SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the Month of March 2004
-----------------------
ELBIT SYSTEMS LTD.
(Translation of Registrant's Name into English)
Advanced Technology Center, P.O.B. 539, Haifa 31053, Israel
(Address of Principal Corporate Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
|X| Form 20-F |_| Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): |_|
NOTE: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a
Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): |_|
NOTE: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a
Form 6-K submitted to furnish a report or other document that the registrant
foreign private issuer must furnish and make public under the laws of the
jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
|_| Yes |X| No
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule
12g3-2(b): 82-______________
Attached hereto as Exhibit 1 and incorporated herein by reference is
the Registrant's press release, dated March 10, 2004.
Attached hereto as Exhibit 2 and incorporated herein by reference is
the Registrant's Management Report with respect to the results of operations of
the Registrant for the year ended December 31, 2003.
Attached hereto as Exhibit 3 and incorporated herein by reference is
the Registrant's consolidated audited financial statements for the year ended
December 31, 2003.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELBIT SYSTEMS LTD.
(Registrant)
By: /s/ Ilan Pacholder
---------------------------------
Name: Ilan Pacholder
Title: Corporate Secretary
Dated: March 10, 2004
EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
----------- -----------
1. Press Release, dated March 10, 2004.
2. Management Report.
3. Financial Statements.
EXHIBIT 1
---------
[GRAPHIC OMITTED]
EARNINGS RELEASE
----------------
ELBIT SYSTEMS REPORTS FOURTH QUARTER
------------------------------------
AND YEAR-END RESULTS FOR 2003
-----------------------------
INCREASED REVENUES, NET EARNINGS AND ORDER BACKLOG IN 2003
o CONSOLIDATED REVENUES - $898 MILLION
o CONSOLIDATED NET EARNINGS - $45.9 MILLION
o BACKLOG OF ORDERS - $1.75 BILLION
HAIFA, ISRAEL, MARCH 10, 2004 - ELBIT SYSTEMS LTD. (THE "COMPANY") (NASDAQ:
ESLT), the international defense electronics company, today reported its
consolidated results for the fourth quarter and year-ended December 31, 2003.
CONSOLIDATED REVENUES FOR THE YEAR ENDED DECEMBER 31, 2003 increased by 8.5% to
$898 million from $827.5 million in 2002.
CONSOLIDATED REVENUES FOR THE FOURTH QUARTER OF 2003 increased by 10.3% to
$262.8 million from $238.3 million in the corresponding quarter in 2002.
CONSOLIDATED NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2003 were $45.9
million compared to $45.1 million in 2002. Diluted earnings per share in 2003
were $1.14 as compared with $1.13 in 2002.
CONSOLIDATED NET EARNINGS FOR THE FOURTH QUARTER OF 2003 were $12.5 million
compared to $13.1 million in the same period in 2002. Diluted earnings per share
for the fourth quarter of 2003 were $0.31 as compared with $0.33 for the fourth
quarter of 2002.
The employees' phantom stock option plan non-cash expense (after tax) for the
fourth quarter and the year ended December 31, 2003 was $1.1 million and $3.8
million, respectively.
Excluding the effect of the employees' phantom stock option plan, the Company's
consolidated net earnings for the year ended December 31, 2003 were $49.7
million and the diluted EPS was $1.24.
In 2002, the Company's financial results were effected by a $9.8 million (before
tax) non-recurring charge due to an agreement reached with the Israeli Office of
the Chief Scientist ("OCS"), and a $2.8 million reduction in tax expenses due to
adjustments for prior years.
Excluding the effect of the above events and the non-cash effect of the
employees' phantom option plan, consolidated net earnings in 2002 were $49.4
million, and the diluted earnings per share were $1.24.
Excluding the effect of the phantom stock option plan, the Company's
consolidated net profit for the fourth quarter of 2003 was $13.6 million and the
fully diluted EPS was $0.34, as compared to $13.1 million and $0.33 in the
fourth quarter of 2002.
GROSS PROFIT FOR THE YEAR ENDED DECEMBER 31, 2003, was $224.4 million, as
compared with gross profit of $222.1 million in 2002.
Excluding the effect of the employees' phantom stock option plan, gross profit
in the year ended December 31, 2003 was $227 million. Gross profit for the year
ended December 31, 2002, excluding the effect of the OCS agreement and the
phantom stock option plan, was $231.4 million.
GROSS PROFIT FOR THE FOURTH QUARTER OF 2003 was $54.1 million, as compared with
gross profit of $67.2 million in the fourth quarter of 2002.
Excluding the effect of the employees' phantom stock option plan, gross profit
in the fourth quarter of 2003 was $54.8 million as compared to $67.2 million in
the fourth quarter of 2002.
The Company's gross profit margin in the fourth quarter of 2003 was affected
mainly by its ongoing involvement in cutting edge engineering projects in the
areas of aerial reconnaissance, space-based electro-optic payloads and advanced
airborne systems that required investment of increased costs in order to achieve
project milestones. In addition, the gross profit was negatively impacted by the
increase in the exchange rate of the New Israeli Shekel against the U.S. dollar.
The impact of the reduction in gross profit on net earnings was partially offset
by the Company's share in earnings of affiliates operating in the Company's core
business areas, such as electro-optics and airborne systems, that generated
increased profits.
The Company produced operating cash flow of $91.4 million in 2003.
THE COMPANY'S BACKLOG OF ORDERS as of December 31, 2003 reached $1,752 million
as compared with $1,689 million at the end of 2002. 63% of the backlog relates
to orders outside of Israel, and approximately 80% of the Company's backlog as
of December 31, 2003 is scheduled to be performed during 2004 and 2005.
The President and CEO of Elbit Systems, Joseph Ackerman, commented: "We are
pleased to report a year in which our revenues, net profit and backlog of orders
increased. We believe that these numbers reflect our technological and marketing
capabilities, as well as our ability to adapt to challenging market conditions.
The results were achieved in part thanks to the fruits of our investments in
core technology businesses in affiliated companies that
contributed to the Company's profitability. We shall continue to work diligently
to grow the Company's revenues and improve its profitability."
The Board of Directors has declared a dividend of $0.11 per share for the fourth
quarter of 2003. The dividend will be paid on April 19, 2004, net of taxes and
levies, at the rate of 19%. The record date of the dividend is April 7, 2004.
The total dividend to be paid for 2003 is $0.40 per share.
CONFERENCE CALL
Elbit Systems cordially invites you to participate in our interactive conference
call on Wednesday, March 10, 2004 at 10:30 AM ET. To take part in the conference
call, please dial 1-866-500-4964 (U.S. and Canada) or 1-866-500-4953 (U.S.) or
0-800-917-4256 (UK) or +972-3-925-5910 (International) a few minutes before the
10:30 AM ET start time.
For your convenience, an instant replay will be available starting at 12:30 PM
ET the same day until Sunday, March 14, 2004 at 10:30 AM ET. The replay
telephone number is 1-877-332-1104 (U.S.), 0 800 917 4256 (UK), or +
972-3-925-5945 (International).
This call will be broadcasted live on www.elbitsystems.com
ABOUT ELBIT SYSTEMS LTD.
Elbit Systems Ltd. is an international defense Electronics Company engaged in a
wide range of defense-related programs throughout the world, in the areas of
aerospace, ground and naval systems, command, control, communications,
computers, intelligence, surveillance and reconnaissance (C4I ISR) and advanced
electro-optic technologies. The Company focuses on the upgrading of existing
military platforms and developing new technologies for defense applications. For
further information, please visit the Company web site at www.elbitsystems.com
COMPANY CONTACT: IR CONTACT:
Ilan Pacholder, V.P. Finance Ehud Helft / Kenny Green
Elbit Systems Ltd Gelbart Kahana
Tel: +972-4 831-6632 Tel: 1-866-704-6710
Fax: +972-4 831-6659 Fax: + 972 - 3 - 607 - 4711
E-mail: pacholder@elbit.co.il E-mail: KENNY@GK-BIZ.COM
E-mail: EHUD@GK-BIZ.COM
STATEMENTS IN THIS PRESS RELEASE WHICH ARE NOT HISTORICAL DATA ARE
FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
OR OTHER FACTORS NOT UNDER THE COMPANY'S CONTROL, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM THE RESULTS, PERFORMANCE OR OTHER EXPECTATIONS IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DETAILED IN THE COMPANY'S PERIODIC FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
(FINANCIAL TABLES TO FOLLOW)
ELBIT SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousand of US Dollars)
December 31 December 31
2003 2002
--------- ---------
AUDITED AUDITED
--------- ---------
ASSETS
------
Current Assets:
Cash and short term deposits 76,846 77,930
Trade receivable and others 251,644 268,471
Inventories, net of advances 249,225 220,399
--------- ---------
Total current assets 577,715 566,800
Affiliated Companies & other Investments 38,223 33,051
Long-term receivables & others 78,565 91,569
Fixed Assets, net 229,221 202,961
Other assets, net 100,012 105,769
--------- ---------
1,023,736 1,000,150
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities 379,017 360,780
Long-term liabilities 188,525 223,292
Minority Interest 4,115 4,717
Shareholder's equity 452,079 411,361
--------- ---------
1,023,736 1,000,150
========= =========
ELBIT SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousand of US Dollars, except for per share amounts)
For the Year Ended Three Months Ended
December 31 December 31
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Audited Unaudited
Revenues 897,980 827,456 262,757 238,313
--------
Cost of revenues 673,561 605,313 208,677 171,097
Gross Profit 224,419 222,143 54,080 67,216
-------- -------- -------- --------
Research and development, net 54,919 57,010 11,913 17,333
-----------------------------
Marketing and selling 69,943 65,691 19,247 18,446
General and administrative 46,077 41,651 12,153 10,864
-------- -------- -------- --------
Total operating expenses 170,939 164,352 43,313 46,643
-------- -------- -------- --------
Operating income 53,480 57,791 10,767 20,573
Financial expenses, net (4,870) (3,035) (1,403) (2,343)
-----------------------
Other income (expenses), net 903 (462) 571 62
-------- -------- -------- --------
Income before income taxes 49,513 54,294 9,935 18,292
Provisions for income taxes 11,334 9,348 834 2,539
--------------------------- -------- -------- -------- --------
38,179 44,946 9,101 15,753
Company's share of partnerships and affiliated 7,209 675 3,271 (1,879)
----------------------------------------------
Companies income (loss), net
Minority rights 557 (508) 101 (747)
-------- -------- -------- --------
Net income 45,945 45,113 12,473 13,127
======== ======== ======== ========
Basic Earnings per share 1.18 1.17 0.32 0.34
======== ======== ======== ========
Diluted net earnings per share 1.14 1.13 0.31 0.33
======== ======== ======== ========
=========================================================================================================
Net earnings excluding phantom plan effect in 2003
and 2002, non-recurring OCS charge and tax
adjustment in 2002 49,738 49,412 13,556 13,129
======== ======== ======== ========
Diluted earnings per share excluding
phantom plan effect in 2003 and 2002,
non-recurring OCS charge and tax
adjustment in 2002 1.24 1.24 0.34 0.33
======== ======== ======== ========
EXHIBIT 2
---------
ELBIT SYSTEMS LTD.
------------------
MANAGEMENT'S REPORT
-------------------
FOR THE YEAR ENDED DECEMBER 31, 2003
------------------------------------
THIS REPORT SHOULD BE READ TOGETHER WITH THE AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES OF ELBIT SYSTEMS LTD. ("ELBIT
SYSTEMS" AND TOGETHER WITH ITS SUBSIDIARIES, THE "COMPANY" OR THE
"GROUP"), FOR THE YEAR ENDED DECEMBER 31, 2003 AND THE COMPANY'S FORM
20-F FOR THE YEAR ENDED DECEMBER 31, 2002, FILED BY THE COMPANY WITH
THE U.S. SECURITIES AND EXCHANGE COMMISSION ("SEC") AND WITH THE
ISRAELI SECURITIES AUTHORITY.
FORWARD LOOKING STATEMENTS WITH RESPECT TO THE COMPANY'S BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN THIS DOCUMENT ARE
SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD LOOKING
STATEMENTS, INCLUDING, BUT NOT LIMITED TO, PRODUCT DEMAND, PRICING,
MARKET ACCEPTANCE, CHANGING ECONOMIC CONDITIONS, RISKS IN PRODUCT AND
TECHNOLOGY DEVELOPMENT, THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES
AS WELL AS CERTAIN OTHER RISK FACTORS WHICH ARE DETAILED FROM TIME TO
TIME IN THE COMPANY'S SEC FILINGS.
A. EXECUTIVE OVERVIEW
BUSINESS DESCRIPTION
Elbit Systems operates in the area of upgrading existing airborne,
ground and naval defense platforms and is engaged in projects involving
the design, development, manufacture and integration of advanced
integrated defense systems, electronic systems, electro-optic systems
and products and software intensive programs and products for the
defense and homeland security sectors. In addition, the Company
provides support services for such platforms, systems and products.
The Company is engaged in leading projects in Israel and worldwide, in
areas such as air, ground and naval Command, Control, Communication,
Computers, Intelligence, Surveillance and Reconnaissance ("C4ISR")
systems, digital maps, night vision systems, pilot helmet mounted
systems, display and data processing systems, unmanned air vehicles
("UAVs"), computerized simulators, communication systems, thermal
imaging products, laser products, optical systems for space
applications, airborne reconnaissance systems, optic communication
systems and products, security systems and products, surveillance
products and systems and electric drive systems.
The Company provides a wide range of logistic support services,
including operation of pilot training services for the Israeli Air
Force on a private financing initiative ("PFI") basis. Several of the
Group's companies also provide advanced engineering and manufacturing
services to various customers, utilizing their significant
manufacturing capabilities. The Company often cooperates with
industries in Israel and in various other countries.
The Company tailors and adapts its technologies, integration skills,
market knowledge and battle-proven systems to each customer's
individual requirements in both existing and new platforms. By
upgrading existing platforms with advanced electronic and electro-optic
technologies, the Company provides customers with cost-effective
solutions, and its customers are able to improve their technological
and operational capabilities within limited defense budgets.
1
The Company operates in a competitive environment for most of its
projects, systems and products. Competition is based on product and
program performance, price, reputation, reliability, maintenance costs
and responsiveness to customer requirements. This includes the ability
to respond to rapid changes in technology. In addition, its competitive
position sometimes is affected by specific requirements in particular
markets.
FINANCIAL HIGHLIGHTS
--------------------
The Company's revenues increased by 8.5% and reached $898 million in
2003. The main increase in revenues was in the armored vehicles systems
area of operation.
Net earnings in 2003 were $45.9 million and the diluted earnings per
share were $1.14, as compared to 45.1 million and $1.13 in 2002. The
net earnings and net earnings per share were effected by a non-cash
expense related to its phantom stock option plan in 2003 and 2002, and
non-recurring OCS change and tax adjustment in 2002. Excluding these
effects, net earnings and net earnings per share in 2003 were $49.7
million and $1.24, respectively, as compared to $49.4 million and $1.24
in 2002. This increase in net earnings and diluted earning per share
was achieved despite a decrease in the gross profit margin from 26.8%
in 2002 to 25.0% in 2003.
The reduction in gross profit margin resulted primarily from certain
significant engineering projects that required investment of increased
time and costs in order to achieve project milestones. These projects
represent cutting edge technology and were mainly in the areas of
aerial reconnaissance, space-based electro-optic payloads and advanced
airborne systems. In addition, the Company's gross profit in 2003 was
negatively impacted by the increase in the value of the New Israeli
Shekel ("NIS") against the U.S. dollar (See "Derivatives and Hedges"
below).
Despite the decrease in the Company's gross profit margin in the fourth
quarter of 2003, the Company believes that its average annual gross
profit margin for 2004 will not be materially different from its annual
gross profit margin in 2003, with possible quarterly variations.
