amendment introducing a new tax
regime for intellectual property (IP)-based companies. The regime is tailored to a post-BEPS (base erosion profit shifting)
world, encouraging multinationals to consolidate IP ownership and profits in Israel along with existing Israeli R&D functions.
Tax benefits created to achieve this goal include a reduced corporate income tax rate of 6% on IP-based income and on capital
gains from the future sale of IP. The 6% rate would apply to qualifying Israeli companies that are part of a group with global
consolidated revenue of over NIS 10 billion (approximately $2.7 billion). Other qualifying companies with global consolidated
revenue below NIS 10 billion would be subject to a 12% tax rate. However, if the Israeli company is located in Jerusalem or in
certain northern or southern parts of Israel, the tax rate is further reduced to 7.5%. Additionally, withholding tax on dividends
would be subject to a reduced rate of 4% for all qualifying companies (unless further reduced by a treaty). See Item 18.
Financial Statements - Note 18A(3).
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Capital Gains to a Shareholder
Capital gains to Israeli residents. Starting in 2012, the tax rate on capital gains to a “non-principal” individual
shareholder (those persons holding less than 10% of our ordinary shares) has been 25%, and 30% to an individual “principal”
shareholder. In 2013, the capital gains tax rate increased by 2% in the event the individual’s taxable income in any tax year
exceeds NIS 810,720 (approximately $215,000) - linked to the CPI each year - including capital gains from marketable
securities, dividends and interest income. As of January 1, 2017, the capital gain tax rate was increased by 3% (rather than the
previous 2% increase) in the event the individual’s taxable income in 2017 and thereafter exceeds NIS 640,000 (approximately
$170,000) - linked to the CPI each year. Dealers in securities in Israel are taxed at regular tax rates applicable to business
income. Companies resident in Israel are taxed at rates applicable to capital gains.
Capital gains to non-residents of Israel. Gains on the sale of ordinary shares traded on the TASE and on Nasdaq
held by non-Israeli resident investors for tax purposes will generally be exempt from Israeli capital gains tax, subject to the
provisions of the Israeli tax legislation. However, non-Israeli corporations will not be entitled to such exemption if an Israeli
resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In addition, the United
States - Israel tax treaty exempts United States residents who hold less than 10% of our voting rights, and who held less than
10% of our voting rights during the twelve months prior to a sale of their shares, from Israeli capital gains tax in connection
with such sales under certain circumstances.
Capital Gains to a Holder of Series A Notes
Capital gains to Israeli residents. A capital gain for an individual derived from the sale of a debenture that is not
linked to an index, such as our Series A Notes, will be taxable at a rate not to exceed 15% in case of a “non-principal”
individual note holder, or 20% in the case of a “principal” individual note holder. Tax payers claiming a deduction of real
interest expenses and linkage differences on debentures such as the Series A Notes will be taxed at a rate of 30% on their real
capital gains. Dealers in securities in Israel are taxed at regular tax rates applicable to business income. Companies resident in
Israel are taxed at rates applicable to capital gains.
Capital gains to non-residents of Israel. Gains on the sale of securities traded on the TASE, such as our Series A
Notes, held by non-Israeli resident investors for tax purposes will generally be exempt from Israeli capital gains tax, subject to
the provisions of the Israeli tax legislation. However, non-Israeli corporations will not be entitled to such exemption if an Israeli
resident: (i) has a controlling interest of 25% or more in such non-Israeli corporation; or (ii) is the beneficiary or is entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
Taxation on Dividends Paid to a Shareholder
Income tax for individual Israeli residents. Residents of Israel are subject to income tax on distributions of
dividends other than bonus shares (stock dividends). The tax rate on dividend income to a “non-principal” individual
shareholder is 25% and 30% to an individual “principal” shareholder. The paying company withholds at source income tax at
the rate of 25% or 30% in the case of a “principal shareholder”. A company whose stock is traded on a stock exchange
withholds tax at the rate of 25% from dividends paid to a “principal” shareholder for shares registered and held by a registration
company. Dividends distributed from “Preferred Income” under Preferred Enterprise status (see above “Investment Law”) are
subject to a withholding tax rate of 20%. These rates are the final tax on dividends.
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Income tax for non-residents of Israel. Non-residents of Israel are subject to income tax on distributions of
dividends other than bonus shares (stock dividends). The tax rate on dividend income to a “non-principal” non-resident of Israel
shareholder is 25% and 30% to a “principal” shareholder (including a foreign company as opposed to an Israeli company). The
paying company withholds at source income tax at the rate of 25% for a “non-principal” shareholder, or 30% for a “principal”
shareholder. A company whose stock is traded on a stock exchange will withhold tax at the rate of 25% from dividends paid to
a “principal” shareholder for shares registered and held by a registration company, unless a lower rate is applicable under a
double taxation treaty. Accordingly, Elbit Systems withholds income tax at the source. Generally, dividends distributed from
taxable income accrued during the period of benefit of an Approved Enterprise, Privileged Enterprise or Preferred Enterprise
are taxable at the rate of 15% if the dividend is distributed during the tax benefit period under the Investment Law or within 12
years after the period (this limitation does not apply if the company qualifies as a foreign investors’ company according to the
Investment Law). Dividends distributed from “Preferred Income” under a Preferred Enterprise status are subject to a
withholding tax rate of 20% (unless a lower treaty rate applies). These rates are the final taxes in Israel on dividends for
individual and corporate non-residents of Israel. Foreign residents who have Israeli derived income for which tax was withheld
at the source are generally exempt from the duty to file tax returns in Israel for such income. This includes income from Israeli
derived interest, dividends and royalties.
Taxation of Interest Income of Holders of Series A Notes
Income tax for Israeli residents. Israeli resident individuals are tax exempt on the linkage differences derived
from the debenture principal, under certain conditions. An individual is taxable at a rate of 15% on interest or discount fees
originating from debentures which are not linked to the index, whether in whole or in part, such as the Series A Notes. The tax
rate on interest income or discount fees originating from fully index-linked debentures, including debentures linked to a foreign
currency, is 25% in case of a “non-principal” note holder. These tax rates will not apply if any of the following conditions are
met: (1) the interest represents income from a “business” or is recorded in the individual’s books of account or is required to be
so recorded; (2) the individual has claimed deduction of linkage differences and interest expenses on the debentures; (3) the
individual is a “principal” individual note holder; or (4) the individual is employed by a corporation that paid the interest, is a
supplier of goods or services to the corporation or has other special relations with the corporation, unless the tax assessing
officer is satisfied that the interest rate has been established in good faith and regardless of the existence of any such relations
between the individual and the corporation. In these cases, the individual will be taxed at the marginal tax rate. The paying
company will deduct tax at a rate of 15% on interest in respect of unlinked debentures, such as the Series A Notes, and at a rate
of 25% in the case of linked debentures. The maximum tax rate will apply in the case of an individual who is a “principal”
individual note holder, an individual employed by the interest-paying-corporation or a supplier of goods or services to the
corporation. The tax rate applicable to interest income (including linkage differences) or discount fees of an Israeli resident
corporation is the corporate tax rate. The paying company will deduct tax at the corporate tax rate.
Income tax for foreign residents. Interest, discount fees or linkage differences paid to a foreign resident on
debentures listed on the TASE and issued by an Israeli resident corporation, such as our Series A Notes, are typically exempt
from Israeli tax, provided that the income is not produced by the foreign resident’s permanent establishment in Israel. The tax
exemption will not apply in the following circumstances: (1) the foreign resident is a “principal” shareholder or note holder of
the issuing company; (2) the foreign resident is a relative, as defined in the Ordinance, of the issuing company; (3) the foreign
resident is an employee, a supplier of goods or services or has special relations with respect to the issuing company (unless it is
demonstrated that the interest rate or discount fees have been determined in good faith and regardless of the existence of any
special relations); or (4) the foreign resident company is held by Israeli residents. If the tax exemption does not apply as above,
the tax rate applicable to interest income received by foreign residents (individuals and corporations) originating from securities
will be established in accordance with the provisions of the Ordinance, or in accordance with the provisions of the relevant
treaty for the avoidance of double taxation signed between the State of Israel and the foreign resident’s country of residence. In
such case, the paying company will withhold tax according to the rates prescribed in the Ordinance as above, and this rate may
be reduced subject to the relevant treaty for the avoidance of double taxation. As indicated above, the Series A Notes are not
registered under the Securities Act and may not be offered or sold in the United States or to U.S. Persons (as defined in
Regulation “S” under the Securities Act) without registration under the Securities Act or an exception from the registration
requirements of the Securities Act.
Israeli Tax on United States Shareholders
Dividends paid by Elbit Systems to an individual shareholder resident in the United States are generally subject to
withholding tax deducted at source in Israel. Israel and the United States are parties to a tax treaty. Under the treaty, the
withholding tax rate on a dividend is normally 25%, or 15% in connection with an Approved Enterprise, Privileged Enterprise
or Preferred Enterprise. (See above “Investment Law.”)
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A U.S. corporation would have a reduced withholding tax rate of 15% on dividends if it were to own 10% or more
of Elbit Systems’ voting shares under specified conditions. The reduced withholding tax rate on the dividend would be 12.5%.
The U.S. corporation must own at least 10% of the voting shares during a portion of Elbit Systems’ tax year in which the
payment of the dividend occurs but prior to the payment date and during the entire prior tax year. The reduced rate is also
subject to two other conditions. First, not more than 25% of Elbit Systems’ gross income for the prior tax year may consist of
interest, other than interest received from banking, financing or similar businesses or from certain subsidiaries. Second, the
dividend may not be derived from income during any period for which Elbit Systems is entitled to the reduced tax rate
applicable to an Approved Enterprise / Privileged Enterprise.
Under the terms of the tax treaty, Israel may tax capital gains realized by shareholders resident in the United
States on a sale of ordinary shares of Elbit Systems if certain conditions exist, however, such right is subject to the following
exemption. Since Elbit Systems’ ordinary shares are traded on the TASE and on Nasdaq, gains on the sale of ordinary shares
held by non-Israeli resident investors for tax purposes generally will be exempt from Israeli capital gains tax, subject to the
provisions of the Israeli tax legislation.
Subject to certain conditions and limitations, any Israeli tax withheld or paid with respect to dividends on ordinary
shares generally will be eligible for credit against a U.S. shareholder’s U.S. federal income tax liability at such U.S.
shareholder’s election. The U.S. Internal Revenue Code of 1986, as amended, (the Code) provides limitations on the amount of
foreign tax credits that a U.S. shareholder may claim, including extensive separate computation rules under which foreign tax
credits allowable with respect to specific categories of income cannot exceed the U.S. federal income taxes otherwise payable
with respect to each such category of income. U.S. shareholders that do not elect to claim a foreign tax credit may instead claim
a deduction for Israeli income tax withheld or paid, but only for a year in which these U.S. shareholders elect to do so for all
foreign income taxes. Dividends with respect to the ordinary shares will generally be classified as foreign source “passive
income” for the purpose of computing a U.S. shareholder’s foreign tax credit limitations for U.S. foreign tax credit purposes.
The rules relating to foreign tax credits are complex, and each U.S. holder of our ordinary shares should consult his or her tax
advisor to determine whether and if he or she would be entitled to this credit.
This summary of Israeli taxation is based on existing treaties, laws, regulations and judicial and
administrative interpretations thereof. There can be no assurance that any of these may not be amended or repealed,
possibly with retroactive effect, or that a tax authority may take a contrary position. Also, this summary does not
address the tax consequences that may be applicable to specific persons based on their individual circumstances. It also
does not address any local or other foreign tax consequences. A shareholder or holder of Series A Notes should consult
his or her own tax advisor as to the specific tax consequences of purchasing, holding or transferring shares or Series A
Notes of Elbit Systems.
United States Federal Income Tax Considerations
General
The following is a summary of material U.S. federal income tax considerations regarding the acquisition,
ownership and disposition of Elbit Systems’ ordinary shares by a “U.S. Shareholder”, which, for these purposes, means a
beneficial owner of an ordinary share who is, for U.S. federal income tax purposes:
(1)
a citizen or individual resident of the United States;
(2)
a corporation (or an entity taxable as a corporation for U.S. federal income tax purposes) created or
organized in or under the laws of the United States or any political subdivision thereof (including the
District of Columbia);
(3)
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
(4)
a trust if: (A) a U.S. court is able to exercise primary supervision over the trust’s administration and (B) one
or more U.S. persons have the authority to control all of the trust’s substantial decisions or (C) if it has a
valid election in place to be treated as a U.S. person.
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This summary is based on provisions of the Code, existing and proposed U.S. Treasury regulations, administrative
pronouncements, rulings and judicial decisions in effect as of the date of this annual report. These authorities and their
interpretation are subject to change, possibly with retroactive effect. Notably, in December 2017, the U.S. President signed into
law the “Tax Cuts and Jobs Act” (the Tax Act), which alters significantly the U.S. federal income tax system. (For risks relating
to the Tax Act, see Item 3. Risk Factors - General Risks Related to Our Business and Market - Recently enacted tax legislation
in the United States may impact our business.) Although this discussion takes into account provisions enacted under the Tax
Act, given the complexity of this new law, investors should consult their own tax advisors regarding its potential impact on the
U.S. Federal income tax consequences to them in light of their particular circumstances.
This summary applies to U.S. shareholders only if they hold ordinary shares as capital assets for tax purposes.
In addition, this summary does not discuss all aspects of U.S. federal income taxation that may be applicable to investors in
light of their particular circumstances or to investors who are subject to special treatment under U.S. federal income tax law,
including, but not limited to, U.S. expatriates, insurance companies, banks, regulated investment companies and real estate
investment trusts, securities broker-dealers, financial institutions, tax-exempt organizations, persons holding ordinary shares as
part of a straddle, hedging or conversion transaction, traders in securities that elect to apply a mark to market method of
accounting, persons subject to the alternative minimum tax, persons who acquired their Elbit Systems’ ordinary shares pursuant
to the exercise of employee stock options or otherwise as compensation, persons whose functional currency is not the U.S.
dollar, and persons owning (directly, indirectly or by attribution) 10% or more of our outstanding voting shares. If a partnership
or other entity treated as a partnership for U.S. federal income tax purposes holds ordinary shares of Elbit Systems, the tax
treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner in a
partnership that holds our ordinary shares is urged to consult its own tax advisor regarding the specific tax consequences of
owning and disposing of our ordinary shares.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR
GENERAL INFORMATION ONLY. ALL SHAREHOLDERS AND PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR TAX ADVISERS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING
OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-
U.S. TAX LAWS AND POSSIBLE CHANGES IN TAX LAW.
Dividends
Subject to the discussion below under “-Passive Foreign Investment Company Rules,” a U.S. Shareholder
generally will be required to include in gross income, as ordinary income, the amount of any distributions paid on ordinary
shares of Elbit Systems to the extent of Elbit Systems’ current or accumulated earnings and profits (calculated before the
reduction of any corresponding Israeli withholding taxes). If a U.S. Shareholder is an individual, trust or estate, dividends
received from Elbit Systems generally will be treated as “qualified dividend income”, which is taxable to such U.S. Shareholder
at preferential tax rates, provided the U.S. Shareholder has held the stock for more than 60 days during the 121-day period
beginning 60 days before the ex-dividend date and certain other conditions are satisfied. There is no assurance that dividends
received by U.S. Shareholders from Elbit Systems will be eligible for such preferential tax rates. Each individual U.S.
Shareholder of ordinary shares is urged to consult his or her own tax advisor regarding the availability to him of the reduced
dividend tax rate in light of his or her own particular situation and regarding the computations of his or her foreign tax credit
limitation with respect to any qualified dividend income paid by us, as applicable. Dividends paid by Elbit Systems do not
qualify for the dividends-received deduction applicable in certain cases to U.S. corporations. Elbit Systems does not intend to
compute earnings and profits under U.S. tax principles; therefore, it is likely that all distributions will be treated as paid out of
Elbit Systems’ current and accumulated earnings and profits.
The amount of any distribution paid in NIS, including the amount of any Israeli withholding tax thereon, will be
included in the gross income of a U.S. Shareholder in an amount equal to the U.S. dollar value of the NIS calculated by
reference to the spot rate of exchange in effect on the date the distribution is received by the U.S. Shareholder. If a U.S.
Shareholder converts dividends paid in NIS into U.S. dollars on the day Elbit Systems distributes the dividends, the U.S.
Shareholder generally should not be required to recognize foreign currency gain or loss with respect to such conversion. If the
NIS received in the distribution are not converted into U.S. dollars on the date of receipt, any foreign currency gain or loss
recognized upon a subsequent conversion or other disposition of the NIS will be treated as U.S. source ordinary income or loss.
Special rules govern and special elections are available to accrual method taxpayers to determine the U.S. dollar amount that
should be included in income in the case of taxes withheld in a foreign currency. Accrual basis taxpayers are urged to consult
their own tax advisors regarding the requirements and the elections applicable in this regard.
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Dividends paid by us to a U.S. Shareholder on our ordinary shares will be treated as foreign source income and
will generally be categorized as “passive category income” for U.S. foreign tax credit purposes. Subject to the limitations in the
Code, as modified by the applicable tax treaty, a U.S. Shareholder may elect to claim a foreign tax credit against its U.S. federal
income tax liability for Israeli income tax withheld from dividends received in respect of ordinary shares. Dividends paid with
respect to ordinary shares may be subject to special rules if a U.S. Shareholder owns more than 50 percent (by vote or value) of
Elbit Systems, which could adversely affect a U.S. Shareholder’s ability to use U.S. foreign tax credits. U.S. Shareholders who
do not elect to claim the foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only for a year in
which the U.S. Shareholder elects to do so with respect to all foreign income taxes. A deduction does not reduce U.S. tax on a
dollar-for-dollar basis as it does for a tax credit. The deduction, however, is not subject to the limitations applicable to foreign
tax credits. The rules relating to the determination of the foreign tax credit are complex. Accordingly, a U.S. Shareholder should
consult its own tax advisor to determine whether and to what extent it would be entitled to the credit.
Sale, exchange or other disposition
Subject to the discussion below under “-Passive Foreign Investment Company Rules,” upon the sale, exchange or
other disposition of ordinary shares, a U.S. Shareholder generally will recognize capital gain or loss equal to the difference
between the U.S. dollar value of the amount realized on the sale, exchange or other disposition and the U.S. Shareholder’s
adjusted tax basis, determined in U.S. dollars, of the ordinary shares. Any gain or loss recognized upon the sale, exchange or
other disposition of the ordinary shares will be treated as long-term capital gain or loss if, at the time of the sale, exchange or
other disposition, the holding period of the ordinary shares exceeds one year. In the case of individual U.S. Shareholders, long-
term capital gains generally are subject to U.S. federal income tax at preferential rates. The deductibility of capital losses by a
U.S. Shareholder is subject to significant limitations. U.S. Shareholders should consult their own tax advisors in this regard.
In general, gain or loss recognized by a U.S. Shareholder on the sale, exchange or other disposition of ordinary
shares will be U.S. source income or loss for U.S. foreign tax credit purposes. U.S. Shareholders who hold ordinary shares
through an Israeli stockbroker or other Israeli intermediary may be subject to Israeli withholding tax on any capital gains
recognized if the U.S. Shareholder does not obtain approval of an exemption from the Israeli Tax Authorities. Israeli taxes paid
under circumstances in which an exemption from such tax was available generally will not give rise to a deduction or credit for
foreign taxes paid for U.S. federal income tax purposes. U.S. Shareholders should consult their Israeli stockbroker or other
intermediary regarding the procedures for obtaining an exemption.
If a U.S. Shareholder receives NIS upon the sale of ordinary shares, that U.S. Shareholder may recognize ordinary
income or loss as a result of currency fluctuations between the date of the sale of the ordinary shares and the date the sales
proceeds are converted into U.S. dollars.
Medicare Tax
Non-corporate U.S. Shareholders may be subject to an additional 3.8% Medicare tax on all or a portion of “net
investment income”, which generally may include dividends on, or capital gains recognized from the disposition of, our
ordinary shares. U.S. Shareholders should consult their own tax advisors regarding the applicability of the Medicare tax to
their investment in our shares.
Passive Foreign Investment Company rules
A non-U.S. corporation will be classified as a Passive Foreign Investment Company (a PFIC) for any taxable year
if at least 75% of its gross income consists of passive income (which is generally subject to certain exceptions for active
businesses, dividends, interest, rents and royalties and gains from the sales of property generating such income), or at least 50%
of the average value of its assets consists of assets that produce, or are held for the production of, passive income. We currently
believe that we were not a PFIC for the year ended December 31, 2018. However, this conclusion is a factual determination that
must be made at the close of each year and is based on, among other things, a valuation of our ordinary shares and assets, which
will likely change from time to time. If we were characterized as a PFIC for any taxable year, a U.S. Shareholder could suffer
adverse tax consequences under certain circumstances. These consequences may include having gains realized on the
disposition of ordinary shares treated as ordinary income rather than capital gains and being subject to punitive interest charges
on certain dividends and on the proceeds of the sale or other disposition of the ordinary shares. Furthermore, dividends paid by
a PFIC are not eligible to be treated as “qualified dividend income” (as discussed above).
The PFIC rules are complex. U.S. Shareholders should consult their own tax advisors regarding the potential
application of the PFIC rules to the ownership of our ordinary shares.
87
Informational reporting and backup withholding
Dividend payments with respect to ordinary shares and proceeds from the sale, exchange or other disposition of
ordinary shares may be subject to informational reporting to the Internal Revenue Service (the IRS) and possible U.S. backup
withholding at a current rate of 24%. Backup withholding will not apply, however, to a holder who timely furnishes a correct
taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise
exempt from backup withholding. U.S. persons who are required to establish their exempt status generally must provide IRS
Form W-9 (Request for Taxpayer Identification Number and Certification). Non-U.S. Shareholders generally will not be
subject to U.S. informational reporting or backup withholding. However, such holders may be required to provide certification
of non-U.S. status (generally on IRS Form W-8BEN or W-BEN-E) in connection with payments received in the United States
or through certain U.S.-related financial intermediaries.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a
holder’s U.S. federal income tax liability, and a holder may obtain a refund of any excess amounts withheld by timely filing the
appropriate claim for refund with the IRS and furnishing any required information.
Holders of our ordinary shares should consult their own tax advisors concerning the specific U.S. federal,
state and local tax consequences of the ownership and disposition of the ordinary shares in light of their particular
situations as well as any consequences arising under the laws of any other taxing jurisdiction. In particular, U.S.
Shareholders are urged to consult their own tax advisors concerning whether they will be eligible for benefits under the
Unites States-Israel tax treaty.
Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In
accordance with these requirements, we file reports and other information with the SEC. These materials, including this annual
report and its exhibits, may be inspected and copied at the SEC’s Public Reference Room (the Public Reference Room) at 100 F
Street, N.E., Washington, D.C. 20549, and copies of the materials may be obtained from the Public Reference Room at
prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330.
Item 11.
Quantitative and Qualitative Disclosures About Market Risk.
General
Market risks relating to our operations result primarily from changes in exchange rates and interest rates. We take
various measures to compensate for the effects and fluctuation in both exchange rates and interest rates. We use financial
instruments and derivatives in order to limit the exposure to risks deriving from changes in exchange rates and interest rates.
No derivatives instruments are entered into for trading purposes.
Exchange Rate Risk Management
General
While our functional currency is the U.S. dollar, we also have some non-U.S. dollar or non-U.S. dollar linked
currency exposures. These exposures are mainly derived from our revenues and expenses denominated in foreign currencies
and non-U.S. dollar accounts receivable, payments to suppliers and subcontractors, obligations in other currencies and payroll
related expenses incurred, mainly in NIS. Some subcontractors are paid in local currency under prime contracts where we are
paid in U.S. dollars.
We take various measures to compensate for the effects of fluctuations in exchange rates. These measures include
currency hedging transactions in which we purchase foreign exchange contracts to reduce the volatility of cash flows associated
with project related revenues and expenses denominated in certain foreign currencies (mainly Euro and GBP) and attempts to
maintain a balance between monetary assets and liabilities in our functional currencies. We also attempt to share currency risks
with subcontractors on a “back-to-back” basis, by having the subcontractor assume a proportional amount of the exchange risk.
88
We use currency hedging contracts and other derivatives instruments to limit our exposure to exchange rate
fluctuations related to payroll expenses incurred in NIS. The objective of the foreign exchange contracts is to better ensure that
the U.S. dollar-equivalent cash flows are not adversely affected by changes in U.S. dollar/foreign currency exchange rates. In
accordance with ASC 815, “Derivatives and Hedging”, these contracts are designated as cash flow hedges. The gain on the
effective portion of a cash flow hedge is initially reported as a component of accumulated other comprehensive income and
subsequently reclassified into revenues and to contract expenses when the hedged exposure affects revenues or contract
expenses, or as financial expenses, if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge
is de-designated, because the hedged transaction is no longer probable of occurring or related to an ineffective portion of a
hedge, is recognized in “financial expenses, net” in our consolidated statements of income.
As of December 31, 2017 and December 31, 2018, the notional amount of our outstanding forward contracts was
$575.7 million and $1,243.9 million, respectively. Most of these contracts met the requirements of hedge accounting.
The table below provides information regarding our derivatives instruments held in order to limit the exposure to
exchange rate fluctuation as of December 31, 2018. The table does not include information regarding the cross currency interest
rate swap transactions in order to effectively hedge the effect of interest and exchange rate differences resulting from the NIS
Series A Notes.
