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/ Ronit
Zmiri
Name: Ronit Zmiri
Title: Corporate Secretary
|
Dated: March
12, 2008
EXHIBIT INDEX
Exhibit No.
|
Description
|
1.
|
Press Release dated March 11, 2008.
|
2.
|
Management Report.
|
3.
|
Financial Statements.
|
|
|
|
|
|
|
Exhibit
1
Earnings
Release
ELBIT SYSTEMS REPORTS FOURTH QUARTER
AND
FULL YEAR RESULTS FOR 2007
Record Revenues, Net Profit, Backlog and Operating Cash
Flow
2007 revenues increased by 30% to $1.98 billion with year-end backlog
over $4.6 billion
2007 EPS increased to $1.81 with operating cash flow of $261
million
Haifa, Israel, March 11, 2008 – Elbit Systems Ltd. (the
“Company”) (NASDAQ: ESLT, TASE: ESLT)
, the
international defense electronics company, today reported its consolidated results for the
fourth quarter and year-ended December 31, 2007.
The
Company’s backlog of orders
as of December 31,
2007
reached $4.62 billion, an increase of 22%, as compared to
$3.79 billion at the end of 2006. 70% of the backlog relates to orders outside of Israel.
Approximately 70% of the Company’s backlog as of December 31, 2007 is scheduled to be
performed during 2008 and 2009.
Full year 2007 results
Consolidated revenues for the year ended December 31, 2007
increased by 30% to $1,982 million, as compared to $1,523 million in
2006.
Gross
profit for the year ended December 31, 2007
was $516.4 million,
as compared to gross profit of $373.5 million in 2006, and the gross profit margin in 2007
was 26.1%, as compared to 24.5% in 2006.
The
annual results were negatively affected by one-time charges related to the completion of
the acquisition of Tadiran Communications on April 26, 2007, which were charged in the
second quarter of 2007. The Company recorded $27.1 million in expenses in relation to the
acquisition as follows: In-Process Research & Development (“IPR&D”)
write-off of $16.6 million recorded under operating expenses, and restructuring expenses of
$10.5 million recorded under cost of goods sold, which negatively affected the gross profit
rate by 0.5%.
Consolidated net earnings for the year ended December 31, 2007
increased by 6.2% to $76.7 million, as compared to $72.2 million in 2006.
Diluted earnings per share (“EPS”) in 2007 were $1.81, as compared to $1.72 in
2006.
Excluding the above one-time, net charges related to the acquisition of
Tadiran Communications, net earnings for the year ended December 31, 2007 were $101
million, and EPS was $2.39.
Operating cash flow
produced by the Company in
2007 was $261 million, as compared to $201 million in 2006.
Fourth quarter 2007 results
Consolidated revenues
for the fourth quarter of
2007 increased by 26.5% to $591.1 million, as compared to $467.4 million in the
corresponding quarter of 2006.
Gross
profit
for the fourth quarter of 2007 was $156.2 million, as
compared to gross profit of $100.2 million in the fourth quarter of 2006, and the gross
profit margin in the fourth quarter of 2007 was 26.4%, as compared to 21.4% in the fourth
quarter of 2006.
During
the fourth quarter of 2007, the Company had a $10 million financial expense related to the
write-off of investments Auction Rate Securities, which were rated AAA or AA when acquired,
and which have experienced multiple failed auctions due to a lack of liquidity in the
market for these securities.
The
Company gained a one-time tax benefit of approximately $10 million, related to prior
years’ adjustments arising from executing tax settlements by the Company and some of
its subsidiaries in the last quarter of 2007.
Consolidated net earnings
for the fourth
quarter of 2007 increased by 33.2% to $31.9 million, as compared to $24.0 million for the
same period of 2006. Diluted EPS for the fourth quarter of 2007 was $0.75, as compared to
$0.57 for the fourth quarter of 2006.
The
President and CEO of Elbit Systems, Joseph Ackerman, commented: “2007 was a banner
year in which we continued our top line growth while producing record net profit, EPS,
backlog and operating cash flow. We have been very successful in further globalizing our
business, with strong growth in Europe, and we now have presence in important and
diversified geographic regions, with a cutting edge comprehensive product portfolio for the
evolving needs of the markets in which we are active.”