The impact of the reduction in gross profit on net earnings was
partially offset by the Company's share of earnings of affiliates. Over
the last several years, substantial core business activities have been
conducted through affiliates owned jointly with other companies. The
profits from such activities are accounted for under the equity method.
During 2003, these activities, which were mainly in core business areas
of the Company such as electro-optics and airborne systems, generated
increased profits, which contributed significantly to the Company's
profit. (See "Company's Share in Earnings of Affiliated Entities"
below).
The Company's backlog as of December 31, 2003 reached $1.75 billion and
the Company's cash flow generated from operations in 2003 was $91.4
million.
B. MARKET TRENDS
-------------
Trends in the defense electronics and homeland security markets in
which the Company operates have been impacted by the nature of recent
conflicts and terrorism activities through the world. Lessons learned
in Operation Iraqi Freedom, Afghanistan, and the attacks of September
11, 2001, among other events, have increased the focus of defense
forces on low intensity conflicts and homeland security.
2
In the defense electronics market, there is an increasing demand for
products and systems in the areas of C4ISR. Accordingly, while the
Company continues to perform platform upgrades, more emphasis is being
placed on C4ISR, including information systems, intelligence gathering,
situational awareness, precision guidance, all weather and day/night
operations, border and perimeter security, UAV's, space and satellite
based defense capabilities and homeland security systems.
The Company believes that its core technologies and abilities will
enable it to take advantage of many of these emerging trends, as well
as to continue to participate in the "Current Force" legacy operations
of its customers.
In recent years consolidations in the defense industry have affected
competition. This has decreased the number but increased the relative
size and resources of the Company's competitors. The Company adapts to
evolving market conditions by adjusting our business strategy to
changing defense market conditions. We also anticipate continued
competition in defense markets due to declining defense budgets in many
countries.
The Company believes in its ability to compete on the basis of its
systems development and technological expertise, combat-proven
performance and policy of offering customers overall solutions to
technological, operational and financial needs.
C. BACKLOG OF ORDERS
-----------------
The Company's backlog of orders as of December 31, 2003 reached $1,752
million, of which 63% were for orders outside of Israel. The Company's
backlog as of December 31, 2002 was $1,689 million, out of which 62%
were for orders outside of Israel.
Approximately 80% of the Company's backlog as of December 31, 2003 is
scheduled to be performed during 2004 and 2005. The majority of the 20%
balance is scheduled to be performed in 2006 and 2007.
D. OPERATING SUBSIDIARIES AND AFFILIATED ENTITIES
----------------------------------------------
o Elop Electro-Optics Industries Ltd. ("El-Op") - a wholly-owned
subsidiary registered in Israel, is engaged in the field of
advanced electro-optical products for defense, homeland security
and civil applications. El-Op's main areas of activity include
development and production of thermal imaging products, laser
products, optical systems for space applications, airborne
reconnaissance systems, optical communications systems, fire
control systems for combat vehicles, homeland security products
and other systems for defense applications.
o EFW Inc. ("EFW") - a wholly-owned subsidiary registered in the
United States, serves as the base for the Group's activities in
the United States, mainly in the area of development, production
and maintenance of advanced defense products and systems.
3
o Vision Systems International LLC ("VSI") - an affiliated company
in the United States, owned 50% each by EFW and Rockwell Collins
Inc., is engaged in the area of helmet mounted systems primarily
for fighter aircraft. o Cyclone Aviation Products Ltd.
("Cyclone") - a wholly-owned subsidiary registered in Israel,
provides logistic support and maintenance services for aircraft
and helicopters and manufactures structure components and
sub-assemblies for aircraft.
o Silver Arrow LP - a wholly-owned limited partnership registered
in Israel, is engaged in the business of UAV systems and
products.
o Ortek Ltd. ("Ortek") - a wholly-owned subsidiary registered in
Israel, is engaged mainly in the area of security products and
systems and night vision equipment.
o Kinetics Ltd. ("Kinetics") - a 51% owned subsidiary registered in
Israel, is involved mainly in the development and production of
systems and components for combat vehicles.
o Semi-Conductor Devices ("SCD") - an Israeli affiliated
partnership, owned 50% each by the Company and Rafael Armaments
Development Authority Ltd. ("Rafael"), is engaged in the
development and production of infrared detectors and laser
diodes.
o Opgal Optronic Industries Ltd. ("Opgal") - an Israeli affiliated
company, owned 50.1% by the Company and 49.9% by Galram
Technologies Ltd., a wholly owned subsidiary of Rafael, is
engaged mainly in the area of thermal imaging systems for
commercial applications.
o Optronics Instruments & Products N.V. ("OIP") - a wholly-owned
subsidiary registered in Belgium, is involved mainly in
development, manufacturing and support of electro-optical
products for defense and space markets. The results of OIP's
operations have been included in the Company's results from the
third quarter of 2003.
o The Company has holdings, directly and indirectly, in several
relatively small companies in various countries. These companies
are engaged mainly in the manufacturing, marketing and servicing
of defense avionics and electronics as well as defense related
software.
o The Company also has holdings, directly and indirectly, in
several non-defense technology spin-off companies whose
activities are based on technologies that were developed by the
Company. The spin-off companies are involved primarily in the
areas of medical equipment, optical communications and space
satellites.
The Company evaluates investments in affiliates, partnerships and other
companies, and when relevant factors indicate other than temporary
decline in the fair value of the investments below their carrying
value, the Company adjusts the investment to the estimated fair value.
The value of these companies is subject to ongoing changes resulting
from their business conditions.
4
E. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
The Company's significant accounting policies are described in Note 2
to the audited consolidated financial statements included in its annual
report on Form 20-F for the year ended December 31, 2002.
The Company's results of operations and financial condition are based
on the preparation of consolidated financial statements in conformity
with generally accepted accounting principles in the U.S. ("U.S.
GAAP"). The preparation of the consolidated financial statements
requires management to select accounting policies for critical
accounting areas as well as estimates and assumptions that affect the
amounts reported in the consolidated financial statements. Significant
changes in assumptions and/or conditions and changes in critical
accounting policies could materially impact the Company's operating
results and financial condition.
The most critical accounting policy applicable to the Company relates
to revenue recognition based on SOP 81-1 "Accounting for Performance of
Construction Type and Certain Production Type Contracts, which is
relevant to most of its revenues.
Under SOP 81-1, the Company has adopted the "percentage of completion"
accounting method. Under this method, the Company recognizes revenues
and profits on long-term fixed price contracts generally based on the
ratio of costs incurred to estimates of costs to be incurred for the
total contract. Under this approach, the Company compares estimated
costs to complete an entire contract to total revenues for the term of
the contract in order to arrive at an estimated gross margin percentage
for each contract. The updated estimated gross margin percentage is
applied, and the current period gross profit is the difference between
the cumulative earned gross profit and gross profit reported for prior
periods.
Management reviews these estimates periodically and the effect of any
change in the estimated gross margin percentage for a contract is
reflected in cost of sales in the period in which the change becomes
known. If increases in projected costs to complete a contract are
sufficient to create a loss in completing the contract, the entire
estimated loss is charged to cost of sales in the period the loss first
becomes known.
A number of internal and external factors affect the Company's cost
estimates, including labor rates, estimated future material prices,
revised estimates of uncompleted work, efficiency variances, linkage to
indices and exchange rates, customer specifications and requirements
and testing requirement changes. If any of the above factors were to
change, or if different assumptions were used in the application of
this and other accounting policies, it is likely that materially
different amounts would be reported in the Company's consolidated
financial statements.
F. IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
--------------------------------------------------
Consistent with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," goodwill is not
amortized, and is tested at least annually for impairment. According to
SFAS 142, an impairment loss will be recognized when the carrying value
of the goodwill is not recoverable and exceeds its fair value.
The methods commonly used to value a closely held company are the
Income, Market and Cost approaches. The Company's subsidiaries' fair
market value was estimated using two valuation methodologies: the
Income Approach and Market Approach.
5
As of December 31, 2003, the Company's goodwill amounted to $32.6
million. The Company tested its goodwill as of December 31, 2003, and
concluded that no assessment of impairment loss was necessary.
Consistent with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company evaluates long-lived assets
for impairment and assesses their recoverability based upon anticipated
future cash flows. As of December 31, 2003, the Company's long-lived
assets amounted to $296.7 million, including $67.4 million in
intangible assets, and the Company concluded that no impairment loss
was necessary.
Should future impairment tests made by the Company determine that
impairment has occurred in the value of the Company's goodwill or
long-lived assets, such impairment may have a material effect on the
financial results of the Company in the period in which the impairment
is determined.
G. SARBANES-OXLEY ACT
------------------
According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, the
Company is required to include in its annual report for 2005 an
assessment, as of the end of the fiscal year, of the effectiveness of
its internal controls and procedures for financial reporting.
During 2003, the Company took steps to assure compliance of its
documentation and controls over financial reporting to the guidelines
stipulated in the Sarbanes-Oxley Act. The Company plans to continue
with these steps during 2004.
H. NEW ACCOUNTING STANDARDS
------------------------
In 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 provides a new framework
for identifying Variable Interest Entities ("VIE's") and determining
when a company should include the assets, liabilities, non-controlling
interests and results of activities of a VIE in the Company's financial
statements.
The Company is currently evaluating the effects of this interpretation
in respect of its investments. It is possible that some of the
Company's unconsolidated investments may be considered a VIE in
accordance with the interpretation. Accordingly, if it is determined
that the Company is the primary beneficiary of a VIE, the Company will
be required to consolidate the financial statements of such VIE, with
in the Company's financial statements commencing in the first quarter
of 2004.
I. EMPLOYEE STOCK OPTION PLAN
--------------------------
The change in the Company's share price affected the Company's
financial results due to the impact of the employee stock option plan
adopted in 2000. The program was comprised of options for 5 million
shares, divided into options to purchase up to 2.5 million shares and
an additional 2.5 million "phantom" options. The phantom options grant
the option holders a
6
number of shares corresponding to the benefit component of the options
exercised, as calculated on the exercise date, in consideration for
their par value only, and are considered as a variable option plan. The
actual number of options granted as of December 31, 2003 was
approximately 4.5 million.
Under U.S. GAAP, the total compensation is computed periodically
according to the change in the share price and amortized as
compensation expense, or income, based on the vesting period of the
options. The effect is allocated mainly to the Company's cost of goods
sold and general and administrative expenses, with smaller amounts
allocated to R&D and sales and marketing expenses. The amounts of the
expenses related to the stock option compensation are included in the
Non-U.S. GAAP disclosure.
J. OFF BALANCE SHEET AND OTHER LONG-TERM ARRANGEMENTS AND COMMITMENTS
------------------------------------------------------------------
In connection with long-term projects in certain countries, the Company
and certain subsidiaries undertook to use their respective best efforts
to make or facilitate purchases or investments in those countries at
certain percentages (typically up to 100%) of the amount of the
specific contract. The Company's obligations to make or facilitate
third parties making such investments and purchases are subject to
commercial conditions in the local market, usually without a specific
financial penalty. The maximum aggregate undertaking as of December 31,
2003 amounted to $630 million to be performed over a period of up to 11
years.
The Company and certain Israeli subsidiaries partially finance their
research and development expenditures under programs sponsored by the
Office of the Chief Scientist in Israel ("OCS") for the support of
research and development activities conducted in Israel. At the time
the participations were received, successful development of the related
projects was not assured.
In exchange for participation in the programs by the OCS, the Company
and the subsidiaries agreed to pay 2% -5% of total sales of products
developed within the framework of these programs. The obligation to pay
these royalties is contingent on actual sales of the products.
The Company and certain of its subsidiaries are also obligated to pay
certain amounts to the IMOD and others on specific sales including
sales resulting from the development of certain technology.
Future minimum lease commitments of the Group under various
non-cancelable operating lease agreements in respect of premises, motor
vehicles and office equipment as of December 31, 2003 are as follows:
$8.3 million for 2004, $6.1 million for 2005, $5.6 million for 2006,
$5.5 million for 2007 and $5.5 million for 2008 and thereafter.
The Company had, as of December 31, 2003, approximately $399.2 million
in guarantees issued on its behalf by banks, mainly in respect of
advance payment and performance guarantees provided in the regular
course of business.
7
K. ACQUISITIONS DURING 2003
------------------------
During 2003 the Company made the following acquisitions:
o In the first quarter of 2003, the Company purchased 8.33% of the
total outstanding common stock of AeroAstro Inc. ("AAI"), a U.S.
company, in consideration for $1 million. AAI is engaged in
innovative micro and nanospacecraft applications. AAI
manufactures low-cost satellites systems and components, used in
its own spacecraft and for spacecraft development in and outside
the U.S.
o On June 30, 2003, the Company acquired, through El-Op, all of the
outstanding ordinary shares of Optronics Instruments & Products
N.V. ("O.I.P."), a Belgian company, from Delft Instruments N.V.,
in consideration for Euro 1.6 million ($1.8 million) in cash. The
amount paid is equal to the estimated fair value of the net
assets acquired. The acquisition has been accounted under the
purchase method of accounting. The results of O.I.P. activities
are included in the Company's results from the third quarter of
2003.
O.I.Pis based in Belgium and develops, manufactures and supports
electro-optical products, mainly for the defense and space
markets. It employs approximately 50 employees and has
established long-term relationships with customers in Belgium and
other European countries as well as with international customers.
o In the third quarter of 2003, the Company acquired approximately
54% of the outstanding shares of Aero Design Development Ltd.
("AD&D"), an Israeli company, in consideration for $1.4 million
in cash. The acquisition was accounted for by the purchase method
of accounting. AD&D develops and manufactures airborne models and
other engineered products. The results of AD&D activities are
included in the Company's results from the third quarter of 2003.
8
L. SUMMARY OF FINANCIAL RESULTS
----------------------------
The following table sets forth the consolidated statements of
operations of the Company and its subsidiaries for the three-month
periods and years ended December 31, 2003 and December 31, 2002.
For the year For the three months
ended on December 31 ended on December 31
------------------------------------ ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
$ % $ % $ % $ %
------- ----- ------- ----- ------- ----- ------- -----
(In thousands of U.S. dollars except per share data)
Total revenues 897,980 100.0 827,456 100.0 262,757 100.0 238,313 100.0
Cost of revenues 673,561 75.0 605,313 73.2 208,677 79.4 171,097 71.8
------- ----- ------- ----- ------- ----- ------- -----
Gross profit 224,419 25.0 222,143 26.8 54,080 20.6 67,216 28.2
------- ----- ------- ----- ------- ----- ------- -----
Research and development expenses, net 54,919 6.1 57,010 6.9 11,913 4.5 17,333 7.3
Marketing and selling expenses 69,943 7.8 65,691 7.9 19,247 7.3 18,446 7.7
General and administrative expenses 46,077 5.1 41,651 5.0 12,153 4.6 10,864 4.6
------- ----- ------- ----- ------- ----- ------- -----
170,939 19.0 164,352 19.9 43,313 16.5 46,643 19.6
------- ----- ------- ----- ------- ----- ------- -----
Operating profit 53,480 6.0 57,791 7.0 10,767 4.1 20,573 8.6
Financing expenses, net (4,870) (0.5) (3,035) (0.4) (1,403) (0.5) (2,343) (1.0)
Other income (expenses), net 903 0.1 (462) (0.1) 571 0.2 62 -
------- ----- ------- ----- ------- ----- ------- -----
Income before income taxes 49,513 5.5 54,294 6.6 9,935 3.8 18,292 7.7
Provision for income taxes 11,334 1.3 9,348 1.1 834 0.3 2,539 1.1
------- ----- ------- ----- ------- ----- ------- -----
38,179 4.2 44,946 5.5 9,101 3.5 15,753 6.6
Minority interest 557 0.1 (508) (0.1) 101 - (747) (0.3)
Company's share of income (loss) of
affiliated entities 7,209 0.8 675 0.1 3,271 1.2 (1,879) (0.8)
------- ----- ------- ----- ------- ----- ------- -----
Net earnings 45,945 5.1 45,113 5.5 12,473 4.7 13,127 5.5
======= ===== ======= ===== ======= ===== ======= =====
Diluted earnings per share 1.14 1.13 0.31 0.33
======= ======= ======= =======
Weighted average number of shares
used in computation 40,230 39,863 40,327 39,756
======= ======= ======= =======
9
NON -U.S. GAAP DISCLOSURE
-------------------------
The following table sets forth the Company's results of operations
excluding the effect of the Company's phantom stock option plan
("phantom plan") in 2003 and 2002, the non-recurring charge related to
the agreement reached by El-Op with the OCS and the tax adjustment in
2002.