Maturity Date - Notional Amount
( US dollars in millions)
2019
2020
2021
2022
2023
onwards
Total
Fair Value
at December
31, 2018
231.2
10.3
25.7
267.2
114.8
4.2
26.2
145.2
50.8
2.4
5.4
58.6
16.3
4.0
—
20.3
1.0
2.7
—
3.7
414.1
23.6
57.3
495.0
18.6
0.5
2.3
21.4
Maturity Date - Notional Amount
( US dollars in millions)
2019
2020
2021
2022
2023
onwards
Total
Fair Value
at December
31, 2018
67.4
4.1
598.2
16.3
686.0
20.6
2.6
—
21.1
44.3
5.9
—
—
4.1
10.0
8.6
—
—
—
8.6
—
—
—
—
—
102.5
6.7
598.2
41.5
748.9
(4.6)
(0.1)
(15.4)
(2.7)
(22.8)
Buy US$ and sell:
EUR
GBP
Other currencies
Total
Sell US$ and buy:
EUR
GBP
NIS
Other currencies
Total
At December 31, 2018, a 5% and 10% strengthening of the U.S. dollar relative to the currencies in which our
derivative instruments were denominated would have resulted in unrealized losses of $12.1 and $21.7 million, respectively, and
a 5% and 10% weakening in the value of the U.S. dollar relative to the currencies in which our derivative instruments were
denominated would have resulted in unrealized gains of $15.1 and $33.6 million, respectively. This calculation assumes that
each exchange rate would have changed in the same direction relative to the U.S. dollar. Consistent with the use of these
contracts to neutralize the effect of exchange rate fluctuations, most of such unrealized losses or gains would be offset by
corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken
together, these forward currency contracts and the offsetting underlying commitments did not create material market risk.
89
Interest Rate Risk Management
On December 31, 2018, our liquid assets and obligations were comprised of cash and cash equivalents, bank
deposits, short and long-term loans and Series A Notes. Our deposits are mainly in U.S. dollars.
In 2010, we issued NIS 1.1 billion (approximately $283 million) of Senior A Notes in a public offering on the
TASE. These Senior A Notes are payable in ten equal annual installments on June 30 of each of the years 2011 through 2020
and bear a fixed interest rate of 4.84% per annum, payable semi-annually on June 30 and December 30 of each of the years
2010 through 2020. In 2012, we issued through a public offering on the TASE additional Series A Notes in the aggregate
principal amount of NIS 807 million (approximately $217 million), and we issued additional Series A Notes in an aggregate
principal amount of NIS 92 million (approximately $24 million) through a private placement to Israeli institutional investors.
As of December 31, 2017 and December 31, 2018, the total principal amount of the Series A Notes was $112.1 million and
$181.7, respectively.
We also entered into ten-year cross currency interest rate swap transactions in order to effectively hedge the effect
of interest and exchange rate differences resulting from the NIS Series A Notes (including the additional Series A Notes that
were issued in 2012). Under the cross currency interest rate swaps, the Company received fixed NIS at a rate of 4.84% on NIS
2 billion and pays floating six-month USD LIBOR + an average spread of 1.84% on $524 million, which reflects the U.S.
dollar value of the Series A Notes on the specific dates the transactions were entered. (See above Item 5. Operating and
Financial Review and Prospects – Israeli Debt Offering.)
The remaining debt is mainly in short and long-term loans in U.S. dollars at floating interest rates. The majority of
our borrowings (net of the effect of the cross currency interest rate swap transaction) are usually linked to the relevant LIBOR
plus a spread of 0.9% - 1.95%, and therefore are exposed to changes in interest rates. Most of our loans will mature within 2019
and 2020.
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. At December 31, 2018, a hypothetical
1% (100 basis points) increase in the current interest rates would result in an additional expense of $7 million.
Item 12.
Description of Securities Other than Equity Securities.
Not applicable.
Item 13.
Defaults, Dividend Arrearages and Delinquencies.
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
Not applicable.
Item 15.
Controls and Procedures.
Disclosure Controls and Procedures. We maintain disclosure controls and procedures designed to cause that
information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. These controls and procedures also provide that such
information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives. Also, management necessarily
was required to use its judgment in evaluating the cost to benefit relationship of possible disclosure controls and procedures. As
of December 31, 2018, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls
and procedures. The evaluation was performed with the participation of senior management of major business areas and key
corporate functions, and under the supervision of the CEO and CFO. Based on the evaluation, our management, including the
CEO and CFO, concluded that our disclosure controls and procedures were effective. There have been no significant changes in
our internal controls or in other factors that could significantly affect internal controls after the date we completed the
evaluation.
90
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as
amended, as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions
and dispositions of assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements including the possibility of human error and the circumvention or overriding of sound control procedures.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our CEO and CFO, assessed the effectiveness of our internal control over financial
reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control – Integrated Framework (2013
Framework).” Based on this assessment, management believes that, as of December 31, 2018, our internal control over
financial reporting is effective. Our assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2018 did not include an assessment of the two subsidiaries acquired during 2018, Universal and IMI.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by
Kost Forer Gabbay & Kasierer (Kost), an independent registered public accounting firm in Israel and a member of Ernst &
Young Global (EY), as stated in their report included in Item 18. Financial Statements. The audit of internal control over
financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of
subsidiaries acquired during 2018, which are included in the 2018 consolidated financial statements of the Company and
constituted 24% and 9% of total and net assets, respectively, as of December 31, 2018, and 4% of revenues and net income, for
the year then ended.
Changes in Internal Control over Financial Reporting. During the period covered by this annual report, there
have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert.
Dr. Gleitman and Prof. Nisan, members of our Audit Committee, each meets the criteria of an “Audit Committee
Financial Expert” under the applicable rules and regulations of the SEC, and each of their designations as an Audit Committee
Financial Expert has been ratified by the Board. They are each “independent”, as that term is defined in the Nasdaq listing
standards.
91
Item 16B. Code of Ethics.
We have adopted a code of business conduct and ethics that is applicable to all our directors, officers and
employees including our principal executive, financial and accounting officers and persons performing similar functions. The
code of ethics was approved by our Board and covers areas of professional and business conduct. It is intended to promote
honest and ethical behavior, including fair dealing and the ethical handling of conflicts of interest. The code of ethics is
supplemented by our anti-bribery and corruption compliance policy and other related policies and procedures, including those
relating to our whistleblower and investigations process, due diligence and business gifts and entertainment. We also have a
supplier code of conduct that is applicable to ethics and compliance requirements for our supply chain. We provide training on
our code of ethics to all of our employees. Our code of ethics, anti-bribery and corruption compliance policy and supplier code
of conduct, as well as certain other compliance related policies, are each posted on our website: www.elbitsystems.com.
Item 16C. Principal Accountant Fees and Services.
At the annual general shareholders meeting held in October 2018, our shareholders reappointed Kost to serve as our
independent auditors. Kost and other EY affiliates billed the Company the following fees for professional services in each of the
last two fiscal years:
Audit Fees
Tax Fees
Other Fees
Total
Year Ended December 31
2018
2017
(U.S. dollars in thousands)
$
$
3,217
$
304
221
3,742
$
3,064
307
319
3,690
“Audit Fees” are the aggregate fees for the audit of our consolidated annual financial statements. This category also
includes services generally provided by the independent auditor, such as consents and assistance with and review of documents
filed with the SEC. It also includes fees billed for accounting consultations regarding the accounting treatment of matters that
occur in the regular course of business, implications of new accounting pronouncements and implementation of ASC 606, ASC
842 and other accounting issues that occur from time to time.
“Tax Fees” are the aggregate fees billed for professional services rendered for tax compliance and tax advice,
other than in connection with the audit. Tax compliance involves preparation of original and amended tax returns, tax planning
and tax advice.
“Other Fees” are fees billed for services related to assessment of finance software.
Kost and other EY affiliates did not bill the Company for services other than the Audit Fees, Tax Fees and Other
Fees described above for fiscal year 2018 or fiscal year 2017.
Our Audit Committee has adopted a pre-approval policy for the engagement of our independent accountant to
perform permitted audit and non-audit services. Under this policy, which is designed to assure that such engagements do not
impair the independence of our auditors, the Audit Committee pre-approves annually a range of specific audit and non-audit
services in the categories of Audit Services, Audit-Related Services, Tax Services and other services that may be performed by
our independent accountants, and the maximum pre-approved fees that may be paid as compensation for each pre-approved
service in those categories. The Audit Committee is notified periodically and before commencement of any work in these
categories. Any proposed services exceeding the pre-approved fees or which includes other scope of work requires specific pre-
approval by the Audit Committee. Accordingly, all of the above-mentioned independent auditor fees were pre-approved by our
Audit Committee.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
Not applicable.
92
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Reference is made to the disclosure relating to changes in shareholdings of major shareholders in Item 7 of this
annual report on Form 20-F.
No shares were repurchased by Elbit Systems during 2018.
Item 16F. Changes in Registrant’s Certifying Accountant.
Not Applicable.
Item 16G. Corporate Governance.
Generally, we follow corporate governance standards applicable to us under Israeli and U.S. laws and regulations
and Nasdaq listing standards.
As a foreign private issuer, Nasdaq Marketplace Rule 5615(a)(3) allows us to follow Israeli corporate governance
practices instead of certain Nasdaq Stock Market requirements. That rule requires that we provide Nasdaq with a letter from
outside Israeli counsel stating that our corporate governance practices are not prohibited by Israeli law and disclose in our
annual reports the Nasdaq requirements we do not follow and the equivalent Israeli requirement.
In March 2018, we notified Nasdaq of our intent to follow Israeli home country practice in connection with our
2018 Equity Incentive Plan for Executive Officers, which was approved by our Board as permitted by Israeli law without
approval by our shareholders. See also Item 6. Directors, Senior Management and Employees - Share Ownership - Elbit
Systems’ Stock Option Plans - 2018 - Equity Incentive Plan for Executive Officers.
Item 16H. Mine Safety Disclosure.
Not applicable.
Item 17.
Financial Statements.
Not applicable.
Item 18.
Financial Statements.
See Consolidated Financial Statements attached to this annual report on Form 20-F.
93
Item 19.
Exhibits.
(a) Index to Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II – Valuation and Qualifying Accounts
Page
F-2
F-7
F-9
F-10
F-11
F-14
F-16
S-1
(b) Exhibits
Elbit Systems’ Memorandum of Association(1)
Elbit Systems’ Restated Articles of Association(2)
Description of the Terms of Office and Employment of the Company’s President and Chief Executive Officer(3)
Elbit Systems Ltd. 2018 Equity Incentive Plan for Executive Officers(4)
Elbit Systems Ltd. 2018 Compensation Policy for Executive Officers and Directors(5)
Summary of IMI Acquisition Agreements
Major Operating Subsidiaries of Elbit Systems
1.1
1.2
4.1
4.2
4.3
4.4
8
12.1
Certification of Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
12.2
Certification of Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1
Certification of Chief Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
13.2
Certification of Chief Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1
Consent of Kost Forer Gabbay & Kasierer
15.2
Consent of Kesselman & Kesselman
15.3
Consent of Somekh Chaikin
(1)
(2)
(3)
Filed as an exhibit to Elbit Systems’ Annual Report on Form 20-F (File No. 0-28998) for the year ended
December 31, 2000, filed with the SEC on April 5, 2001, and incorporated herein by reference.
Filed as Exhibit 2 to Elbit Systems’ Report of Foreign Private Issuer on Form 6-K, filed with the SEC on March
26, 2008, and incorporated herein by reference; as amended by that certain amendment filed as Annex A to
Exhibit 1 to Elbit Systems’ Report of Foreign Private Issuer on Form 6-K, filed with the SEC on October 25,
2011, and incorporated herein by reference.
Filed as Exhibit 4.2 to Elbit Systems’ Annual Report on Form 20-F, filed with the SEC on March 22, 2016, and
incorporated herein by reference.
94
(4)
(5)
Filed as Exhibit 99.1 to Elbit Systems’ Registration Statement on Form S-8 (No. 333-223785), for the registration
of the underlying shares that may be issued upon exercise of options thereunder, filed with the SEC on March 20,
2018, and incorporated herein by reference.
Filed as Exhibit “A” to Elbit Systems’ proxy statement dated March 1, 2018, filed as Exhibit 1 to Elbit Systems’
Report of Foreign Private Issuer on Form 6-K, filed with the SEC on March 1, 2018, and incorporated herein by
reference.
95
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it
meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 19, 2019
ELBIT SYSTEMS LTD.
By:
Name:
Title:
/s/ BEZHALEL MACHLIS
Bezhalel Machlis
President and Chief Executive Officer
(Principal Executive Officer)
96
ELBIT SYSTEMS LTD. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018
ELBIT SYSTEMS LTD. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018
in thousands of U.S. dollars
C O N T E N T S
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
F - 2 - F - 6
Page
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
F - 7 - F - 8
F - 9
F - 10
F - 11- F - 13
F - 14 - F - 15
F - 16 - F - 81
F - 1
Kost Forer Gabbay & Kasierer
144 Menachem begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Elbit Systems Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Elbit Systems Ltd. ("Elbit Systems") and subsidiaries as of
December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in equity and
cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
"consolidated financial statements") and the financial statement schedule listed in the index at Item 19. In our opinion, based on
our audits and the reports of the other auditors the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Elbit Systems and subsidiaries as of December 31, 2018 and 2017, and the consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with
U.S. generally accepted accounting principles.
We did not audit the financial statements of two Israeli subsidiaries, which reflect total assets constituting 22% as of December
31, 2018, and total revenues constituting 1% in 2018 of the related consolidated totals. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the two Israeli
subsidiaries, is based solely on the reports of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board ("United States")
("PCAOB"), Elbit Systems and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework), and our report dated March 19, 2019, expressed an unqualified opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue from
contracts with customers in the consolidated financial statements for the year ended December 31, 2018, due to the adoption of
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, using the modified retrospective adoption
method.
Basis for Opinion
These consolidated financial statements are the responsibility of Elbit Systems’ management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to Elbit Systems in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We believe that our audits and the reports of other auditors provide
a reasonable basis for our opinion.
/s/ Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
We have served as Elbit Systems' auditor since 2003.
Tel Aviv, Israel
March 19, 2019
F - 2
Kost Forer Gabbay & Kasierer
144 Menachem begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Elbit Systems Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Elbit Systems Ltd. ("Elbit Systems") and subsidiaries’ internal control over financial reporting as of December
31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Elbit Systems and subsidiaries
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO
criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of subsidiaries acquired during 2018, which are included in the 2018 consolidated financial statements of the Company
and constituted 24% and 9% of total and net assets, respectively, as of December 31, 2018 and 4% of revenues and net income,
for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation
of the internal control over financial reporting of the subsidiaries acquired during 2018.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of Elbit Systems and subsidiaries as of December 31, 2018 and 2017, and the related
consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the
period ended December 31, 2018, and the related notes and financial statement schedule and our report dated March 19, 2019
expressed an unqualified opinion thereon, based on our audit and the reports of the other auditors.
Basis for Opinion
Elbit Systems’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on Elbit Systems and subsidiaries’ internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
F - 3
Kost Forer Gabbay & Kasierer
144 Menachem begin St.
Tel-Aviv 6492102, Israel
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
Tel Aviv, Israel
March 19, 2019
F - 4
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of IMI Systems Ltd.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of IMI Systems Ltd. and its subsidiaries (the Company) as of
December 31, 2018 and the related consolidated statement of income, of changes in shareholders’ equity and of cash flows for the
one-month ended December 31, 2018, including the related notes (collectively referred to as the consolidated financial statements).
In our opinion, based on our audit and the report of other auditors, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for
the one-month ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of
America.
We did not audit the financial statements of Ashot Ashkelon Industries Ltd. a subsidiary, which statements reflect total assets of
approximately $146,400 as of December 31, 2018 and total revenues of $10,500 for the one-month ended December 31, 2018.
Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Ashot Ashkelon Industries Ltd., is based solely on the report of the other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
Kesselman & Kesselman
Certified Public Accountants (lsr.)
A member firm of PricewaterhouseCoopers International Limited
Tel-Aviv, Israel
March 19, 2019
We have served as the Company's auditor since 2016.
Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel,
P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il
F - 5
Somekh Chaikin
KPMG Millennium Tower
17 Ha’arba’a Street, PO Box 609
Tel Aviv 61006, Israel
+972 3 684 8000
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Ashost Ashkelon Industries, Ltd.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Ashot Ashkelon Industries Ltd. and its subsidiary (the Company)
as of December 31, 2018, the related consolidated statements of income, shareholders’ equity, and cash flows for the month ended
December 31, 2018, and the related notes collectively, the consolidated financial statements. In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and
the results of its operations and its cash flows for the month ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
s/ Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
We have served as the Company’s auditor since 2009.
Tel Aviv, Israel
March 12, 2019
F - 6
CONSOLIDATED BALANCE SHEETS
U.S. dollars (In thousands, except share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
CURRENT ASSETS:
Cash and cash equivalents
Short-term bank deposits and restricted deposits
Available-for-sale marketable securities
Trade and unbilled receivables and contract assets, net
Other receivables and prepaid expenses
Inventories, net
Total current assets
LONG-TERM INVESTMENTS AND RECEIVABLES:
Investments in affiliated companies, partnerships and other companies
Long-term trade and unbilled receivables and contract assets
Premises evacuation
Long-term bank deposits and other receivables
Deferred income taxes, net
Severance pay fund
PROPERTY, PLANT AND EQUIPMENT, NET
GOODWILL
OTHER INTANGIBLE ASSETS, NET
December 31,
Note
2018
2017
$
208,479
16,447
—
1,712,915
199,148
1,141,996
3,278,985
$
156,074
3,126
13,371
1,406,563
128,946
902,954
2,611,034
196,180
297,145
365,436
42,962
42,804
278,732
1,223,259
172,338
295,396
—
38,082
51,358
298,590
855,764
686,620
495,716
1,022,624
646,715
239,297
105,688
9
3
4
5
6
7
1C(3)
8
18F
2R
10
11
11
TOTAL ASSETS
$ 6,450,785
$ 4,714,917
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
CONSOLIDATED BALANCE SHEETS
U.S. dollars (In thousands, except share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
CURRENT LIABILITIES:
Short-term bank credit and loans
Current maturities of long-term loans and Series A Notes
Trade payables
Other payables and accrued expenses
Contract liabilities (customer advances)
Total current liabilities
LONG-TERM LIABILITIES:
Long-term loans, net of current maturities
Series A Notes, net of current maturities
Employee benefit liabilities
Deferred income taxes and tax liabilities, net
Contract liabilities (customer advances)
Other long-term liabilities
Total long-term liabilities
COMMITMENTS AND CONTINGENT LIABILITIES
EQUITY:
Elbit Systems Ltd. equity:
Share capital:
Ordinary shares of 1 New Israeli Shekels (“NIS”) par value each; Authorized –
80,000,000 shares as of December 31, 2018 and 2017; Issued 44,162,103 and
44,159,951 shares as of December 31, 2018 and 2017, respectively; Outstanding
42,753,182 and 42,751,030 shares as of December 31, 2018 and 2017, respectively
Additional paid-in capital
Treasury shares – 1,408,921 as of December 31, 2018 and 2017
Accumulated other comprehensive loss
Retained earnings
Total Elbit Systems Ltd. equity
Non-controlling interests
Total equity
December 31,
Note
2018
2017
$
208,821
62,546
776,100
1,081,992
780,994
2,910,453
$
133,750
67,556
633,689
835,394
418,560
2,088,949
467,649
56,303
736,798
78,677
175,890
170,607
1,685,924
119,514
124,865
413,117
68,159
133,649
48,692
907,996
12
15,16
13
14
15
16
2R
18F
14
20
21
22
12,348
263,556
(40,428)
(94,944)
12,347
262,122
(40,428)
(87,652)
1,691,921
1,561,921
1,832,453
1,708,310
21,955
1,854,408
9,662
1,717,972
TOTAL LIABILITIES AND EQUITY
$ 6,450,785
$ 4,714,917
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars (In thousands, except per share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Marketing and selling, net
General and administrative, net
Other operating income, net
Total operating expenses
Operating income
Financial expenses, net
Other expense, net
Income before income taxes
Income taxes
Equity in net (losses) earnings of affiliated companies and
partnerships
Net income
Less: net income attributable to non-controlling interests
Net income attributable to Elbit Systems Ltd.’s shareholders
Basic net earnings per share attributable to Elbit Systems
Ltd.’s shareholders
Diluted net earnings per share attributable to Elbit Systems
Ltd.’s shareholders
Weighted average number of shares used in computation of
basic net earnings per share
Weighted average number of shares used in computation of
diluted net earnings per share
(*) Revised for the adoption of ASU 2017-07. See Note 2S.
Note
23, 2T
24
1C(6)
1C(2),(8)
25
26
18D
6B
22
Year ended December 31,
2018
2017
2016
$ 3,683,684
$ 3,377,825
$ 3,260,219
2,707,505
976,179
2,374,775
1,003,050
2,294,934
965,285
287,352
281,014
160,348
(45,367)
683,347
292,832
(44,061)
(11,449)
237,322
(26,445)
210,877
(2,222)
208,655
(1,917)
206,738
4.84
4.84
$
$
$
$
265,060
280,246
133,314
—
678,620
324,430
(34,502)
(5,082)
284,846
(55,585)
229,261
11,361
240,622
(1,513)
239,109
5.59
5.59
$
$
$
$
255,792
271,037
151,353
(17,575)
660,607
304,678
(23,742)
(1,735)
279,201
(45,617)
233,584
5,224
238,808
(1,899)
236,909
5.54
5.54
$
$
$
$
42,753
42,753
42,750
42,753
42,742
42,752
The accompanying notes are an integral part of the consolidated financial statements.
F - 9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars (In thousands)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Year ended December 31,
2017
2016
2018
Net income
$
208,655
$
240,622
$
238,808
Other comprehensive income (loss), net of tax:(*)
Foreign currency translation differences
Unrealized gains (losses) on derivative instruments, net of tax
Pension and other post-retirement benefit plans, net of tax
Unrealized losses on available-for-sale marketable securities, net of tax
Total comprehensive income
(19,705)
3,805
7,970
(11)
8,169
(22,224)
(662)
(6)
(8,471)
6,741
(56)
(11)
(7,941)
(14,723)
(1,797)
200,714
225,899
237,011
Less: comprehensive income attributable to non-controlling interest
(1,268)
(2,261)
(673)
Comprehensive income attributable to Elbit Systems Ltd.’s shareholders
$
199,446
$
223,638
$
236,338
(*) Other comprehensive loss, net of tax expenses in the amounts of $2,175, $5,199 and $1,904 for the years 2018, 2017 and
2016, respectively.
The accompanying notes are an integral part of the consolidated financial statements.
F - 10
STATEMENTS OF CHANGES IN EQUITY
U.S. dollars (In thousands, except share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Number of
outstanding
shares
Share
capital
Additional
paid–in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Treasury
shares
Non–
controlling
interest
Total
equity
Balance as of January 1, 2016
42,730,068
$
12,341
$
261,421
$
(71,610) $
1,229,650
$ (40,428) $
8,053
$
1,399,427
Exercise of options
15,748
Stock-based compensation
Purchase of minority interest
shares, net
Dividends paid
Other comprehensive income, net
of tax expense of $1,904
Net income attributable to non-
controlling interests
Net income attributable to Elbit
Systems Ltd.'s shareholders
—
—
—
—
—
—
4
—
—
—
—
—
—
501
70
—
—
—
—
—
—
—
—
—
(571)
—
—
—
—
—
(68,447)
—
—
236,909
—
—
—
—
—
—
—
—
—
505
70
(1,325)
(1,325)
—
(68,447)
(1,226)
(1,797)
1,899
1,899
—
236,909
Balance as of December 31, 2016
42,745,816
$
12,345
$
261,992
$
(72,181) $
1,398,112
$ (40,428) $
7,401
$
1,567,241
The accompanying notes are an integral part of the consolidated financial statements.
F - 11
STATEMENTS OF CHANGES IN EQUITY
U.S. dollars (In thousands, except share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Number of
outstanding
shares
Share
capital
Additional
paid–in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Treasury
shares
Non–
controlling
interest
Total
equity
Balance as of January 1, 2017
42,745,816
$
12,345
$
261,992
$
(72,181) $
1,398,112
$ (40,428) $
7,401
$
1,567,241
Exercise of options
5,214
Stock-based compensation
Dividends paid
Other comprehensive loss, net of
tax expense of $5,199
Net income attributable to non-
controlling interests
Net income attributable to Elbit
Systems Ltd.'s shareholders
—
—
—
—
—
2
—
—
—
—
—
117
13
—
—
—
—
—
—
—
(15,471)
—
—
—
—
(75,300)
—
—
239,109
—
—
—
—
—
—
—
—
—
119
13
(75,300)
748
(14,723)
1,513
1,513
—
239,109
Balance as of December 31, 2017
42,751,030
$
12,347
$
262,122
$
(87,652) $
1,561,921
$ (40,428) $
9,662
$
1,717,972
The accompanying notes are an integral part of the consolidated financial statements.
F - 12
STATEMENTS OF CHANGES IN EQUITY
U.S. dollars (In thousands, except share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Number of
outstanding
shares
Share
capital
Additional
paid–in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Treasury
shares
Non–
controlling
interest
Total
equity
Balance as of January 1, 2018
42,751,030
$
12,347
$
262,122
$
(87,652) $
1,561,921
$ (40,428) $
9,662
$
1,717,972
Cumulative effect of adoption of
ASC Topic 606
Exercise of options
Stock-based compensation
Dividends paid
Minority interest related to IMI's
acquisition
Other comprehensive loss, net of
tax expense of $2,175
Net income attributable to non-
controlling interests
Net income attributable to Elbit
Systems Ltd.'s shareholders
—
2,152
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
47
1,387
—
—
—
—
—
—
—
—
—
—
(7,292)
—
—
(1,433)
—
—
(75,305)
—
—
—
206,738
—
—
—
—
—
—
—
—
—
—
—
—
(1,433)
48
1,387
(75,305)
11,025
11,025
(649)
(7,941)
1,917
1,917
—
206,738
Balance as of December 31, 2018
42,753,182
$
12,348
$
263,556
$
(94,944) $
1,691,921
$ (40,428) $
21,955
$
1,854,408
The accompanying notes are an integral part of the consolidated financial statements.