He
added: “The synergies of our recent acquisitions with the rest of the Company are
already bearing fruit, including implementing the successful integration of Tadiran
Communications and Ferranti Technologies into the Elbit Systems family. We are gaining
access to increased business opportunities, by utilizing our ability to offer more
comprehensive and integrated solutions. We have been able to leverage and utilize our
ability to offer even more wide-ranging end-to-end systems and solutions for the benefit of
our customers and to compete for even larger projects. With our dedicated and professional
worldwide workforce, we believe there are still further underlying synergies between our
businesses and opportunities to grow. I am confident that we will continue to be able to
meet our goals in the years ahead.”
The
Board of Directors has declared a dividend of $0.18 per share for the fourth quarter of
2007. The dividend will be paid on April 14, 2008, net of taxes and levies, at the rate of
16.29%. The record date of the dividend is April 1, 2008.
Conference Call
The
Company will be hosting a conference call on Tuesday, March 11, at 10.00 am EDT.
To
participate, please call one of the following teleconferencing numbers. Please begin
placing your calls at least 5 minutes before the conference call commences. If you are
unable to connect using the toll-free numbers, please try the international dial-in
number.
US
Dial-in Numbers: 1 888 407 2553
UK
Dial-in Number: 0 800 917 9141
ISRAEL
Dial-in Number: 03 918 0610
INTERNATIONAL Dial-in Number: +972 3 918 0610
at:
10:00
am Eastern Daylight Time 7:00 am Pacific Time
2:00
pm Greenwich Mean Time 4:00 pm Israel Time
This
call will also be broadcast live on Elbit Systems’ web-site at
http://www.elbitsystems.com
. An online replay
will be available from 24 hours after the call ends.
Alternatively, for two days following the end of the call, investors will be
able to dial a replay number to listen to the call. Please dial either: 1 888 254 7270 (US)
0 800 917 4256 (UK) or +972 3 925 5938 (Israel and International).
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. The Company, which includes Elbit Systems
and its subsidiaries, operates in the areas of aerospace, land and naval systems, command,
control, communications, computers, intelligence surveillance and reconnaissance
(“C4ISR”), unmanned air vehicle (UAV) systems, advanced electro-optics,
electro-optic space systems, EW suites, airborne warning systems, ELINT systems, data links
and military communications systems and radios. The Company also focuses on the upgrading
of existing military platforms and developing new technologies for defense, homeland
security and commercial aviation applications.
Contacts:
Company
Contact
:
Joseph Gaspar, Corporate VP & CFO
Dalia Rosen, Director of Corporate Communications
|
IR
Contact
:
Ehud Helft
Kenny Green
|
Elbit Systems Ltd.
|
G.K. Investor Relations
|
Tel: +972-4-8316663
|
Tel:
1-866-704–6710
|
Fax: +972-4-8316944
|
Fax:
+ 972-3-607–
711
|
E-mail:
gspr@elbit.co.il
daliarosen@elbit.co.il
|
E-mail:
info@gkir.com
|
This
press release contains forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended) regarding Elbit Systems Ltd. and/or its subsidiaries (collectively the
Company), to the extent such statements do not relate to historical or current fact.
Forward Looking Statements are based on management’s expectations, estimates,
projections and assumptions. Forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.
These statements are not guarantees of future performance and involve certain risks and
uncertainties, which are difficult to predict. Therefore, actual future results,
performance and trends may differ materially from these forward-looking statements due to a
variety of factors, including, without limitation:scope and length of customer
contracts;governmental regulations and approvals;changes in governmental budgeting
priorities;general market, political and economic conditions in the countries in which the
Company operates or sells, including Israel and the United States among others;differences
in anticipated and actual program performance, including the ability to perform under
long-term fixed-price contracts; andthe outcome of legal and/or regulatory
proceedings
.
The factors listed above
are not all-inclusive, and further information is contained in Elbit Systems Ltd.’s
latest annual report on Form 20-F, which is on file with the U.S. Securities and Exchange
Commission.All forward-looking statements speak only as of the date of this release. The
Company does not undertake to update its forward-looking statements.
(FINANCIAL TABLES TO FOLLOW)
ELBIT SYSTEMS LTD.