For the year For the three months
ended December 31 ended December 31
--------------------------------- -------------------------------
2003 2002 2003 2002
-------------- --------------- ------------- --------------
$ % $ % $ % $ %
------- ---- ------- ---- ------ ---- ------ ----
(In thousands of U.S. dollars except per share data)
GROSS PROFIT AS REPORTED 224,419 25.0 222,143 26.8 54,080 20.6 67,216 28.2
Non-recurring charge due to OCS agreement - - 9,801 1.2 - - - -
Non-cash expense (income) related to
phantom plan 2,608 0.3 (509) - 745 0.3 1 -
------- ---- ------- ---- ------ ---- ------ ----
Gross profit excluding phantom plan effect in 2003 and
2002, and non-recurring OCS charge in 2002 227,027 25.3 231,435 28.0 54,825 20.9 67,217 28.2
======= ==== ======= ==== ====== ==== ====== ====
OPERATING PROFIT AS REPORTED 53,480 6.0 57,791 7.0 10,767 4.1 20,573 8.6
Non-recurring charge due to OCS agreement - - 9,801 1.2 - - - -
Non-cash expense (income) related to
phantom plan 4,741 0.5 (926) (0.1) 1,354 0.5 2 -
------- ---- ------- ---- ------ ---- ------ ----
Operating profit excluding phantom plan effect in 2003
and 2002, and non-recurring OCS charge in 2002 58,221 6.5 66,666 8.1 12,121 4.6 20,575 8.6
======= ==== ======= ==== ====== ==== ====== ====
45,945 5.1 45,113 5.5 12,473 4.7 13,127 5.5
NET EARNINGS AS REPORTED
Non-recurring charge due to OCS agreement, net - - 7,840 0.9 - - - -
Tax adjustment - - (2,800) (0.3) - - - -
Non-cash expense (income) related to
phantom plan, net 3,793 0.4 (741) (0.1) 1,083 0.5 2 -
------- ---- ------- ---- ------ ---- ------ ----
Net earnings excluding phantom plan effect in 2003 and
2002, non-recurring OCS charge and tax adjustment in 2002 49,738 5.5 49,412 6.0 13,556 5.2 13,129 5.5
======= ==== ======= ==== ====== ==== ====== ====
DILUTED EARNINGS PER SHARE AS REPORTED 1.14 1.13 0.31 0.33
Diluted earnings per share excluding phantom plan effect
in 2003 and 2002, non-recurring OCS charge and tax
adjustment in 2002 1.24 1.24 0.34 0.33
======= ======= ====== ======
10
REVENUES
--------
The Company's consolidated revenues increased by 8.5%, from $827.5
million in 2002 to $898.0 million in 2003.
The following table sets forth the Company's revenue distribution by
areas of operation:
Year ended
--------------------------------------------------------
December 31, 2003 December 31, 2002
----------------------- ------------------------
$ millions % $ millions %
Airborne systems 373.6 41.6 372.8 45.1
Armored vehicle systems 199.8 22.2 135.7 16.4
C4ISR systems 133.9 14.9 122.7 14.8
Electro-optics 140.5 15.7 148.1 17.9
Other (mainly non-defense engineering and
production services) 50.2 5.6 48.2 5.8
---- --- ---- ---
Total 898.0 100.0 827.5 100.0
===== ===== ===== =====
The Company maintained its revenue from airborne systems projects,
resulting mainly from upgrade programs in their final stages and new
projects in Brazil and other countries. Revenues also included new
programs in the U.S. (F-16 and others).
The increase in the armored vehicle systems revenues of approximately
47% was mainly due to revenues from the major projects the Company and
its subsidiaries performed in Israel (Merkava), and in the U.S.
(Bradley and MLRS).
The Company's electro-optics revenues increased in the fourth quarter
of 2003, reflecting sales of advanced electro-optics systems for
airborne and ground applications. In addition, electro-optics products
were incorporated into the Company's airborne and armored vehicles
systems. Accordingly, there was an increase in the Company's
electro-optics business in 2003.
The following table sets forth the Company's distribution of revenues
by geographical regions:
Year ended
--------------------------------------------------------
December 31, 2003 December 31, 2002
----------------------- ------------------------
$ millions % $ millions %
Israel 255.7 28.5 225.7 27.3
United States 332.3 37.0 267.7 32.3
Europe 109.4 12.2 144.9 17.5
Other countries 200.5 22.3 189.2 22.9
----- ---- ----- ----
Total 898.0 100.0 827.5 100.0
===== ===== ===== =====
The Company's sales are primarily to governmental entities and prime
contractors under government defense programs. Accordingly, the level
of the Company's revenues is subject to governmental budgetary
constraints.
11
Revenues are generated mainly from sales to the United States, Israel
and countries in Europe, Latin America and Asia. The recent economic
situation in Israel has created uncertainty with respect to the Israeli
Government general and defense budgets.
Revenues from customers in the United States increased by 24%, from
$267.7 million to $332.3 million. Revenues also increased in other
countries, mainly in Latin America and Asia, while revenues in Europe
declined as deliveries under certain major programs entered final
phases.
The IMOD accounted for 18% of the Company's revenues in 2002 and 21% in
2003. The IMOD was the only customer to exceed 10% of the Company's
revenues in 2003 and 2002.
GROSS PROFIT
------------
The Company's gross profit represents the aggregate results of the
Company's activities and projects and is based on the mix of programs
in which the Company is engaged during the reported period.
Reported gross profit in 2003 was $224.4 million (with gross profit
margin of 25.0%) as compared to $222.1 million (gross profit margin of
26.8%) in 2002.
The Company's cost of goods sold in the year ended December 31, 2003
included $2.6 million in non-cash expenses resulting from its phantom
option plan, as compared to income of $0.5 million in the year ended
December 31, 2002.
Excluding non-cash expenses related to the Company's phantom option
plan, gross profit in the year ended December 31, 2003 was $227.0
million, or 25.3% of revenues.
Excluding the non-recurring charge under the OCS agreement and the
phantom option plan effect, gross profit in the in the year ended
December 31, 2002 was $231.4 million, or 28% of revenues.
The reduction in gross profit margin resulted primarily from the
Company's ongoing involvement in significant engineering projects that
required investment of increased time and costs in order to achieve
project milestones. These projects represent cutting edge technology
and were mainly in the areas of aerial reconnaissance, space-based
electro-optic payloads and advanced airborne systems. In addition, the
Company's gross profit in 2003 was negatively impacted by the increase
in the value of the NIS against the U.S. dollar (See "Derivatives and
Hedges" below).
Despite the decrease in the Company's gross profit margin in the fourth
quarter of 2003, the Company believes that its average annual gross
profit margin for 2004 will not be materially different from its annual
gross profit margin in 2003, with possible quarterly variations.
RESEARCH AND DEVELOPMENT ("R&D")
--------------------------------
The Company continually invests in R&D in order to maintain and further
advance its technologies, in accordance with a long-term plan, based on
its estimate of future market needs.
12
The Company's R&D activities in the reported period were in accordance
with its plans. Some of these activities are coordinated with, and
partially funded by, third parties, including the IMOD and the OCS.
These programs were mainly in the areas of advanced airborne systems,
cutting edge electro-optics technology and products for surveillance,
aerial reconnaissance, lasers and space based sensors. The Company
experienced increased IMOD and OCS participation in these programs.
Gross R&D expenses in 2003 totaled $65.5 million (7.3% of revenues), as
compared with $62.6 million (7.6% of revenues) in 2002.
Net R&D expenses (after deduction of third party participation,
including the IMOD and the OCS) in 2003 totaled $54.9 million (6.1% of
revenues), as compared to $57.0 million (6.9% of revenues) in 2002.
MARKETING AND SELLING EXPENSES
------------------------------
The Company invests significantly in developing new markets and pursues
at any given time various business opportunities. The continued
investment in developing new business opportunities, as well as the
increasing length of time required for marketing efforts until orders
are received, impact the marketing and selling expenses.
Marketing and selling expenses in 2003 were $69.9 million (7.8% of
revenues), as compared to $65.7 million (7.9% of revenues) in 2002.
Excluding the phantom option plan non-cash expenses in 2003, marketing
and selling expenses in the year ended December 31, 2003 were $69.2
million (7.7% of revenues).
The increase in these expenses was due mainly to increased marketing
efforts in the U.S. and European markets, in view of identified
business opportunities for the Company.
GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES
-------------------------------------------
Reported G&A expenses in 2003 were $46.1 million (5.1% of revenues), as
compared to $41.7 million (5.0% of revenues) in 2002.
Excluding the phantom option plan non-cash expenses in 2003, G&A
expenses in the year ended December 31, 2003 were $44.9 million (5.0%
of revenues).
In the second half of 2003, the Company's G&A expenses consolidated for
the first time the expenses related to newly acquired companies (OIP
and AD&D).
Additional increases in G&A expenses in 2003 compared to 2002 were
related to an increase in insurance expenses and the cost of various
audit and control activities, including expenses related to compliance
with the Sarbanes-Oxley Act.
13
OPERATING INCOME
----------------
As a result of all of the above, reported operating income in 2003 was
$53.5 million (6.0% of revenues), as compared to $57.8 million (7.0% of
revenues) in 2002.
For the year ended December 31, 2003, the Company's operating profit
included $4.7 million in non-cash expenses associated with the
Company's phantom option plan, as compared to an income of $0.9 million
in the year ended December 31, 2002.
Excluding non-cash expenses related to the Company's phantom option
plan, operating income totaled $58.2 million (6.5% of revenues) in the
year ended December 31, 2003.
Excluding the non-recurring charge under the OCS agreement and the
phantom option plan effect, operating income in the year ended December
31, 2002 was $66.7 million, or 8.1% of revenues.
FINANCING EXPENSES (NET)
------------------------
Net financing expenses in 2003 were $4.9 million, as compared to $3.0
million of net financing expenses in 2002.
The increase in the net financing expenses during the year ended
December 31, 2003, as compared to the year ended December 31, 2002,
resulted mainly from a higher level of short-term loans from banks, and
from the effect of the devaluation of the U.S. dollar against the NIS
on NIS denominated loans, which occurred in 2003.
TAXES ON INCOME
---------------
The Company's tax rate represents a weighted average of the tax rates
to which the various entities in the Group are subject. The changes in
the effective tax rate are attributable mainly to the mix of the tax
rates in the various tax jurisdictions in which the Group's entities
generating the taxable income operate.
Provision for taxes in 2003 was $11.3 million (effective tax rate of
22.9%), as compared to a provision for taxes of $9.3 million (effective
tax rate of 17.2%) in 2002.
The provision for taxes in 2002 included reduction of tax expenses in
the amount of $2.8 million that was made in the third quarter of 2002,
due to adjustment of estimated taxes and completion of tax assessments
for prior years in respect of various Group entities. Excluding the tax
reduction mentioned above, the Company's tax rate for the year 2002
would have been 22.4%.
The reduction in the provision for taxes in the last quarter of 2003
was mainly due to certain tax benefits related to approved enterprise
status and other tax benefits in Israel and to tax benefits related to
export revenues of the Company's U.S. subsidiaries.
COMPANY'S SHARE IN EARNINGS OF AFFILIATED ENTITIES
--------------------------------------------------
In 2003, the Company had net income of $7.2 million from its share in
earnings of affiliated entities, as compared to $0.7 million in 2002.
The affiliated entities in which the Company holds 50% or less in
shares or voting rights and are therefore not consolidated in the
Company's financial statements, operate mainly in the Company's core
business areas, including electro-optics and airborne systems. The
earnings from affiliated entities in 2003 resulted mainly from SCD and
VSI.
14
NET EARNINGS AND EARNINGS PER SHARE ("EPS")
-------------------------------------------
Reported net earnings in 2003 were $45.9 million (5.1% of revenues), as
compared to reported net earnings of $45.1 million (5.5% of revenues)
in 2002. Reported fully diluted EPS was $1.14 in 2003, as compared to
$1.13 in 2002.
Excluding the phantom option plan non-cash expenses in 2003, net
earnings in 2003 were $49.7 million (5.5% of revenues) and the EPS was
$1.24.
Excluding the non-recurring charge under the OCS agreement, the phantom
option plan effect and the tax adjustment, net earnings in 2002 were
$49.4 million (6% of revenues) and the EPS was $1.24.
The number of shares used for computation of diluted EPS in 2003 was
40,230 thousand shares, as compared to 39,863 thousand shares in 2002.
The increase in the number of shares used for computation of diluted
EPS was due mainly to the exercise of options by employees during 2003.
M. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash flow is effected by the cumulative cash flows of its
various projects in the reported periods. Cash flow is affected by the
timing of the receipt of advances and the collection of accounts
receivable from customers, which relate to specific events during the
project, while expenses are on-going. As a result, the Company's cash
flow may vary from one period to another.
The Company's policy is to invest its cash surplus primarily in
interest bearing deposits in accordance with its projected needs.
The resources available to the Company include mainly profits,
collection of accounts receivable, advances from customers, as well as
Government of Israel grants and participation and bank financing in
Israel and elsewhere based on the Company's capital, assets and
activities. In addition, the Company has the ability to raise funds
through the offering of shares and other securities to the public from
time to time. The Company and certain subsidiaries are obligated to
meet certain financial covenants set forth in their respective loan and
credit agreements. As of March 1, 2004, the Company and each of the
subsidiaries subject to financial covenants were in compliance with the
applicable covenants.
In 2003, the Controller of the Banks in Israel instituted new
regulations governing lending by Israeli banks to groups of affiliated
borrowers. Under these regulations the banks are limited in their
maximum exposure to groups of affiliated companies under a combined
lending ceiling based on objective and subjective guidelines. As a
result, the Company's borrowing capacity may be limited under certain
circumstances, even if it has unused lines of credit, due to borrowing
by companies affiliated with shareholders that are defined by the
Controller of the Banks as controlling shareholders. In anticipation of
such developments the Company is developing credit facilities that will
not be affected by the new regulations.
15
The Company's net cash flow generated from operating activities in 2003
was $91.4 million.
Net cash flow used for investment activities in 2003 was $53.8 million,
which was used mainly for procurement of property, plant and equipment.
The investments were primarily in equipment for the Group's various
manufacturing plants and in buildings being constructed at Elbit
Systems' facility in Haifa, Israel and El-Op's site in Rehovot, Israel.
The Company expects to maintain this level of investments in 2004, in
order to increase its production facilities and to invest in R&D
laboratories, manufacturing and testing equipment.
Net cash flow used for financing activities in 2003 was $37.7 million,
which was used mainly for reduction of long-term loans and dividends
payable, which were partially offset by proceeds from the exercise of
share options.
On December 31, 2003, the Company had total borrowings in the amount of
$77.4 million, including $15.3 million in short-term loans. On December
31, 2003, the Company had a cash balance amounting to $76.8 million.
N. DERIVATIVES AND HEDGES
----------------------
Market risks relating to the Company's operations result primarily from
changes in interest rates and exchange rates, and the Company uses
financial instruments to limit exposure. The Company typically enters
into forward contracts in connection with transactions that are
denominated in currencies other than U.S. dollars and NIS. The Company
enters from time to time into forward contracts related to NIS.