F - 13
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars (In thousands )
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Write-off impairment
Stock-based compensation
Amortization of Series A Notes discount (premium) and related issuance costs, net
Deferred income taxes and reserve, net
Loss (gain) on sale of property, plant and equipment
Loss (gain) on sale of investments and deconsolidation of subsidiaries
Equity in net (earnings) losses of affiliated companies and partnerships, net of dividend
received(*)
Changes in operating assets and liabilities, net of amounts acquired:
Increase in short and long-term trade and unbilled receivables and contract assets, net and
prepaid expenses
Increase in inventories, net
Increase (decrease) in trade payables, other payables and accrued expenses
Severance, pension and termination indemnities, net
Increase (decrease) in contract liabilities (customer advances)
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment and other assets
Acquisitions of subsidiaries and business operations (Schedule A)
Investments in affiliated companies and other companies
Deconsolidation of subsidiary (Schedule B)
Proceeds from sale of property, plant and equipment
Proceeds from sale of investments
Investment in long-term deposits
Proceeds from sale of long-term deposits
Investment in short-term deposits and available-for-sale marketable securities
Proceeds from sale of short-term deposits and available-for-sale marketable securities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options
Repayment of long-term loans
Proceeds from long-term loans
Repayment of Series A Notes
Dividends paid
Change in short-term bank credit and loans, net
Net cash used in financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
(*) Dividends received from affiliated companies and partnerships
$
$
$
Year ended December 31,
2017
2016
2018
$
208,655
$
240,622
$
238,808
118,205
13,334
1,387
(92)
13,724
2,080
(41,822)
114,017
—
13
(92)
28,774
(2,440)
1,358
122,888
86
70
(92)
2,683
(3,347)
(16,734)
17,929
(1,987)
(1,728)
(89,099)
(117,221)
(89,956)
(31,363)
185,898
191,659
(102,301)
(504,447)
(7,538)
(2,873)
4,388
—
(183)
82
(10,361)
30,363
(592,870)
48
(775)
342,528
(55,532)
(75,305)
242,652
453,616
52,405
156,074
208,479
15,707
(315,236)
(59,699)
63,273
2,003
30,287
100,893
(107,880)
(25,440)
(4,964)
—
6,270
12,067
(1,396)
176
(40,893)
46,491
(115,569)
119
(167,425)
118,623
(55,532)
(75,300)
127,455
(52,060)
(66,736)
222,810
156,074
9,374
$
$
$
$
$
$
(297,439)
(8,040)
253,413
315
(82,881)
208,002
(124,221)
—
(19,277)
(1,538)
15,745
—
(417)
894
(25,622)
36,619
(117,817)
505
(48,250)
—
(55,532)
(68,447)
5,027
(166,697)
(76,512)
299,322
222,810
3,496
The accompanying notes are an integral part of the consolidated financial statements.
F - 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars (In thousands )
SUPPLEMENTAL CASH FLOW ACTIVITIES:
Cash paid during the year for:
Income taxes, net
Interest
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Year ended December 31,
2018
2017
2016
$
$
26,463
30,304
$
$
47,707
16,139
$
$
28,603
6,254
Schedule A: Acquisitions of subsidiaries and business operations
Estimated net fair value of assets acquired and liabilities assumed at the date of
acquisition was as follows:
Working capital deficit, net (excluding cash and cash equivalents in the amount of
$7,379)
Property, plant and equipment
Other long-term assets
Goodwill and other intangible assets
Deferred income taxes
Employee benefit liabilities, net
Long-term liabilities
Non-controlling interest
Schedule B: Deconsolidation of subsidiary
Year ended December 31,
2017
2016
2018
$
(105,392)
200,115
386,101
550,115
(5,633)
(382,871)
(126,963)
(11,025)
$
(10,454)
$
672
—
50,185
(3,543)
—
(11,420)
—
$
504,447
$
25,440
$
—
—
—
—
—
—
—
—
—
Year ended December 31,
2018
2017
2016
Estimated net fair value of assets and liabilities that exited consolidation scope was
as follows:
Working capital, net (excluding cash and cash equivalents)
$
2,514
$
— $
Other long term liabilities
Property, plant and equipment
Fair value of investment / interest retained
Gain from deconsolidation
Deconsolidation of subsidiary's cash, net
838
(1,938)
43,350
(41,891)
—
—
—
—
$
2,873
$
— $
3,098
1,823
(1,458)
5,107
(7,032)
1,538
The accompanying notes are an integral part of the consolidated financial statements.
F - 15
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 1 - GENERAL
A. GENERAL
Elbit Systems Ltd. (“Elbit Systems” or the “Company”) is an Israeli corporation that is 45.80% owned by the
Federmann Group. Elbit Systems’ shares are traded on the Nasdaq National Market in the United States
(“Nasdaq”) and on the Tel-Aviv Stock Exchange (“TASE”). Elbit Systems and its subsidiaries (collectively the
“Company”) are engaged mainly in the fields of defense, homeland security and commercial aviation. Elbit
Systems’ major wholly-owned subsidiaries are the Elbit Systems of America, LLC (“ESA”) companies, Elbit
Systems Electro-Optics Elop Ltd. (“Elop”), Elbit Systems Land and C4I Ltd. (“ESLC”), Elbit Systems EW and
SIGINT - Elisra Ltd. (“Elisra”) and IMI Systems Ltd. (“IMI”).
B. SALES TO GOVERNMENTAL AGENCIES
The Company derives a majority of its revenues from direct or indirect sales to governments or governmental
agencies. As a result, these sales are subject to the special risks associated with sales to governments or
governmental agencies. These risks include, among others, dependence on the resources allocated by
governments to defense programs, changes in governmental priorities, anti-corruption regulations, changes in
governmental regulations, cyber security and information assurance requirements and changes in governmental
approvals regarding export licenses required for the Company’s products and for its suppliers. As for major
customers, refer to Note 23C.
C. ACQUISITIONS AND INVESTMENTS
1.
In April 2018, the Company completed the acquisition of the assets and operations of the privately-owned
U.S. company Universal Avionics Systems Corporation (“Universal”) for a total consideration of
approximately $123,581. Universal is a developer and manufacturer of commercial avionics systems for
the retrofit and forward-fit market for a wide range of fixed and rotary aircraft types.
Based on a purchase price allocation ("PPA") performed by an independent adviser, the purchase price was
attributed to the fair value of assets acquired and liabilities assumed as follows:
Net tangible assets and liabilities assumed (current and non-current)
Technology
Customer relationships
Trademark
Goodwill
Expected useful
lives
15 years
15 years
20 years
Fair
value
52,509
21,128
13,924
4,960
31,060
123,581
The results of operations of Universal were consolidated from the date of acquisition. Pro forma information
has not been provided, since the impact of Universal's financial results was not material to the revenue and
net income of the Company.
Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets
acquired.
F - 16
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 1 -
GENERAL (Cont.)
C. ACQUISITIONS AND INVESTMENTS (Cont.)
2. In the second quarter of 2018, an Israeli subsidiary operating in the filed of commercial cybersecurity, was
deconsolidated following an investment by a third party, which holds certain substantial participation rights,
resulting in loss of control over the subsidiary. As a result, the Company recognized in other operating income
a net gain related to the revaluation the shares held by the Company of approximately $42,000 (see Note 6C
(1)). In addition, in the second quarter of 2018, a third party invested in a newly established Israeli subsidiary
acting in the area of surgeon-centered visualization technologies, resulting in loss of control of the subsidiary
because the third party investor holds certain substantial participation rights. As a result, the Company recognized
in other operating income a net gain of approximately $3,500 related to revaluation of the shares held by the
Company (see Note 6C(2)).
3. On November 25, 2018, the Company completed the acquisition of 100% of the interests in an Israeli company,
IMI Systems Ltd. and its subsidiaries (collectively: "IMI"), for a total nominal consideration of approximately
$520,000 (approximately NIS 1,900 million).The consideration is comprised of the following: approximately
$380,000 (approximately NIS 1,400 million) paid in cash, approximately $24,000 (approximately NIS 90 million)
is contingent consideration recorded at fair value, subject to IMI achieving agreed performance goals, which
may become payable on the occurrence of certain future events, and approximately $94,000 (approximately NIS
350 million) at present value are deferred payments to be paid in 2020 and 2022.
The results of operations of IMI were consolidated in the Company's financial statements commencing on the
date of acquisition and were immaterial to the Company's results of operations for the year ended December 31,
2018.
IMI is engaged primarily in the development and manufacture of precision munitions and armored vehicle
survivability and protection systems.
Based on a preliminary PPA performed by independent advisors, the purchase price was attributed to the fair
value of assets acquired and liabilities assumed from the seller as follows:
Net tangible assets and liabilities assumed (current and non-current)
Employees benefit liabilities, net
Premises evacuation
Backlog
Technology
Customer relationships
Goodwill
Average expected
useful lives
mainly 10
mainly 8
mainly 10
Fair value
$
39,405
(386,101)
370,089
18,600
52,905
52,131
351,426
$ 498,455
The Company is in the process of completing the valuation of the net tangible and intangible assets acquired
and liabilities assumed, and its estimate of these values was still preliminary on December 31, 2018. Therefore,
these provisional amounts are subject to change as the Company completes the valuation throughout the
measurement period, which will be completed within 12 months of the acquisition date.
Goodwill represents the purchase price paid in excess of the fair value of net tangible and intangible assets
acquired, and is attributable primarily to expected synergies, economies of scale and the assembled workforce
of IMI.
Further to the acquisition agreement, the Company will be entitled to premises evacuation compensation in
the amount of approximately $365,000 (approximately NIS 1,365 million) , which will be received upon the
relocation of certain of IMI's facilities.
F - 17
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 1 -
GENERAL (Cont.)
C. ACQUISITIONS AND INVESTMENTS (Cont.)
3. Following are the supplemental consolidated financial results of the Company on an unaudited pro forma
basis, as if the IMI acquisition had been consummated on January 1, 2017 (unaudited):
Proforma revenue
Proforma net income (loss)
Proforma earning (loss) per share:
Basic
Diluted
December 31,
2018
2017
4,028,656
(18,758)
3,941,825
216,109
(0.44)
(0.44)
5.06
5.05
These pro forma results were based on estimates and assumptions, which the Company believes are reasonable.
They are not necessarily the results that would have been realized had the Company and IMI been a combined
company during the periods presented and are not necessarily indicative of the Company's consolidated results
of operations in future periods. The pro forma results include adjustments related to purchase accounting,
primarily amortization of intangible assets, depreciation related to the excess of cost over equity attributable to
purchased real estate, property, plant and equipment and elimination of intercompany transactions.
4. Expenses related to the IMI acquisition and other non-recurring expenses:
During the fourth quarter of 2018, following the acquisition of IMI, the Company initiated a reorganization plan,
which includes charges related to the integration of IMI, primarily associated with plans to abandon duplicate
facilities, manufacturing and supply chain infrastructure, write-off of pre-contract costs and impairment of
property, plant and equipment and intangible assets. Total expenses related to the IMI acquisition and other non-
recurring expenses amounted to approximately $69,464, as follows:
Expense type
Inventory write-off
Employees related costs(*)
Long lived assets write-off
Intangibles write-off
Other
Expense category
Cost of revenue
Marketing and selling
Other income
$
2018
43,487
12,709
2,700
5,520
5,048
$
69,464
2018
66,636
128
2,700
69,464
$
$
(*)
Employees related costs represent non-recurring expenses related to certain reorganizational activities,
primarily related to one-time payments to certain Israeli subsidiaries' employees under collective
bargaining agreements. In addition, other income includes impairment charges on one of the Company's
affiliates that was assessed to be impaired given the more advanced IMI technology.
F - 18
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 1 -
GENERAL (Cont.)
C. ACQUISITIONS AND INVESTMENTS (Cont.)
5.
6.
7.
8.
9.
In June 2017, the Company completed the acquisition of a 100% interest in a Canadian company for a purchase
price of approximately $20,200, of which $10,500 is contingent consideration, which may become payable on
the occurrence of certain future events. Based on a PPA performed by an independent adviser, the purchase price
was attributed mainly to goodwill (approximately $9,500) and to other intangible assets (approximately $9,500).
The results of operation of the acquired company were consolidated in the Company's financial statements
commencing on the date of acquisition. The effects on consolidated revenues and net income were immaterial.
Pro-forma information was not provided due to immateriality. As of December 31, 2018 the contingent
consideration was $10,013.
In June 2017, the Company completed the acquisition of a 100% interest in a Brazilian company for a purchase
price of approximately $23,000, of which approximately $9,700 is contingent consideration, which may become
payable on the occurrence of certain future events. Based on a PPA performed by an independent adviser, the
purchase price was attributed mainly to goodwill (approximately $15,600) and to other intangible assets
(approximately $12,300). The results of operation of the acquired company were consolidated in the Company's
financial statements commencing on the date of acquisition. The effects on consolidated revenues and net income
were immaterial. Pro-forma information was not provided due to immateriality. As of December 31, 2018 the
contingent consideration was $8,245.
In the third quarter of 2016, a third party invested in a newly established Israeli subsidiary acting in the area of
energy technology solutions for civilian transportation applications. The third party investor holds certain
substantial participation rights. As a result, the Company recognized in other operating income a net gain of
approximately $10,500 related to valuation of the shares previously held by the Company. See note 6B(5).
In the first quarter of 2016, an Israeli subsidiary was deconsolidated following an investment by a third party,
which holds certain substantial participating rights. As a result, the Company recognized in other operating
income a net gain related to the revaluation of the investment of approximately $7,000.
In July 2015, the Company acquired a division from an Israeli-based company (the “Seller”), for a total
consideration of approximately $154,000, of which approximately $40,000 is contingent consideration, which
may become payable on the occurrence of certain future events. In December 2016, following certain claims
and allegations demanding indemnification pursuant to the asset purchase agreement, the Company signed a
settlement agreement with the Seller, in which the parties agreed on certain cash payments and a reduction of
up to $4,000 from any contingent consideration payment to Seller. During 2018 and 2017, the Company
recognized reductions of approximately $4,500 and $31,200 , respectively, in its earn-out contingent liability
consideration related to the acquisition of the division, since the Company concluded that the acquired division
had not achieved the performance requirements necessary for making contingent earn-out payments. Further,
in May 2018, the period in which the Seller could have filed a dispute over the earn-out computation, expired
without any claim or demand from the Seller. The income resulting from the reductions in the contingent
consideration liability was recognized in general and administrative expenses.
F - 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 -
SIGNIFICANT ACCOUNTING POLICIES
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“U.S. GAAP”).
A. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. The most significant assumptions are employed in estimates used in determining values
of intangible assets, warranty and contract loss accruals, legal contingencies, tax assets and tax liabilities, stock-
based compensation costs, retirement and post-retirement benefits (including the actuarial assumptions), financial
instruments with no observable market quotes, as well as in estimates used in applying the Company's revenue
recognition policies. Actual results may differ from estimated results.
B. FUNCTIONAL CURRENCY
The Company’s revenues are generated mainly in U.S. dollars. In addition, most of the Company’s costs are
incurred in U.S. dollars. The Company’s management believes that the U.S. dollar is the primary currency of
the economic environment in which the Company operates. Thus, the functional and reporting currency of the
Company is the U.S. dollar.
Transactions and balances of the Company and certain subsidiaries that are denominated in other currencies
have been remeasured into U.S. dollars in accordance with principles set forth in ASC 830, “Foreign Currency
Matters”. All exchange gains and losses from the remeasurement mentioned above are reflected in the statement
of income as financial expenses or income, as appropriate.
For those Israeli and non-Israeli subsidiaries and investees whose functional currency has been determined to
be other than the U.S. dollar, assets and liabilities are translated at year-end exchange rates, and statement of
income items are translated at average exchange rates prevailing during the year. Resulting translation differences
are recorded as a separate component of accumulated other comprehensive income (loss) in equity.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Elbit Systems and its wholly and majority-owned
subsidiaries and variable interests entities that are required to be consolidated.
Intercompany transactions and balances, including profit from intercompany sales not yet realized outside the
Company, have been eliminated upon consolidation.
F - 20
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
D.
COMPREHENSIVE INCOME
The Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income”. This
statement establishes standards for the reporting and display of comprehensive income and its components.
Comprehensive income generally represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders. Accordingly, the Company presents a separate
statement of consolidated comprehensive income.
The following table displays the changes in accumulated other comprehensive income (loss), net of taxes, in the
amount of $7,292 and $15,471, for the years ended December 31, 2018 and December 31, 2017, respectively, by
components:
Unrealized
gains (losses)
on derivative
instruments
Unrealized
gains (losses)
on available-
for-sale
marketable
securities
Pension and
post-
retirement
benefit plans
Foreign
currency
translation
differences
Total
Balance as of January 1, 2018
$
(6,963) $
11
$
(47,469) $
(33,231) $ (87,652)
Other comprehensive income (loss) before
reclassifications
Amount reclassified from accumulated other
comprehensive income (loss)
Net current-period other comprehensive
income (loss)
(5,357)
9,162
3,805
Balance as of December 31, 2018
$
(3,158) $
—
(11)
3,321
(19,056)
(21,092)
4,649
—
13,800
(11)
— $
7,970
(39,499) $
(19,056)
(7,292)
(52,287) $ (94,944)
Unrealized
gains (losses)
on derivative
instruments
Unrealized
gains (losses)
on available-
for-sale
marketable
securities
Pension and
post-
retirement
benefit plans
Foreign
currency
translation
differences
Total
Balance as of January 1, 2017
$
15,261
$
17
$
(46,807) $
(40,652) $ (72,181)
Other comprehensive income (loss)
before reclassifications
Amount reclassified from accumulated
other comprehensive income (loss)
Net current-period other comprehensive
income (loss)
25,306
(47,530)
(22,224)
Balance as of December 31, 2017
$
(6,963) $
—
(6)
(6)
11
(4,441)
7,421
28,286
3,779
—
(43,757)
(662)
(47,469) $
7,421
(15,471)
(33,231) $ (87,652)
$
F - 21
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
E. BUSINESS COMBINATIONS
The Company applies ASC 805, “Business Combinations”. ASC 805 requires recognition of assets acquired,
liabilities assumed and non-controlling interest in the acquired entity at the acquisition date, measured at their
fair values as of that date. This ASC also requires the fair value of acquired in-process research and development
(“IPR&D”) to be recorded as intangibles with indefinite lives, contingent consideration to be recorded on the
acquisition date and restructuring and acquisition-related deal costs to be expensed as incurred. Any excess of
the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies
are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets
and in acquired income tax position are to be recognized in earnings.
F. CASH AND CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original
maturities of three months or less, when purchased.
G. SHORT-TERM BANK DEPOSITS AND RESTRICTED DEPOSITS
Short-term bank deposits are deposits with original maturities of more than three months but less than one year.
The short-term bank deposits are presented at their cost, which approximates fair value. The Company was
required to maintain $15,420 of restricted deposits as of December 31, 2018, related to certain collateral
requirements for obligations.
H. AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The Company accounts for its investments in debt securities, and marketable equity securities of entities in which
it does not have significant influence, in accordance with ASC 320, “Investments - Debt and Equity Securities”.
The Company classifies all debt securities and marketable equity securities as “available-for-sale”. All of the
Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses
are comprised of the difference between fair value and the cost of such securities and are recognized, net of tax,
in accumulated other comprehensive income (“OCI”).
The amortized cost of debt securities reflects amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion together with interest and dividends on securities are included in “financial
expenses, net”.
The Company recognizes an impairment charge when a decline in the fair value of its investments in debt
securities below the amortized cost basis of such securities is judged to be other-than-temporary impairment
(“OTTI”). Factors considered in making such a determination include the duration and severity of the impairment,
the reason for the decline in value, the potential recovery period,if the entity has the intent to sell the debt security
or if it is more likely than not that it will be required to sell the debt security before recovery of its amortized
cost basis. However, if an entity does not expect to sell a debt security, it will still need to evaluate expected
cash flows to be received and determine if a credit loss exists. In the event of a credit loss, only the amount of
impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit
losses are recorded in OCI.
F - 22
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
I.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Inventory write-offs are provided to cover risks
arising from slow-moving items or technological obsolescence for which recoverability is not probable.
Cost is determined as follows:
•
•
Raw materials using the average or FIFO cost method.
Work in progress:
•
Costs incurred on certain long-term contracts in progress, but for which control has not transferred
to the customer, include direct labor, material, subcontractors, other direct costs and an allocation
of overheads, which represent recoverable costs incurred for production, allocable operating
overhead cost and, where appropriate, research and development costs (See Note 2(V)).
Labor overhead is generally included on the basis of updated hourly rates and is allocated to
each project according to the amount of hours expended. Material overhead is generally allocated
to each project based on the value of direct material that is charged to the project.
•
Pre-contract costs are generally expensed, but can be deferred and included in inventory only when such costs
can be directly associated with a specific anticipated contract and if their recoverability from the specific
anticipated contract is probable according to the guidelines of ASC 606.
J.
INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES
Investments in affiliated companies and partnerships that are not controlled but over which the Company can
exercise significant influence (generally, entities in which the Company holds approximately between 20% to
50% of the voting rights of the investee) are presented using the equity method of accounting. Profits on
intercompany sales, not realized outside the Company, are eliminated. The Company discontinues applying the
equity method when its investment (including advances and loans) is reduced to zero and the Company has not
guaranteed obligations of the affiliate or otherwise committed to provide further financial support to the affiliate.
For certain investments, the Company elected to measure the investments at fair value. Such elections are
irrevocable. Under the fair value method, investments are recorded at fair value and any changes in fair value
are reported in the consolidated statements of operations. All costs (other then purchase price ) directly associated
with the acquisition of an investment to be accounted for using the fair value method are expensed as incurred.
Investments in preferred shares, which do not result in significant influence and without readily determinable
fair value, are measured at cost, less impairments, plus or minus observable price changes in accordance with
ASC 825-10. Equity investments without readily determinable fair value are assessed for impairment periodically.
A change in the Company’s proportionate share of an investee’s equity, resulting from issuance of common or
in-substance common stock by the investee to third parties, is recorded as a gain or loss in the consolidated
income statements in accordance with ASC 323-10-40-1.
F - 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
J.
INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES (Cont.)
For investments in non-marketable equity securities without readily determinable fair values where the Company
does not have control or the ability to exercise significant influence over the operation and financial policies of
the issuer of the securities, the Company has elected to measure these investments at cost minus impairment, if
any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or
similar investment in the same issuer. This election is made for each investment separately and is reassessed at
each reporting period as to whether the investment continues to qualify for this election. Additionally, at each
reporting period, the Company makes a qualitative assessment considering impairment indicators to evaluate
whether the investment is impaired.
Management evaluates investments in affiliated companies, partnerships and other non-marketable equity
securities for evidence of other-than-temporary declines in value. Such evaluation is dependent on the specific
facts and circumstances. Accordingly, in determining whether other-than-temporary declines exist, management
evaluates various indicators for other-than-temporary declines and evaluates financial information (e.g. budgets,
business plans, financial statements, etc.). During 2018 the Company recorded impairment of approximately
$17,500 for three of its affiliated companies. During 2017 no material impairment was recognized and during
2016 the Company recorded an impairment of approximately $2,500 for one of its affiliated companies.
K. VARIABLE INTEREST ENTITIES
ASC 810-10, “Consolidation”, provides a framework for identifying variable interest entities (“VIEs”) and
determining when a company should include the assets, liabilities, non-controlling interests and results of
activities of a VIE in its consolidated financial statements. According to ASC 810-10, the Company consolidates
a VIE when it has both (1) the power to direct the economically significant activities of the entity and (2) the
obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant
to the VIE. The determination of whether the Company should consolidate a VIE is evaluated continuously as
existing relationships change or future transactions occur.
The Company’s assessment of whether an entity is a VIE and the determination of the primary beneficiary is
judgmental in nature and involves the use of significant estimates and assumptions. Those include, among others,
forecasted cash flows, their respective probabilities and the economic value of certain preference rights. In
addition, such assessment also involves estimates of whether an entity can finance its current activities, until it
reaches profitability, without additional subordinated financial support.
Also according to ASC 810, a non-controlling interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as a separate component of equity in the consolidated financial statements. As
such, changes in the parent’s ownership interest with no change of control are treated as equity transactions,
rather than acquisitions achieved in stages or dilution gains or losses. Losses of partially-owned consolidated
subsidiaries will continue to be allocated to the non-controlling interests even when the investment in the
subsidiary was already reduced to zero.
A 51%-held subsidiary in the U.K. (the “UK Subsidiary”) is considered to be a VIE. As Elbit Systems is the
primary beneficiary and has both the power to direct its activities and absorb the majority of its losses or the
right to the majority of its earnings based upon holding the 51% economic interest, the UK Subsidiary is
consolidated in the Company’s financial statements.
The Company holds 50% of the contractual rights in, and is the primary beneficiary of, an Israeli limited
partnership, which is considered to be a VIE and is consolidated in the Company’s financial statements.
F - 24
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
L. LONG-TERM RECEIVABLES
Long-term trade, unbilled (contract assets) and other receivables, with payment terms in excess of one year that
are considered collectible, are recorded at their estimated present values (determined based on the market interest
rates at the date of initial recognition).
M. LONG-TERM BANK DEPOSITS
Long-term bank deposits are deposits with maturities of more than one year. These deposits are presented at cost
and earn interest at market rates. Accumulated interest to be received over the next year is recorded as a current
asset. The deposits and accumulated interest approximate fair value.
N. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated depreciation and investment grants. For
equipment produced for the Company’s own use, cost includes materials, labor and overhead (including interest
costs, when applicable) but not in excess of the fair value of the equipment.