CONSOLIDATED BALANCE
SHEETS
(In thousand of US Dollars)
|
|
December
31
|
|
December
31
|
|
|
|
|
|
|
|
|
|
Audited
|
|
Audited
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash and short term
deposits
|
|
373,955
|
|
85,400
|
|
Trade receivable and
others
|
|
569,533
|
|
465,429
|
|
Inventories, net of
advances
|
|
|
|
|
|
Total current
assets
|
|
1,424,091
|
|
922,791
|
|
|
|
|
|
|
|
Affiliated Companies
& other Investments
|
|
66,161
|
|
235,723
|
|
Long-term receivables
& others
|
|
309,991
|
|
190,963
|
|
Fixed Assets,
net
|
|
350,514
|
|
294,628
|
|
Other assets,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholder’s Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
1,267,198
|
|
810,885
|
|
Long-term
liabilities
|
|
957,200
|
|
461,760
|
|
Minority
Interest
|
|
20,085
|
|
6,871
|
|
Shareholder’s
equity
|
|
|
|
|
|
|
|
|
|
|
|
ELBIT SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF
INCOME
(In thousand of US Dollars, except for
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31
|
|
Three Months
Ended
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
Audited
|
|
Revenues
|
|
1,981,761
|
|
1,523,243
|
|
591,056
|
|
467,388
|
|
Cost of
revenues
|
|
1,454,913
|
|
1,149,768
|
|
434,891
|
|
367,163
|
|
Restructuirng
expenses
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development, net
|
|
126,995
|
|
92,232
|
|
39,401
|
|
27,869
|
|
Marketing and
selling
|
|
157,411
|
|
111,880
|
|
44,277
|
|
30,853
|
|
General and
administrative
|
|
107,447
|
|
77,505
|
|
34,265
|
|
20,051
|
|
IPR&D
write-off
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
107,953
|
|
91,858
|
|
38,222
|
|
21,452
|
|
|
|
|
|
|
|
|
|
|
|
Financial expenses,
net
|
|
(19,329
|
)
|
(21,456
|
)
|
(10,632
|
)
|
(6,093
|
)
|
Other income
(expenses), net
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
88,992
|
|
72,216
|
|
27,876
|
|
16,782
|
|
Provisions for income
taxes
|
|
|
)
|
|
)
|
|
|
|
)
|
|
|
75,182
|
|
51,522
|
|
35,377
|
|
12,733
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings
(losses) of affiliated companies and partnership
|
|
14,565
|
|
14,743
|
|
4,544
|
|
6,554
|
|
Minority
rights
|
|
|
)
|
|
|
|
)
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share
|
|
|
|
|
|
|
|
|
|
Basic net earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings
per share
|
|
|
|
|
|
|
|
|
|
Exhibit
2
Elbit Systems Ltd.
Management’s Report
For
the Year Ended December 31, 2007
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”) for the year ended December
31, 2007 and the Company’s Form 20-F for the year ended December 31, 2006, 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, governmental authorizations, 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.
Business Description
The Company operates in the areas of aerospace, land and naval systems,
command, control, communications, computers, intelligence, surveillance and reconnaissance
(“C
4
ISR”), unmanned air vehicles (“UAVs”), advanced
electro-optic and space technologies, electronic warfare (“EW”) suites,
airborne warning systems, electronic intelligence (“ELINT”) systems, data
links, military communications systems and equipment and radios. The Company also focuses
on the upgrading of existing military platforms and developing new technologies for
defense, homeland security and commercial aviation applications.
The Company provides support services for the platforms it upgrades as well
as the systems and products it supplies. In addition, the Company offers a wide range of
logistic support services as well as advanced engineering and manufacturing services to
various customers, utilizing its significant logistic and 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.
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.
1
Financial Highlights
On April 26, 2007, the Company completed the acquisition of 100% of the
shares of Tadiran Communications Ltd. (“Tadiran”). The financial statements
include the consolidation of Tadiran commencing May 1, 2007. The Company’s financial
statements include an In-Process Research and Development (“IPR&D”)
write-off and restructuring costs in the second quarter, due to the acquisition, in the
amount (net) of $24.4 million, which amounts to $0.58 per share of the Company.
The Company’s revenues increased by 30% and reached $1,982 million in
2007, as compared to $1,523 million in 2006.
Net earnings in 2007 (including the $24.4 million in IPR&D write-off and
restructuring costs, net, amounting to $0.58 per share, mentioned above) were $76.7 million
and the diluted earnings per share were $1.81, as compared to $72.2 million and $1.72,
respectively in 2006.
The Company’s backlog as of December 31, 2007 reached $4.62 billion,
as compared to $3.79 billion as of December 31, 2006, an increase of 22%.
The Company’s cash flow generated from operations in the year ended
December 31, 2007 was $261 million, as compared to $201 million in the year ended December
31, 2006.
The Board of Directors declared a dividend of $0.18 per share for the last
quarter of 2007, resulting in a cumulative dividend for 2007 of $ 0.67 per
share.
Trends in the defense electronics and homeland security markets in which the
Company operates have been impacted by the nature of recent conflicts and terrorism
activities throughout the world. Lessons learned in Operation Iraqi Freedom, Afghanistan
and various terrorist actions worldwide have increased the focus of defense forces on low
intensity conflicts and homeland security.