On December 31, 2003, the Company's liquid assets were comprised of
bank deposits, and it had no investments in liquid equity securities
that were subject to market fluctuations. The Company's deposits and
loans are based on variable interest rates, and their value as of
December 31, 2003 was therefore not exposed to changes in interest
rates. Should interest rates either increase or decrease, such change
may affect the Company's results of operations due to changes in the
cost of its liabilities and the return on its assets that are based on
variable rates.
The Company's functional currency is the U.S. dollar. On December 31,
2003, the Company had exposure due to liabilities denominated in NIS of
$44 million in excess of its NIS denominated assets. These liabilities
represent mostly provisions for wages and trade payables. The amount of
the Company's exposure to the changes in the NIS/U.S. dollar exchange
rate may vary from time to time. In order to hedge against certain
expected NIS payments, the Company entered into forward contracts. On
December 31, 2003, the Company had hedging contracts covering NIS
exposure in the amount of $25 million.
Most of the Company's assets and liabilities which are denominated in
currencies other than the NIS and the U.S. dollar were covered as of
December 31, 2003 by forward contracts. On December 31, 2003, the
Company had contracts for the sale and purchase of such foreign
currencies totaling $26.5 million.
16
O. DIVIDENDS
---------
The Board of Directors declared on March 9, 2004 a dividend of $0.11
per share. The total dividend declared for 2003 was $0.40 per share.
* * *
17
EXHIBIT 3
---------
---------------------------------------
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
---------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2003
-----------------------
(In U.S. dollars)
---------------------------------------
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
---------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2003
(In U.S. dollars)
C O N T E N T S
Page
----
REPORT OF INDEPENDENT AUDITORS 2 - 4
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 5 - 6
Consolidated Statements of Income 7
Statements of Changes in Shareholders' Equity 8 - 9
Consolidated Statements of Cash Flows 10 - 11
Notes to the Consolidated Financial Statements 12 - 58
# # # # # # #
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Elbit Systems Ltd.
We have audited the accompanying consolidated balance sheet of Elbit Systems
Ltd. (the "Company") and its subsidiaries as of December 31, 2003, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the year ended December 31, 2003. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2003, and the consolidated
results of their operations and cash flows for the year ended December 31, 2003,
in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible assets".
Kost Forer Gabbay & Kasierer
A member of Ernst & Young Global
Haifa, Israel
March 9, 2004
-2-
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Elbit Systems Ltd.
We have audited the accompanying consolidated balance sheet of Elbit Systems
Ltd. (the "Company") and its subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Elbit Systems Ltd. As of December 31, 2001 and for the year then
ended were audited by other auditors who have ceased operations as a foreign
associated firm of the Securities and Exchange Commission Practice Section of
the American Institute of Certified Public Accountants and whose report dated
March 24, 2002, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2002 and the consolidated
results of their operations and cash flows fro the year then ended in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002.
LUBOSHITZ KASIERER
AN AFFILIATE MEMBER OF ERNST & YOUNG INTERNATIONAL
Haifa, Israel
March 10, 2003
-3-
This is a copy of the previously issued Independent Public Account's report of
Arthur Andersen. The report has not been reissued by Arthur Andersen.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
ELBIT SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Elbit Systems
Ltd. and its subsidiaries as of December 31, 2001 and 2000 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elbit
Systems Ltd. and its subsidiaries as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Luboshitz Kasierer
Arthur Andersen
Haifa, Israel
March 24, 2002
-4-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)
December 31,
--------------------------------
Note 2003 2002
----------- -------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 76,156 $ 76,280
Short-term bank deposits 690 1,650
Trade receivables, net (3) 203,281 225,773
Other receivables and prepaid expenses (4) 48,363 42,698
Inventories, net of advances (5) 249,225 220,399
-------------- --------------
Total current assets 577,715 566,800
-------------- --------------
INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in affiliated companies and
partnership (6A) 26,478 21,947
Investments in other companies (6B) 11,745 11,104
Long-term trade receivables 393 20,859
Long-term bank deposits and loan (7) 1,954 3,686
Severance pay fund (2N) 76,218 67,024
-------------- --------------
116,788 124,620
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT,
NET (8) 229,221 202,961
-------------- --------------
OTHER ASSETS, NET: (9)
Goodwill 32,576 32,162
Know-how and other intangible assets, net 67,436 73,607
-------------- --------------
100,012 105,769
-------------- --------------
$ 1,023,736 $ 1,000,150
============== ==============
The accompanying notes are an integral part of the consolidated financial statements
-5-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
December 31,
---------------------------------
Note 2003 2002
----------- -------------- ---------------
CURRENT LIABILITIES:
Short-term bank credit and loans (10) $ 8,509 $ 24,302
Current maturities of long-term loans (13) 6,818 6,613
Trade payables 107,545 82,094
Other payables and accrued expenses (11) 156,527 141,304
Customers advances and amounts in excess of
costs incurred on contracts in progress (12) 99,618 106,467
-------------- ---------------
Total current liabilities 379,017 360,780
-------------- ---------------
LONG-TERM LIABILITIES:
Long-term loans (13) 62,038 73,173
Advances from customers (12) 7,592 40,411
Deferred income taxes (15E) 24,916 24,735
Accrued severance pay (14,2N) 93,979 84,973
-------------- ---------------
188,525 223,292
-------------- ---------------
COMMITMENTS AND CONTINGENT
LIABILITIES (16)
MINORITY INTERESTS 4,115 4,717
-------------- ---------------
SHAREHOLDERS' EQUITY (17)
Share capital
Ordinary shares of New Israeli Shekels (NIS)
1 par value;
Authorized - 80,000,000 shares as of
December 31, 2003 and 2002;
Issued - 39,746,125 and 39,212,328 shares as
of December 31, 2003 and 2002, respectively;
Outstanding - 39,337,304 and 38,803,507
shares as of December 31, 2003 and 2002,
respectively 11,273 11,154
Additional paid-in capital 259,033 248,387
Accumulated other comprehensive loss (3,992) (2,882)
Retained earnings 190,086 159,023
Treasury shares - 408,821 shares as of
December 31, 2003 and 2002 (4,321) (4,321)
-------------- ---------------
452,079 411,361
-------------- ---------------
$ 1,023,736 $ 1,000,150
============== ===============
The accompanying notes are an integral part of the consolidated financial statements
-6-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
Year ended December 31,
Note 2003 2002 2001
---- ---- ---- ----
Revenues (18) $897,980 $827,456 $764,501
Cost of revenues 673,561 605,313 553,957
-------- -------- --------
Gross profit 224,419 222,143 210,544
-------- -------- --------
Research and development costs, net (19) 54,919 57,010 58,759
Marketing and selling expenses 69,943 65,691 54,876
General and administrative expenses 46,077 41,651 43,216
-------- -------- --------
170,939 164,352 156,851
-------- -------- --------
Operating income 53,480 57,791 53,693
Financial expenses, net (20) (4,870) (3,035) (2,617)
Other income (expenses), net (21) 903 (462) 774
-------- -------- --------
Income before taxes on income 49,513 54,294 51,850
Taxes on income (15) 11,334 9,348 11,003
-------- -------- --------
38,179 44,946 40,847
Equity in net earnings (losses) of affiliated companies and
partnership 7,209 675 (598)
Minority interests in losses (earnings) of
subsidiaries 557 (508) 547
-------- -------- --------
Net income $ 45,945 $45,113 $40,796
======== ======== ========
Earnings per share (17G)
Basic net earnings per share $ 1.18 $ 1.17 $ 1.07
======== ======== ========
Diluted net earnings per share $ 1.14 $ 1.13 $ 1.04
The accompanying notes are an integral part of the consolidated financial statements
-7-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
Accumulated
Number of Additional other
outstanding Share paid-in comprehensive
shares capital capital loss
------------- ------------ ------------ ----------------
Balance as of January 1, 2001 37,811,398 $ 10,916 $ 235,462 $ -
---------- ----------- ----------- -----------
Exercise of options 585,860 138 3,162 -
Tax benefit in respect of options
exercised - - 1,363 -
Adjustment to capital reserve - - (3,874) -
Amortization of stock based
compensation - - 8,512 -
Purchase of treasury shares (66,986) - - -
Dividends paid - - - -
Net income - - - -
---------- ----------- ----------- -----------
Balance as of December 31, 2001 38,330,272 11,054 244,625 -
Exercise of options 473,235 100 4,040 -
Tax benefit in respect of options
exercised - - 648 -
Amortization of stock based
compensation - - (926) -
Dividends paid - - - -
Comprehensive income (loss):
Minimum pension liability - - - (2,882)
Net income - - - -
---------- ----------- ----------- -----------
Total comprehensive income
Balance as of December 31, 2002 38,803,507 $ 11,154 $ 248,387 $ (2,882)
========== =========== =========== ===========
Total Total other
Retained Treasury shareholders' comprehensive
earnings shares equity income
------------ ------------- -------------- ----------------
Balance as of January 1, 2001 $ 97,963 $ (3,613) $ 340,728
Exercise of options - - 3,300
Tax benefit in respect of options
exercised - - 1,363
Adjustment to capital reserve - - (3,874)
Amortization of stock based
compensation - - 8,512
Purchase of treasury shares - (708) (708)
Dividends paid (12,132) - (12,132)
Net income 40,796 - 40,796 $ 40,796
--------- --------- --------- ---------
Total comprehensive income $ 40,796
=========
Balance as of December 31, 2001 126,627 (4,321) 377,985
Exercise of options - - 4,140
Tax benefit in respect of options
exercised - - 648
Amortization of stock based
compensation - - (926)
Dividends paid (12,717) - (12,717)
Comprehensive income (loss):
Minimum pension liability - - (2,882) $ (2,882)
Net income 45,113 - 45,113 45,113
--------- --------- --------- ---------
Total comprehensive income $ 42,231
=========
Balance as of December 31, 2002 $ 159,023 $ (4,321) $ 411,361
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements
-8-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
Accumulated
Number of Additional other
outstanding Share paid-in comprehensive
shares capital capital loss
------------- ------------ ------------ ----------------
Balance as of December 31, 2002 38,803,507 $ 11,154 $ 248,387 $ (2,882)
Exercise of options 533,797 119 5,147 -
Tax benefit in respect of
options exercised - - 758 -
Amortization of stock based
compensation - - 4,741 -
Dividends paid - - - -
Comprehensive income (loss):
Unrealized gains on derivative
instruments - - - (578)
Foreign currency translation differences - - - 340
Minimum pension liability - - - (872)
Net income - - - -
------------ ------------ ------------ ------------
Total comprehensive income
Balance as of December 31, 2003 39,337,304 $ 11,273 $ 259,033 $ (3,992)
============ ============ ============ ============
Accumulated other comprehensive loss
------------------------------------
Accumulated gains on derivative instruments $ (578)
Accumulated foreign currency translation differences 340
Accumulated minimum pension liability (3,754)
------------
Accumulated other comprehensive loss
as of December 31, 2003 $ (3,992)
============
Total Total other
Retained Treasury shareholders' comprehensive
earnings shares equity income
------------ ------------- -------------- ----------------
Balance as of December 31, 2002 $ 159,023 $ (4,321) $ 411,361
Exercise of options - - 5,266
Tax benefit in respect of
options exercised - - 758
Amortization of stock based
compensation - - 4,741
Dividends paid (14,882) - (14,882)
Comprehensive income (loss):
Unrealized gains on derivative
instruments - - (578) $ (578)
Foreign currency translation differences - - 340 340
Minimum pension liability - - (872) (872)
Net income 45,945 - 45,945 45,945
--------- --------- --------- ---------
Total comprehensive income $ 44,835
=========
Balance as of December 31, 2003 $ 190,086 $ (4,321) $ 452,079
========= ========= =========
The accompanying notes are an integral part of the consolidated statements.
-9-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 45,945 $ 45,113 $ 40,796
Adjustments required to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 37,890 32,937 32,865
Amortization of deferred stock based compensation 4,741 (926) 8,512
Deferred income taxes, net 35 (5,620) (2,694)
Accrued severance pay, net (1,240) 6,260 (633)
Gain (loss) on sale of property, plant and equipment (915) 743 (327)
Tax benefit in respect of options exercised 758 648 1,363
Minority interests in earnings (losses) of subsidiaries (557) 508 (547)
Equity in net losses (earnings) of affiliated companies and partnership, net of
dividend received (*) (4,995) (675) 598
Changes in operating assets and liabilities:
Decrease (increase) in short and long-term receivables and prepaid expenses 45,297 58,554 (9,963)
Increase in inventories (38,651) (55,106) (72,165)
Increase (decrease) in trade payable, other payables and accrued expenses 32,147 (19,321) 37,004
Increase (decrease) in advances received from customers (27,855) 42,999 6,489
Settlement of royalties with the Office of the Chief Scientist (1,581) 9,197 -
Other adjustments 337 683 (117)
--------- --------- ---------
Net cash provided by operating activities 91,356 115,994 41,181
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (61,287) (46,003) (45,244)
Investment grants received for property, plant and equipment - 119 1,334
Acquisition of subsidiaries and businesses (Schedule A) (2,458) (5,280) (3,344)
Investments in affiliated companies and subsidiaries (1,049) (1,681) (801)
Proceeds from sale of property, plant and equipment 5,815 956 3,010
Grant of long-term loan - (714) -
Repayment of long-term loan 2,400 - -
Repayment of short-term loan - 1,371 -
Investment in long-term bank deposits (1,750) (1,228) (1,872)
Proceeds from sale of long-term bank deposits 3,568 1,689 2,322
Short-term bank deposits, net 960 (204) (57)
--------- --------- ---------
Net cash used in investing activities (53,801) (50,975) (44,652)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 5,266 4,140 3,300
Repayment of long-term credit for purchase of a building - - (3,000)
Purchase of treasury shares - - (708)
Repayment of long-term bank loans (27,066) (3,249) (13,049)
Proceeds from long-term bank loans 10,000 2,233 25,444
Dividends paid (14,882) (12,717) (12,132)
Change in short-term bank credit and loans, net (10,997) (19,729) (6,517)
--------- --------- ---------
Net cash used in financing activities (37,679) (29,322) (6,662)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (124) 35,697 (10,133)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 76,280 40,583 50,716
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 76,156 $ 76,280 $ 40,583
========= ========= =========
(*) Dividend received $ 2,214 $ - $ -
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
-10-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
-------------------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the year for:
Income taxes $ 14,666 $ 21,730 $ 9,469
======== ======== ========
Interest $ 4,034 $ 2,947 $ 6,649
======== ======== ========
SCHEDULE A:
Subsidiaries and businesses acquired (*)
Estimated net fair value of assets acquired and liabilities assumed at the date
of acquisition was as follows:
Working capital deficiency (excluding cash and cash equivalents) $ 657 $ - $ 888
Property, plant and equipment (249) (275) (1,886)
Goodwill, know-how and other intangible assets (1,334) (5,078) (3,800)
Deferred income taxes (1,765) - -
Long-term liabilities 198 - 1,454
Minority interest 35 - -
-------- -------- --------
(2,458) (5,353) (3,344)
Less short-term debt incurred on acquisition - 73 -
-------- -------- --------
$ (2,458) $ (5,280) $ (3,344)
======== ======== ========
(*) AEL in 2001 (see Note 1C). Defense systems division of Elron Telesoft
in 2002 (see Note 1D). In 2003 OIP (see Note 1E) and AD&D (see Note
1F).
The accompanying notes are an integral part of the consolidated financial statements.
-11-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 1 - GENERAL
A. Elbit Systems Ltd. (the "Company") is an Israeli
corporation, 30% owned by the Federmann Group and 20% owned
by Elron Electronic Industries Ltd. ("Elron"). The Company's
shares are traded on the Tel Aviv Stock Exchange and on the
Nasdaq National Market in the United States. The Company and
its subsidiaries (the "Group") are engaged mainly in the
field of defense electronics. The Company's principal wholly
owned subsidiaries are EFW Inc. ("EFW") and Elop
Electro-Optics Industries Ltd. ("El-Op").