Depreciation is calculated by the straight-line method over the estimated useful life of the assets at the following
annual rates:
Buildings and leasehold improvements (*)
Instruments, machinery and equipment
Office furniture and other
Motor vehicles
%
2-25
5-33
7-33
6-20
(Mainly 15%)
(*) Leasehold improvements are amortized generally over the term of the lease or the useful life of the
assets, whichever is shorter.
The Company capitalizes direct costs (internal and external) of materials and services used in the
development and purchase of internal-use software. Amounts capitalized are amortized on a straight-line basis
over a period of 3 to 12 years and are reported as a component of property and equipment.
The Company is in the process of developing and implementing a new Enterprise Resource Planning (“ERP”)
system. Certain costs incurred during the application development stage have been capitalized in accordance
with authoritative accounting guidance related to accounting for the cost of computer software developed or
obtained for internal use. The net book value of capitalized costs for this new ERP system was approximately
$32,453 and $20,600 as of December 31, 2018 and 2017, respectively. These costs will be amortized over the
system's estimated useful life as the ERP system is placed in service.
F - 25
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
O. OTHER INTANGIBLE ASSETS
Other identifiable intangible assets mainly consist of purchased technology, customer relations and trademarks.
These intangible assets are stated at cost, net of accumulated amortization and impairments, and are amortized
over their useful life using the straight-line method or the accelerated method, whichever better reflects the
applicable expected utilization pattern.
P.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company’s long-lived assets and finite-lived 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 (or assets group) to be held and used is determined by a comparison of the carrying
amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If the carrying
amount is higher, an asset is deemed to be impaired and the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair value. For the year ended December 31, 2018
the Company recognized an impairment of $5,520 (see note 1C(5)). For each of the two years ended December
31, 2017 and 2016, no impairment was identified.
As required by ASC 820, “Fair Value Measurements”, the Company applies assumptions that marketplace
participants would consider in determining the fair value of long-lived assets (or asset groups).
Q. GOODWILL IMPAIRMENT
Goodwill is subject to an impairment test at the reporting unit level on an annual basis (or more frequently if
impairment indicators arise).
The Company identified several reporting units based on the guidance of ASC 350, “Intangibles – Goodwill and
Other”.
ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for
impairment, while the second phase (if necessary) measures impairment.
Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value.
In such case, the second phase is then performed, and the Company measures impairment by comparing the
carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss
is recognized in an amount equal to the excess. For each of the three years in the period ended December 31,
2018, no impairment was identified.
As required by ASC 820, “Fair Value Measurement”, the Company applies assumptions that market place
participants would consider in determining the fair value of each reporting unit.
F - 26
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
R. SEVERANCE PAY
Elbit Systems’ and its Israeli subsidiaries’ obligations for severance pay are calculated pursuant to Israel’s
Severance Pay Law, based on the most recent salary of the employees multiplied by the number of years of
employment as of the balance sheet date and are presented on an undiscounted basis (the “Shut Down Method”).
Subject to certain conditions, employees are entitled to one month’s salary for each year of employment or a
portion thereof. The obligation is funded by monthly deposits through insurance policies and by an accrual. The
value of these policies is recorded as an asset on the Company’s balance sheet. The deposited funds may be
withdrawn only upon the fulfillment of the obligation, pursuant to the Severance Pay Law or labor agreements.
The value of the deposited funds is based on the cash surrender value of these policies and includes profits (or
losses) accumulated to the balance sheet date.
Elbit Systems and its Israeli subsidiaries have entered into an agreement with some of its employees implementing
Section 14 of the Severance Pay Law and the General Approval of the Labor Minister dated June 30, 1998,
issued in accordance with such Section 14. The agreement mandates that upon termination of such employees’
employment, all the amounts accrued in their insurance policies will be released to them. The severance pay
liabilities and deposits covered by these plans are not reflected in the balance sheet, as the severance pay risks
have been irrevocably transferred to the severance funds.
Severance pay expenses for the years ended December 31, 2018, 2017 and 2016 amounted to approximately
$56,515, $62,777 and $55,294, respectively.
S. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company accounts for its obligations for pension and other post-retirement benefits in accordance with
ASC 715, “Compensation – Retirement Benefits” (see Note 17).
On January 1, 2018, the Company retrospectively adopted ASU 2017-07, "Compensation - Retirement Benefits
(Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost".
ASU 2017-07 requires the service cost component of net retirement benefit cost to be reported separately from
the other components of net retirement benefit cost in the Consolidated Statement of Income. As a result, the
Company reclassified non-service cost components of net benefit cost in the amount of $5,130 and $5,702 for
the years ended December 31, 2017 and 2016, respectively, with no impact to net income.
F - 27
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
T. REVENUE RECOGNITION
The Company generates revenues primarily from fixed-price long-term contracts involving the design,
development, manufacture and integration of defense systems and products. To a lesser extent, the Company
generates revenues from short-term contracts or support and services which could be either fixed-price or cost-
reimbursement contracts.
Revenues from our contracts are recognized using the five-step model in ASC 606 - "Revenue from Contracts
with Customers" ("ASC 606"). At first, the Company determines if an agreement with a customer is considered
a contract to the extent it has a commercial substance, it is approved in writing by both parties, all rights and
obligations including payment terms are identifiable, the agreement between the parties creates enforceable
rights and obligations, and collectability in exchange for goods and services that will be transferred to the customer
is considered probable. The Company then assesses the transaction price for a contract in order to determine the
consideration the Company expects to receive for satisfying the performance obligations called for in the contract.
The Company assesses the timing of transfer of goods and services to the customer as compared to the timing
of payments, to determine whether a significant financing component exists. 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. To the extent the transaction price includes variable
consideration (e.g., contract penalties, economic price adjustments, unpriced change orders or like measures),
the Company usually estimates the most likely amount that should be included in the transaction price subject
to constraints based on the specific facts and circumstances.
At the inception of a contract, the Company also evaluates the products and services promised by it in order to
determine if the contract should be separated into more than one performance obligation. The products and
services in the Company's contracts are often not distinct from one another due to a customer defined interrelated
operational performance requirement, a highly complex interrelated and integrated system or solutions design
and significant contract management requirements. To a lesser extent, such performance obligations could be
for performance of services, or other distinct performance obligations such as indirect buy-back transactions
(see Note 21B), which may be distinct and separated into a performance obligation. Following the determination
of the performance obligations in the contract, the Company allocates the total transaction price to each
performance obligation in an amount based on the estimated relative standalone selling prices of the promised
goods or services underlying each performance obligation.
Standalone selling price is the price at which the Company would sell a promised good or service separately to
a customer. Standalone selling prices for the Company’s products and services are generally not observable, and
consequently the Company would use the “Expected Cost plus a Margin” approach to determine a standalone
selling price. Expected costs are typically derived from our performance cost forecast information.
F - 28
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
T.
REVENUE RECOGNITION (Cont.)
The Company recognizes revenues for each of the identified performance obligations when its customer obtains
control of the products or services. The assessment of when the customer obtains control involves significant
judgments, which consider, among other things, 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 a group of performance obligations or contracts collectively, as
opposed to individually by using the "portfolio approach". 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 practical expedient would not differ materially from applying the expedient
to the individual contracts or performance obligations within that portfolio (i.e., a gross margin at a narrow
range).
For most of the Company's long-term contracts, where the Company's performance does not create an asset with
an alternative use, the Company recognizes revenue over time as it performs because of continuous transfer of
control to the customer. For Israeli, U.S. and some other government contracts, this continuous transfer of control
to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the
contract for convenience, pay the Company for costs incurred plus a reasonable profit and take control of any
work-in-process. Similarly, for other government contracts, the customer typically controls the work-in-process
as evidenced either by contractual termination for convenience clauses or by the Company's 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, the Company generally recognizes 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. The Company believes that costs incurred as a portion
of total estimated costs is an appropriate measure of progress towards satisfaction of the performance obligation
since this measure reasonably depicts the progress of the work effort. 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 upon delivery). For performance obligations that are satisfied at a point in time, the Company
evaluates the point in time when the customer can direct the use of, and obtain the benefits from, the products
and services. Shipping and handling costs are not considered performance obligations and are included in cost
of sales as incurred.
Service revenues include contracts primarily for the provision of supplies and services other than those associated
with 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 contract or performance obligation for the design,
development or delivery of products. Our service contracts include contracts in which the customer
simultaneously receives and consumes the benefits provided as the performance obligations are satisfied. Our
service contracts primarily include operation-type contracts, outsourcing-type arrangements, maintenance
contracts, training and similar activities. Revenue from service contracts or performance obligations were less
than 10% of total revenues in each of the fiscal years 2018, 2017 and 2016.
F - 29
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
T. REVENUE RECOGNITION (Cont.)
Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and
performance costs. For long-term contracts, the Company estimates the profit on a contract as the difference
between the total estimated transaction price and the total expected performance costs of the contract and
recognizes revenue and costs over the life of the contract. Changes to performance cost estimates under a contract
may occur in a situation where: (a) identified contract risks cannot be resolved within the cost estimates included
in a contract's estimated costs at completion (“EAC”); or (b) new or unforeseen risks or changes in the performance
cost estimates must be incorporated into the contract's EAC. The nature of the Company's numerous contracts
is such that refinements of the estimated performance costs or revenues for a project may occur for various
reasons, including: contract change orders, option exercise, changes in labor costs, change in subcontractors and
other procurement costs, efficiency variances, customer specifications and testing requirement, economic price
adjustments, significant technical and development matters encountered during performance and provision for
loss. Changes to performance cost or revenues estimates on contracts are considered in estimating sales and
profit margins and are recorded when they are probable and reasonably determinable by management. Changes
in estimated revenues and/or estimated project costs which are related to an existing performance obligation,
and that are not distinct from those goods and services already provided, and therefore form part of single
performance obligation, are recorded in the period the change is reasonably determinable, with the full amount
of the inception-to-date effect of such changes recorded in such period on a "cumulative catch-up" basis. For
contracts that are deemed to be loss contracts, the Company establishes forward loss reserves for total estimated
costs that are in excess of total estimated consideration under a contract in the period in which they become
probable. If any of the above factors were to change, or if different assumptions were used in estimating progress
cost and measuring progress towards completion, it is possible that materially different amounts would be reported
in the Company’s consolidated financial statements.
Management periodically reviews the estimates of progress towards completion and contract costs. These
estimates are determined, based on engineering estimates and past experience, by personnel having the
appropriate authority and expertise to make reasonable estimates of the related costs. Such engineering estimates
are reviewed for each specific contract by professional personnel from various disciplines within the organization.
These estimates take into consideration the probability of achievement of certain milestones, as well as other
factors that might impact the contract’s completion and projected cost.
Net EAC Adjustments Effect:
The Company's cost of revenues included net EAC adjustments resulting from changes in performance cost
estimates of approximately $32,200 (1.19% of cost of revenues and 3.30% of gross profit, excluding the non-
recurring expenses related to the IMI acquisition recorded in cost of revenues in 2018 - see Note 1C(4)), $42,700
(1.79% of cost of revenues and 4.28% of gross profit) and $33,700 (1.47% of cost of revenues and 3.52% of
gross profit) for the years ended December 31, 2018, 2017 and 2016, respectively. These adjustments changed
the Company's net income by approximately $28,600 ($0.67 per diluted share), excluding the non-recurring
expenses related to the IMI acquisition recorded incost of revenues - see Note 1C(4), $34,400 ($0.80 per diluted
share) and $28,200 ($0.66 per diluted share for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company adopted ASC 606 using the modified retrospective method effective as of January 1, 2018.
Accordingly, for comparative periods prior to 2018, a majority of the Company's revenues were recognized
under the contract method of accounting, and sales and profits were recorded on each contract using the
percentage-of-completion method of accounting, primarily using units-of-delivery. Under the units-of-delivery
method, revenue is recognized based upon the number of units delivered during a period, and the contract price
and expenditures are recognized as cost allocable to the delivered units. For further description on the adoption
of ASC 606 and the impacts of adoption on the financial statements for the period ended December 31, 2018,
see Note 2AE, Recent Accounting Pronouncements.
F - 30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
T. REVENUE RECOGNITION (Cont.)
Disaggregation of revenue:
Revenue by products and services was as follows:
Revenue from sale of products
Service revenue
Revenue by transfer type was as follows:
Over time
Point in time
Revenue by customers was as follows:
Israel Government Authorities (1,2)
US Government (2)
Other Governments
Commercial sales and other
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Year ended December
31, 2018
$
$
3,352,602
331,082
3,683,684
Year ended December
31, 2018
$
$
3,037,223
646,461
3,683,684
Year ended December
31, 2018
$
$
685,680
635,150
2,004,947
357,907
3,683,684
(1) Including U.S. Foreign Military Financing Sales
(2) Including indirect sales
See Note 23 for disaggregation of revenue by areas of operations and geographic areas.
Remaining performance obligations ("Backlog"):
Backlog represents the future revenues expected to be recognized on firm orders received by the Company and is
equivalent to the Company’s remaining performance obligations at the end of each period for a remaining period of
more than a year. Unexercised contract options and indefinite delivery indefinite quantity ("IDIQ") contracts are not
included in backlog until the time an option or specific task order is authorized, exercised or awarded.
Company backlog as of December 31, 2018 was $9,399,200. We expect to recognize approximately 64% as
revenue in 2019 and 2020, with the remainder to be recognized thereafter.
F - 31
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
U. WARRANTY
The Company estimates the costs that may be incurred under its basic warranty. Such costs are estimated as part
of the total contract’s cost and are recorded as a liability at the time revenue is recognized. The specific terms
and conditions of those warranties vary depending upon the product sold and the country in which the Company
does business. Factors that affect the Company’s warranty cost include the number of delivered products,
engineering estimates and anticipated rates of warranty claims. The Company periodically assesses the adequacy
of its recorded warranty cost and adjusts the amount as necessary.
Changes in the Company’s provision for warranty, which is included mainly in other payables and accrued
expenses in the balance sheet, are as follows:
Balance, at January 1
Cumulative effect from adopting ASC 606
Warranties issued during the year
Reduction due to expired warranties or claims during the year
Deconsolidation of subsidiary
Additions resulting from acquisitions
Balance, at December 31
V. RESEARCH AND DEVELOPMENT COSTS
2018
2017
$
198,226
$
245,728
337
64,723
(84,593)
(369)
41,371
—
75,819
(126,068)
—
2,747
$
219,695
$
198,226
Research and development costs, net of participation grants, include costs incurred for independent research and
development and bid and proposal efforts and are expensed as incurred unless the costs are related to certain
contractual arrangements, which are recorded as part of cost of revenues over the period that revenue is
recognized, consistent with the Company’s revenue recognition accounting policy. The Company does not
perform significant stand-alone research and development for others.
The Company has certain research and development contractual arrangements that meet the requirements for
best efforts research and development accounting. Accordingly, the amounts funded by the customer are
recognized as an offset to its research and development expenses rather than as contract revenues.
Elbit Systems and certain Israeli subsidiaries receive grants (mainly royalty-bearing) from the Israeli Innovation
Authority of the Ministry of Economy and Industry (formerly the Office of Chief Scientist's) and from other
sources for the purpose of partially funding approved research and development projects. The grants are not to
be repaid, but instead Elbit Systems and certain Israeli subsidiaries are required to pay royalties as a percentage
of future sales if and when sales from the funded projects are generated. These grants are recognized as a deduction
from research and development costs at the time the applicable entity is entitled to such grants on the basis of
the research and development costs incurred. Since the payment of royalties is not probable when the grants are
received, the Company records a liability in the amount of the estimated royalties for each individual contract,
when the related revenues are recognized, as part of COR. For more information regarding such royalty
commitments see Note 21A. For more information regarding grants and participation received see Note 23.
F - 32
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
W. INCOME TAXES
The Company accounts for income taxes and uncertain tax positions in accordance with ASC 740, “Income
Taxes”. This guidance prescribes the use of the liability method whereby deferred tax asset and liability account
balances are determined based on differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected
to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts
that are more likely than not to be realized.
The Company establishes reserves for uncertain tax positions based on an evaluation of whether the tax position
is “more likely than not” to be sustained upon examination. The Company records interest and penalties pertaining
to its uncertain tax positions in the financial statements as income tax expense.
X. CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally
of cash and cash equivalents, short and long-term deposits, marketable securities and trade receivables.
The majority of the Company’s cash and cash equivalents and short and long-term deposits are invested with
major banks, mainly in Israel and the United States. Deposits in the U.S. may be in excess of insured limits and
are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s
investments have a high credit rating.
The Company's marketable securities included investments in corporate debentures and Israeli Treasury Bills.
The Company's investment policy limits the amount that the Company may invest in any one type of investment
or issuer, thereby reducing credit risk concentrations.
The Company’s trade receivables are derived primarily from sales to large and stable customers and governments
located mainly in Israel, the United States, Europe and Asia-Pacific. The Company performs ongoing credit
evaluations of its customers and has not experienced in recent years any unexpected material losses. An allowance
for doubtful accounts is recognized with respect to those amounts that the Company has determined to be doubtful
of collection.
The Company entered into foreign exchange forward contracts and cross currency interest rate swaps (together
“derivative instruments”) intended to protect against the increase in the dollar equivalent value of forecasted
non-dollar currency cash flows and interest as applicable. These derivative instruments are designed to effectively
hedge the Company’s non-dollar currency and interest rates exposures (see Note 2Y).
F - 33
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Y. DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for derivatives and hedging based on ASC 815, “Derivatives and Hedging”, which
requires the Company to recognize all derivatives on the balance sheet at fair value. If a derivative meets the
definition of a cash flow hedge and is so designated, changes in the fair value of the derivative will be recognized
in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a
derivative’s change in fair value is recognized immediately in earnings. If a derivative does not meet the definition
of a hedge, the changes in the fair value are included immediately in earnings in “Financial expenses, net”, in
each reporting period (see Note 25).
As part of its hedging strategy, the Company enters into forward exchange contracts in order to protect the
Company from the risk that the eventual dollar cash flows from the sale to international customers and purchase
of products from international vendors will be adversely affected by changes in exchange rates.
The Company also may enter into forward exchange contracts and options strategies in order to limit the exposure
to exchange rate fluctuation associated with payroll expenses mainly incurred in NIS.
In connection with the issuance of Series A Notes in 2010 and in 2012 on the Tel Aviv Stock Exchange (see Note
16), the Company entered into cross-currency interest rate swap transactions with a notional principal of the
NIS 1.1 billion and NIS 0.9 billion, respectively, to effectively hedge the effect of interest and exchange rate
difference from the NIS Series A Notes. The cross-currency interest rate swap instruments effectively convert
the fixed interest rate of the debt to a floating interest rate. The terms of the swap agreements substantially match
the terms of the debt. Under the terms of the swap agreements, the Company receives interest payments semi-
annually in NIS at an annual rate of 4.84% on the notional principal and pays interest semi-annually in U.S.
dollars at an annual weighted rate of six-month LIBOR plus 1.84% on the notional principal.
The swap agreements are designated as a fair value hedge. The gains and losses related to changes in the fair
value of the cross-currency interest rate swap transactions are included in interest expense and substantially
offset changes in the fair value of the hedged portion of the underlying hedged Series A Notes.
Z.
STOCK-BASED COMPENSATION
The Company accounts for share-based arrangements under ASC 718, “Compensation – Stock Compensation”,
which requires all share-based payments, including grants of employee stock options and grants under the
Company's Phantom Bonus Retention Plan, to be recognized in the income statement based on their fair values.
The fair value based cost of employee stock options is estimated at the grant date using a lattice-based option
valuation model with the following weighted average assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Forfeiture rate
Suboptimal factor
F - 34
2018
2.2%
20.9%
2.7%
5.25
0.6%
1.75
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AA. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables, short-term bank
credit and loans and trade payables approximate their fair values due to the short-term maturities of such
instruments.
The fair value of long-term loans is estimated by discounting the future cash flows using current interest rates
for loans of similar terms and maturities. The carrying amount of the long-term loans approximates their fair
value.
As of December 31, 2018, the fair value of the Series A Notes, based on the quoted market price on the Tel-Aviv
Stock Exchange, was approximately $116,419.
The Company accounts for certain assets and liabilities at fair value under ASC 820, “Fair Value Measurement”.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or a
liability.
The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair
value are observable in the market. The Company categorizes each of its fair value measurements in one of these
three levels based on the lowest level input that is significant to the fair value measurement in its entirety.
The three levels of inputs that may be used to measure fair value are as follows:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active
markets;
Level 2 - Includes other inputs that are directly or indirectly observable in the marketplace, other than quoted
prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions or other
inputs that are observable (model-derived valuations in which significant inputs are observable), or can be derived
principally from or corroborated by observable market data; and
Level 3 - Unobservable inputs that are supported by little or no market activity.
The availability of observable inputs can vary from instrument to instrument and is affected by a wide variety
of factors, including, for example, the type of instrument, the liquidity of markets and other characteristics
particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment and the instruments are
categorized as Level 3.
Under FASB ASC 825-10, the Company may elect to report certain other items at fair value on an instrument-
by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is
made at the time an eligible financial assetor financial liability or firm commitment is acquired or incurred, as
applicable, or when certain specified reconsideration events occur. The fair value election, with respect to an
item, may not be revoked once an election is made.
The Company has elected to account for certain investments that would otherwise be accounted for under the
equity method using the fair value method (see Note 6). For these investments the Company will also measure
any guarantee at fair value, with changes in fair value reported through earnings. Such investments are categorized
as level 3.
F - 35
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AA. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont.)
The Company’s cross-currency interest rate swaps are valued under an income approach using industry-standard
models that consider various assumptions, including time value, volatility factors, current market and contractual
prices for the underlying and counterparty non-performance risk. Substantially all of these assumptions are
observable in the marketplace throughout the full term of the instruments, and can be derived from observable
data or are supported by observable levels at which transactions are executed in the marketplace. Accordingly,
such instruments are categorized as Level 2.
The Company measures its marketable equity securities, debt securities and foreign currency derivative
instruments at fair value. Government debt securities are classified as Level 1. The Company's corporate debt
marketable securities trade in markets that are not considered to be active, but are valued based on quoted market
prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency
and accordingly are categorized as Level 2.
The Company’s foreign currency derivative instruments are classified as Level 2 because valuation inputs are
based on quoted prices and market observable data of similar instruments.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair value measurement at
December 31, 2018 using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Description of Assets
Available-for-sale marketable securities:
Foreign currency derivatives and option contracts
Cross-currency interest rate swap
Investment elected to be accounted for using the fair value method(*)
Liabilities
Foreign currency derivative and option contracts
Total
(*) See Note 6C.
$
$
— $
—
—
$
22,549
4,378
—
—
— $
(23,936)
2,991
$
—
—
46,858
—
46,858
Fair value measurement at
December 31, 2017 using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
1,415
—
—
—
—
$
— $
11,956
5,953
24,009
—
—
1,415
$
(12,200)
29,718
$
—
—
—
—
5,114
—
5,114
Description of Assets
Government bonds
Corporate bonds
Foreign currency derivatives and option contracts
Cross-currency interest rate swap
Investment elected to be accounted for using the fair value method
Liabilities
Foreign currency derivative and option contracts
Total
F - 36
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AB. TRANSFERS OF FINANCIAL ASSETS
ASC 860, “Transfers and Servicing”, establishes a standard for determining when a transfer of financial assets
should be accounted for as a sale. The Company's arrangements are such that the underlying conditions are met
for transfers of financial assets to qualify for accounting as a true sale. Transfers of financial assets typically
consist of the factoring of receivables to Israeli and European financial institutions. The Company sold rights
to receive payments from customers in a total amount of $185,727 and $79,633 during the years 2018 and 2017,
respectively. Control and risk of these rights were fully transferred in accordance with ASC 860.
The Company's agreement pursuant to which the Company sells its trade receivables is structured such that the
Company (i) transfers the proprietary rights in the receivable from the Company to the financial institution,
(ii) legally isolates the receivable from the Company's other assets, and presumptively puts the receivable beyond
the lawful reach of the Company and its creditors, even in bankruptcy or other receivership, (iii) confers on the
financial institution the right to further pledge or exchange the receivable and (iv) eliminates the Company's
effective control over the receivable, in the sense that the Company is not entitled and will not be obligated to
repurchase the receivable other than in case of failure by the Company to fulfill its commercial obligation under
the contract giving rise to the receivable.
AC. BASIC AND DILUTED NET EARNINGS PER SHARE
Basic earnings per share are computed based on the weighted average number of outstanding ordinary shares
during each year. Diluted earnings per share are computed based on the weighted average number of outstanding
ordinary shares during each year, plus dilutive potential ordinary shares outstanding during the year. Outstanding
stock options are excluded from the calculation of the diluted earnings per share when their effect is anti-dilutive.
The weighted average number of shares related to outstanding anti-dilutive stock options excluded from the
calculations of diluted net earnings per share was not material in each of the three years ended December 31,
2018.
AD. TREASURY SHARES
Elbit Systems’ shares held by the Company are recognized at cost and presented as a reduction of shareholders’
equity.
AE. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
(1)
On January 1, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with
Customers" ("ASC 606"), using the modified retrospective method applied to those contracts that were
not substantially completed as of January 1, 2018. The Company has identified satisfied and unsatisfied
performance obligations, for determining the transaction price and for allocating the transaction price
in order to reflect the aggregate effect resulting from the transition to ASC 606 for its contracts executed
prior to the date of initial application. Results for reporting periods beginning after January 1, 2018,
are presented under ASC 606, while prior periods amounts are not adjusted and continue to be reported
in accordance with legacy GAAP under prior guidance ("ASC 605"). Under the modified retrospective
method, the cumulative effect of the adoption of ASC 606 is recognized as an adjustment to retained
earnings and to relevant assets and liabilities on the date of initial application (“Transition
Adjustment”).