In the defense electronics market, there is an increasing demand for
products and systems in the areas of C
4
ISR and UAV. Accordingly, while the
Company continues to perform platform upgrades, in recent years it has placed more emphasis
on C
4
ISR, including information systems, intelligence gathering, situational
awareness, precision guidance, all weather and day/night operations, border and perimeter
security, UAVs, space and satellite based defense capabilities and homeland security
systems.
The Company believes that its core technologies and abilities enable it to
take advantage of many of these emerging trends, as well as to continue to participate in
the “Current Force” legacy operations of its customers.
In recent years consolidations in the defense industry have affected
competition. This has decreased the number but increased the relative size and resources of
the Company's competitors. The Company adapts to evolving market conditions by adjusting
its business strategy to changing defense market conditions. It also anticipates continued
competition in defense markets due to declining defense budgets in some
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 and at the
same time in many cases enhancing the industrial capabilities at these
countries.
2
The Company’s backlog of orders as of December 31, 2007 reached $4,624
million, of which approximately 70% were for orders outside Israel. The Company’s
backlog as of December 31, 2006 was $3,786 million, of which approximately 68% were for
orders outside Israel.
Approximately 70% of the Company’s backlog as of December 31, 2007 is
scheduled to be performed during 2008 and 2009. The majority of the 30% balance is
scheduled to be performed in 2010 and 2011.
|
D.
|
Operating Subsidiaries and Affiliated
Entities
|
As of December 31, 2007, the Company had the following major operating
subsidiaries and affiliated entities:
|
•
|
Elbit Systems Electro-Optics Industries Elop Ltd.
(“Elop”) - a wholly-owned subsidiary based in Israel, is
engaged in the area of advanced electro-optical products and systems for
military and civilian use. Elop’s business areas include thermal
imaging products, lasers, image intelligence (“IMINT”)
solutions, head-up displays, integrated sights for ground forces, space and
airborne reconnaissance systems and electro-optical homeland security and
defense security systems.
|
|
•
|
Elbit Systems of America, LLC (“ESA”) – is
the headquarters for the U.S. operations of the Company and includes the
following subsidiaries:
|
|
•
|
EFW Inc. (“EFW”), a wholly-owned subsidiary
based in Fort Worth, Texas, provides combat-proven design, development,
production and life-cycle support of mission critical systems for U.S. and
allied military tactical platforms.
|
|
•
|
Kollsman, Inc. (“Kollsman”), a wholly-owned
subsidiary located in Merrimack, New Hampshire, is a supplier of avionic
equipment, electro-optic systems and subsystems, vision based solutions and
surveillance systems to the commercial aviation, defense and homeland
security markets, as well as a supplier of medical
instrumentation.
|
|
•
|
International Enterprises, Inc. (“IEI”), a
wholly-owned subsidiary based in Talladega, Alabama, provides depot level
repair, manufacturing and logistics support for military electronic systems
and components.
|
|
•
|
Vision Systems International LLC (“VSI”), a 50%
joint venture with Rockwell Collins, located in San Jose, California, is a
supplier of helmet mounted cueing systems for fixed-wing, tactical fighter
aircraft.
|
|
•
|
Tadiran – a wholly-owned subsidiary based in Israel,
is engaged in the worldwide market for military communications systems and
equipment and is also active in the civilian communications market, which
as of December 31, 2007, had wholly-owned operating facilities in the U.S.
and Germany. In November 2007, the Company announced that Elbit Systems'
Board of Directors approved a plan to merge Tadiran into Elbit Systems and
for Tadiran's Israeli operations to be combined with Elbit Systems Land and
C4I Division under a new wholly-owned subsidiary Elbit Systems Land &
C4I - Tadiran Ltd. The merger plan is subject to completion of certain
approvals which are currently pending.
|
3
|
•
|
Cyclone Aviation Products Ltd. (“Cyclone”)
– a wholly-owned subsidiary based in Israel, is engaged in the
production of aerostructure components and parts for leading aerospace
companies. Cyclone also performs maintenance, repair and customized
upgrading of light airplanes and helicopters.
|
|
•
|
Silver Arrow LP – a wholly-owned limited partnership
based in Israel, is engaged in UAV systems development, production and
support and produces a full range of UAV systems for tactical
use.