B. A majority of the Group's revenues were derived in recent
years from direct or indirect sales to governments or to
government agencies. As a result, a substantial portion of
the Group's sales is subject to the special risks associated
with sales to governments or to government agencies. These
risks include, among others, the dependency on the resources
allocated by governments to defense programs, changes in
governmental priorities and changes in governmental
approvals regarding export licenses required for the Group
products and for its suppliers. As for a major customer
refer to Note 18C.
C. In 2001, the Company acquired a 62.5% interest in
Aeroeletronica - Industria de Componentes Avionicos S.A.
("AEL"), a Brazilian company located in Porto Alegre, for
approximately $3,450 in cash. In July 2002, the Company
acquired the remaining 37.5% interest for an additional $900
in cash. The consideration paid included approximately
$1,200 held in escrow, pending final resolution of certain
liabilities and contingencies of AEL to be resolved over a
period of five years following the acquisition. The excess
of cost over the fair value of net liabilities acquired of
approximately $6,700 was allocated to land ($1,200) and
identifiable intangible assets ($5,500), to be amortized
over a period of 8 years.
AEL serves as a center for the production and logistics
support of defense electronics for programs in Brazil.
The results of AEL's operations have been included in the
consolidated financial statements from the date of
acquisition.
Pro forma information in accordance with Statement of
Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS No. 141") has not been provided, since
the revenues and net income of AEL were not material in
relation to total consolidated revenues and net income for
the year 2001.
-12-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 1 - GENERAL (Cont.)
D. In January 2002, the Company acquired from Elron Telesoft
Inc. and its subsidiaries ("Elron Telesoft") the assets and
the business of the Defense Systems Division of Elron
Telesoft ("the Government Division") in consideration for
$5,700 in cash. The excess of the purchase price over the
fair value of net tangible assets acquired in the amount of
approximately $5,100 was allocated to technology and other
intangible assets to be amortized over a weighted average
period of 3 years.
The Government Division is engaged mainly in the development
of communication systems, information technology and image
intelligence processing for defense and military
applications.
The results of the Government Division have been included in
the consolidated financial statements from the first quarter
of 2002.
Pro forma information in accordance with SFAS No. 141 has
not been provided, since the revenues and net income of the
Government Division were not material in relation to total
consolidated revenues and net income for the years 2001 and
2002.
E. In June 2003, the Company (through El-Op) acquired all of
the outstanding Ordinary shares of Optronics Instruments &
Products N.V. (O.I.P.), a company registered in Belgium, in
consideration for $1,846 in cash. The acquisition was
accounted for by the purchase method of accounting.
O.I.P. develops, manufactures and supports electro-optical
products, mainly for the defense and space markets.
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition
as estimated by the Company:
Current assets $ 6,896
Property and equipment 168
Deferred tax assets 1,700
--------
Total assets acquired 8,764
Current liabilities (6,918)
--------
Net assets acquired $ 1,846
========
The results of O.I.P.'s operations have been included in the
consolidated financial statements from the date of
acquisition.
-13-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 1 - GENERAL (Cont.)
Pro forma information in accordance with SFAS No. 141 has
not been provided, since the revenues and net income of
O.I.P. were not material in relation to total consolidated
revenues and net income for the years 2001, 2002 and 2003.
F. In July 2003, the Company acquired approximately 54% of the
outstanding shares of Aero Design Development Ltd. ("AD&D")
an Israeli company in consideration for $1,406 in cash. The
acquisition was accounted for by the purchase method of
accounting.
AD&D develops, manufactures and builds airborne models and
other engineered products.
The purchase price over the fair value of net tangible
assets acquired in the amount of approximately $1,334 was
allocated to know-how ($1,000) to be amortized by the
straight-line method over a period of 10 years and to
goodwill ($334).
The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition
as estimated by the Company:
Current assets $ 604
Property and equipment 81
Know-how and goodwill 1,334
Deferred tax assets 65
---------
Total assets acquired 2,084
Current liabilities (445)
Long-term liabilities (198)
Minority interest (35)
---------
Net assets acquired $ 1,406
=========
The results of AD&D.'s operations have been included in the
consolidated financial statements from the date of
acquisition.
Pro forma information in accordance with SFAS No. 141 has
not been provided, since the revenues and net income of AD&D
were not material in relation to total consolidated revenues
and net income for the years 2001, 2002 and 2003.
-14-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States ("U.S. GAAP"). As applicable to the consolidated
financial statements of the Group, such principles are
substantially identical to accounting principles generally
accepted in Israel, except as described in Note 23.
A. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported and disclosure of contingent assets and liabilities
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The Company's revenues are generated mainly in U.S. dollars.
In addition, most of the Company's costs are incurred in
U.S. dollars. The Company's management believes that the
U.S. dollar is the primary currency of the economic
environment in which the Company operates. Thus, the
functional and reporting currency of the Company is the U.S.
dollar.
Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts. Transaction
and balances in other currencies have been remeasured into
U.S. dollars in accordance with principles set forth in SFAS
No. 52 "Foreign Currency Translation". All exchange gain and
losses from the remeasurement mentioned above are reflected
in the statement of income in financial income or expenses.
For those foreign subsidiaries whose functional currency has
been determined to be other than the U.S. dollar, assets and
liabilities are translated at year-end exchange rates and
statement of income items are translated at average exchange
rates prevailing during the year. Such translation
adjustments are recorded as a separate component of
accumulated other comprehensive income in shareholders'
equity.
-15-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of the Company and its wholly and majority-owned
subsidiaries.
The consolidated subsidiaries include El-Op, EFW and other
Israeli and non-Israeli subsidiaries.
Intercompany transactions and balances including profit from
intercompany sales not yet realized outside the Group have
been eliminated upon consolidation.
D. CASH EQUIVALENTS
Cash equivalents, are short-term highly liquid investments
that are readily convertible to cash with maturities of
three months or less at the date of acquisition.
E. SHORT-TERM BANK DEPOSITS
Short-term bank deposits are deposits with maturities of
more than three months but less than one year. The
short-term bank deposits are presented at their cost.
F. INVENTORIES
Inventories are stated at the lower of cost or net
realizable value. Inventory write-offs are provided for
slow-moving items or technological obsolescence for which
recoverability is not probable.
Cost is determined as follows:
- Raw materials using the average cost method.
- Costs incurred on long-term contracts in progress
represent recoverable costs incurred for production,
allocable operating overhead and, where appropriate,
research and development costs (refer to Note 2Q).
Advances from customers are allocated to the applicable
contract inventories and are reflected as an offset against
the related inventory balances.
-16-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES
Investments in non-marketable shares of companies in which
the Group holds less than 20% and the Group does not have
the ability to exercise significant influence over operating
and financial policies of the companies are recorded at the
lower of cost or estimated fair value.
Investments in companies and partnership over which the
Group can exercise significant influence (generally,
entities in which the Group holds between 20% and 50% of
voting rights) are presented using the equity method of
accounting. Profits on intercompany sales, not realized
outside the Group, were eliminated. The Group discontinues
applying the equity method when its investment (including
advances and loans) is reduced to zero and it has not
guaranteed obligations of the affiliate or otherwise
committed to provide further financial support to the
affiliate.
Certain investments are accounted for under the hypothetical
liquidation method. For these investments, the Group applies
Emerging Issues Task Force ("EITF 99-10"), "Percentage Used
to Determine the Amount of Equity Method Losses", according
to which the Group recognizes equity method losses based on
the ownership level of the particular investee security or
loan held by the Group to which the equity method losses are
being applied.
The Group's investments in affiliates are reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an investment may not
be recoverable. As of December 31, 2003, based on
management's most recent analyses, no impairment losses have
been identified.
H. LONG-TERM TRADE RECEIVABLES
Long-term trade receivables from extended payment agreements
are recorded at their estimated present values (determined
based on the original rates of interest).
I. LONG-TERM BANK DEPOSITS
Bank deposits with maturities of more than one year are
presented at cost including accumulated interest.
-17-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
J. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of
accumulated depreciation and investment grants. For
equipment produced for the Group's own use, cost includes
materials, labor and overhead, but not in excess of the fair
value of the equipment. Depreciation is calculated by the
straight-line method over the estimated useful life of the
assets at the following annual rates:
%
-----
Buildings 2-4 (mainly 4%)
Instruments, machinery and equipment 10-33
Office furniture and other 6-33
Motor vehicles 15-20 (mainly 15%)
Land rights and leasehold improvements - over the term of
the lease.
K. IMPAIRMENT OF LONG-LIVED ASSETS
The Group's long-lived assets and certain identifiable
intangible assets are reviewed for impairment in accordance
with SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted cash flows expected
to be generated by the asset. If an asset is determined to
be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds
its fair value. As of December 31, 2003, no impairment
losses have been identified.
L. OTHER ASSETS
Intangible assets subject to amortization arose from
acquisitions prior to July 1, 2001, are being amortized on a
straight-line basis over their useful life in accordance
with APB Opinion No. 17, "Intangible Assets" ("APB No. 17").
-18-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
L. OTHER ASSETS (CONT.)
Intangible assets acquired in a business combination for
which date is on or after July 1, 2001, are being amortized
over their useful life using a method of amortization that
reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise used up, in
accordance with Statements of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets", ("SFAS No.
142").
M. GOODWILL
Goodwill represents excess of the cost of acquired entities
over the net fair values of the assets acquired and
liabilities assumed. Goodwill that arose from acquisitions
prior to July 1, 2001, was amortized until December 31,
2001, on a straight-line basis over 10 - 20 years. Under
SFAS No. 142, such goodwill shall no longer be amortized
effective as of January 1, 2002. Goodwill acquired in a
business combination on or after July 1, 2001 is not
amortized.
SFAS No. 142 requires goodwill to be tested for impairment
on adoption and at least annually thereafter or between
annual tests in certain circumstances, and written down when
impaired, rather than being amortized as previous accounting
standards required. Goodwill attributable to each of the
reporting units is tested for impairment by comparing the
fair value of each reporting unit with its carrying value.
If the carrying value exceeds the fair value, impairment is
measured by comparing the implied fair value of goodwill to
its carrying value. Fair value of a reporting unit is
determined using discounted cash flows. Significant
estimates used in the methodology include estimates of
future cash flows, future short-term and long-term growth
rates and weighted average cost of capital for each of the
reporting units. As of December 31, 2003, no impairment
losses have been identified.
The adoption of SFAS 142 did not affect the financial
position and results of operations of the Group as of
January 1, 2002.
-19-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
N. SEVERANCE PAY
Under Israeli law and employment agreements, the Group's
companies in Israel are required to make severance payments
and, in certain situations, pay pensions to terminated
employees. The calculation is based on the employee's latest
salary and the period of his employment. The companies'
obligation for severance pay and pension is provided by
monthly deposits with insurance companies, pension funds and
by an accrual.
The value of severance pay funds is presented in the balance
sheet and includes profits accumulated to balance sheet
date. The amounts deposited may be withdrawn only after
fulfillment of the obligations pursuant to Israeli severance
pay law or labor agreements. The value of the deposited
funds are based on the cash surrendered value of these funds
and include immaterial profits.
Severance pay expenses for the years ended December 31,
2003, 2002 and 2001, amounted to approximately $11,491,
$10,138 and $8,097, respectively.
O. REVENUE RECOGNITION
The Group generates revenues from long-term contracts
involving the design, development, manufacture and
integration of defense systems and products and providing
support and services for such systems and products. Revenues
from long-term contracts are recognized based on Statement
of Position 81-1 "Accounting for Performance of
Construction-Type and Certain Production - Type Contracts"
("SOP 81-1") on the percentage of completion method.
Sales and anticipated profit under long-term fixed-price
production type contracts are recorded on a percentage of
completion basis, generally using units of delivery as the
measurement basis for effort accomplished. Estimated
contract profit is included in earnings in proportion to
recorded sales.
Sales under certain long-term fixed-price contracts which,
among other things require a significant amount of
development effort in relation to total contract value, are
recorded using the cost-to-cost method of accounting where
sales and profit are recorded based on the ratio of costs
incurred to estimated total costs at completion but not
before the Group achieves certain milestones. As for
research and development costs accounted for as contract
costs refer to Note 2Q.
-20-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
O. REVENUE RECOGNITION (CONT.)
Sales under long-term fixed-price development and production
type contracts are recorded on a percentage of completion
basis using cost-to-cost method and units of delivery
method, as applicable.
Estimated gross profit or loss from long-term contracts may
change due to changes in estimates resulting from
differences between actual performance and original
forecasts. Such changes in estimated gross profit are
recorded in results of operations when they are reasonably
determinable by management, on a cumulative catch-up basis.
Amounts representing contract change orders, claims or other
items are included in sales only when they can be reliably
estimated and realization is probable. Penalties and awards
applicable to performance on contracts are considered in
estimating sales and profit rates, and are recorded when
there is sufficient information to assess anticipated
contract performance.
The Group believes that the use of the percentage of
completion method is appropriate as the Group has the
ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and
contract costs. In addition, contracts executed include
provisions that clearly specify the enforceable rights
regarding services to be provided and received by the
parties to the contracts, the consideration to be exchanged
and the manner and terms of settlement. In all cases the
Group expects to perform its contractual obligations and its
customers are expected to satisfy their obligations under
the contract. Anticipated losses on contracts are charged to
earnings when identified.
Sales under cost-reimbursement-type contracts are recorded
as costs are incurred. Applicable estimated profits are
included in earnings in the proportion that incurred costs
bear to total estimated costs.
-21-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. WARRANTY
The Group estimates the costs that may be incurred under its
basic warranty and records a liability in the amount of such
costs at the time revenue is recognized. The specific terms
and conditions of those warranties vary depending upon the
product sold and the country in which the Group does
business. Factors that affect the Group's warranty liability
include the number of delivered units, engineering estimates
and anticipated rates of warranty claims. The Group
periodically assesses the adequacy of its recorded warranty
liability and adjusts the amount as necessary.
Changes in the Group's provision for warranty during the
year are as follows:
Balance, at January 1, 2003 $ 8,541
Warranties issued during the year 4,491
Warranties forfeited or exercised
during the year (3,340)
-------
Balance, at December 31, 2003 $ 9,692
=======
Q. RESEARCH AND DEVELOPMENT COSTS
Research and development costs, net of participations, are
charged to operations as incurred.
Group sponsored research and development costs primarily
include independent research and development and bid and
proposal efforts.
Under certain arrangements in which a customer shares in
product development costs, the Group's portion of such
unreimbursed costs is expensed as incurred.
Customer-sponsored research and development costs incurred
pursuant to contracts are accounted for as contract costs.
Certain Group companies in Israel receive grants (mainly
royalty-bearing) from the Government of Israel and from
other sources for the purpose of funding approved research
and development projects. These grants are recognized at the
time the applicable company is entitled to such grants on
the basis of the costs incurred and are presented as a
deduction from research and development costs.
-22-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
R. INCOME TAXES
The Group accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". This Statement
prescribes the use of the liability method whereby deferred
tax assets and liability account balances are determined
based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Group provides a
valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
S. CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash
and cash equivalents and trade receivables.
The majority of the Group's cash and cash equivalents and
deposits are invested in dollar instruments with major banks
in Israel and in the U.S. Management believes that the
financial institutions that hold the Group investments are
financially sound and accordingly, minimal credit risk
exists with respect to these investments.
The Group's trade receivables are derived primarily from
sales to large and solid customers and governments located
mainly in Israel, the United States and Europe. The Group
performs ongoing credit evaluations of its customers and to
date, has not experienced any unexpected material losses
except for a one time loss in 2002 of approximately $4,600
due to the insolvency of one of the Group's customers. An
allowance for doubtful accounts is determined with respect
to those amounts that the Group has determined to be
doubtful of collection.