F - 37
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
AE. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS (Cont.)
The Transition Adjustment made to our consolidated balance sheet as of January 1, 2018, was:
Trade and unbilled receivables and contract assets, net
Inventories
Deferred income taxes, net
Other payables and accrued expenses
Contract liabilities (customer advances)
Total Elbit Systems' equity
As reported
As of January 1, 2018
Impact of
adoption of
ASC Topic
606
Adjusted
according to
ASC 606
1,406,563
1,012,763
51,358
835,394
639,328
1,708,310
97,274
(104,570)
1,090
(400)
(4,373)
(1,433)
1,503,837
908,193
52,448
834,994
634,955
1,706,877
The adoption of ASC 606 does not impact the Company's cash flows or the underlying economics of the Company's
contracts with customers. However, the pattern and timing of revenue and profit recognition, as well as financial
statement presentation and disclosures, has changed.
The significant changes and the qualitative and quantitative impact of the adoption of ASC 606 are noted below:
1. Revenue from contracts with customers:
The adoption of ASC 606 primarily impacts the Company's contracts where revenue was recognized using the
percentage-of-completion units-of-delivery method, because control is transferred continuously to the customers
over the performance period for contracts recognized over time. The Company uses the cost incurred to date
relative to total estimated costs at completion to measure progress toward satisfying the Company's performance
obligations, since incurred costs represent work performed, which corresponds with, and thereby best depicts,
the transfer of control to the customer.
This change also impacts the Company's balance sheet presentation with a decrease in inventories and an increase
in contract assets (i.e., unbilled receivables) and a net decrease in customer advances and contract liabilities.
2. Contract Costs:
ASC 606 requires product engineering and development costs under contracts (or anticipated contracts) with
customers to be capitalized as contract fulfillment costs, to the extent recoverable from the associated contract
margin (or anticipated contract), and subsequently amortized as the related goods or services are transferred to
the customer. Such costs continue to be classified as inventory.
3. Contract assets and liabilities:
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled
receivables (contract assets) and customer advances (contract liabilities) on the consolidated balance sheet. In
the majority of the Company's contracts, amounts are billed as work progresses in accordance with agreed upon
contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, billing
occurs subsequent to revenue recognition, resulting in accounts receivable. Such accounts receivable may include
billed and unbilled amounts for which the amount of consideration is unconditional or conditional upon
achievement of milestones. Accounts receivables billed or unbilled is a right to consideration that is unconditional
if only the passage of time is required before payment of that consideration is due. However, the Company may
receive cash in advance from its customers, particularly on its Israeli and other non-U.S. government contracts,
before revenue is recognized, resulting in contract liabilities. Contract liabilities (customer advances) are
liquidated when revenue is recognized. These assets and liabilities are reported on the Consolidated Balance
Sheet on a contract-by-contract basis at the end of each reporting period (see Note 3).
F - 38
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
AE. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS (Cont.)
The following table summarizes the impacts of adopting ASC 606 on the Company’s consolidated financial statements for the
year ended December 31, 2018 and a comparison to previous standard:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Marketing and selling
General and administrative
Other operating income, net
Total operating expenses
Operating income
Finance expense, net
Other expense, net
Income before taxes on income
Taxes on income
Income after taxes on income
Equity in net earnings of affiliated companies and partnerships
Net income attributable to non-controlling interests
Net income attributable to the consolidated company shareholders'
Year Ended December 31, 2018
Previous
standard
3,567,909
2,633,207
934,702
Impact of
adoption of
ASC 606
115,775
74,298
41,477
As reported
3,683,684
2,707,505
976,179
287,352
275,757
160,348
(45,367)
678,091
256,611
(44,061)
(11,449)
201,101
(20,327)
180,774
(2,222)
(1,917)
176,635
—
5,257
—
—
5,257
36,220
—
—
36,220
(6,118)
30,103
—
—
30,103
287,352
281,014
160,348
(45,367)
683,347
292,832
(44,061)
(11,449)
237,322
(26,445)
210,877
(2,222)
(1,917)
206,738
The following table summarizes the impacts of adopting ASC 606 on the Company’s consolidated balance sheet for
the year ended December 31, 2018:
Trade and unbilled eceivables and contract assets, net
Other receivables and prepaid expenses
Inventories, net
Other assets
Trade payables
Other payables and accrued expenses
Contract liabilities (customer advances)
Other long-term liabilities and deferred tax liabilities
As of December 31, 2018
Previous
standard
Impact of
adoption of
ASC 606
As reported
1,523,200
199,579
1,240,005
46,587
780,794
1,083,788
718,269
253,413
189,715
(431)
(98,009)
(3,783)
(4,694)
(1,796)
62,725
1,154
1,712,915
199,148
1,141,996
42,804
776,100
1,081,992
780,994
254,567
Retained earnings
1,661,818
30,103
1,691,921
F - 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
AE. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS (Cont.)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
(2)
In January 2016, the FASB issued guidance on Financial Instruments - Recognition and Measurement
of Financial Assets and Financial Liabilities, ASU 2016-01: “Financial Instruments -
Overall” (Subtopic 825-10). The ASU revises the classification and measurement of investments in
certain equity investments and the presentation of certain fair value changes for certain financial
liabilities measured at fair value. ASU 2016-01 is effective for fiscal years beginning after December
15, 2017 and interim periods within those years. The Company adopted ASU 2016-01 on January
1,2018. The adoption of this ASU did not have a material impact on our consolidated financial
statements.
(3) In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted
Cash”. The ASU requires that the Consolidated Statement of Cash Flows explain the change in total
cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a
reconciliation between the total of cash and equivalents and restricted cash presented on the
Consolidated Statement of Cash Flows and the cash and equivalents balance presented on the
Consolidated Balance Sheet. ASU 2016-18was effective retrospectively on January 1, 2018, with early
adoption permitted. The Company adopted ASU 2016-18 on January 1,2018. The adoption of this
ASU did not have a material impact on our consolidated financial statements.
(4)
(5)
AF.
(1)
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the
Definition of a Business". The amendments in this ASU clarify the definition of a business, with the
objective of adding guidance to assist entities in evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many
areas of accounting including acquisitions, disposals, goodwill and consolidation. ASU 2017-01 is
effective for fiscal years beginning after December 15, 2017. The Company adopted ASU 2017-01
on January 1,2018. The adoption of this ASU did not have a material impact on our consolidated
financial statements.
In February 2017, the FASB issued ASU 2017-05, “Other Income - Gains and Losses from the
Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition
Guidance and Accounting for Partial Sales of Non-financial Assets”. This ASU clarifies the scope and
application of ASC 610-20 on the sale or transfer of non-financial assets and in substance non-financial
assets to non-customers, including partial sales. The amendments in ASU 2017-05 are effective for
annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-05
on January 1,2018. The adoption of this ASU did not have a material impact on our consolidated
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require lessees
to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with
current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising
from a lease by a lessee primarily will depend on its classification as a finance or operating lease.
However, unlike current GAAP, which requires only capital leases to be recognized on the balance
sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The
ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption
permitted. A modified retrospective transition approach is required, applying the new standard to all
leases existing at the date of initial application. An entity may choose to use either (1) its effective
date or (2) the beginning of the earliest comparative period presented in the financial statements as its
date of initial application. If an entity chooses the second option, the entity must recast its comparative
period financial statements and provide disclosures required by the new standard for the comparative
periods.
F - 40
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)
AF. RECENT ACCOUNTING PRONOUNCEMENTS (Cont.)
The Company expects to adopt the new standard on January 1, 2019 using the effective date as its date
of initial application. Consequently, financial information will not be updated and disclosures required
under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company elected
to adopt the ‘package of practical expedients’, which permits it not to reassess under the new standard
its prior conclusions about lease identification, lease classification and initial direct costs.
The adoption of this new standard will materially affect the Company's consolidated balance sheets by
recognizing new right-of-use ("ROU") assets and lease liabilities for operating leases. The impact on
the Company's results of operations and cash flows is not expected to be material. As part of the
implementation efforts, the Company implemented a new lease accounting system and is updating its
processes in preparation for the adoption of the new standard, including the requirement to provide
significant new disclosures about the Company's leasing activities.
Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for
operating leases of approximately $350,000 - $400,000 as of January 1, 2019. The ROU and lease
liabilities estimate includes non-cancelable operating lease agreements (see Note 21D) and estimated
operating lease options.
transactions by expanding
(2) In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718)
- Improvements to Nonemployee Share-Based Payment Accounting, to simplify the accounting for
nonemployee share-based payment
the scope of ASC Topic
718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring
goods and services from nonemployees. Under the new standard, most of the guidance on stock
compensation payments to nonemployees would be aligned with the requirements for share-based
payments granted to employees. This standard is effective for annual reporting periods beginning after
December 15, 2018, including interim reporting periods within those annual reporting periods, with
early adoption permitted. While the Company continues to assess the potential impact of this standard,
the Company does not expect the adoption of this standard to have a material impact on its consolidated
financial statements.
(3)
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates step two of the goodwill
impairment test and specifies that goodwill impairment should be measured by comparing the fair
value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to
each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU
2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning
after December 15, 2019, and early adoption is permitted. The Company does not expect this ASU to
have a material effect on its consolidated financial statements.
F - 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
AF. RECENT ACCOUNTING PRONOUNCEMENTS (Cont.)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
(4)
(5)
(6)
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging - Targeted Improvements
to Accounting for Hedging Activities”, which is intended to simplify and amend the application of
hedge accounting to more clearly portray the economics of an entity’s risk management strategies in
its financial statements. The ASU will make more financial and non-financial hedging strategies
eligible for hedge accounting, reduce complexity in fair value hedges of interest rate risk and ease
certain documentation and assessment requirements of hedge effectiveness. It also changes how
companies assess effectiveness and amends the presentation and disclosure requirements. ASU
2017-12 is effective for fiscal years beginning after December 15, 2018. The Company is currently
evaluating the impact of adopting the ASU on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive
Income (Topic 220): “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income”, which allows for the elimination of the stranded income tax effects resulting from the
enactment of the Tax Cuts and Jobs Act through a reclassification from accumulated other
comprehensive income to retained earnings. The standard is effective for fiscal years beginning after
December 15, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have
a significant impact on the Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)".
The ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis
to be presented at the net amount expected to be collected. The amendments broaden the information
that an entity must consider in developing its expected credit loss estimate for assets measured either
collectively or individually. The use of forecasted information incorporates more timely information
in the estimate of expected credit loss, which will be of greater use to users of the financial statements.
ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. Early adoption is allowed as of the fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. The Company
is still evaluating the effect that this guidance will have on the Company’s consolidated financial
statements.
AG. RECLASSIFICATIONS
Certain financial statement data for prior years has been reclassified to conform to current year financial statement
presentation.
F - 42
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 3 - TRADE AND UNBILLED RECEIVABLES AND CONTRACT ASSETS, NET
The following table presents the components of trade receivables and contract assets, net as of December 31, 2018 and 2017:
Trade and unbilled receivables (1)
Contract assets (2)
Less – allowance for doubtful accounts
December 31,
$
2018
968,064
756,159
(11,308)
$ 1,712,915
$
2017
747,327
668,821
(9,585)
$ 1,406,563
(1)
(2)
Trade and unbilled receivables balances represents amounts for which the Company's right for consideration is
unconditional. The balance also includes receivables from affiliated companies in the amounts of $97,588 and $75,340
as of December 31, 2018 and 2017, respectively.
Contract assets (unbilled receivables) include unbilled amounts typically resulting from sales under contracts when an
over-time method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the
customer. Contract liabilities include advance payments and billings in excess of revenue recognized.
Short and long-term trade receivables and contract assets include amounts related to contracts with the IMOD in the aggregate
amounts of $576,756 and $547,970, as of December 31, 2018 and 2017, respectively.
Trade receivables and contract assets are expected to be billed and collected during 2019. As for long-term trade and unbilled
receivables – see Note 7.
Trade and unbilled receivables and contract assets increased by approximately $210,826, compared to the beginning balance as
of January 1, 2018 (according to ASC 606), of which an increase of approximately $135,220, is a result of acquisitions of new
subsidiaries during 2018, and a decrease in the amount of $185,727 is a result of sale of trade receivables and contract assets. See
Notes 1C, 2AB and 2AE(1).
There were no significant impairment losses related to our contract assets during the year ended December 31, 2018.
Note 4 - OTHER RECEIVABLES AND PREPAID EXPENSES
The following table presents the components of other receivables and prepaid expenses as of December 31, 2018 and 2017.
Prepaid expenses
Government institutions
Derivative instruments
Cross-currency interest rate swap
Right to use land and buildings
Other
December 31,
2018
2017
66,137
80,928
22,549
1,543
6,183
21,808
38,420
66,189
5,953
7,501
—
10,883
$
199,148
$
128,946
F - 43
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 5 - INVENTORIES
The following table presents the components of other inventories, net of customer advances as of December 31, 2018 and 2017.
Cost incurred on long-term contracts in progress(1)
Raw materials
Advances to suppliers and subcontractors
Less -
Cost incurred on contracts in progress deducted from customer advances
Advances received from customers(2)
Provision for losses on long-term contracts
December 31,
2018
2017
$
620,350
$
612,763
455,517
87,788
342,274
57,726
1,163,655
1,012,763
—
—
21,659
34,523
52,596
22,690
$ 1,141,996
$
902,954
(1)
Costs incurred to fulfill a contract in advance of the contract being awarded are included in inventories as work-in-process
if the Company determines that those costs relate directly to a contract or to an anticipated contract that can be specifically
identified and contract award is probable, the costs generate or enhance resources that will be used in satisfying performance
obligations, and the costs are recoverable (referred to as pre-contract costs). Pre-contract costs that are initially capitalized
in inventory are generally recognized as cost of revenues consistent with the transfer of control of the products and services
to the customer. All other pre-contract costs, including start-up costs, are expensed as incurred. As of December 31,
2018 and 2017, $108,627 and $107,207 of pre-contract costs were included in inventory, respectively.
(2)
In 2017, the Company transferred legal title of inventories to certain customers as collateral for advances received.
Advances are allocated to the relevant inventories on a per-project basis. In cases where advances are in excess of the
inventories, the net amount is presented in contract liabilities (customer advances) (see Note 14).
Note 6 -
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES
A.
INVESTMENT IN AFFILIATED COMPANIES:
Companies accounted for under the equity method (1)
Companies accounted for under the fair value method (2)
Companies accounted for on a cost basis (3)
December 31,
2018
2017
$
144,435
$
159,647
46,858
4,887
5,114
7,577
$
196,180
$
172,338
(1)
(2)
(3)
See Note 6B.
See Note 6C.
Companies accounted for cost basis under ASU 2016-01 effective January 1, 2018. During 2018, the Company wrote-
off an impairment in the amount of $2,700. See Note 1C(4).
F - 44
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 6 -
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES (Cont.)
B.
INVESTMENT IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD:
Company A (1)
Company B (2)
Company C (3)
Company D (4)
Company E (5)
Other
December 31,
2018
2017
73,001
19,631
25,259
8,724
8,266
9,554
144,435
$
$
65,799
21,708
27,927
15,000
18,003
11,210
159,647
$
$
(1) Company A is an Israeli partnership, held 50% by the Company and 50% by Rafael Advanced Defense Systems
Ltd. (“Rafael”). Company A is engaged in the development and production of various thermal detectors and
laser diodes. Company A is jointly controlled and therefore is not consolidated in the Company’s financial
statements. During 2018 and 2017, the Company received dividends in the amount of $4,138 and $9,374,
respectively from Company A.
(2) Company B is an Israeli company owned 50.00001% by the Company and 49.99999% by Rafael. Company B
focuses mainly on commercial applications of thermal imaging and electro-optic technologies. The Company
jointly controls Company B with Rafael, and therefore Company B is not consolidated in the Company’s financial
statements.
(3) Company C is a U.K. joint venture held 50% by a wholly-owned U.K. subsidiary of the Company and 50% by
Kellogg Brown & Root Limited. Company C is engaged in the area of flight training systems. During 2018, the
Company received a dividend in the amount of $10,610 from Company C.
(4) Company D is a European company held 33% by the Company. Company D is engaged in the area of composite
aerostructure parts manufacturing for commercial aircraft.
(5) Company E is an Israeli company held 77% by the Company, and is engaged in developing energy solutions for
civilian transportation application. During 2017, an investor invested €2,500 (approximately $2,800) in exchange
for an additional 3% ownership in Company E. During 2018, due to a revaluation prepared by an independent
advisor, the Company wrote-off an impairment of its investment in Company E in the amount of $9,737.
F - 45
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 6 -
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES (Cont.)
B.
INVESTMENT IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD (Cont.):
Equity in net earnings (losses) of affiliated companies and partnerships is as follows:
Company A
Company B
Company C
Company D
Company E
Other
Year ended December 31,
2018
2017
2016
$
$
$
11,340
(2,077)
10,102
(6,275)
(9,737)
(5,575)
(2,222) $
9,579
$
1,734
6,427
(4,129)
—
(2,250)
11,361
$
6,157
2,047
4,253
(872)
—
(6,361)
5,224
The summarized aggregate financial information of companies accounted for under the equity method and the fair
value method is as follows:
Balance Sheet Information:
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Shareholders' equity
Total liabilities and equity
Income Statement Information:
Revenues
Gross profit
Net income
See Note 21E for guarantees.
$
$
$
December 31,
2018
392,144
131,636
523,780
139,183
145,501
239,096
$
$
$
2017
542,600
117,438
660,038
161,414
223,253
275,371
$
523,780
$
660,038
Year ended December 31,
2017
2016
2018
$
$
$
362,711
94,463
727
$
$
$
466,349
101,242
10,338
$
$
$
424,045
83,266
21,252
F - 46
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 6 -
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES (Cont.)
C.
INVESTMENT ACCOUNTED FOR UNDER THE FAIR VALUE METHOD:
Company F (1)
Company G (2)
Company H (3)
(1)
December 31,
2018
2017
43,350
3,476
32
46,858
—
—
5,114
5,114
In May 2018, Company F, the Company's then wholly-owned subsidiary, which is engaged in the field of
commercial cybersecurity, issued preferred shares to third party investors in return for an investment of $30,000,
which reflected approximately 17% of the total outstanding share capital of the subsidiary. Although the Company
holds more than 50% of the subsidiary's shares, it concluded that the rights of the preferred shareholders, as
required by the investors, represent substantive participating rights because, in the aggregate, the rights entitle
the investors to effectively participate in decisions that occur as part of the subsidiary’s ordinary course of
business and are significant factors in directing and carrying out the activities of the business. Based on the
abovementioned factors, the Company concluded that it no longer controls the subsidiary as it does not have the
unilateral power to make decisions on the subsidiary's day-to-day operations, and therefore deconsolidated the
subsidiary.
The Company's management determined the equity fair value of the formerly consolidated subsidiary and of its
retained non-controlling investment in this subsidiary, by performing an equity fair value analysis, which included
various factors and measures including, among others, the assistance of third-party valuation specialists, by
applying the market approach with the use of an option-pricing method to evaluate the fair value of the Company
retained equity class investment in the formerly consolidated subsidiary, and used this equity fair value analysis
as the basis to determine the recognition of gain of approximately $42,000 upon deconsolidation, included in
"Other operating income, net".
(2) During 2018, the Company established Company G, based on its in-house developed visualization technology.
This company is engaged in developing surgeon-centered visualization technologies. In June 2018, an
international strategic investor invested $11,500 in preferred shares in exchange for 41% of Company G's
ownership interest. Although the Company holds more than 50% of the subsidiary's shares, it concluded that the
rights of the preferred shareholder, as required by the investor, represent substantive participating rights because,
in the aggregate, the rights entitle the investor to effectively participate in decisions that occur as part of the
subsidiary’s ordinary course of business and are significant factors in directing and carrying out the activities of
the business. Based on the abovementioned factors, the Company concluded that it no longer controls the
subsidiary as it does not have the unilateral power to make decisions on the subsidiary's day-to-day operations,
and therefore deconsolidated the subsidiary.
The Company's management determined the equity fair value of the formerly consolidated subsidiary and of its
retained non-controlling investment in this subsidiary, by performing an equity fair value analysis, which included
various factors and measures including, among others, the assistance of third-party valuation specialists, by
applying the market approach with the use of an option-pricing method to evaluate the fair value of the Company
retained equity class investment in the formerly consolidated subsidiary, and used this equity fair value analysis
as the basis to determine the recognition of gain of approximately $3,500 upon deconsolidation, included in
"Other operating income, net".
F - 47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Note 6 -
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIPS AND OTHER COMPANIES (Cont.)
C.
INVESTMENT ACCOUNTED FOR UNDER THE FAIR VALUE METHOD (Cont.):
(3) Company H is an Israeli company held 71% by the Company. For the year ended December 31, 2017, there was
no significant change in fair value. During 2018, the Company estimated the fair value of its holdings in Company
H as approximately zero, and recorded a write-off of approximately $5,100. see Note 26.
Note 7 - LONG-TERM TRADE AND UNBILLED RECEIVABLES AND CONTRACT ASSETS
The following table presents the components of long-term trade and unbilled receivables and contract assets as of
December 31, 2018 and 2017.
Trade and unbilled receivables
Contract assets (*)
December 31,
2018
112,955
184,190
297,145
$
$
2017
63,833
231,563
295,396
$
$
The majority of the long-term contract assets are expected to be billed and collected during the years 2020 - 2026.
Long-term trade receivables and contract assets are mainly related to contracts with the IMOD.
Contract assets (*) - See Note 3.
Note 8 - LONG-TERM BANK DEPOSITS AND OTHER RECEIVABLES
The following table presents the components of long-term bank deposits and other receivables as of December 31, 2018 and
2017.
Prepaid expenses for land rights
Cross-currency interest rate swap
Long-term receivables(1)
Deposits with banks and other long-term receivables (2)
December 31,
2018
2017
$
$
19,429
2,835
11,696
9,002
42,962
$
$
—
16,508
11,300
10,274
38,082
(1)
(2)
Includes related legal expenses in the amount of $9,956 and $9,400 as of December 31, 2018 and 2017,
respectively (see Note 21C).
Includes long-term balances of a non-qualified deferred compensation plan structured under Section
409A of the U.S. Internal Revenue Code in the amount of $7,531 and $8,220 as of December 31, 2018
and 2017, respectively (see Note 17).
F - 48
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 9 - AVAILABLE-FOR-SALE MARKETABLE SECURITIES
During the year ended December 31, 2018, the Company sold all of its marketable securities for aggregate net proceeds
(including redemptions) of approximately $13,484, representing a net loss of $270. The loss from the sale of such
marketable securities is included in “Financial expenses, net”, for the year ended December 31, 2018.
As of December 31, 2017, interest receivable included in other receivables amounted to $118.
As of December 31, 2017, the fair value amortized cost and gross unrealized holding gains and losses of available-
for-sale marketable securities were as follows:
Government debentures - fixed and floating interest rate
Corporate debentures - fixed and floating interest rate
Amortized
cost
$
$
1,409
11,951
13,360
December 31, 2017
Gross
unrealized
gains
Gross
unrealized
losses
Fair value
6
5
11
— $
—
— $
1,415
11,956
13,371
F - 49
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 10 -
PROPERTY, PLANT AND EQUIPMENT, NET
The following table presents the components of property, plant and equipment, net as of December 31, 2018 and 2017:
Cost (1):
Land, buildings and leasehold improvements (2)
Instruments, machinery and equipment (3)
Office furniture and other
Motor vehicles and airplanes
Accumulated depreciation
Depreciated cost
December 31,
2018
2017
$
756,767
$
473,483
1,270,259
882,858
112,297
55,947
90,602
48,281
2,195,270
(1,508,650)
686,620
$
1,495,224
(999,508)
495,716
$
Depreciation expenses for the years ended December 31, 2018, 2017 and 2016 amounted to $91,731, $85,449 and
$81,728, respectively.
(1) Net of investment grants received (mainly for instruments, machinery and equipment) in the amounts of $15,492
and $15,208 as of December 31, 2018 and 2017, respectively.
(2) Set forth below is additional information regarding the real estate owned or leased by the Company:
Owned
Leased
Israel(a)
2,816,000 square feet
6,574,000 square feet
U.S.(b)
808,000 square feet
787,000 square feet
Other Countries(c)
1,097,000 square feet
525,000 square feet
(a) Includes offices, development and engineering facilities, manufacturing facilities, maintenance facilities,
hangar facilities and landing strips in various locations in Israel.
(b) Includes offices, development and engineering facilities, manufacturing facilities and maintenance facilities
of ESA primarily in Texas, New Hampshire, Florida, Alabama and Virginia.
(c) Includes offices, design and engineering facilities and manufacturing facilities, mainly in Europe, Latin
America and Asia-Pacific.
(3) Includes equipment produced by the Company for its own use in the aggregate amount of $120,093 and $121,205
as of December 31, 2018 and 2017, respectively, and capitalized costs related to the new ERP system (see Note
2N).
As for liens on assets – see Notes 21H and 21I.
F - 50
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 11 - GOODWILL AND OTHER INTANGIBLE ASSETS, NET
A. COMPOSITION OF IDENTIFIABLE INTANGIBLE ASSETS:
Original cost:
Technology
Customer relations
Trademarks and other
Accumulated amortization:
Technology
Customer relations
Trademarks and other
Amortized cost
Weighted
average
useful lives
11
12
14
December 31,
2018
2017
$
314,511
$
244,352
177,878
188,507
680,896
206,567
93,519
141,513
441,599
114,696
160,917
519,965
191,866
89,982
132,429
414,277
$
239,297
$
105,688
B. AMORTIZATION EXPENSES
Amortization expenses amounted to $26,474, $28,568 and $41,160 for the years ended December 31, 2018,
2017 and 2016, respectively.
During 2018, the Company wrote-off impairment of $5,520 related to the IMI acquisition. See Note 1C(4).