|
|
•
|
Elbit Security Systems Ltd. (“Elsec”) (formerly
Ortek Ltd.) – a wholly-owned subsidiary based in Israel, is engaged
in the development and production of optical security systems and products
and performs a range of projects for homeland security and defense
applications.
|
|
•
|
European subsidiary – a wholly-owned subsidiary based
in Belgium, is involved mainly in development, manufacturing and support of
electro-optical products for defense and space markets.
|
|
•
|
Ferranti Technologies (Group) Limited (“FTL”)
– a wholly-owned subsidiary based in the U.K., provides engineering,
manufacturing and customer logistic support to the aerospace and defense
industry.
|
|
•
|
Elisra Electronic Systems Ltd. (“Elisra”)
– in which Elbit Systems owns a 70% interest, with the balance being
owned by a subsidiary of Israel Aerospace Industries Ltd., is a privately
held Israeli company, which together with its two wholly-owned Israeli
subsidiaries – Tadiran Electronic Systems Ltd. and Tadiran
Spectralink Ltd. specializes in the design, manufacture, integration and
support of advanced defense solutions and its main business areas include
EW suites, airborne warning systems, ELINT systems, artillery C4I systems
and data links for UAVs and guided munitions.
|
|
•
|
UAV Tactical Systems Ltd. (“U-TacS”) – a
51% owned subsidiary based in the U.K., with the balance being owned by
Thales U.K. Limited. U-TacS main business is to perform a major part of the
U.K. Watchkeeper Program and other related programs.
|
|
•
|
Kinetics Ltd. (“Kinetics”) – a 51%-owned
subsidiary based in Israel, is involved mainly in the development and
production of systems and components for combat vehicles.
|
|
•
|
Semi-Conductor Devices (“SCD”) – an
Israeli affiliated partnership held in equal part by each of the Company
and Rafael Armaments Development Authority Ltd. (“Rafael”), is
engaged in the development and production of infrared detectors and laser
diodes.
|
|
•
|
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.
|
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.
4
The Company also has holdings, directly and indirectly, in certain
non-defense technologies, mainly spin-off, companies whose activities are usually based on
technologies that were developed within the Company. The companies are involved primarily
in the areas of computer technology, medical equipment, 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.
|
•
|
On December 2, 2007, the Company announced that its
subsidiary Cyclone was awarded a contract to supply the US Navy 330-gallon
fuel tanks to be installed on F-18 aircraft. The first phase of this
contract amounts to $2.4 million and the total value is estimated at
approximately $60 million. Deliveries are scheduled to take place between
2009 and 2013.
|
|
•
|
On December 17, 2007, the Company announced that
Skylark® II was selected by the South Korean military as a preferred
solution in a tender involving extensive technical tests and including UAV
manufacturers from all over the world. The first phase of the contract
includes a comprehensive Skylark® II system with additional systems
expected in the future.
|
|
•
|
On January 20, 2008, the Company announced that it's
subsidiary Elop recently was awarded contracts valued at a total of
approximately $40 million from several customers for the supply of its
CORAL and CORAL-CR hand-held lightweight thermal imaging
cameras.
|
|
•
|
On January 27, 2008, the Company announced that it has been
awarded a contract in the amount of approximately $40 million from the
Netherlands MoD for the supply of advanced Battlefield Management Systems
– BMS. The contract calls for deliveries over a five-year
period.
|
|
•
|
On February 11, 2008, the Company announced that its U.S.
subsidiary Kollsman was awarded a $26.5 million delivery order under a
previous Indefinite-Delivery/Indefinite-Quantity (ID/IQ) contract from the
U.S. Marine Corp Systems Command for thermal laser spot imagers with
accessories and logistic support.
|
|
•
|
On March 4, 2008, the Company announced that its subsidiary,
Cyclone, was awarded a contract by Spirit AeroSystems to supply doors for
commercial aircraft. The contract, valued at approximately $160 million, is
Cyclone's largest contract ever, with deliveries scheduled between 2009 and
2016.
|
|
F.
|
Critical Accounting Policies and
Estimates
|
The Company’s significant accounting policies are described in Note 2
to the audited consolidated financial statements for the year ended December 31,
2007.
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 United States (“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.
5
The Company believes its most critical accounting policies relate
to:
|
•
|
Business Combinations and Purchase Price
Allocation.
|
|
•
|
Impairment of Goodwill and Other Long-Lived
Assets.
|
|
•
|
Other-Than-Temporary Decline in Value of Investments in
Investee Companies.
|
|
•
|
Useful Life of Long-Lived Assets.
|
The Company generates revenues, mainly from long-term contracts involving
the design, development, manufacture and integration of defense systems and products and
providing support and services for such systems and products.