-23-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
T. DERIVATIVE FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"), requires companies to recognize all of its
derivative instruments as either assets or liabilities in
the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or
losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging
relationship and further, on the type of hedging
relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the
exposure being hedged, as a fair value hedge, cash flow
hedge or a hedge of a net investment in a foreign
operations.
For derivative instruments that are designated and qualify
as a fair value hedge (i.e., hedging the exposure to changes
in the fair value of an asset or a liability or an
identified portion thereof that is attributable to a
particular risk), the gain and loss on the derivative
instrument as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized
in the same line item associated with the hedged item in
current earnings during the period of the change in fair
values. For derivative instruments that are designated and
qualify as a cash flow hedge (i.e. hedging the exposure to
variability in expected future cash flows that is
attributable to a particular risk), the effective portion of
the gain or loss on the derivative instrument is reported as
a component of other comprehensive income and reclassified
into earnings in the same line item associated with the
forecasted transaction in the same period or periods during
which the hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized
in other income/expense in current earnings during the
period of change.
For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in other
income/expense in current earnings during the period of
change.
-24-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
T. DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)
As part of its fair value hedging strategy the Group enters
into forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. The purpose
of the Group's foreign currency hedging activities is to
protect the Group from risk that the eventual dollar cash
flows from the sale of products to international customers
will be adversely affected by changes in the exchange rates.
In addition, in order to ensure the dollar value of certain
assets and liabilities, the Group has enters into forward
exchange contracts.
As part of its cash flows hedging strategy the Group enters
into forward exchange contracts to hedge forecasted salary
expenses denominated in currency other than the U.S. dollar.
As of December 31, 2003, the Group had forward contracts
with notional value of approximately $27,500 to purchase and
sell foreign currencies. The Group also had options to hedge
future cash flow in the amount of $24,000. The forward
contracts and the options mature in 2004.
The fair value of the foreign exchange contracts as of
December 31, 2003 amounted to $1,113. The fair value of the
options as of December 31, 203 is minimal.
U. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles
Board Opinion No. 25 ("APB No. 25") "Accounting for Stock
Issued to Employees" and FASB Interpretation No. 44 ("FIN
No. 44") "Accounting for Certain Transactions Involving
Stock Compensation" in accounting for its employee stock
option plans. Under APB No. 25, compensation expense is
recognized based on the intrinsic value method where by
compensation expense is equal to the excess if any of the
quoted market price of the stock at the grant date of the
award or other measurement date, over the amount an employee
must pay to acquire the stock. The Company recognizes the
expense over the vesting period of the award.
In respect of phantom share options, the Company applies
variable stock compensation accounting (See Note 17C).
-25-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
U. STOCK-BASED COMPENSATION (CONT.)
The Company adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 148, "Accounting
for Stock-Based Compensation - transition and disclosure"
("SFAS No. 148"), which amended certain provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for an entity that
voluntarily changes the fair value based method of
accounting for stock-based employee compensation, effective
as of the beginning of the fiscal year. The Company
continues to apply the provisions of APB No. 25, in
accounting for stock-based compensation.
Pro forma information regarding the Company's net income and
net earnings per share is required by SFAS No. 123 and has
been determined as if the Company had accounted for its
employee stock options under the fair value method
prescribed by SFAS No. 123.
The fair value for options granted in 2003, 2002 and 2001 is
amortized over their vesting period and estimated at the
date of grant using a Black-Scholes options pricing model
with the following weighted average assumptions:
2003 2002 2001
---- ---- ----
Divided yield 2.19% 1.99% 2.03%
Expected volatility 19.03% 21.9% 33.8%
Risk-free interest 1.20% 1.34% 2%
Expected life of up to 6 years 6 years 6 years
-26-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
U. STOCK-BASED COMPENSATION (CONT.)
Pro forma information under SFAS No.123 is as follows:
Year ended December 31,
2003 2002 2001
------------- ------------ -------------
Net income as reported $ 45,945 $ 45,113 $ 40,796
Add - Stock based compensation
expense (income), net of related
tax effects as reported (intrinsic
method) 3,793 (741) 6,810
Deduct - Stock based compensation
expense under fair value based
method of SFAS 123 net of
related tax effects (2,956) (2,956) (2,932)
-------- -------- ----------
Pro forma net income $ 46,782 $ 41,416 $ 44,674
======== ======== ==========
Net earnings per share:
Basic net earnings per share as reported $ 1.18 $ 1.17 $ 1.07
======== ======== ==========
Diluted net earnings per share as reported $ 1.14 $ 1.13 $ 1.04
======== ======== ==========
Pro forma basic net earnings per share $ 1.20 $ 1.08 $ 1.18
======== ======== ==========
Pro forma diluted net earnings per share $ 1.16 $ 1.04 $ 1.14
======== ======== ==========
V. FAIR VALUE FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash
and cash equivalents, short-term bank deposits, trade
receivables, short-term bank credit and loans and trade
payables approximate their fair values due to the short-term
maturities of such instruments.
Long-term loans are estimated by discounting the future cash
flows using current interest rates for loans of similar
terms and maturities. The carrying amount of the long-term
loans approximates their fair value.
The fair value of foreign currency contracts (used for
hedging purposes) is estimated by obtaining current quotes
from investment bankers.
-27-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
V. FAIR VALUE FINANCIAL INSTRUMENTS (CONT.)
It was not practicable to estimate the fair value of the
Group's investments in shares of non-public companies that
are accounted for under the cost method because of the lack
of a quoted market price and the inability to obtain
valuation of each company without incurring excessive costs.
The carrying amounts of these companies were $11,104 and
$11,745 as of December 31, 2002 and 2003, respectively, and
represent the original cost of acquisition.
W. BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share is computed based on the
weighted average number of Ordinary shares outstanding
during each year. Diluted net earnings per share is computed
based on the weighted average number of Ordinary shares
outstanding during each year, plus dilutive potential
Ordinary shares considered outstanding during the year in
accordance with SFAS No. 128 "Earnings Per Share".
Outstanding stock options are excluded from the calculation
of the diluted net earnings per Ordinary share when such
securities are anti-dilutive. In all the years presented no
stock options were excluded.
X. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued FASB Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57, and
107 and Rescission of FASB Interpretation No. 34" ("FIN No.
45"). FIN No. 45 elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the
guarantee.
FIN No. 45 does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability
over the term of the related guarantee. It also
incorporates, without change, the guidance in FASB
Interpretation No.34, "Disclosure of Indirect Guarantees of
Indebtedness of Others", which is being superseded. The
disclosure provisions of FIN No. 45 are effective for
financial statements of interim or annual periods that end
after December 15, 2002, and the
-28-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)
provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002, irrespective of
a guarantor's year-end. The adoption of FIN No. 45 did not
have a material impact on the Group's results of operations
or financial position.
In November 2002, the EITF reached a consensus on Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003. Additionally, companies will be permitted to
apply the consensus guidance in this issue to all existing
arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20,
"Accounting Changes". The adoption of EITF Issue No. 00-21
did not have a material impact upon the Company's
consolidated financial position, cash flows or results of
operations.
In December 2003, the SEC issued Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition." ("SAB No. 104")
which revises or rescinds certain sections of SAB No. 101,
"Revenue Recognition", in order to make this interpretive
guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The
changes noted in SAB NO. 104 did not have a material effect
on the Company's consolidated financial position, results of
operations or cash flows.
In 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51 ("FIN
46"). In December 2003, the FASB revised FIN 46 to make
certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new
framework for identifying Variable Interest Entities
("VIE's") 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.
-29-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)
In general, a VIE is an entity that either (1) has an
insufficient amount of equity to carry out its principal
activities, without additional subordinated financial
support, (2) has a group of equity owners that are unable to
make significant decisions about the entity's activities, or
(3) has a group of equity owners that do not have the
obligation to absorb the entity's losses or the right to
receive returns generated by its operations. FIN 46 requires
the consolidation of a VIE by the primary beneficiary. The
primary beneficiary is the entity that absorbs a majority of
the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the
entity.
The Group is currently evaluating the effects of this
interpretation in respect of its investments. It is possible
that some of its unconsolidated investees may be considered
as VIEs in accordance with the interpretation. Accordingly,
if it is determined that the Group is the primary
beneficiary of a VIE, the Group will be required to
consolidate the financial statements of such VIE with its
own financial statements commencing in the first quarter of
2004.
Y. RECLASSIFICATIONS
Certain financial statement data for prior years has been
reclassified to conform with current year financial
statement presentation.
-30-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 3 - TRADE RECEIVABLES, NET
Trade receivables
December 31,
---------------------
2003 2002
---- ----
Open accounts (*) $170,287 $185,997
Unbilled receivables 36,855 43,187
Less - allowance for doubtful accounts (3,861) (3,411)
-------- --------
$203,281 $225,773
======== ========
(*) Includes affiliated companies $ 6,668 $ 9,647
======== ========
Note 4 - OTHER RECEIVABLES AND PREPAID EXPENSES
December 31,
---------------------
2003 2002
---- ----
Prepaid expenses $ 14,310 $ 12,244
Government departments 5,826 5,915
Employees 513 1,029
Deferred income taxes 21,908 19,997
Others 5,806 3,513
-------- --------
$ 48,363 $ 42,698
======== ========
Note 5 - INVENTORIES, NET OF ADVANCES
December 31,
------------------------------
2003 2002
---- ----
Cost incurred on long-term contracts in progress $253,663 $ 210,418
Raw materials 78,504 75,579
Advances to suppliers and subcontractors 20,137 25,047
-------- ----------
352,304 311,044
Less -
Cost incurred on contracts in progress deducted
from customer advances 14,581 10,658
-------- ----------
337,723 300,386
Less -
Advances received from customers 77,482 67,624
Provision for losses 11,016 12,363
-------- ----------
$249,225 $ 220,399
======== ==========
The Company has transferred legal title of inventories to certain
customers as collateral for advances received.
-31-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES
A. Investments in companies accounted for under the equity
method:
December 31,
--------------------------
2003 2002
---- ----
SCD (1) $ 17,347 $ 15,713
VSI (2) 6,149 3,893
Opgal (3) 2,390 2,028
Others (4) 592 313
-------- --------
$ 26,478 $ 21,947
======== ========
(1) Semi Conductor Devices ("SCD"), an Israeli partnership,
held 50% by the Company and 50% by Rafael Armaments
Development Authority Ltd. ("Rafael"). SCD is engaged
in the development and production of various thermal
detectors and laser diodes. SCD is jointly controlled
and therefore is not consolidated in the Company's
financial statements.
(2) Vision Systems International LLC ("VSI") based in San
Jose, is a California limited liability company that is
held 50% by EFW. VSI is jointly controlled and
therefore is not consolidated in the Company's
financial statements. VSI operates in the area of
helmet mounted display systems for fixed wing military
and paramilitary aircraft. VSI is jointly controlled
and therefore is not consolidated in the Company's
financial statements.
(3) Opgal Optronics Industries Ltd. ("Opgal") is an Israeli
company owned 50.1% by the Company and 49.9% by a
subsidiary of Rafael. Opgal focuses mainly on
commercial applications of thermal imaging and
electro-optic technologies. The Company jointly
controls Opgal with Rafael, and therefore Opgal is not
consolidated in the Company's financial statements.
-32-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES (CONT.)
A. Investments in companies accounted for under the equity
method (cont.)
(4) Mediguide Inc. ("Mediguide") and its Israeli
subsidiary, Mediguide Ltd., were established in 2000 as
a spin-off from the Company, which holds the majority
of Mediguide's Ordinary shares. In 2001-2003, Mediguide
issued Preferred shares to other investors in
consideration for approximately $16,000. The Preferred
shares entitle the other investors to preference rights
in any liquidation event. Therefore, the Company did
not record any gain as a result of the above
transaction. In addition the Preferred shares entitle
their holders to certain participating rights.
Accordingly, based on the guidance in EITF 96-16, the
Company does not consolidate Mediguide. The carrying
value of the investment in Mediguide is zero.
RedC Optical Networks Inc. ("RedC") is engaged in the
multi-focal optic communications sector and is held
36.5% by El-Op. RedC designs, develops and manufacture
optical amplifiers for dense wave-length multiplexing
(DWDM) optical networks for telecommunication renders.
Based on analysis performed, the Company recorded a
provision for loss on its investment in RedC of $2,500
during the year ended December 31, 2002. This provision
has been presented under "Equity in net earnings of
affiliated companies and partnership".
(5) See Note 16(E) for guarantees.
-33-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES (CONT.)
B. Investments in companies accounted for under the cost method
December 31
--------------------------
2003 2002
---- ----
Sultam (1) $ 3,500 $ 3,500
ISI (2) 7,230 7,230
Aero Astro (3) 1,000 -
Others 15 374
-------- --------
$ 11,745 $ 11,104
======== ========
(1) Sultam Systems Ltd. ("Sultam"), held 10%, is an Israeli
company engaged in the development and manufacturing of
military systems in the artillery sector.
(2) ImageSat International N.V. ("ISI"), held 14% (10% on a
fully diluted basis), is engaged in the operation of
satellite photography formations and commercial
delivery of satellite photography for civil purposes.
(3) AeroAstro Inc. - In January 2003, the Company purchased
Common stock of AeroAstro Inc., ("AAI") a Delaware
corporation, representing 8.33% of the total
outstanding Common stock of AAI on a fully diluted
basis, in consideration for $1,000. AAI is engaged in
innovative micro and nanospacecraft applications. AAI
manufactures low-cost satellite systems and components,
used in its own spacecraft and for spacecraft
development in and outside the U.S.
Note 7 - LONG -TERM BANK DEPOSITS AND LOAN
December 31,
---------------------------
2003 2002
---- ----
Deposits with bank for loans
granted to employees (*) $ 1,901 $ 2,037
Other deposits with bank 53 935
Long-term loan - 714
------- -------
$ 1,954 $ 3,686
======= =======
(*) The deposits are linked to the Israeli CPI, bear annual
interest of 4% and are presented net of current maturities
of $633 (2002 - $680).
-34-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 8 - PROPERTY, PLANT AND EQUIPMENT, NET
December 31,
----------------------------
2003 2002
---- ----
Land, buildings and leasehold improvements (2) $ 143,223 $ 128,456
Instruments, machinery and equipment (3) 194,129 169,467
Office furniture and other 24,943 21,904
Motor vehicles 29,776 24,393
--------- ---------
392,071 344,220
Accumulated depreciation (162,850) (141,259)
--------- ---------
Depreciated cost $ 229,221 $ 202,961
========= =========
Depreciation expenses for the years ended December 31, 2003, 2002
and 2001 amounted to $30,775, $26,525 and $24,517, respectively.
(1) Net of investment grants received (mainly for
instruments, machinery and equipment) in the amounts of
approximately $30,700 and $30,800 as of December 31,
2003 and 2002, respectively.
(2) Includes, rights in approximately 9,225 square meters
of land in, Tirat Hacarmel, Israel. The land is leased
from the Israel Land Administration until the years
2014 to 2024 with a renewal option for additional
periods of up to 49 years. The Company's rights in the
land have not yet been registered in its name.
Includes, rights in approximately 10,633 square meters
of land in Rehovot, Israel. The land is leased from the
Israel Land Administration until the year of 2043 with
a renewal option for additional periods of up to 49
years. The Company's rights in the land have not yet
been registered in its name.
(3) Includes equipment produced by the Group for its own
use in the amount of $10,498 and $5,517 as of December
31, 2003 and 2002, respectively.
(4) As for pledges of assets - see Note 16(H).
-35-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 9 - OTHER ASSETS, NET
A.
Weighted-average December 31,
number of ------------------------
years 2003 2002
----------------- ---- ----
Original cost:
Know-how and technology (1) 12.5 $ 82,449 $ 81,398
Trade marks (2) 17 8,000 8,000
Goodwill (3) 37,613 37,199
--------- ---------
128,062 126,597
--------- ---------
Accumulated amortization:
Know-how and technology 21,555 14,666
Trade marks 1,458 1,125
Goodwill 5,037 5,037
--------- ---------
28,050 20,828
--------- ---------
Amortized cost $ 100,012 $ 105,769
========= =========
(1) Includes mainly know-how acquired in the merger with
El-Op ($45,000), know-how acquired in the acquisition
of AEL and the Government Division ($10,600) and
intangible assets acquired from Honeywell Inc.