C. AMORTIZATION EXPENSES FOR FIVE SUCCEEDING YEARS
The estimated aggregate amortization expenses for each of the five succeeding fiscal years and thereafter are as
follows:
2019
2020
2021
2022
2023 and after
D. CHANGES IN GOODWILL
Changes in goodwill during 2018 were as follows:
Balance, at January 1
Additions (1)
Net translation differences (2)
Balance, at December 31
$
34,615
30,595
27,412
21,338
125,337
239,297
$
2018
646,715
385,074
(9,165)
$ 1,022,624
(1) See Note 1C.
(2) Foreign currency translation differences resulting from goodwill allocated to reporting units, whose functional
currency has been determined to be other than the U.S. dollar.
F - 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 12 -
SHORT-TERM BANK CREDIT AND LOANS
Short-term loans
Short-term bank credit
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Interest %
December 31,
Libor+0.9%
Prime -0.5%
2018
208,606
215
208,821
$
$
2017
122,118
11,632
133,750
$
$
Note 13 - OTHER PAYABLES AND ACCRUED EXPENSES
Payroll and related expenses
Provision for warranty and cost
Provision for vendors on accrued expenses
Provision for vacation pay (1)
Provision for losses on long-term contracts(2)
Provision for income tax, net of advances
Provision for royalties
Other income tax liabilities
Value added tax (“VAT”) payable
Derivative instruments
Purchase obligation
Other (3)
December 31,
$
2018
250,765
228,236
2017
$
190,028
203,632
59,064
68,273
97,013
14,537
35,623
4,149
11,460
23,936
43,137
46,773
52,891
24,088
23,453
36,941
4,954
21,510
12,200
14,159
245,799
204,765
$ 1,081,992
$
835,394
(1) Long-term provision for vacation pay - see Note 20.
(2) The increase in the provision for losses on long-term contracts primarily resulted from the acquisition of IMI.
See Note 1C(3).
(3) Includes provisions for estimated future costs in respect of (1) unbilled services of certain third parties, (2)
probable loss from claims (legal or unasserted) in the ordinary course of business and (3) damages caused by
the items sold and claims as to the specific products ordered.
F - 52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 14 - CONTRACT LIABILITIES (CUSTOMER ADVANCES)
Contract liabilities(1)
Less -
Contract liabilities presented under long-term liabilities
Contract liabilities deducted from inventories
Less -
Costs incurred on contracts in progress(2)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
December 31,
2018
2017
$
956,884
$
639,328
175,890
—
780,994
133,649
52,596
453,083
—
34,523
$
780,994
$
418,560
(1)
(2)
Contract liabilities increased by approximately $321,929 compared to the beginning balance as of January 1, 2018,
primarily as a result of acquisitions of new subsidiaries during 2018 in the amount of approximately $153,000.
During the year ended December 31, 2018, the Company recognized approximately $393,000 of its contract
liabilities at January 1, 2018, as revenue.
In 2017, the Company transferred legal title of inventories to certain customers as collateral for advances received.
Contract assets are allocated to the relevant inventories on a per-project basis. In cases where advances are in excess
of the inventories, the net amount is presented in customer advances (see Note 5).
As for guarantees and liens, see Notes 21E, 21H and 21I.
Note 15 - LONG-TERM LOANS, NET OF CURRENT MATURITIES
Currency
USD
NIS (**)
Other
Interest %
Libor+1.1% - Libor + 2.6%
Prime+1% - Prime+2.99%
4.2%
Years of
maturity
mainly 2
5
10
Long-term loans (*)
Less: current maturities
December 31,
2018
458,550
10,636
1,272
470,458
2,809
467,649
2017
118,550
—
1,023
119,573
59
119,514
$
$
$
$
(*)
(**)
For covenants see Note 21F.
Includes derivative instrument defined as hedge accounting. See Note 2Y and Note 2AA.
As of December 31, 2018, the LIBOR semi-annual rate for long-term loans denominated in U.S. dollars was 2.876%.
The maturities of these loans for periods after December 31, 2018, are as follows:
2019 - current maturities
2020
2021
2022 and after
F - 53
$
2,809
461,219
2,671
3,759
$
470,458
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 16 -
SERIES A NOTES, NET OF CURRENT MATURITIES
Series A Notes
Less – Current maturities
Carrying amount adjustments on Series A Notes (*)
Premium on Series A Notes, net
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
December 31,
2018
2017
$
$
112,060
(59,737)
3,842
138
181,713
(67,497)
10,420
229
$
56,303
$
124,865
(*) As a result of fair value hedge accounting, described below and in Notes 2Y and 2AA, the carrying amount of
the Series A Notes is adjusted for changes in the interest rates.
In June 2010, the Company issued Series A Notes in the aggregate principal amount of NIS 1.1 billion (approximately
$283,000), payable in 10 equal annual installments on June 30 of each of the years 2011 through 2020. The Series A
Notes bear a fixed interest rate of 4.84% per annum, payable on June 30 and December 30 of each of the years 2010
through 2020 (the first interest payment was made on December 30, 2010, and the last interest payment will be made
on June 30, 2020). Debt issuance costs were approximately $2,530, of which $2,164 were allocated to the Series A
Notes discount, and $366 were allocated to deferred issuance costs and are amortized as financial expenses over the
term of the Series A Notes due in 2020.
In March 2012, the Company issued additional Series A Notes in the aggregate principal amount of NIS 807 million
(approximately $217,420). The immediate gross proceeds received by the Company for the issuance of the March 2012
Series A Notes were approximately NIS 831 million (approximately $224,000). Debt issuance costs were approximately
$2,010, of which $1,795 was allocated to the Series A Notes discount, and $215 was allocated to deferred issuance
costs and are amortized as financial expenses over the term of the Series A Notes due in 2020. The premium was
approximately $3,675 and is amortized as financial income over the term of the Series A Notes due in December 2020.
In May 2012, the Company issued additional Series A Notes in an aggregate principal amount of NIS 92 million
(approximately $24,407) through a private placement to Israeli institutional investors. The immediate gross proceeds
received by the Company for the issuance of the May 2012 Series A Notes were approximately NIS 95 million
(approximately $24,900). Debt issuance costs were approximately $94. These costs were allocated to deferred issuance
costs and are amortized as financial expenses over the term of the Series A Notes due in 2020. The premium was
approximately $260 and is amortized as financial income over the term of the Series A Notes due in December 2020.
The 2010 Series A Notes together with the 2012 Series A Notes form one single series with the same terms and conditions.
The Series A Notes (principal and interest) are not linked to any currency or index. The Series A Notes are unsecured,
non-convertible and do not restrict the Company’s ability to issue additional notes of any class or distribute dividends
in the future. There are no covenants on the Series A Notes. The Series A Notes are listed for trading on the Tel-Aviv
Stock Exchange.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded $5,480, $6,112 and $6,565,
respectively, as interest expenses and $92 as amortization of debt issuance costs and premium, net, in each of the three
years ended December 31, 2018, on the Series A Notes.
F - 54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Note 16 - SERIES A NOTES, NET OF CURRENT MATURITIES (Cont.)
The Company also entered into 10-year cross currency interest rate swap transactions in order to effectively hedge the
effect of interest and exchange rate differences resulting from the 2010 NIS Series A Notes. Under the cross currency
interest rate swaps, the Company receives fixed NIS at a rate of 4.84% on NIS 1.1 billion and pays floating six-month
USD LIBOR + an average spread of 1.65% on $287,000, which reflects the U.S. dollar value of the Series A Notes on
the specific dates the transactions were consummated. Both the debt and the swap instruments pay semi-annual interest
on June 30 and December 31. The purpose of these transactions was to convert the NIS fixed rate Series A Notes into
USD LIBOR (six-month) floating rate obligations. As a result of these agreements, the Company is currently paying
an effective interest rate of six-month LIBOR (1.84% at December 31, 2018) plus an average of 1.65% on the principal
amount, as compared to the original 4.84% fixed rate. The above transactions qualify for fair value hedge accounting.
In April 2012 and May 2012, the Company entered into cross currency interest rate swap transactions in order to
effectively hedge the effect of interest and exchange rate differences resulting from the 2012 issuance of Series A Notes.
Under these cross currency interest rate swaps, the Company receives fixed NIS at a rate of 4.84% on NIS 807 million
and NIS 92 million and pays floating six-month USD LIBOR + an average spread of 2.02% on $217,300 and 2.285%
on $24,100, respectively, which reflects the U.S. dollar value of the 2012 issued Series A Notes on the specific dates
the transactions were consummated. Both the debt and the swap instruments pay semi-annual interest on June 30 and
December 31. The purpose of these transactions was to convert the NIS fixed rate Series A Notes into USD LIBOR
(six-month) floating rate obligations. As a result of these agreements, the Company is currently paying an effective
interest rate of six-month LIBOR (2.88% at December 31, 2018) plus an average of 2.05% on the 2012 principal
amounts, as compared to the original 4.84% fixed rate. The above transactions qualify for fair value hedge accounting.
Future principal payments for the Series A Notes, including the effect of the cross-currency interest rate swap
transactions, are as follows:
2019 current maturities
2020
December 31,
2018
$
55,533
55,533
F - 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 17 - BENEFIT PLANS AND OBLIGATIONS FOR TERMINATION INDEMNITY
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
The Company’s subsidiaries ESA, IMI and its subsidiaries in Israel, a German subsidiary (the “German Subsidiary”)
and a Belgian subsidiary (the “Belgian Subsidiary”) sponsor benefit plans for their employees in the U.S., Israel,
Germany and Belgium, respectively, as follows:
1. Defined Benefit Retirement Plan based on Employer’s Contributions
a) ESA has three defined benefit pension plans (the “Plans”) which cover the employees of ESA’s two largest
subsidiaries. Monthly benefits are based on years of benefit service and annual compensation. Annual
contributions to the Plans are determined using the unit credit actuarial cost method and are equal to or exceed
the minimum required by law. Pension fund assets of the Plans are invested primarily in stocks, bonds and cash
through a financial institution, as the investment manager of the Plans’ assets. Pension expense is allocated
between cost of sales and general and administrative expenses, depending on the responsibilities of the employee.
The measurement date for ESA subsidiaries' benefit obligation is December 31.
Participation in ESA’s qualified defined benefit plans was frozen as of January 1, 2010, for non-represented
employees. Benefit accruals ceased nonrepresented employees effective December 31, 2018.
b)
IMI and subsidiaries have several post-employment benefit arrangements, which are based on collective
agreements concluded with certain groups of employees before the privatization of IMI. According to these
agreements, some groups of employees possess special retirement conditions and preferable rights for post-
employment benefits that will apply to employees who will terminate their employment in the event of relocation
of plants as part of the post privatization restructuring of IMI and subsidiaries. The arrangements are determined
according to the various existing formats of employment, seniority and other factors. The liabilities recognized
in respect of these arrangements are calculated on an actuarial basis.
c) The German Subsidiary, which is wholly-owned by the Company, has mainly one defined benefit pension plan
(the “P3-plan”) which covers all employees. The P3-plan provides for yearly cash balance credits equal to a
percentage of a participant’s compensation, which accumulate together with the respective interest credits on
the employee’s cash balance accounts. In case of an insured event (retirement, death or disability) the benefits
can be paid as a lump sum, in installments or as a life-long annuity. The P3-plan is an unfunded plan.
d) The Belgian Subsidiary, which is wholly-owned by the Company, has a defined benefit pension plan, which is
divided into two categories:
1) Normal retirement benefit plan, with eligibility at age 65. The lump sum is based on employee contributions
of 2% of the final pensionable salary up to a certain breakpoint, plus 6% exceeding the breakpoint at a
maximum of 5% of pensionable salary, and the employer contributions, with a maximum of 40 years. The
vested benefit is equal to the retirement benefit calculated with the pensionable salary and pensionable
service observed at the date of leaving service.
2) Pre-retirement death benefit to employees.
The plan is funded and includes profit sharing.
F - 56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Note 17 - BENEFIT PLANS AND OBLIGATIONS FOR TERMINATION INDEMNITY (Cont.)
The following table sets forth the Plans’ funded status and amounts recognized in the consolidated financial statements
for the years ended December 31, 2018 and 2017:
Changes in benefit obligation:
Benefit obligation at beginning of year
Benefit obligation related to acquired companies
Service cost
Interest cost
Exchange rate differences
Actuarial losses (gain)
Benefits paid
Effect of curtailment
Benefit obligation at end of year
Changes in the Plans’ assets:
Fair value of Plans’ assets at beginning of year
Actual return on Plans’ assets (net of expenses)
Employer contribution
Benefits paid
Fair value of Plans’ assets at end of year
Accrued benefit cost, end of year:
Funded status
Unrecognized net actuarial loss
Unrecognized prior service cost
Amount recognized in the statement of financial position:
Accrued benefit liability, current
Accrued benefit liability, non-current
Accumulated other comprehensive income, pre-tax
Net amount recognized
December 31,
2018
2017
$
267,141
$
235,246
—
7,655
9,108
1,551
19,794
(6,213)
—
$
267,141
378,055
8,391
9,631
43
(20,337)
(7,560)
(6,940)
628,424
167,961
(11,121)
15,002
(7,560)
164,282
$
$
$
140,240
23,343
10,591
(6,213)
167,961
(99,180)
71,385
141
(27,654)
(1,580)
(97,600)
71,526
(27,654)
(464,142)
60,141
24
$ (403,977) $
(6,040)
(458,102)
60,165
$ (403,977) $
F - 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 17 - BENEFIT PLANS AND OBLIGATIONS FOR TERMINATION INDEMNITY (Cont.)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Components of the Plans’ net periodic pension cost:
Service cost
Interest cost
Expected return on Plans’ assets
Amortization of prior service cost
Amortization of net actuarial loss
Total net periodic benefit cost
Additional information
Accumulated benefit obligation
Weighted average assumptions:
Discount rate as of December 31
Expected long-term rate of return on Plans’ assets
Rate of compensation increase
Asset allocation by category as of December 31:
Asset Category:
Equity Securities
Debt Securities
Other
Total
Year ended December 31,
2018
2017
2016
$
8,391
$
7,655
$
7,768
9,631
(12,080)
64
5,884
11,890
628,017
$
$
9,108
(10,203)
64
6,161
12,785
259,242
$
$
8,929
(9,057)
65
5,765
13,470
227,799
$
$
December 31,
2018
2017
3.1%
7.1%
3.0%
3.4%
7.1%
2.4%
2018
2017
61.3%
38.2%
0.5%
66.8%
31.9%
1.3%
100.0%
100.0%
The investment policy of ESA is directed toward a broad range of securities. The diversified portfolio seeks to
maximize investment return while minimizing the risk levels associated with investing. The investment policy is
structured to consider the Plans' obligations and the expected timing of benefit payments. The target asset allocation
for the Plans' years presented is as follows:
Asset Category:
Equity Securities
Debt Securities
Other
Total
2018
2017
63.0%
36.0%
1.0%
100.0%
65.0%
35.0%
—%
100.0%
F - 58
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 17 - BENEFIT PLANS AND OBLIGATIONS FOR TERMINATION INDEMNITY (Cont.)
The fair value of the asset values by category at December 31, 2018 was as follows:
Asset Category
Cash
Cash Equivalents:
Money Market Funds (a)
Fixed Income Securities:
Mutual Funds (b)
Equity Securities:
International Companies (c)
Mutual Funds (d)
Total
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservab
le Inputs
(Level 3)
Total
$
83
$
83
$
— $
652
652
62,765
62,765
4,424
96,358
4,424
96,358
—
—
—
—
$
164,282
$
164,282
$
— $
—
—
—
—
—
—
a. This category includes highly liquid daily traded cash-like vehicles.
b. This category invests in highly liquid mutual funds representing a diverse offering of debt issuance.
c. This category represents common stocks of companies domiciled outside of the U.S.; they can be represented by
ordinary shares or ADRs.
d. This category represents highly liquid diverse equity mutual funds of varying asset classes and styles.
In developing the overall expected long-term rate of return on assets assumption, ESA used a building block approach
in which rates of return in excess of inflation were considered separately for equity securities, debt securities, real
estate and all other assets. The excess returns were weighted by the representative target allocation and added along
with an approximate rate of inflation to develop the overall expected long-term rate of return. It is the policy of ESA
to meet the ERISA minimum contribution requirements for a Plan year. The minimum contribution requirements for
the 2018 Plan year have been satisfied as of December 31, 2018. Benefit payments over the next five years are
expected to be $7,837 in 2019, $8,544 in 2020, $9,375 in 2021, $10,124 in 2022 and $10,903 in 2023.
F - 59
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 17 - BENEFIT PLANS AND OBLIGATIONS FOR TERMINATION INDEMNITY (Cont.)
2. Retiree Medical Plan
ESA offers retiree medical benefits to a limited number of retirees, The measurement date for ESA's benefit obligation
is December 31. The following table sets forth the retiree medical plans’ funded status and amounts recognized in
the consolidated financial statements for the years ended December 31, 2018 and 2017:
Change in Benefit Obligation:
Benefit obligation at beginning of period
Service cost
Interest cost
Actuarial (gain) loss
Employee contribution
Benefits paid
Benefit obligation at end of period
Change in Plan Assets:
Employer contribution
Employee contribution
Benefits paid
Fair value of Plan assets at end of period
Accrued benefit cost, end of period:
Funded status
Unrecognized net actuarial (gain) loss
Accrued benefit cost, end of period
Amounts recognized in the statement of financial position:
Accrued benefit liability, current
Accrued benefit liability, non-current
Accumulated other comprehensive gain, pretax
Net amount recognized
Components of net periodic pension cost (for period):
Service cost
Interest cost
Amortization of net actuarial gain
Total net periodic benefit cost
Assumptions as of end of period:
Discount rate
Health care cost trend rate assumed for next year
Ultimate health care cost trend rate
F - 60
December 31,
2018
2017
$
$
$
$
1,641
71
50
(353)
19
(69)
1,359
$
$
$
50
19
(69)
— $
2,053
64
67
(439)
36
(140)
1,641
104
36
(140)
—
Year ended December 31,
2018
2017
$
$
$
$
$
$
(1,359) $
(1,610)
(2,969) $
(112) $
(1,247)
(1,610)
(2,969) $
$
71
50
(164)
(43) $
3.91%
5.40%
3.84%
(1,641)
(1,420)
(3,061)
(111)
(1,531)
(1,419)
(3,061)
64
67
(128)
3
3.17%
5.50%
3.84%
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 17 - BENEFIT PLANS AND OBLIGATIONS FOR TERMINATION INDEMNITY (Cont.)
2. Retiree Medical Plan (Cont.)
The effect of a 1% change in the health care cost trend rate at December 31, 2018 was as follows:
Net periodic benefit cost
Benefit obligation
3. Defined Contribution Plan
1% increase
14
$
94
$
1% decrease
(12)
$
(85)
$
The 401(k) savings plan (“401(k) plan”) is a defined contribution retirement plan that covers all eligible ESA
employees, as defined in section 401(k) of the U.S. Internal Revenue Code. Employees may elect to contribute a
percentage of their annual gross compensation to the 401(k) plan. ESA may make discretionary matching contributions
as determined by ESA. Total expense under the 401(k) plan amounted to $6,453, $5,646 and $5,300 for the years
ended December 31, 2018, 2017 and 2016, respectively. Expense for the deferred 401(k) plan is allocated between
cost of sales and general and administrative expenses depending on the responsibilities of the related employees.
4. Non-Qualified Defined Contribution Plan
ESA has two benefit plans for the executives of the organization. The non-qualified, defined contribution plan is
structured under Section 409(A). The plan provides the employees at vice president level and above the opportunity
to defer up to 100% of their salary to the 409(A) plan. ESA provides a match of 50 cents on the dollar up to 10% of
the employees’ total salary and incentive-based compensation. The contribution can be made into the 401(k) plan,
the 409(A) plan or both plans. The purpose is to provide comparable defined contribution plan benefits for the senior
management across ESA locations. The 409(A) plan funds are contributed to several life insurance policies. Participant
contributions to the plan were $3,238, $1,962 and $1,194 for the years ended December 31, 2018, 2017 and 2016,
respectively, and the total ESA contribution to the plan was $417 for 2018. The cash surrender value of these life
insurance policies at December 31, 2018 was $4,720. The total liability related to the 409(A) plan was $10,278 at
December 31, 2018.
The second plan implemented is a non-qualified, defined benefit plan for certain executives of ESA. The plan provides
the executives with a calculated, guaranteed payment in addition to their regular pension through the company upon
retirement. The plan is funded with several life insurance policies. The policies are not segregated into a trust or
otherwise effectively restricted. These policies are corporate owned assets that are subject to the claims of general
creditors and cannot be considered as formal plan assets. The defined benefit plan put in place meets the ERISA
definition of an unfunded deferred compensation plan maintained for the benefit of a select group of management
or highly compensated employees. The plan assets of life insurance policies have a cash surrender of $2,813 at
December 31, 2018. Related liability for the pension payments is $5,463 at December 31, 2018. As of December 31,
2018, all executives had partially vested balances in the plan.
F - 61
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME
A. APPLICABLE TAX LAWS
(1) Israeli Corporate Income Tax Rates
Generally, regular corporate tax rates and real capital gain tax rates in Israel were 23%, 24% and 25%
for the years 2018, 2017 and 2016, respectively.
(2) Tax benefits under Israel’s Law for the Encouragement of Industry (Taxes), 1969:
Elbit Systems and most of its subsidiaries in Israel currently qualify as “Industrial Companies”, as defined
by the Law for the Encouragement of Industry (Taxes), 1969, and as such, these companies are entitled to
certain tax benefits, mainly amortization of costs relating to know-how and patents over eight years,
accelerated depreciation, the right to deduct public issuance expenses for tax purposes and an election under
certain conditions to file a consolidated tax return with additional related Israeli Industrial Companies.
In December 2015, Elbit Systems and certain of its Israeli subsidiaries (also industrial companies) submitted
an election notice to the Israel Tax Authority to file a consolidated tax return starting from tax year 2015.
(3) Tax benefits under Israel’s Law for the Encouragement of Capital Investments, 1959 (Cont.):
The operations of Elbit Systems and certain of its Israeli subsidiaries (“the Companies”) have been granted
“Approved Enterprise” status under Israel’s Law for the Encouragement of Capital Investments, 1959 (the
“Law”). Accordingly, certain income of the Companies derived from the Approved Enterprise programs is
tax exempt for two years and subject to reduced tax rates of 25% for five year to eight year periods or tax
exempt for a ten year period, commencing in the first year in which the companies had taxable income
(limited to twelve years from commencement of production or fourteen years from the date of approval,
whichever is earlier).
An Amendment to the Law from 2005 defines the “Privileged Enterprise” status rather than the previous
Approved Enterprise status and limits the scope of enterprises which may qualify for Privileged Enterprise
status by setting criteria such as that at least 25% of the Privileged Enterprise program’s income be derived
from exports. Additionally, the 2005 Amendment enacted major changes in the manner in which tax benefits
are awarded under the Law so that companies no longer require an Investment Center approval in order to
qualify for tax benefits. Similar criteria have been set for the “Preferred Enterprise” status which was added
in an Amendment to the Law in 2011. Companies are not required to receive an Investment Center approval
in order to qualify for the tax benefits under the Preferred Enterprise status, however, companies which are
under an Approved Enterprise or Privileged Enterprise programs must waive their former benefits in order
to elect the Preferred Enterprise regime.
Tax-exempt income generated by the Company and certain of its Israeli subsidiaries’ Approved Enterprises
and Privileged Enterprises will be subject to tax upon dividend distribution or complete liquidation. Income
generated under a Preferred Enterprise is not subject to additional taxation to the Company or its Israeli
subsidiaries upon distribution or complete liquidation.
The entitlement to the above benefits is subject to the Companies’ fulfilling the conditions specified in
the Law, and the regulations promulgated thereunder and the letters of approval for the specific
investments in Approved Enterprises. In the event of failure to comply with these conditions, the benefits
may be canceled and the companies may be required to refund the amount of the benefits, in whole or in
part, including interest.
As of December 31, 2018, the Company’s management believes that the Company and its Israeli subsidiaries
met all conditions of the Law and letters of approval.
F - 62
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME (Cont.)
A. APPLICABLE TAX LAWS (Cont.)
(3) Tax benefits under Israel’s Law for the Encouragement of Capital Investments, 1959 (Cont.):
As of December 31, 2018, retained earnings of the Company included approximately $646,000 in tax-
exempt profits earned by the Company’s Approved Enterprises. If the retained tax-exempt income were to
be distributed, with respect to the Approved Enterprises it would be taxed at the corporate tax rate applicable
to such profits as if the Company had not elected the alternative tax benefits track, and an income tax liability
would be incurred of approximately $162,000 as of December 31, 2018.
The boards of directors of the Company and its applicable Israeli subsidiaries have decided that their policy
is not to declare dividends out of such tax-exempt income. Accordingly, no deferred income taxes have been
provided on exempt income attributable to the Companies’ Approved Enterprises and Privileged Enterprises,
as such retained earnings are essentially permanent in duration.
In Israel, income from sources other than the Approved Enterprises, Privileged Enterprises and Preferred
Enterprises during the benefit period will be subject to tax at the regular corporate tax rate.
Enhancement of Current Tax Incentives Regime:
Tax incentives in Israel are also available to certain Israeli industrial companies and to R&D centers
(operating on a cost plus basis) under two tracks: (i) a Preferred Enterprise and (ii) a Special Preferred
Enterprise, aimed at large enterprises that meet certain investment requirements. Accordingly, a Preferred
Enterprise is eligible for a reduced corporate income tax rate of 16%. However, if the company is located
in Jerusalem or in certain northern or southern parts of Israel, the tax rate was further reduced to 9%. On
15 December 2016, the Finance Committee approved a further 1.5% reduction in the tax rate for such
locations, from 9% to 7.5%.