Revenues from long-term contracts are recognized based on Statement of
Position 81-1 “Accounting for Performance of Construction-Type and Certain
Production-Type Contracts” (“SOP 81-1”) according to which revenues are
recognized on the percentage-of-completion basis.
Sales under long-term fixed-price contracts which provide for a substantial
level of development efforts in relation to total contract efforts are recorded using the
cost-to-cost method of accounting as the basis to measure progress toward completing the
contract and recognizing revenues. According to this method, sales and profits are recorded
based on the ratio of costs incurred to estimated total costs at completion. In certain
circumstances, when measuring progress toward completion, the Company considers other
factors, such as achievement of performance milestones.
Sales and anticipated profit under long-term fixed-price production type
contracts are recorded on a percentage-of-completion basis, using the units-of-delivery as
the basis to measure progress toward completing the contract and recognizing revenues. In
certain circumstances, which involve long-term fixed-price production type contracts for
non-homogenous or small quantity of units, revenue is recognized based on the achievement
of performance milestones, which provide a more reliable, and objective, measure to the
extent of progress toward completion.
Sales and anticipated profit under long-term fixed-price contracts that
involve both development and production are recorded using the cost-to-cost method and
units-of-delivery method as applicable to the phase of the contract, as the basis to
measure progress toward completion. In addition, when measuring progress toward completion
under the development portion of the contract, the Company considers other factors, such as
achievement of performance milestones.
The percentage-of-completion method of accounting requires management to
estimate the cost and gross profit margin for each individual contract. Estimated gross
profit or loss from long-term contracts may change due to changes in estimates resulting
from differences between actual performance and original estimated forecasts. Such changes
in estimated gross profit are recorded in results of operations when they are reasonably
determinable by management, on a cumulative catch-up basis. Anticipated losses on contracts
are charged to earnings when determined to be probable.
Sales under cost-reimbursement-type contracts are recorded as costs are
incurred. Applicable estimated profits are included in earnings in the proportion that
incurred costs bear to total estimated costs.
Amounts representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and realization is probable.
Penalties and awards applicable to performance on contracts are considered in estimating
sales and profit rates and are recorded when there is sufficient information to assess
anticipated contract performance.
6
The Company believes that the use of the percentage-of-completion method is
appropriate as the Group has the ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and contract costs. In addition,
contracts executed include provisions that clearly specify the enforceable rights regarding
services to be provided and received by the parties to the contracts, the consideration to
be exchanged and the manner and terms of settlement. In all cases the Company expects to
perform its contractual obligations and its customers are expected to satisfy their
obligations under the contract.
In cases where the contract involves the delivery of products and
performance of services, the Company follows the guidelines specified in EITF 00-21,
“Revenue Arrangements with Multiple Deliverables” in order to allocate the
contract fees between the products accounted for under SOP 81-1 and the
services.
In certain circumstances, sales under short-term fixed-price production type
contracts are accounted for in accordance with SAB No. 104, "Revenue Recognition in
Financial Statements" ("SAB 104"), and recognized when the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the seller's price to
the buyer is fixed or determinable, no further obligation exists and collectability is
reasonably assured.
Management reviews periodically the estimates of progress towards completion
and project costs. These estimates are determined based on engineering estimates and past
experience, by personnel having the appropriate authority and expertise to make reasonable
estimates of the related costs. Such engineering estimates are reviewed periodically for
each specific contract by professional personnel from various disciplines within the
organization. These estimates take into consideration the probability of achievement of
certain milestones, as well as other factors that might impact the contract’s
completion.
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 testing requirement changes. If any of the above factors were to change,
or if different assumptions were used in estimating progress cost and measuring progress
towards completion, it is likely that materially different amounts would be reported in the
Company’s consolidated financial statements.
|
(2)
|
Business Combinations and Purchase Price
Allocation
|
Business combinations are accounted for using the purchase method of
accounting, under which the total purchase price is allocated to proportional interest in
the acquired company’s assets and liabilities based on their estimated fair values,
and the remainder, if any, is attributed to goodwill.
The aggregate purchase price of any investment accounted for under either
the consolidation or the equity method of accounting is being allocated to identifiable net
assets, intangible assets other than goodwill, IPR&D activities, and to goodwill. The
amount allocated to IPR&D is charged immediately to the Company’s results of
operations in accordance with FASB Interpretation No. 4, "Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the Purchase Method" (FIN 4). The amounts
allocated to finite-lived intangible assets other than goodwill are amortized on a
straight-line basis over their weighted average expected useful life.