($9,300).
(2) Includes trade marks acquired in the merger with El-Op.
(3) Includes mainly goodwill acquired in the merger with
El-Op ($34,200) and goodwill acquired from Honeywell
Inc. ($1,800). Until January 1, 2002, goodwill was
amortized at an annual rate of 5% - 10%.
B. Amortization expenses amounted to $7,222, $6,412 and $8,348
for the years ended December 31, 2003, 2002 and 2001,
respectively.
C. The annual amortization expense relating to intangible
assets existing as of December 31, 2003 for each of the five
years in the period ending December 31, 2008 is estimated to
be approximately $6,000.
-36-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 9 - OTHER ASSETS, NET (CONT.)
The following information is presented to reflect net income and
net earnings per share for all prior periods adjusted to exclude
amortization of goodwill.
Year ended
December 31,
------------
2001
------------
Reported net income $ 40,796
Goodwill amortization 2,760
--------
Adjusted net income $ 43,556
========
Net earnings per share
Reported basic net earnings per share $ 1.07
Goodwill amortization 0.08
--------
Adjusted basic net earnings per share $ 1.15
========
Reported diluted net earnings per share $ 1.04
Goodwill amortization 0.07
--------
Adjusted diluted net earnings per share $ 1.11
========
Note 10 - SHORT-TERM BANK CREDIT AND LOANS
December 31,
----------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest rate %
------------------
Short-term bank loans:
In U.S. dollars 3.3-4.75 3-5 $ 533 $ 13,512
In EURO 3.5 - 1,927 -
--------- ---------
2,460 13,512
--------- ---------
Short-term bank credit:
In NIS unlinked 7.2 9.6-10.9 4,684 5,241
In U.S. dollars 2.6 2.8-3.6 1,365 5,549
--------- ---------
6,049 10,790
--------- ---------
$ 8,509 $ 24,302
========= =========
The subsidiary in the U.S. maintains standby lines of credit with
various banks. The sum of the lines equals $66,000 of which
$15,900 was available as of December 31, 2003.
As for liens - see Note 16F.
-37-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 11 - OTHER PAYABLES AND ACCRUED EXEPNSES
December 31,
---------------------
2003 2002
---- ----
Payroll and related expenses $ 33,382 $ 27,912
Provision for vacation pay 25,280 20,492
Government departments 25,243 22,443
Provision for warranty 9,692 8,541
Cost provisions and others 62,930 61,916
---------- ----------
$ 156,527 $ 141,304
========== ==========
Note 12 - CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED ON
CONTRACTS IN PROGRESS
December 31,
---------------------
2003 2002
---- ----
Advances received $199,273 $225,160
Less -
Advances presented under long-term
liabilities 7,592 40,411
Advances deducted from inventories 77,482 67,624
-------- --------
114,199 117,125
Less -
Costs incurred on contracts in progress 14,581 10,658
-------- --------
$ 99,618 $106,467
======== ========
As for guarantees see Note 16G
-38-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 13 - LONG-TERM LOANS
December 31,
Interest Years of -----------------
Linkage % maturity 2003 2002
------- -------- -------- ---- ----
Banks U.S. dollars Libor + 2004 - 2005 $57,574 $67,206
0.75%-1.85%
Banks NIS-unlinked Israeli
Prime 2004 - 2022 3,599 3,383
Office of chief NIS-linked to
scientist the Israeli-CPI 5.2% 2004 - 2008 7,683 9,197
------- -------
68,856 79,786
Less-current maturities 6,818 6,613
------- -------
$62,038 $73,173
======= =======
The Libor rate as of December 31, 2003 was 1.12%. The Israeli
Prime rate as of December 31, 2003 was 6.3%. The maturities of
these loans after December 31, 2003 are as follows:
2004 - current maturities $ 6,818
2005 56,136
2006 2,693
2007 139
2008 148
2009 and thereafter 2,922
----------
$ 68,856
==========
In connection with bank credits and loans, including performance
guarantees issued by banks and bank guarantees securing certain
advances from customers, the Company and certain subsidiaries are
obligated to meet certain loan covenants. Management believes that
the Company and the subsidiaries meet the conditions of these
covenants as of balance sheet date.
As for charges see Note 16H.
-39-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 14 - BENEFIT PLANS
The subsidiary in the U.S. has adopted for its employees in the
U.S. benefits plans as follows:
Defined Benefit Retirement Plan
The subsidiary in the U.S. has two defined benefit pension plans
(the Plans) covering substantially its employees in the U.S.
Monthly benefits are based on years of benefit service and annual
compensation. Annual contributions to the Plans are determined
using the unit credit actuarial cost method and are equal to or
exceed the minimum required by law. Pension fund assets of the
Plans are invested primarily in stock, bonds and cash by a
financial institution, as the investment manager of the Plans'
assets.
The following table reconciles the benefit obligations, Plans
assets, funded status and net asset (liability) information of the
Plans:
December 31,
------------------------
2003 2002
---- ----
Benefit obligation at beginning of year $ 28,439 $ 22,358
Service cost 2,480 2,067
Interest cost 1,921 1,678
Actuarial losses 2,825 2,955
Benefits repaid (700) (619)
-------- --------
Benefit obligation at end of year 34,965 28,439
-------- --------
Plans assets at beginning of year 15,558 16,167
Actual return on Plan assets 2,689 (1,560)
Contributions by employer 3,649 1,571
Benefits repaid (700) (619)
-------- --------
Plans assets at end of year 21,196 15,559
-------- --------
Funded status of Plans (underfunded) (13,769) (12,880)
Unrecognized prior service cost (195) 234
Unrecognized net actuarial loss 9,395 7,582
-------- --------
Net amount recognized (4,569) (5,064)
======== ========
Net asset (liability) consists of:
Accrued benefit liability (11,011) (10,298)
Intangible asset 51 234
Accumulated other comprehensive income 6,391 5,000
-------- --------
Net amount recognized (4,569) $ (5,064)
======== ========
Weighted average assumptions :
Discount rate as of December 31, 6.25% 6.75%
Expected long-term rate of return on
Plans assets 9.00% 9.00%
Rate of compensation increase 3.00% 3.00%
-40-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 14 - BENEFIT PLANS (Cont.)
Year ended December 31,
------------------------------
2003 2002 2001
---- ---- ----
Components of net periodic pension cost:
Service cost $ 2,480 $ 2,067 $ 1,766
Interest cost 1,921 1,678 1,461
Expected return on Plan assets (1,573) (1,597) (1,666)
Amortization of prior service cost (15) 28 24
Recognized of net actuarial gain 339 - (38)
One-time FAS 88 charge for 2001 SRP - - 177
------- -------- -------
Net periodic pension cost $ 3,152 $ 2,176 $ 1,724
======= ======== =======
Defined Contribution Plan
The 401(k) savings plan ("401(k) plan") is a defined contribution
retirement plan that covers all eligible employees, as defined in
section 401(k) of the U.S. Internal Revenue Code. Subsidiary's
employees may elect to contribute a percentage of their annual
gross compensation to the 401(k) plan. The U.S. subsidiary may
make discretionary matching contributions as determined by the
subsidiary. Total expense under the 401(k) plan amounted to $1,629
for the year ended December 31, 2003 (2002 - $1,369).
-41-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - TAXES ON INCOME
A. APPLICABLE TAX LAWS
(1) Measurement of taxable income under Israel's Income Tax
(Inflationary Adjustments) Law, 1985:
Results for tax purposes for the Company and certain of
its Israeli subsidiaries are measured and reflected in
accordance with the change in the Israeli Consumer
Price Index ("CPI"). As explained above in Note 2B, the
consolidated financial statements are presented in U.S.
dollars. The differences between the change in the
Israeli CPI and in the NIS/U.S. dollar exchange rate
cause a difference between taxable income and the
income before taxes reflected in the consolidated
financial statements.
In accordance with paragraph 9(f) of SFAS No. 109, the
Company has not provided deferred income taxes on the
above difference between the reporting currency and the
tax basis of assets and liabilities.
(2) Tax benefits under Israel's Law for the Encouragement
of Industry (Taxes), 1969:
The Company and certain subsidiaries in Israel (mainly
El-Op and Cyclone) are "Industrial Companies", as
defined by the Law for the Encouragement of Industry
(Taxes), 1969, and as such, these companies are
entitled to certain tax benefits, mainly amortization
of costs relating to know-how and patents over eight
years, accelerated depreciation and the right to deduct
public issuance expenses for tax purposes.
(3) Tax benefits under Israel's Law for the Encouragement
of Capital Investments, 1969:
Several expansion programs of the Company and certain
of its Israeli subsidiaries ("the companies") have been
granted "Approved Enterprise" status under Israel's Law
for the Encouragement of Capital Investments, 1959. For
some expansion programs, the companies have elected the
grants track and for others they have elected the
alternative tax benefits track, waiving grants in
return for tax exemptions.
-42-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - TAXES ON INCOME
A. APPLICABLE TAX LAWS (CONT.)
(3) Tax benefits under Israel's Law for the Encouragement
of Capital Investments, 1959 (cont.):
Accordingly, certain income of the companies, derived
from the "Approved Enterprise" expansion programs is
tax exempt for two-year to ten-year period and subject
to reduced tax rates of 25% for a five-year to
eight-year period commencing in the year in which the
companies had taxable income (limited to twelve years
from commencement of production or fourteen years from
the date of approval, whichever is earlier). As of
December 31, 2003, the tax benefits for these expansion
programs will expire between 2004 to 2010.
The entitlement to the above benefits is subject to the
companies fulfilling the conditions specified in the
above referred law, regulations published there under
and the letters of approval for the specific
investments in "Approved Enterprises". In the event of
failure to comply with these conditions, the benefits
may be canceled and the companies may be required to
refund the amount of the benefits, in whole or in part,
including interest. (For liens - see Note 16F). As of
December 31, 2003, Management believes that the
companies are meeting all conditions of the approvals.
The tax-exempt income attributable to the "Approved
Enterprise" can be distributed to shareholders without
imposing tax liability on the companies only upon the
complete liquidation of the companies. As of December
31, 2003, retained earnings included approximately
$96,000 in tax-exempt profits earned by the companies'
"Approved Enterprise".
If the retained tax-exempt income is distributed in a
manner other than on the complete liquidation of the
Company, it would be taxed at the corporate tax rate
applicable to such profits as if the Company had not
elected alternative tax benefits (currently - 25%) and
an income tax liability would be incurred of
approximately $ 23,940 as of December 31, 2003.
-43-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - TAXES ON INCOME
A. APPLICABLE TAX LAWS
(3) Tax benefits under Israel's Law for the Encouragement
of Capital Investments, 1959:
The Company's Board of Directors has decided that its
policy is not to declare dividends out of such
tax-exempt income. Accordingly, no deferred income
taxes have been provided on income attributable to the
Companyies "Approved Enterprise".
In Israel, income from sources other than the "Approved
Enterprise" during the benefit period will be subject
to tax at the regular corporate tax rate of 36%.
Since the companies are operating under more than one
approval, and since part of their taxable income is not
entitled to tax benefits under the abovementioned law
and is taxed at the regular tax rate of 36%, the
effective tax rate is the result of a weighted
combination of the various applicable rates and tax
exemptions, and the computation is made for income
derived from each approval on the basis of formulas
specified in the law and in the approvals.
B. NON - ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are taxed based on tax laws in
their countries of residence (mainly in the U.S.).
-44-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
C. INCOME BEFORE TAXES ON INCOME
Year ended December 31,
----------------------------
2003 2002 2001
---- ---- ----
Income before taxes on income:
Domestic $ 38,423 $ 42,317 $ 44,212
Foreign 11,090 11,977 7,638
-------- -------- --------
$ 49,513 $ 54,294 $ 51,850
======== ======== ========
D. TAXES ON INCOME
Year ended December 31,
----------------------------
2003 2002 2001
---- ---- ----
Taxes on income:
Current taxes:
Domestic $ 12,346 $ 11,654 $ 9,385
Foreign 718 6,114 3,048
-------- -------- --------
$ 13,064 17,768 12,433
======== ======== ========
Deferred income taxes:
Domestic (4,672) (3,561) (839)
Foreign 2,942 (2,059) (591)
-------- -------- --------
(1,730) (5,620) (1,430)
-------- -------- --------
Taxes in respect of prior years - (*)(2,800) -
-------- -------- --------
$ 11,334 $ 9,348 $ 11,003
======== ======== ========
(*) A reduction of tax expenses due to adjustments of estimated
tax provision pursuant to the completion of prior years'
tax assessments in respect of various Group companies.
-45-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
E. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components
of net deferred tax assets and liabilities are as follows:
Deferred
tax asset (liability)(1)
-------------------------------
Total Current Noncurrent
----- ------- ----------
As of December 31, 2003
Deferred tax assets:
Reserve and allowances $ 13,884 $ 13,922 $ (38)
Inventory 7,547 7,547 -
Net operating loss carryforwards 6,606 439 6,167
-------- -------- --------
28,037 21,908 6,129
Valuation allowance (2) (3,879) - (3,879)
-------- -------- --------
Net deferred tax assets 24,158 21,908 2,250
-------- -------- --------
Deferred tax liabilities:
Property, plant and equipment (12,769) - (12,769)
Other assets (14,397) - (14,397)
-------- -------- --------
(27,166) - (27,166)
-------- -------- --------
Net deferred tax assets (liabilities) $ (3,008) $ 21,908 $(24,916)
======== ======== ========
As of December 31, 2002
Deferred tax assets:
Reserve and allowances $ 10,510 $ 10,859 $ (349)
Inventory 9,138 9,138 -
Net operating loss carryforwards 2,326 - 2,326
-------- -------- --------
21,974 19,997 1,977
Valuation allowance (2) (2,326) - (2,326)
-------- -------- --------
Net deferred tax assets 19,648 19,997 (349)
-------- -------- --------
Deferred tax liabilities:
Property, plant and equipment (9,209) - (9,209)
Other assets (15,177) - (15,177)
-------- -------- --------
(24,386) - (24,386)
-------- -------- --------
Net deferred tax assets (liabilities) $ (4,738) $ 19,997 $(24,735)
======== ======== ========
-46-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 15 - INCOME TAXES (CONT.)
E. DEFERRED INCOME TAXES (CONT.)
(1) Current tax asset is included in other receivables.
Noncurrent tax liability is included as a long-term
liability.
(2) During 2003, the Group increased the valuation
allowance due to an increase in accumulated operating
loss carryforwards that more likely than not, will not
be utilized.
F. The Group's Israeli subsidiaries have estimated total
available carryforward tax losses of approximately $12,000
as of December 31, 2003. The Group's non-Israeli
subsidiaries have estimated available carryforward tax
losses of approximately $8,500 as of December 31, 2003 to
offset against future taxable profits for an indefinite
period. Deferred tax assets in respect of the above
carryforward losses amount to approximately $6,600 in
respect of which a valuation allowance has been recorded in
the amount of approximately $3,900.
G. Reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to income
of the Group, and the actual tax expense as reported in the
statements of operations, is as follows:
Year ended December 31,
----------------------------------------------
2003 2002 2001
---- ---- ----
Income before taxes as reported in the
consolidated statements of operations $ 49,513 $ 54,294 $ 51,850
Statutory tax rate 36% 36% 36%
======== ======== ========
Theoretical tax expense $ 17,825 $ 19,546 $ 18,666
Tax benefit arising from reduced rate as an
"Approved Enterprise" and other tax (8,391) (9,054) (7,697)
benefits
Tax adjustment in respect of different tax rate for
foreign subsidiaries 279 (461) (952)
Operating carryforward losses for which
valuation allowance was provided 126 2,189 101
Increase (decrease) in taxes resulting from
nondeductible expenses 993 (263) 571
Difference in basis of measurement for
financial reporting and tax return purposes 846 458 832
Taxes in respect of prior years - (2,800) -
Other differences, net (344) (267) (518)
-------- -------- --------
Actual tax expenses $ 11,334 $ 9,348 $ 11,003
======== ======== ========
Effective tax rate 22.9% 17.2% 21.2%
======== ======== ========
-47-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES
A. ROYALTY COMMITMENTS
1. The Company and certain Israeli subsidiaries partially
finance their research and development expenditures
under programs sponsored by the Office of the Chief
Scientist in Israel ("OCS") for the support of research
and development activities conducted in Israel. At the
time the participations were received, successful
development of the related projects was not assured.
In exchange for participation in the programs by the
OCS, the Company and the subsidiaries agreed to pay 2%
- 5% of total sales of products developed within the
framework of these programs. The royalties will be paid
up to maximum amount equaling 100% to 150% of the
grants provided by the OCS, linked to the dollar and
for grants received after January 1, 1999, also bearing
annual interest at a rate based on LIBOR and other
applicable law. The obligation to pay these royalties
is contingent on actual sales of the products and in
the absence of such sales, payment of royalties is not
required.
In some cases, the Government of Israel participation
(through the OCS) is subject to export sales or other
conditions. The maximum amount of royalties is
increased in the event of production outside of Israel.
The Company and certain of its subsidiaries are also
obligated to pay certain amounts to the Israeli
Ministry of Defense and others on certain sales
including sales resulting from the development of
certain technology.
Royalties expensed or accrued amounted to $7,812,
$14,741 and $8,252 in 2003, 2002 and 2001,
respectively.
2. In September 2001, the OCS issued "Regulations for the
Encouragement of Research and Development in Industry"
(rules for determining the level and payment of
royalties) ("the regulations"). The regulations allow
large R&D intensive companies to reach certain
agreements with the OCS regarding determination of the
amount and payment schedule of royalties, subject to
certain conditions.
-48-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
A. ROYALTY COMMITMENTS (CONT.)
If the Company elects to adopt the regulations, it will have
to record a significant one-time expense resulting from
accruing a liability for an absolute amount of royalties.
In May 2002, El-Op's Board of Directors approved an
arrangement, proposed by the OCS, according to which El-Op
pays commencing in 2002, an agreed amount of $10,632 in
exchange for a release from all obligations to pay royalties
in the future. As a result El-Op recorded an expense for the
agreed amount net of the accrual for royalties previously
recorded by El-Op in the amount of $9,801 included in Cost
of Revenues.
B. COMMITMENTS IN RESPECT OF LONG-TERM PROJECTS
In connection with long-term projects in certain countries,
the Company and certain subsidiaries undertook to use their
respective best efforts to make or facilitate purchases or
investments in those countries at certain percentages of the
amount of the projects. The companies' obligation to make or
facilitate third parties making such investments and
purchases is subject to commercial conditions in the local
market, typically without a specific financial penalty. The
maximum aggregate undertaking as of December 31, 2003
amounted to $630,000 to be performed over a period of up to
11 years, is typically tied to a percentage (up to 100%) of
the amount of the specific contract.
In the opinion of Management, the actual amount of the
investments and purchases is anticipated to be less than
that mentioned above, since certain investments and
purchases can result in reducing the overall undertaking on
more than a one to one basis.
-49-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
C. LEGAL CLAIMS
The Company and its subsidiaries are involved in legal
claims arising in the ordinary course of business, including
claims by employees, consultants and others. Company's
Management, based on the opinion of its legal counsel,
believes that the financial impact for the settlement of
such claims in excess of the accruals recorded in the
financial statements will not have a material adverse effect
on the financial position or results of operations of the
Group.
D. LEASE COMMITMENTS
The future mininum lease commitments of the Group under
various non-cancelable operating lease agreements in respect
of premises, motor vehicles and office equipment are as of
December 31, 2003:
2004 $ 8,520
2005 6,145
2006 5,557
2007 5,453
2008 and there after 5,451
--------
$ 31,126
========
Rent expenses for the years ended December 31, 2003, 2002
and 2001 amounted to $9,177, $9,215, and $7,978,
respectively.
E. The Company has provided, on a proportional basis to its
ownership interest, guarantees for two of its investees in
respect of credit lines from banks amounting to $13,900
(2002- $10,600), of which $13,400 (2002 - $10,200) relates
to a owned 50% foreign investee. The guarantees will exist
as long as the credit lines are in effect. The Company would
be liable to perform under the guarantee for any debt the
investee would be in default under the terms of the credit
line.
F. A lien on the Group's Approved Enterprises has been
registered in favor of the State of Israel. Grants received
in respect of projects which have not yet been approved
amount to approximately $800 (see Note 15 A (3) above ).
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
G. Guarantees in the amount of approximately $399,200 were
issued by banks securing certain advances from customers and
performance bonds on behalf of Group companies.
H. Certain Group companies recorded fixed charges on most of
their machinery and equipment, mortgages on most of their
real estate and floating charges on most of their assets.
Note 17 - SHAREHOLDER'S EQUITY
A. SHARE CAPITAL
Ordinary shares confer upon their holders voting rights, the
right to receive dividends and the right to share in equity
upon liquidation of the Company.
B. 2000 EMPLOYEE STOCK OPTION PLAN
In 2000, the Company adopted an employee stock option plan
for employees comprising options to purchase up to 2,500,000
Ordinary shares. The exercise price approximates market
price of the shares at the grant date. The plan includes an
additional 2,500,000 options to be issued as "phantom"
shares options that grant the option holders a number of
shares reflecting the benefit component of the options
exercised, as calculated at the exercise date, in
consideration for their par value only. Options vest over a
period of one to four years from the date of grant and
expire no later than six years from the date of grant.
Any options, which are canceled or forfeited before
expiration, become available for future grants. As of
December 31, 2003, 479,217 options of the Company were still
available for future grants.
C. "PHANTOM" SHARE OPTIONS
The phantom share options are considered as part of a
variable plan as defined in APB No. 25, and accordingly the
compensation cost of the options is measured by the
difference between the market price of the Company's shares
and the exercise price of the options at the end of every
reporting period and amortized by the accelerated method
over the remaining vesting period.
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
D. A summary of the Company's share option activity under the
plans is as follows:
December 31,
----------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
--------- --------- -------------- ---------- ----------- ---------------
Outstanding-beginning of
the year 4,511,724 $ 12.26 5,107,634 $ 11.93 5,671,918 $ 11.26
Granted 13,000 14.91 27,000 14.92 98,840 12.91
Exercised (757,947) 12.13 (558,901) 9.45 (598,348) 11.93
Forfeited (31,175) 12.29 (64,009) 11.33 (64,776) 12.50
--------- -------- --------- -------- --------- ---------
Outstanding - end of the
year 3,735,602 $ 12.30 4,511,724 $ 12.26 5,107,634 $ 11.93
========= ======== ========= ======== ========= =========
Options exercisable at
the end of the year 2,547,196 $ 12.23 2,287,790 $ 12.18 373,138 $ 7.56
========= ======== ========= ======== ========= =========
E. The options outstanding as of December 31, 2003, have been
separated into ranges of exercise price, as follows:
Options outstanding Options exercisable
----------------------------------------------- -----------------------------
Number Weighted Weighted
outstanding average Weighted Number average
as of remaining average outstanding as exercise
December 31, contractual exercise of December 31, price per
Exercise price 2003 life (years) price per share 2003 share
-------------- ------------ ------------ --------------- --------------- ---------
$10.61-$12.16 158,935 0.42 $10.69 158,935 $10.69
$12.18-$15.64 1,786,193 2.93 12.37 1,190,240 12.34
$12.18-$15.64(*) 1,790,474 2.94 12.37 1,198,021 12.33
--------- ---- ------ --------- ------
3,735,602 2.83 $12.30 2,547,196 $12.23
========= ==== ====== ========= ======
(*) Phantom share options.
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
E. (Cont.)
Where the Company has recorded deferred stock compensation
for options issued with an exercise price below the fair
value of the Ordinary shares, the deferred stock
compensation is amortized and recorded as compensation
expense ratably over the vesting period of the options.
Compensation expense (income) of $4,741, $(926) and $8,512
were recognized during the years ended December 31, 2003,
2002 and 2001, respectively.
F. The weighted average exercise price and fair value of
options granted during the years ended December 31, 2003,
2002 and 2001 were:
Less than market price
--------------------------------------
Year ended December 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Weighted-average
exercise price $ 14.91 $ 14.92 $ 12.91
Weighted-average
fair values on
grant date $ 4.63 $ 4.31 $ 5.14
G. Computation of basic and diluted net earnings per share:
Year ended Year ended Year ended
December 31, 2003 December 31, 2002 December 31, 2001
-------------------------------------- ------------------------------------ -------------------------------------
Net income
Net income to Weighted to Weighted Net income to Weighted
shareholders averaged Per shareholders averaged Per shareholders averaged Per
of Ordinary number of share of Ordinary number of share of Ordinary number of share
shares shares (*) amount shares shares (*) amount shares shares (*) amount
-------------------------------------- ------------------------------------ -------------------------------------
Basic net earnings $ 45,945 39,061 $1.18 $45,113 38,489 $1.17 $40,796 37,975 $1.07
Effect of dilutive
securities:
Employee stock
options - 1,169 - 1,374 - 1,384
---------- ------ ------- ------ ------- ------
Diluted net
earnings $ 45,945 40,230 $1.14 $45,113 39,863 $1.13 $40,796 39,359 $1.04
========== ====== ===== ======= ====== ===== ======= ====== =====
* In thousands
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 17 - SHAREHOLDER'S EQUITY (CONT.)
H. TREASURY SHARES
The Company's shares held by the Company are presented at
cost and deducted from shareholder's equity.
I. DIVIDEND POLICY
Dividends declared by the Company are paid in NIS or in
foreign currency subject to any statutory limitations. The
Company has decided not to declare dividends out of tax
exempt earnings.
Note 18 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
The Group adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information", ("SFAS No. 131"). The Group operates in one
reportable segment (see Note 1 for a brief description of the
Group's business).
A. Revenues are attributed to geographic areas based on
location of the end customers as follows:
Year ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Europe $109,409 $144,862 $179,560
U.S. 332,323 267,686 206,627
Israel 255,742 225,674 226,650
Others 200,506 189,234 151,664
-------- -------- --------
$897,980 $827,456 $764,501
======== ======== ========
B. Revenues are generated by the following product lines:
Year ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Airborne systems $373,580 $372,756 $334,201
Armored vehicles systems 199,800 135,700 126,300
Command, control, communications,
computers and intelligence systems (C4I) 133,900 122,700 105,800
Electro-optical systems 140,500 148,200 162,700
Others 50,200 48,100 35,500
-------- -------- --------
$897,980 $827,456 $764,501
======== ======== ========
C. Revenues from single customer, which exceed 10% of total
revenues in the reported years:
Year ended December 31,
-----------------------------------
2003 2002 2001
---- ---- ----
Customer A 21% 18% 20%
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 18 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION (CONT.)
D. Long-lived assets by geographic areas:
December 31,
----------------------------------
2003 2002 2001
---- ---- ----
Israel $229,396 $211,256 $ 84,864
U.S 81,261 83,814 194,690
Others 18,093 13,660 10,451
-------- -------- --------
$328,750 $308,730 $290,005
======== ======== ========
Note 19 - RESEARCH AND DEVELOPMENT COSTS, NET
Year ended December 31,
--------------------------------------
2003 2002 2001
---- ---- ----
Total expenses $ 65,487 $ 62,560 $ 67,871
Less - participations (10,568) (5,550) (9,112)
-------- -------- --------
$ 54,919 $ 57,010 $ 58,759
======== ======== ========
Note 20 - FINANCIAL EXPENSES, NET
Year ended December 31,
----------------------------------
2003 2002 2001
---- ---- ----
Expenses:
On long-term bank debt $ 2,719 $ 2,026 $ 3,033
On short-term bank credit and loans 2,838 3,415 3,806
Others 5,600 1,214 798
------- ------- -------
11,157 6,655 7,637
------- ------- -------
Income:
Interest on cash, cash equivalents
and bank deposits 309 1,547 2,179
Others 5,978 2,073 2,841
------- ------- -------
6,287 3,620 5,020
------- ------- -------
$ 4,870 $ 3,035 $ 2,617
======= ======= =======
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 21 - OTHER INCOME (EXPENSES), NET
Year ended December 31,
--------------------------------
2003 2002 2001
---- ---- ----
Gain (loss) on sale of property
plant and equipment $ 915 $(743) $ 327
Others, net (12) 281 447
----- ----- -----
$ 903 $(462) $ 774
===== ===== =====
Note 22 - RELATED PARTIES TRANSACTIONS AND BALANCES
Year ended December 31,
---------------------------------
2003 2002 2001
---- ---- ----
Income -
Sales (*) $34,674 $37,924 $28,675
Expenses charged $ 1,773 $ 902 $ 633
Cost and expenses -
Supplies and services $21,606 $10,457 $11,125
Participation in expenses (*) $ 1,751 $ 1,498 $ 1,632
Financial expenses $ 23 $ 110 $ 193
December 31,
------------------
2003 2002
---- ----
Trade receivables (*) $ 6,668 $ 9,647
Trade payables $ 4,975 $ 4,006
(*) The amounts relate mainly to transactions with VSI.
Note 23 - RECONCILIATION TO ISRAELI GAAP
As described in Note 1, the Company prepares its financial
statements in accordance with U.S. GAAP. The effects of the
differences between U.S. GAAP and Israeli GAAP on the Company's
financial statements are detailed below.
Differences between U.S. GAAP and Israeli GAAP:
-56-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 23 - RECONCILIATION TO ISRAELI GAAP (CONT.)
A building purchased from Elbit Ltd.
------------------------------------
According to generally accepted accounting principles in Israel
("Israeli GAAP"), the Company charged to capital reserves the
excess of the amount paid over net book value of a building
acquired from Elbit Ltd in 1999.
According to U.S. GAAP, the entire amount paid is considered as
the cost of the building acquired.
Proportional consolidation method
---------------------------------
According to Israeli GAAP, a jointly controlled company should be
included according to the proportional consolidation method.
According to U.S. GAAP, the investment in such a company is
recorded according to the equity method.
Tax benefit in respect of options exercised
-------------------------------------------
According to Israeli GAAP, tax benefits from employee options
exercised are recorded as a reduction of tax expense. According to
U.S. GAAP, the difference between the above mentioned tax benefits
and the benefits recorded in respect of compensation expense in
the financial statements is credited to capital reserves.
Goodwill
--------
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill
and Other Intangible Assets" according to which goodwill and
intangible assets with indefinite lives are no longer amortized
periodically but are reviewed annually for impairment (or more
frequently if impairment indicators arise). According to Israeli
GAAP, all intangibles, including goodwill should be amortized.
-57-
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)
Note 23 - RECONCILIATION TO ISRAELI GAAP
1. Effect on net income and earnings per share
Year ended December 31
--------------------------------------
2003 2002 2001
---- ---- ----
Net income as reported according to
U.S. GAAP $ 45,945 $ 45,113 $ 40,796
Adjustments to Israeli GAAP 595 (4,227) 1,767
-------- -------- --------
Net income according to Israeli GAAP $ 46,540 $ 40,886 $ 42,563
======== ======== ========
2. Effect on shareholders' equity
As per
As reported Adjustments Israeli GAAP
----------- ----------- ------------
As of December 31, 2003
Shareholders' equity $452,079 $(10,367) $441,712
======== ======== ========
As of December 31, 2002
Shareholders' equity $411,361 $(11,076) $400,285
======== ======== ========
# # # # # # # #
-58-