Since the Company and its Israeli subsidiaries are operating under more than one program or incentive
segment, and since part of their taxable income is not entitled to tax benefits under the Law and is taxed at
the regular tax rates, the effective tax rate is the result of a weighted combination of the various applicable
rates and tax exemptions, and the computation is made for income derived from each program on the basis
of formulas specified in the law.
The Israeli Parliament enacted a reform to the Law, effective January 2011. According to the reform, a flat
rate tax applies to companies eligible for the Preferred Enterprise status. In order to be eligible for a Preferred
Enterprise status, a company must meet minimum requirements to establish that it contributes to the country’s
economic growth and is a competitive factor for the Gross Domestic Product (a competitive enterprise).
Israeli companies which currently benefit from an Approved Enterprise or Privileged Enterprise status and
meet the criteria for qualification as a Preferred Enterprise can elect to apply the Preferred Enterprise benefits
by waiving their benefits under the Approved Enterprise and Privileged Enterprise status. The Company
and several of its Israeli subsidiaries have elected the Preferred Enterprise status.
Benefits granted to a Preferred Enterprise include reduced and gradually decreasing tax rates. In peripheral
regions (Development Area A) the reduced tax rate was 10% in 2012 and 7% in 2013. In other regions the
tax rate was 15% in 2012, and 12.5% in 2013. Following the enactment of the National Priorities Law,
effective January 1, 2014, the reduced tax rate is 9% in the Development Area A regions and 16% in other
regions. Preferred Enterprises in peripheral regions are eligible for Investment Center grants, as well as the
applicable reduced tax rates.
F - 63
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME (Cont.)
A. APPLICABLE TAX LAWS (Cont.)
(3) Tax benefits under Israel’s Law for the Encouragement of Capital Investments, 1959 (Cont.):
A distribution from a Preferred Enterprise out of “Preferred Income” through December 31, 2013, was
subject to 15% withholding tax for Israeli-resident individuals and non-Israeli residents (subject to applicable
treaty rates) and effective January 1, 2014, is subject to 20% withholding tax for Israeli-resident individuals
and non-Israeli residents (subject to applicable treaty rates).
In December 2016, the Knesset (Israeli Parliament) approved amendments to the Law that introduce an
innovation box regime for intellectual property (IP)-based companies, enhanced tax incentives for certain
industrial companies and reduced the standard corporate tax rate and certain withholding rates starting in
2017.
Innovation Box Regime Special Technological Preferred Enterprise
The new regime was tailored by the Israeli government to a post-base erosion and profit shifting (“BEPS”)
world, encouraging multinationals to consolidate IP ownership and profits in Israel along with existing
Israeli research and development (“R&D”) functions. Tax benefits created to achieve this goal include a
reduced corporate income tax rate of 6% on IP-based income and on capital gains from future sale of IP.
The 6% tax rate would apply to qualifying Israeli companies that are part of a group with global consolidated
revenue of over NIS 10 billion (approximately US $2.8 billion). Other qualifying companies with global
consolidated revenue below NIS 10 billion would be subject to a 12% tax rate. However, if the Israeli
company is located in Jerusalem or in certain northern or southern parts of Israel, the tax rate is further
reduced to 7.5%. Additionally, withholding tax on dividends for foreign investors would be subject to a
reduced rate of 4% for all qualifying companies (unless further reduced by a treaty).
Entering into the regime is not conditioned on making additional investments in Israel, and a company could
qualify if it invested at least 7% of the last three years’ revenue in R&D (or incurred NIS 75 million in R&D
expense per year) and met one of the following three conditions:
1. At least 20% of its employees are R&D employees engaged in R&D (or more than 200 R&D employees);
2. Venture capital investments of NIS 8 million were previously made in the company; or
3. Average annual growth over three years of 25% in sales or employees.
A company that does not meet the above conditions may still be considered as a qualified company at the
discretion of the Israeli Innovation Authority of the Ministry of Economy and Industry (formerly, the Office
of the Chief Scientist). Companies wishing to exit from the regime in the future will not be subject to
clawback of tax benefits. The Knesset also approved a stability clause in order to encourage multinationals
to invest in Israel. Accordingly, companies will be able to confirm the applicability of tax incentives for a
10-year period under a pre-ruling process. Further, in line with the new Organization for Economic Co-
operation and Development (“OECD”) Nexus Approach, the Israeli Finance Minister will promulgate
regulations to ensure companies are benefiting from the regime to the extent qualifying R&D expenditures
are incurred. The regulations were set to be finalized by March 31, 2017, with new amendments to the Law
coming into effect after the regulations have been finalized. Accordingly, the new law was not considered
enacted at December 31, 2016.
On May 16, 2017, the Knesset Finance Committee approved the regulations effective as of January 1, 2017.
As of December 31, 2018, the Company's management believes that Elbit Systems' and certain of its Israeli
subsidiaries' meet the conditions and qualify as a "Special Preferred Technological Enterprise" tax regime.
As a result, the primary effect of applying the Special Preferred Technological Enterprise tax regime on the
Company's deferred tax assets, net, balance as of December 31, 2017, was a reduction in the amount of
approximately $9,500.
F - 64
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME (Cont.)
B. NON-ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are generally taxed based upon tax laws applicable in their countries of residence.
In December 2017, the Tax Cuts and Jobs Act (the "2017 Tax Act") was enacted in the United States. The 2017
Tax Act represents major tax reform legislation that, among other provisions, reduces the U.S. corporate tax rate.
The 2017 Tax Act includes a number of changes that impact the Company's U.S. subsidiaries, most notably, a
reduction of the U.S. corporate income tax rate from 35% to 21% effective as of January 1, 2018.
The 2017 Tax Act also provides for a one-time transition tax on certain foreign earnings and the acceleration of
depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes
beginning in 2018, including repeal of the domestic manufacturing deduction, acceleration of tax revenue
recognition, capitalization of research and development expenditures, additional limitations on executive
compensation and limitations on the deductibility of interest.
The Company recognized the income tax effects of the 2017 Tax Act in its 2017 consolidated financial statements
in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application
of ASC 740, "Income Taxes", in the reporting period in which the 2017 Tax Act was enacted. As a result, the
Company's financial results reflect in the income tax effects of the 2017 Tax Act for which the accounting under
ASC 740 is complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for
which the accounting under ASC 740 is incomplete but a reasonable estimate could be determined.
The changes to existing U.S. tax laws as a result of the 2017 Tax Act, which had the most significant impact on
the Company's federal income taxes are related to the reduction of the U.S. corporate income tax rate and such
effect on deferred tax assets and liabilities. The Company remeasured certain deferred tax assets, net, based on
the rates at which they are expected to reverse in the future, which is generally 21%. As a result, the amount
recorded related to the remeasurement of the Company's deferred tax assets, net, balance was $10,950, which
is included as an increase in income tax expense and a corresponding reduction in the deferred tax assets, net,
as of December 31, 2017.
The Company applied the guidance in Staff Accounting Bulletin 118 when accounting for the enactment-date
effect of the Tax Act in 2017, and throughout 2018. At December 31, 2017, the Company substantially completed
its provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate in 2017 of
such effects. During 2018, the Company refined its calculations, evaluated changes in interpretations and
assumptions that were made, applied additional guidance issued by the U.S. Government, and evaluated actions
and related accounting policy decisions that were made. As of December 31, 2018, the Company completed its
accounting for all of the enactment-date income tax effects of the Tax Act and did not identify any material
changes to the provisional, for the year ended December 31, 2017, related to the Tax Act.
C. INCOME FROM CONTINUING OPERATIONS BEFORE TAXES ON INCOME
Income before taxes on income:
Domestic
Foreign
Year ended December 31,
2018
2017
2016
$
$
195,491
41,831
237,322
$
$
245,680
39,166
284,846
$
$
234,643
44,558
279,201
F - 65
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME (Cont.)
D. TAXES ON INCOME
Current taxes:
Domestic
Foreign
Adjustment for previous years:
Domestic
Foreign
Deferred income taxes:
Domestic
Foreign (*)
Total taxes on income
Total:
Domestic
Foreign
Total taxes on income
Year ended December 31,
2018
2017
2016
$
$
$
$
$
17,805
7,672
25,477
$
24,070
12,070
36,140
44,095
14,454
58,549
(1,287)
(1,266)
(2,553)
5,387
(1,866)
3,521
26,445
21,905
4,540
26,445
$
$
$
(2,481)
(1,849)
(4,330)
12,700
11,075
23,775
55,585
34,289
21,296
55,585
$
$
$
(18,630)
8
(18,622)
4,605
1,085
5,690
45,617
30,070
15,547
45,617
(*) Includes $10,950 in deferred tax asset adjustments in 2017, related to the tax reform in the U.S.
F - 66
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME (Cont.)
E. UNCERTAIN TAX POSITIONS
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
2018
2017
Balance at the beginning of the year
Additions related to interest and currency translation
Additions based on tax positions taken during a prior period
Reductions related to tax positions taken during a prior period
Reductions related to settlement of tax matters
Additions based on tax positions taken during the current period (*)
Reductions related to a lapse of applicable statute of limitation
$
55,087
(1,241)
4,625
119
(1,294)
3,157
(509)
Balance at the end of the year
$
59,944
$
(*)
Includes an amount of $2,005 related to acquisitions of subsidiaries during 2018.
$
46,847
5,455
2,708
(4,278)
(5,589)
10,489
(545)
55,087
At December 31, 2018 and 2017, the Company had a liability for unrecognized tax benefits of $59,944 and
$55,087, respectively, including an accrual of $4,507 and $2,532 for the payment of related interest and penalties,
respectively. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision
for income taxes.
During 2018 and 2017, the Company and certain of its subsidiaries settled certain income tax matters pertaining
to multiple years in Israel and Europe. As a result of the settlement of the tax matters, the Company recorded
tax benefits of approximately $1,157 and $5,500 during the years 2018 and 2017 respectively, in the statements
of income in “taxes on income”. Following the examination by the Israeli Tax Authority, the Company applied
some of the items for which a settlement was reached to subsequent outstanding years.
The Company operates in multiple jurisdictions throughout the world, and its tax returns are periodically audited
or subject to review by both domestic and foreign authorities. Certain Israeli subsidiaries of the Company are
currently undergoing tax audits by the Israeli Tax Authority.
As a result of ongoing examinations, tax proceedings in certain countries and additions to unrecognized tax
benefits for positions taken and interest and penalties, if any, arising in 2018, it is not possible to estimate the
potential net increase or decrease to the Company’s unrecognized tax benefits during the next twelve months.
F - 67
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME (Cont.)
F. DEFERRED INCOME TAXES
Significant components of net deferred tax assets and liabilities are based on separate tax jurisdictions as follows:
Deferred tax assets:
Reserves and allowances
Inventory allowances
Property, plant and equipment
Other assets
Net operating loss carry-forwards
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Intangible assets
Property, plant and equipment
Reserves and allowances
Net deferred tax assets(*)
December 31,
2018
2017
$
52,691
—
465
47,354
63,945
164,455
(121,651)
42,804
25,127
—
(2,324)
22,194
13,687
58,684
(7,326)
51,358
(2,640)
(10,132)
(10,110)
(22,882)
19,922
$
(2,591)
(10,661)
(4,774)
(18,026)
33,332
$
$
Deferred tax assets and liabilities are measured based on the enacted tax rates that will apply in the years in
which the temporary differences are expected to be recovered or paid. As such, during 2017, the Company
remeasured its deferred tax assets net, as a result of the enactment of the 2017 Tax Act in the U.S. and appled
the provisions of the "Special Preferred Technological Enterprise" tax regime in Israel. The primary effect of
the remeasurements was a reduction in deferred tax assets, net, in the aggregate amount of approximately $20,450.
The net tax effect of applying the provisions of the "Special Preferred Technological Enterprise" tax regime in
Israel was immaterial in 2017 as the decrease in current taxes offset the increase in the deferred tax assets.
(*) The net deferred tax assets include deferred tax liability in the amount of $1,400 with respect to
investment in subsidiaries at fair value, and a deferred tax asset in the same amount with respect to capital
gain losses that can be utilized in case of realization of this investment.
G. CARRY-FORWARD TAX LOSSES
As of December 31, 2018, the Company and its Israeli subsidiaries had estimated total available carry-forward
operating tax losses of approximately $419,719, and its non-Israeli subsidiaries had estimated available carry-
forward operating tax losses of approximately $30,297. The Company had also carry-forward capital losses of
approximately $44,361, out of which a valuation allowance was provided in the sum of approximately $39,596.
F - 68
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 18 - TAXES ON INCOME (Cont.)
H. RECONCILIATION
Reconciliation of the actual tax expense as reported in the statements of operations to the amount computed
by applying the Israeli statutory tax rate is as follows:
Year ended December 31,
2018
2017
2016
Income before taxes as reported in the consolidated statements of income
$ 237,322
$ 284,846
$ 279,201
Statutory tax rate
Theoretical tax expense
Tax benefit arising from reduced rate as an “Approved, Privileged and Preferred
Enterprise” and other tax benefits (*)
Tax adjustment in respect of different tax rates for foreign subsidiaries
Changes in carry-forward losses and valuation allowances
Taxes resulting from non-deductible expenses
Difference in basis of measurement for financial reporting and tax return purposes
Taxes in respect of prior years (See D above)
Other differences, net
Actual tax expenses
Effective tax rate
23.0%
24.0%
25.0%
$
54,584
$
68,363
$
69,800
(17,132)
687
927
2,159
(13,775)
(2,553)
1,548
(15,749)
2,946
4,135
1,634
(3,257)
(4,330)
1,843
$
26,445
$
55,585
$
(16,072)
3,597
5,290
3,144
135
(18,622)
(1,655)
45,617
11.14%
19.51%
16.34%
(*) Net earnings per share – amounts of the benefit resulting from the Approved,
Privileged and Preferred Enterprises:
Basic and diluted
$
0.40
$
0.37
$
0.38
I. FINAL TAX ASSESSMENTS
Final income tax assessments have been received by the Company up to and including the tax year 2014 and by
certain subsidiaries up to 2015.
F - 69
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 19 - DERIVATIVE FINANCIAL INSTRUMENTS
A. FAIR VALUE OF DERIVATIVE INSTRUMENTS
Derivative financial instruments are presented as other assets or other payables. For asset derivatives and liability
derivatives, the fair values of the Company’s outstanding derivative instruments as of December 31, 2018 and
December 31, 2017 are summarized below:
Derivatives designated as hedging instruments
Foreign exchange contracts
Cross-currency interest rate swaps
Derivatives not designated as hedging instruments
Foreign exchange contracts
Asset Derivatives (*)
Liability Derivatives (**)
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
22,327
4,378
26,705
222
222
$
$
5,235
24,009
29,244
718
718
$
$
22,637
—
22,637
1,299
1,299
$
$
11,025
—
11,025
1,175
1,175
$
$
(*) Presented as part of other receivables and long-term other receivables.
(**) Presented as part of other payables and long-term other payables.
B. EFFECT ON CASH FLOW HEDGING
The effect of derivative instruments on cash flow hedging and the relationship between income and other
comprehensive income for the years ended December 31, 2018 and December 31, 2017, are summarized below:
Gain (Loss) Recognized
in Other Comprehensive
Income on Effective-
Portion of Derivative, net
December 31,
December 31,
2017
2018
Gain (Loss) on Effective
Portion
of Derivative Reclassified
from Accumulated Other
Comprehensive Income (*)
December 31,
December 31,
2017
2018
Ineffective Portion of Gain
(Loss) of Derivative and
Amount Excluded from
Effectiveness Testing
Recognized in Income (**)
December 31,
December 31,
2017
2018
$
(6,249) $
27,841
$
10,180
$
55,851
$
2,726
$
(2,419)
$
— $
— $
— $
— $
1,457
$
(1,494)
Derivatives designated as
hedging instruments:
Foreign exchange contracts
Derivatives not designated as
hedging instruments:
Foreign exchange contracts
and other derivatives
instruments
(*) Presented as part of revenues/cost of revenue and equity in net earning of affiliated companies and
partnerships.
(**) Presented as part of financial income (expenses), net.
F - 70
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 19 - DERIVATIVE FINANCIAL INSTRUMENTS (Cont.)
C. NET EFFECT OF CROSS-CURRENCY SWAPS
The net effect on earnings from the cross-currency swaps in 2018 was a gain of approximately $3,400, of
which approximately $2,000 was offset against exchange rate difference related to Series A Notes and
approximately $1,400 was offset against interest expenses.
D. FORWARD CONTRACTS
The notional amounts of outstanding foreign exchange forward contracts at December 31, 2018 is
summarized below:
Euro
GBP
NIS
Other
Forward contracts
Buy
Sell
December 31,
December 31,
$
2018
102,485
6,764
598,200
41,467
2017
$
81,037
$
3,662
71,200
36,555
2018
414,211
23,559
—
57,266
2017
$
282,760
39,226
—
61,228
$
748,916
$
192,454
$
495,036
$
383,214
Note 20 - OTHER LONG-TERM LIABILITIES
The following table presents the components of other long-term liabilities as of December 31, 2018 and 2017.
Provision for vacation pay
Purchase obligations
Other
December 31,
2018
2017
$
31,310
$
128,739
10,558
30,813
10,844
7,035
$
170,607
$
48,692
F - 71
Note 21 - COMMITMENTS AND CONTINGENT LIABILITIES
A. ROYALTY COMMITMENTS
Elbit Systems and certain Israeli subsidiaries partially finance their research and development expenditures under
grant programs sponsored by the Israel Innovation Authority (“IIA”) of the Ministry of Economy and Industry
(formerly the Office of Chief Scientist) for the support of research and development activities conducted in
Israel. At the time the grants were received from the IIA, successful development of the related projects was not
assured.
In exchange for participation in the programs by the IIA, Elbit Systems and the subsidiaries agreed to pay 2%
- 5% of total sales of products developed within the framework of these programs. The royalties will be paid up
to a maximum amount equaling 100% to 150% of the grants provided by the IIA, linked to the dollar, bearing
annual interest at a rate based on LIBOR. The obligation to pay these royalties is contingent on actual sales of
the products, and in the absence of such sales payment of royalties is not required.
In some cases, the Government of Israel’s participation (through the IIA) is subject to export sales or other
conditions. The maximum amount of royalties is increased in the event of production outside of Israel.
Elbit Systems and certain of its subsidiaries may also be obligated to pay certain amounts to the IMOD and
others on certain sales including sales resulting from the development of certain technologies.
Royalties expenses amounted to $7,559, $10,424 and $4,460 in 2018, 2017 and 2016, respectively.
B. COMMITMENTS IN RESPECT OF LONG-TERM PROJECTS
In connection with projects in certain countries, Elbit Systems and some of its subsidiaries have entered and
may enter in the future into “buy-back” or “offset” agreements, required by a number of the Company’s customers
for these projects as a condition to the Company obtaining orders for its products and services. These agreements
are customary in the Company’s industry and are designed to facilitate economic flow back (buy-back) and/or
technology transfer to businesses or government agencies in the applicable country.
These commitments may be satisfied by the Company’s 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. The
buy-back rules and regulations, as well as the underlying contracts, may differ from one country to another. The
ability to fulfill the buy-back obligations may depend, among other things, on the availability of local suppliers
with sufficient capability to meet the Company requirements and which are competitive in cost, quality and
schedule. In certain cases, the Company’s commitments may also be satisfied through transactions conducted
by other parties.
The Company does not commit to buy-back agreements until orders for its products or services are definitive,
but in some cases the orders for the Company’s products or services may become effective only after the
Company’s corresponding buy-back commitments are in effect.
Buy-back programs generally extend at least over the relevant commercial contract period and may provide for
penalties in the event the Company fails to perform in accordance with buy-back requirements. In some cases
the Company provides guarantees in connection with the performance of its buy-back obligations.
Should the Company be unable to meet such obligations it may be subject to contractual penalties, the Company's
guarantees may be drawn upon, and the Company's chances of receiving additional business from the applicable
customers could be reduced or, in certain cases, eliminated.
At December 31, 2018, the Company had outstanding buy-back obligations totaling approximately $1,385,000
that extend through 2028.
F - 72
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 21 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
C. LEGAL CLAIMS
The Company and its subsidiaries are involved in legal claims arising in the ordinary course of business. The
Company’s management, based on the opinion of its legal counsel, believes that any financial impact from the
settlement of such claims in excess of the accruals recorded in the financial statements will not have a material
adverse effect on the financial position or results of operations of the Company. The following is a description
of significant legal proceedings.
In 2015, Elbit Systems of America, LLC and Elbit Systems Land & C4I Ltd. (collectively “Elbit”) filed a claim
for patent infringement in the U.S. District Court for the Eastern District of Texas (the “Court”) against Hughes
Network Systems, LLC (“Hughes”), Black Elk Energy Offshore Operations, LLC (“Black Elk”), Blue Tide
Communications, Inc. (“Blue Tide”) and Country Home Investments, Inc. (“Country Home”) (Hughes, Black
Elk, Blue Tide and Country Home are referred to collectively as the “defendants”). The claim alleges that the
defendants infringed the Company's patents relating to “Reverse Link for a Satellite Communications Network”
and “Infrastructure for Telephony Network”. In June 2017, Elbit voluntarily dismissed Blue Tide and Country
Home as defendants, and Black Elk was dismissed earlier since it was in bankruptcy. A trial was conducted
before a jury from July 31 - August 7, 2017. The jury concluded that Hughes infringed Elbit's patents, rejected
Hughes' invalidity arguments and returned a damages verdict in Elbit's favor of $21,075. The Court confirmed
the jury's verdict and awarded post-trial royalties of an additional $4,680, additional pre-trial royalties of
approximately $1,000 and interest in an amount to be determined upon final judgment. In addition, the Court
granted Elbit's request that the case be deemed exceptional and Elbit be entitled to legal fees. Hughes appealed
the Court's rulings to the U.S. Court of Appeals for the Federal Circuit. Briefing on the appeal was completed
in November 2018, and oral argument is expected to take place during 2019.
F - 73
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 21 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
D. LEASE COMMITMENTS
The future minimum lease commitments of the Company under various non-cancelable operating lease
agreements in respect of premises, motor vehicles and office equipment as of December 31, 2018, are as follows:
2019
2020
2021
2022
2023 and after
$
$
65,540
49,142
28,311
21,001
98,660
262,654
Lease expenses for the years ended December 31, 2018, 2017 and 2016 amounted to $60,782, $47,479 and
$44,614, respectively.
E. GUARANTEES
As of December 31, 2018, guarantees in the amount of approximately $1,895,346 were issued by banks and
other financial institutions on behalf of the Company and certain of its subsidiaries mainly in order to secure
certain contract liabilities (advances from customers) and performance obligation and employee benefit plans.
F. COVENANTS
In connection with bank credits and loans, including performance guarantees issued by banks and bank guarantees
in order to secure certain advances from customers, the Company and certain subsidiaries are obligated to meet
certain financial covenants. Such covenants include requirements for shareholders’ equity, current ratio, operating
profit margin, tangible net worth, EBITDA, interest coverage ratio and total leverage.
As of December 31, 2018, the Company met all financial covenants.
F - 74
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 21 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
G. CONTRACTUAL OBLIGATIONS
Substantially all of the Company’s purchase commitments relate to obligations under purchase orders and
subcontracts entered into by the Company. These purchase orders and subcontracts are typically in standard
formats proposed by the Company, with the subcontracts and purchase orders also reflecting provisions from
the Company’s applicable prime contract that apply on a flow down basis to subcontractors and vendors. The
terms typically included in these purchase orders and subcontracts are consistent with Uniform Commercial
Code provisions in the United States for sales of goods, as well as with specific terms called for by its customers
in various countries. These terms include the Company’s right to terminate the purchase order or subcontract in
the event of the vendor’s or subcontractor’s default, and typically include the Company’s right to terminate the
order or subcontract for the Company’s convenience (or if the Company’s prime contractor has so terminated
the prime contract). Such purchase orders and subcontracts typically are not subject to variable price provisions.
As of December 31, 2018 and 2017, the purchase commitments were $1,775,000 and $1,592,000, respectively.
H. FIXED LIENS
In order to secure bank loans and bank and other financial institutions guarantees in the amount of approximately
$1,895,346 as of December 31, 2018, certain Company entities recorded fixed liens on most of their machinery
and equipment, mortgages on most of their real estate and floating charges on most of their assets.
I. LIEN ON APPROVED ENTERPRISES
A lien on the Company’s Approved Enterprises has been registered in favor of the State of Israel. See Note
18A.
Note 22 -
SHAREHOLDERS’ EQUITY
A. SHARE CAPITAL
Ordinary shares confer upon their holders voting rights and the right to receive dividends.
B. 2018 EQUITY INCENTIVE PLAN
In February 2018 the Company's Board of Directors approved the 2018 Equity Incentive Plan for Executive
Officers (the “2018 Equity Incentive Plan”). The purpose of this plan was to enable the Company to link the
compensation and benefits of its Executive Officers with the future growth and success of the Company and its
Affiliates and with long-term shareholder value. The 2018 Equity Incentive Plan consists of 1,000,000 options
to be exercised under a Net Exercise Mechanism which entitles the recipients to exercise the options for an
amount of shares reflecting only the benefit factor. The Options were allocated, subject to the required approvals,
to the Company's Israeli Executive Officers.
The exercise price of an option is determined in U.S dollars and is the higher of: (i) the average closing share
price of an Elbit Systems ordinary shares on the TASE, during the period of thirty (30) trading days preceding
the date on which the Company's Board of Directors approves the granting of the respective options, converted
into U.S. Dollars by applying the average representative U.S. dollar - NIS exchange rate during such thirty (30)
trading days period; or (ii) the closing share price of our ordinary shares on the TASE on the last trading date
preceding the date on which the Company's Board of Directors approves the granting of the respective options,
converted into the U.S. Dollars by applying the representative U.S. dollar - NIS exchange rate.