Estimating the fair value of certain assets acquired and liabilities assumed
is judgmental in nature and often involves the use of significant estimates and
assumptions, mainly with respect to intangible assets. While there are a number of
different methods for estimating the value of intangibles acquired, the primary method used
is the discounted cash flow approach. Some of the more significant estimates and
assumptions inherent in the discounted cash flow approach include projected future cash
flows, including their timing, a discount rate reflecting the risk inherent in the future
cash flows
7
and a terminal growth rate. Another area which requires judgment which can
impact the Company’s results of operations is estimating the expected useful lives of
the intangible assets.
To the extent intangible assets are ascribed with longer useful lives, there
may be less amortization expenses recorded in any given period. As the Company’s
entities operate in industries which are extremely competitive, the value of the intangible
assets, including goodwill and their respective useful lives, are exposed to future adverse
changes which can result in a charge to the Company’s results of
operations.
|
(3)
|
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
Company conducts a goodwill impairment review at least annually and on an interim basis
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important which could trigger an impairment review include
significant underperformance relative to historical or expected future operating results
and significant negative industry or economic trends. The Company tests for impairment at a
level referred to as a reporting unit. Determining fair value of a reporting unit involves
the use of significant estimates and assumptions. These estimates and assumptions could
have an impact on whether or not an impairment charge is recognized. To determine fair
value, the Company may use a number of valuation methods.
The methods commonly used to value a closely held company are the Income,
Market and Cost approaches. The Company’s reported units fair market value was
estimated using two valuation methodologies: the Income Approach and the Market Approach.
As mentioned above, these approaches use estimates and assumptions including projected
future cash flows, discount rate and terminal growth rate. Using different assumptions
could result in different results.
As of December 31, 2007, the Company’s goodwill amounted to $332
million. The Company tested its goodwill as of December 31, 2007 and concluded that no
impairment loss has been identified.
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 whenever events or circumstances indicate that carrying amount of an
asset may not be recoverable. The 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 considered 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. In the evaluation of fair value, the Company uses significant
estimates and assumptions such as projected future cash flows which are subject to high
degree of judgment. If the carrying value of the intangible asset exceeds its fair value,
an impairment loss is recognized in an amount equal to that excess. In the valuation of
fair value the Company uses judgment as to which is the most appropriate method to use for
measuring fair value and as to what assumptions to use in implementing the methodology
chosen. As the Company operates in industries which are extremely competitive, changes in
the assumptions and estimates may affect the carrying value of the intangible assets, and
could result in an additional impairment charge to the Company’s results of
operations. As of December 31, 2007, the Company’s long-lived assets amounted to
$649.4 million, including $298.9 million in intangible assets, and the Company concluded
that there were no indicators for impairment.
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. See also “Finance Expenses (Net)”
below.
8
|
(4)
|
Other-Than-Temporary Decline in Value of Investments
in Investee Companies
|
At the end of each reported period the Company evaluates whether an
other-than-temporary decline in the value of an investment in investee companies has been
sustained. This evaluation is judgmental in nature. If it has been determined that an
investment has sustained an other-than-temporary decline in its fair value relative to its
carrying value, the investment is written down to its fair value by a charge to the
Company’s results of operations.
An evaluation of fair value is dependent upon specific facts and
circumstances. Factors that are considered in this determination include financial
information (including, among others, budgets, business plans and financial statements) and
independent appraisals, if available. Factors indicative of an other-than-temporary decline
include recurring operating losses, credit defaults, specific conditions affecting the
investment, such as in the industry or in a geographic area, and subsequent rounds of
financing at an amount below the cost basis of the investment. This list is not all
inclusive, and the Company weighs all quantitative and qualitative factors in determining
if an other-than-temporary decline in value of an investment has occurred. As the Company
operates in industries which are extremely competitive, it is possible that estimates could
change in the near term, and there can be no assurance that an additional write-down or
write-off of the carrying value will not be required in the future.
|
(5)
|
Useful Life of Long-Lived Assets
|
Intangible assets and property, plant and equipment are amortized over their
estimated useful lives. Determining the useful life of such assets involves the use of
estimates and judgments. In determining the useful life the Company takes into account
various factors such as the expected use of the assets, effects of obsolescence,
competition, demand, changes in business, acquisitions and other economic factors. If the
Company’s estimates changes and the useful lives of such assets increase or decrease,
it will affect the Company’ results of operations.
According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, the Company
is required to include in its annual report for the fiscal year ending December 31, 2007 an
assessment, as of the end of the fiscal year, of the effectiveness of its internal controls
over financial reporting.