According to the 2018 Equity Incentive Plan, the options become vested and exercisable in accordance with the
following vesting schedule:
F - 75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 22 -
SHAREHOLDERS’ EQUITY (Cont.)
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
B.
2018 EQUITY INCENTIVE PLAN (Cont.)
(1)
(2)
(3)
(4)
Forty percent (40%) of the options are vested and exercisable from the second anniversary of the grant
date;
An additional twenty percent (20%) of the options are vested and exercisable from the third anniversary
of the grant date;
An additional twenty percent (20%) of the options are vested and exercisable from the forth anniversary
of the grant date; and
The remaining twenty (20%) of the options are vested and exercisable from the fifth anniversary of the
grant date.
The options expire no later than 63 months from the date of grant.
As of December 31, 2018, there were 35,000 options available for future grants under the 2018 Equity Incentive
Plan.
C.
2018 EQUITY INCENTIVE PLAN ACTIVITY
The following is asummary of Elbit Systems' share option activity under the 2018 Equity Incentive Plan:
Outstanding - beginning of the year
Granted
Outstanding - end of the year
Options execrable at the end of the year
2018
Number of
options
Weighted average
exercise price
—
965,000
965,000
—
—
128.48
128.48
—
The aggregate intrinsic value represents the total intrinsic value (the difference between Elbit Systems’ closing
stock price on the last trading day of the fourth quarter of the applicable fiscal year and the exercise price,
multiplied by the number of in-the-money options) that would have been received by the option holders had all
option holders exercised their options on December 31, 2018. This amount changes, based on the market price
of the Company’s stock and the average exercise price of in-the-money options. Aggregate intrinsic value of
outstanding options as of December 31, 2018 was zero.
As of December 31, 2018, there was $20,413 of total unrecognized compensation cost related to share-based
compensation arrangements granted under Elbit Systems’ stock option plan. That cost is expected to be recognized
over a weighted average period of 5 years.
As of December 31, 2018, 959,596 options were expected to be vested at a weighted average exercise price of
$128.48 per share. The weighted average remaining contractual life of exercisable options as of December 31,
2018 is approximately 4.94, and their aggregate intrinsic value is zero.
F - 76
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 22 -
SHAREHOLDERS’ EQUITY (Cont.)
D.
OUTSTANDING OPTIONS AND COMPENSATION EXPENSES
The options outstanding as of December 31, 2018, have been separated into ranges of exercise prices, as follows:
Exercise price
Number of options
Options outstanding
Weighted average
remaining contractual
life (years)
Weighted average
exercise price per
share
$128.91 - $121.42
965,000
4.94
$
128.48
Compensation expenses related to the 2018 Equity Incentive Plan amounted to $1,387, which were recognized
during the year ended December 31, 2018, as follows:
Cost of revenues
General and administration expenses
E. COMPUTATION OF EARNINGS PER SHARE
Computation of basic and diluted net earnings per share:
Year ended December 31,
2018
$
$
1,189
198
1,387
Year ended December 31, 2018
Year ended December 31, 2017
Year ended December 31, 2016
Net income
to
shareholders
of ordinary
shares
Weighted
average
number
of
shares (*)
Net income
to
shareholders
of ordinary
shares
Per
Share
amount
Weighted
average
number of
shares (*)
Per
Share
amount
Net income
to
shareholders
of ordinary
shares
Weighted
average
number
of
shares (*)
Per
Share
amount
$
206,738
42,753
$
4.84
$
239,109
42,750
$
5.59
$
236,909
42,742
$
5.54
—
—
—
3
—
10
$
206,738
42,753
$
4.84
$
239,109
42,753
$
5.59
$
236,909
42,752
$
5.54
(*) In thousands
Basic net
earnings
Effect of
dilutive
securities:
Employee
stock options
Diluted net
earnings
F - 77
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 22 -
SHAREHOLDERS’ EQUITY (Cont.)
F.
2018 PHANTOM BONUS RETENTION PLAN
In August 2018, the Company’s Board of Directors approved a “Phantom Bonus Retention Plan” for Senior
Officers, who are not Executive Officers (the “2018 Phantom Plan”).
The 2018 Phantom Plan provides for phantom bonus units which entitle the recipients to receive payment in
cash of an amount reflecting the “benefit factor”, which is linked to the performance of Elbit Systems’ stock
price over the applicable periods (tranches) under the 2018 Phantom Plan. As of December 31, 2018, 589,200
phantom bonus units of the Plan were granted with a weighted average basic price per unit, as defined in the
Plan, of $121.83.
The benefit earned for each year of a tranche is the difference between the basic price and the closing price of
the Company’s share for that year, as defined in the 2018 Phantom Plan, not to exceed an increase of 100% in
the Company's share price from the basic price of the first year of a tranche.
The Company recorded an amount of approximately $1,064 during the year ended December 31, 2018, as
compensation costs related to the phantom bonus units granted under the 2018 Phantom Plan.
G.
2012 PHANTOM BONUS RETENTION PLAN
In August 2012, the Company’s Board of Directors approved a “Phantom Bonus Retention Plan” for Senior
Officers (the “2012 Phantom Bonus Retention Plan”). In August 2013, the 2012 Phantom Bonus Retention Plan
was extended to include other officers of the Company.
The 2012 Phantom Bonus Retention Plan provides for phantom bonus units which entitle the recipients to receive
payment in cash of an amount reflecting the “benefit factor”, which is linked to the performance of Elbit Systems’
stock price over the applicable periods (tranches) under the Plan. As of December 31, 2018, 108,878 phantom
bonus units of the 2012 Phantom Bonus Retention Plan were granted with a weighted average basic price per
unit, as defined in the 2012 Phantom Bonus Retention Plan, of $114.87.
The benefit earned for each year of a tranche is the difference between the basic price and the closing price of
the Company’s share for that year, as defined in the 2012 Phantom Bonus Retention Plan, not to exceed an
increase of 100% in the Company's share price from the basic price of the first year of a tranche.
The Company recorded an amount of approximately $2,628, $28,254 and $32,065 in the years ended
December 31, 2018, 2017 and 2016, respectively, as compensation costs related to the phantom bonus units
granted under the 2012 Phantom Bonus Retention Plan, as follows:
Cost of revenues
General and administration expenses
Marketing and selling
G. DIVIDEND POLICY
Year ended December 31,
2018
2017
2016
$
$
985
$
10,199
$
1,225
418
13,948
4,107
10,056
18,024
3,985
2,628
$
28,254
$
32,065
Dividends declared by Elbit Systems are paid subject to statutory limitations. Elbit Systems’ Board of Directors
has determined not to declare dividends out of tax exempt earnings.
F - 78
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 23 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business).
A.
REVENUES ARE ATTRIBUTED TO GEOGRAPHIC AREAS BASED ON LOCATION OF THE END
CUSTOMERS AS FOLLOWS:
North America
Asia-Pacific
Israel
Europe
Latin America
Other
Year ended December 31,
2018
2017
2016
$
979,165
$
827,608
$
825,665
791,821
740,232
737,051
192,406
243,009
670,490
741,873
763,963
193,369
180,522
801,639
709,562
640,763
212,773
69,817
$ 3,683,684
$ 3,377,825
$ 3,260,219
B. REVENUES ARE GENERATED BY THE FOLLOWING AREAS OF OPERATIONS:
Airborne systems
C4ISR systems
Land systems
Electro-optic systems
Other (*)
Year ended December 31,
2018
$ 1,470,082
1,130,092
2017
2016
$ 1,272,075
$ 1,242,286
1,144,789
1,220,917
649,141
333,855
100,514
503,878
341,215
115,868
408,003
276,029
112,984
$ 3,683,684
$ 3,377,825
$ 3,260,219
(*) Mainly non-defense engineering and production services.
C. MAJOR CUSTOMER DATA AS A PERCENTAGE OF TOTAL REVENUES:
Year ended December 31,
2017
19%
2016
18%
2018
13%
Year ended December 31,
2018
$ 1,541,195
245,865
161,481
2017
2016
$
922,367
$
943,381
147,255
178,497
149,581
107,545
$ 1,948,541
$ 1,248,119
$ 1,200,507
D. LONG-LIVED ASSETS BY GEOGRAPHIC AREAS:
IMOD
Israel
U.S.
Other
F - 79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 24 - RESEARCH AND DEVELOPMENT, NET
Total expenses
Less - grants and participations
Note 25 -
FINANCIAL EXPENSES, NET
Expenses:
Interest on long-term bank debt
Interest on Series A Notes, net
Interest on short-term bank credit and loans
Guarantees
Loss from exchange rate differences, net
Other
Income:
Interest on cash, cash equivalents and bank deposits
Other
Note 26 - OTHER INCOME, NET
Pension non-service cost(1)
Impairment of investment (2)
Capital gain (3)
Other
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Year ended December 31,
2018
317,690
$
2017
2016
$
301,382
$
291,749
(30,338)
(36,322)
(35,957)
$
287,352
$
265,060
$
255,792
Year ended December 31,
2017
2016
2018
(1,489)
(6,565)
(5,457)
(7,465)
(2,224)
(2,030)
(25,230)
$
(13,718) $
(5,494)
(9,073)
(2,779) $
(6,112)
(8,432)
(7,105)
(4,487)
(7,148)
(36,063)
(9,027)
(3,362)
(5,807)
(46,481)
1,115
1,305
751
810
933
555
2,420
(44,061) $
1,561
(34,502) $
1,488
(23,742)
$
Year ended December 31,
2018
2017
2016
$
(3,794) $
(7,807)
152
—
$
(11,449) $
(5,130) $
—
—
48
(5,082) $
(5,702)
—
3,868
99
(1,735)
(1)
(2)
(3)
During 2018, the Company adopted ASU 2017-07 see Note 2S.
During 2018 the Company recognized an impairment related to two investments. An amount of approximately $5,100
is related to impairment of an investment measured under the fair value option. See Note 6C(3), and amount of
$2,700 is related to an investment accounted under cost method (see Note 1C(4)).
During 2016, the Company recognized a gain from the sale of land and property.
F - 80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars (In thousands, except per share data)
Note 27 - RELATED PARTIES' TRANSACTIONS AND BALANCES
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Transactions:
Income -
Sales to related-party companies (*)
Participation in expenses
Cost and expenses -
Supplies from related parties (**)
Balances:
Trade receivables and other receivables (*)
Trade payables and advances (**)
Year ended December 31,
2018
2017
2016
$
$
$
181,566
2,580
8,188
$
$
$
179,867
2,625
16,900
$
$
$
176,429
2,502
20,224
December 31,
2018
2017
$
$
103,035
33,868
$
$
77,470
28,675
The sales to the Company’s related parties in respect of U.S. government defense contracts are made on the basis of cost.
(*) A significant portion of the sales and balances include sales of helmet mounted cueing systems purchased from the
(**)
Company by a 50%-owned subsidiary of ESA.
Includes mainly electro-optics components and sensors, purchased by the Company from a 50%-owned Israeli
partnership, and electro-optics products purchased by the Company from another 50%-owned Israeli subsidiary.
F - 81
ELBIT SYSTEMS LTD. AND SUBSIDIARIES
Schedule II – Valuation and Qualifying Accounts
(In thousands of U.S. dollars)
Description
Year ended December 31, 2018:
Provisions for Losses on Long-Term
Contracts (*)
Provisions for Claims and Potential
Contractual Penalties and Others
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Taxes
Year ended December 31, 2017:
Provisions for Losses on Long-Term
Contracts (*)
Provisions for Claims and Potential
Contractual Penalties and Others
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Taxes
Year ended December 31, 2016:
Provisions for Losses on Long-Term
Contracts (*)
Provisions for Claims and Potential
Contractual Penalties and Others
Allowance for Doubtful Accounts
Valuation Allowance on Deferred Taxes
Column A
Column B
Balance at
Beginning of
Period
Additions
(Charged to
Costs and
Expenses)
Column C
Deductions
(Write-Offs
and Actual
Losses
Incurred)
Column D
Column E
Additions
Resulting
from
Acquisitions
Balance at
End of
Period
46,778
19,842
20,396
72,448
118,672
5,406
9,585
7,326
801
1,548
1,399
940
1,813
473
3,274
1,988
113,397
8,541
11,308
121,649
83,348
14,149
50,719
4,484
7,416
6,605
1,186
2,541
798
264
372
77
130,274
20,775
67,701
7,501
6,738
6,540
158
1,554
2,641
3,175
876
2,576
—
—
—
—
—
—
—
—
46,778
5,406
9,585
7,326
83,348
4,484
7,416
6,605
(*)
An amount of $21,659 and $22,690 and $43,513 as of December 31, 2018, 2017 and 2016, respectively, is presented as
a deduction from inventories, and an amount of $97,013 and $24,088 and $39,835 as of December 31, 2018, 2017 and
2016, respectively, is presented as part of other payables and accrued expenses. In 2018, it includes a deduction related
to the adoption of ASC 606 in the amount of approximately $3,390.
S-1
Exhibit 4.4
Summary of IMI Acquisition Agreements
I. Overview
1. Background
On November 25, 2018 (the "Acquisition Date"), Elbit Systems Ltd. (the “Company”) completed the
acquisition (the “Acquisition”) of 100% of the share capital of IMI Systems Ltd. (“IMI”) from the Government
of Israel (“Seller” or “GOI”) for the purchase price described below. The Acquisition was pursuant to the
GOI’s decision to privatize IMI (the “Privatization”). In order to implement the Privatization, during 2015
the GOI issued a tender to sell IMI. Towards the end of 2015, all potential bidders for the tender except the
Company withdrew their participation, and the Company remained the sole bidder. During 2016, 2017 and
2018, the Company and the GOI were engaged in a process to complete the Acquisition.
2. IMI
IMI is an Israeli defense company, engaged in the development, manufacture, marketing and sale of various
munitions and other defense systems and products, principally survivability and protection systems for armored
vehicles. IMI was incorporated in 2015 and was, prior to the Acquisition, a GOI-owned company. On January
1, 2016, IMI acquired most of the assets and liabilities of Israel Military Industries Ltd., a GOI-owned company
that was incorporated in 1990 (and which prior to its incorporation acted as a unit of the GOI). IMI owns
approximately 85% of the ordinary shares of Ashot Ashkelon Industries Ltd. (“Ashot”), an Israeli publicly-
traded company engaged primarily in build-to-print manufacture of gears, transmissions and gear boxes, and
the remaining 15% of Ashot’s shares are traded on the Tel-Aviv Stock Exchange.
3. Liabilities and Assets Excluded from the Acquisition
Certain liabilities of Israel Military Industries Ltd. were not transferred to IMI in 2016 and remained within
the GOI-owned Israel Military Industries Ltd., which changed its name in December 2016 to Netzer Hasharon
Ltd. (“Netzer Hasharon”). On the Acquisition Date, certain assets, liabilities and employees of IMI, mainly
dealing with the manufacture of heavy rockets propulsion, which were not acquired by the Company, were
transferred to another GOI-owned entity, "Tomer - A Government-Owned Company Ltd.” (“Tomer”).
4. Purchase Price
The purchase price for the Acquisition is approximately $495 million (NIS 1.8 billion) (the “Purchase Price”).
Approximately $106 million of the Purchase Price is payable in deferred payments, with approximately $54
million to be paid by the Company on December 31, 2020 and approximately $52 million to be paid on
December 29, 2022. An additional payment of up to approximately $27 million (NIS 100 million) is to be
paid by the Company, contingent upon IMI meeting certain agreed performance goals. An agreed upon portion
of the Purchase Price was transferred by the Seller to cover monetary liabilities of IMI existing on the
Acquisition Date. Some monetary amounts mentioned in this Exhibit are linked to various indexes, to be paid
according to certain milestones defined in the Acquisition Agreements.
5. “As Is” Transaction
Due to the tender requirements for the Privatization, the sale was essentially an “as is” purchase, with the
Seller providing very limited representations.
II. Major Agreements and Understandings Related to the Acquisition
The agreements and understandings relating to the Acquisition comprise two GOI decisions relating to the Privatization;
several agreements between GOI entities and branches and IMI; several agreements between GOI entities and branches
and the Company; several agreements between IMI and Netzer Hasharon and between IMI and Tomer; and several
agreements between IMI and the employees trade union (collectively referred to as the “Acquisition Agreements”).
The following is a summary of the major provisions under the Acquisition Agreements that were not described above:
1. Arrangements Relating to Real Estate
IMI executed several agreements with the Israel Land Authority (the “ILA”) granting IMI the rights described in
items A. through F. below:
A. The right to use IMI’s Israeli sites and facilities in Ramat Hasharon, Tirat-Hacarmel, Nazareth Illit and Ramat
Beka.
B. The right to long-term lease authorization (49 years + 49 years) and usage at the Ramat Beka and Nazareth Illit
sites, which will come into effect upon resolving certain planning and zoning matters.
C. The Ramat Hasharon Arrangement:
IMI was granted temporary use permits for the Ramat Hasharon site until December 2023, by which date IMI
is obligated to evacuate the site, except for 80 dunams (approximately 20 acres), in which it was granted longer
lease rights. In consideration for the evacuation of the Ramat Hasharon site, IMI will receive from the ILA a
total amount of approximately $365 million (NIS 1.3 billion).
D. The Tirat-Hacarmel Arrangement:
IMI is obligated to evacuate the Tirat-Hacarmel site and transfer applicable activities and facilities to an existing
Company site in Yokneam, Israel. IMI has the right to continue operating at the Tirat-Hacarmel site until building
rights in Yokneam will be granted and implemented. In consideration for the evacuation of the Tirat-Hacarmel
site, IMI will receive from the ILA reimbursement of actual expenses of the Company related to the relocation
in a total amount of up to approximately $53 million (NIS 200 million).
E. Transferring Activities and Construction in Ramat Beka:
The Ramat Beka site, situated in southern Israel, contains approximately 50,000 dunams (approximately 12,500
acres). According to the Acquisition Agreements, facilities and activities in Ramat Hasharon will be relocated
and transferred to Ramat Beka. In order to enable the relocation of facilities and the future construction of
manufacturing capabilities in Ramat Beka, the GOI has been pursuing a zoning plan for the site. In consideration
for the relocation to Ramat Beka the ILA will pay IMI a total amount of up to approximately $133 million
(approximately NIS 500 million) to be paid according to milestones defined in the Acquisition Agreements.
F. Givon and Area 209 sites:
The IMOD provided IMI with a long-term use permit in defined parts of the Givon and Area 209 sites.
2. Agreement with the Israeli Ministry of Defense
The Company signed an agreement with the Israeli Ministry of Defense (“IMOD”) addressing the following
issues:
A. Rights to use Area 209.
B. Adjustments to prior undertakings relating to the relocation of production lines from Ramat Hasharon to
Ramat Beka.
C. Adjustments to prior understandings regarding Tomer (see “Arrangements Relating to Tomer” below).
D. Arrangements applicable to future orders of the IMOD to be placed with IMI.
3. Handling Environmental Issues Related to the Acquisition
As part of the Acquisition Agreements, an environmental liability sharing agreement was signed prior to the
Acquisition Date, between Israel Military Industries Ltd. (now Netzer Hasharon) and IMI. The main principle
of this agreement is that Netzer Hasharon will be liable for environmental liabilities arising from activities or
omissions that took place at IMI sites prior to January 1, 2016 (including the activities and the omissions of
the Israel Military Industries GOI unit before 1990).
4. Maintaining the State’s Essential Interests in IMI and Ashot
Essential Interests Orders relating to IMI and Ashot were published in the Israeli official gazette (the “Orders”).
The Orders define areas of activity in which the State of Israel has an essential interest in maintaining and
preserving IMI’s and Ashot’s capabilities and establishes certain commitments in order to ensure continuous
supply of certain product lines. In addition, the Orders establish certain limitations on transferring control in
IMI and Ashot. According to the GOI authorization, signed by the Company and the Company’s controlling
shareholder Mr. Michael Federmann, transfer of control in IMI and Ashot to any other person or entity will
require the prior approval of certain Israeli government ministers.
5. Arrangements Regarding Employees’ Rights
A. Continuation of Collective Bargaining Agreements.
IMI and Ashot employed approximately 2,960 employees as of December 31, 2018. Except for
approximately 80 senior employees, all of the employees were employed under various collective bargaining
agreements.
B. Special Retirement Rights.
(1) Approximately 930 employees will be entitled to special retirement rights in the event their employment
is terminated by IMI or by Ashot after the Acquisition Date. Such retirement rights include the right
to receive a monthly allowance during the early retirement period, the right to receive an additional
monthly allowance after legal retirement age and certain one-time severance payments on the retirement
date.
(2) The Company paid a total amount of approximately $175 million (out of the Purchase Price) to a
secured fund designated to ensure payments for the special retirement rights of approximately 680
employees (the "Retirement Safety Net"). The Retirement Safety Net funds were transferred to a special
purpose company (“SPC”), whose shares are held by a trustee appointed by IMI and the employees’
trade union for the purpose of maintaining and handling these funds. The Retirement Safety Net funds
were transferred to the SPC under two loan agreements whereby IMI loaned the funds to the SPC, and
the loans will be repaid by the SPC by covering the retirement costs payable by IMI. According to a
secured loan agreement signed between IMI and the SPC, the obligation to repay the loaned Retirement
Safety Net funds is secured by a guarantee issued to the SPC by an insurance company. The guarantee
amounts are reduced on a periodic basis.
(3) The collective bargaining agreements also define special retirement rights that will apply to certain
employees whose employment will be terminated by IMI due to the relocation of the Ramat Hasharon
and Tirat-Hacarmel facilities.
(4) Senior employees who are not subject to the collective bargaining agreements will be entitled to special
retirement rights defined in a separate arrangement. The GOI undertook to indemnify the Company
with respect to certain payments which IMI may be required to pay to senior employees in connection
with a privatization grant.
6. Arrangements Relating to Tomer
Understandings relating to Tomer in the following areas were incorporated into the Acquisition Agreements:
A. IMI and Tomer established an exclusive supplier-customer and non-competition relationship, for a period
of thirteen (13) years after the Acquisition Date, that will exist between the parties concerning development,
manufacture and delivery of rocket propulsion engines other than in connection with the sale of light
propulsion products and services to Israel Aerospace Industries Ltd. and Rafael Advanced Defense Systems
Ltd.
B. Transfer of intellectual property and use of know-how on light rocket propulsion, including the method
and terms and conditions for transferring such know-how from IMI to Tomer.
C. Transfer of intellectual property rights and use of know-how on heavy rocket propulsion and shared know-
how, including the method and terms and conditions for transferring ownership over know-how on heavy
propulsion from IMI to Tomer.
D. "Cohabitation" between IMI and Tomer at the Givon and Area 209 sites, and maintaining continuous good
management of such cohabitation.
E. The prices and payment terms of light propulsion products and services, and the additional services included
in the cooperation agreement that IMI will purchase from Tomer.
F. Tomer’s undertaking to purchase certain materials and products exclusively from IMI.
Major Operating Subsidiaries of Elbit Systems Ltd.
EXHIBIT 8
Exhibit 12.1
Certification by Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Bezhalel Machlis, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Elbit Systems Ltd.
Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report.
Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this annual report.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
March 19, 2019
By:
/S /BEZHALEL MACHLIS
Bezhalel Machlis
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 12.2
Certification by Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Joseph Gaspar, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 20-F of Elbit Systems Ltd.
Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report.
Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this annual report.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the period covered by this annual report that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting.
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
March 19, 2019
By:
/S / JOSEPH GASPAR
Joseph Gaspar
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
In connection with the annual report on Form 20-F of Elbit Systems Ltd. (the “Company”) for the
year ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned, Bezhalel Machlis, Chief Executive Officer (Principal Executive Officer) of
the Company, certifies, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-
Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the
financial condition and result of operations of the Company.
March 19, 2019
By:
/S / BEZHALEL MACHLIS
Bezhalel Machlis
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
In connection with the annual report on Form 20-F of Elbit Systems Ltd. (the “Company”) for the
year ended December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), the undersigned, Joseph Gaspar, Chief Financial Officer (Principal Financial and
Accounting Officer) of the Company, certifies, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec.
906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the
financial condition and result of operations of the Company.
March 19, 2019
By:
/S / JOSEPH GASPAR
Joseph Gaspar
Chief Financial Officer
(Principal Financial and Accounting
Officer)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.1
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-223785)
pertaining to the 2018 Equity Incentive Plan for Executive Officers of Elbit Systems Ltd. of our reports
dated March 19, 2019, with respect to the consolidated financial statements and schedule of Elbit Systems Ltd. and
the effectiveness of internal control over financial reporting of Elbit Systems Ltd. included in this Annual Report on
Form 20-F for the year ended December 31, 2018.
By:
/s/ Kost Forer Gabbay & Kasierer
Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
Tel-Aviv, Israel, March 19, 2019
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.2
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-223785) of
Elbit Systems Ltd. of our report dated March 15, 2019 relating to the financial statements of IMI Systems Ltd., which appears
in this Form 20-F.
By:
/s/ Kesselman & Kesselman
Kesselman & Kesselman
A member firm of
PricewaterhouseCoopers
International Limited
Tel-Aviv, Israel, March 19, 2019
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 15.3
We consent to the incorporation by reference in the registration statement (No. 333-223785) on Form S-8 of Elbit
Systems Ltd. of our report dated March 12, 2019, with respect to the consolidated balance sheet of Ashot Ashkelon Industries
Ltd. as of December 31, 2018, and the related consolidated statements of income, shareholders' equity, and cash flows for the
month ended December 31, 2018, and the related notes (collectively, the "consolidated financial statements"), not included
herein, which report appears in the Annual Report on Form 20-F of Elbit Systems Ltd. dated March 19, 2019.
By:
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Israel)
A member firm of KPMG International
Tel-Aviv, Israel, March 19, 2019