During 2007, the Company took steps to assure compliance of its
documentation and internal controls over financial reporting with the guidelines stipulated
in the Sarbanes-Oxley Act. The Company has completed the required activities for the 2007
year end financial statements.
|
H.
|
New Accounting Standards
|
New pronouncements issued but not effective as of December 31, 2007 are not
expected to have a significant effect on the Company’s consolidated financial
position or results of operations, with the possible exception of the following, which are
currently being evaluated by management:
|
•
|
In September 2006, the FASB issued SFAS No. 157,
"Fair Value Measurements" (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and enhances fair value measurement disclosure. In
February 2008, the FASB issued FASB Staff Position (FSP) 157-1,
"Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13" FSP
157-1 and FSP 157-2, "Effective Date of FASB Statement No. 157"
FSP 157-2. FSP 157-1 amends SFAS No. 157 to remove certain leasing
transactions from its scope. FSP 157-2 delays the effective date of
SFAS No. 157 for all non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of 2009. The measurement and
disclosure requirements related to financial assets and financial
liabilities are effective for the Company beginning in the first quarter of
2008.
|
9
The resulting fair values calculated under SFAS No. 157 after
adoption may be different from the fair values that would have been calculated under
previous guidance. The Company is currently evaluating the impact that
SFAS No. 157 will have on its consolidated financial statements when it is
applied to non-financial assets and non-financial liabilities beginning in the first
quarter of 2009.
|
•
|
In February 2007, the FASB issued SFAS No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities"
(“SFAS No. 159”). SFAS No. 159 permits
companies to choose to measure certain financial instruments and other
items at fair value. The standard requires that unrealized gains and losses
are reported in earnings for items measured using the fair value option.
SFAS No. 159 is effective for the company beginning in the first
quarter of 2008. It is not anticipated that the adoption of
SFAS No. 159 will have a significant impact on the
Company’s consolidated financial statements.
|
|
•
|
In June 2007, the FASB ratified EITF 07-3, Accounting
for Non-Refundable Advance Payments for Goods or Services Received for Use
in Future Research and Development Activities
(“EITF 07-3”). EITF 07-3 requires that nonrefundable
advance payments for goods or services that will be used or rendered for
future research and development activities be deferred, capitalized and
recognized as an expense as the goods are delivered or the related services
are performed. EITF 07-3 is effective, on a prospective basis, for
fiscal years beginning after December 15, 2007. The Company does not
expect it to have a material impact on its consolidated results of
operations and financial condition from the adoption of EITF
07-3.
|
|
•
|
In December 2007, the FASB issued SFAS No. 141
(revised 2007), "Business Combinations"
(“SFAS No. 141(R)”). Under SFAS No. 141(R),
an entity is required to recognize the assets acquired, liabilities
assumed, contractual contingencies, and contingent consideration at their
fair value on the acquisition date. It further requires that
acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred
tax asset valuation allowances and acquired income tax uncertainties after
the measurement period impact income tax expense. In addition, acquired
IPR&D is capitalized as an intangible asset and amortized over its
estimated useful life. The adoption of SFAS No. 141(R) will
change the Company’s accounting treatment for business combinations
consumed beginning in the first quarter of 2009.
|
|
•
|
In December 2007, the FASB issued FAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements —
an amendment of Accounting Research Bulletin No. 51
(“FAS 160”). FAS 160 addresses the accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable
to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated.
FAS 160 also establishes disclosure requirements that clearly identify
and distinguish between the interests of the parent and the interests of
the noncontrolling owners. FAS 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by the Company
in 2009. The Company is currently assessing the impact of this standard on
its future consolidated results of operations and financial
condition.
|
10
|
I.
|
Off Balance Sheet and Other Long-Term Arrangements and
Commitments
|
|
•
|
Elbit Systems and certain Israeli subsidiaries partially
finance their research and development expenditures under programs
sponsored by the Government of Israel Chief Scientist Office
(“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, Elbit Systems 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.
Elbit Systems and some of its subsidiaries may also be obligated to pay
certain amounts to the Israeli Ministry of Defense (“IMOD”) and others on
certain sales including sales resulting from the development of some of the technologies
developed with the IMOD’s or such other parties’ participation.
|
•
|
In connection with long-term projects in certain countries,
Elbit Systems and certain subsidiaries undertook to use their respective
best efforts to make or facilitate purchases or investments in those
countries at specified percentages (typically up to 100%) of the amount of
the specific contract. 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,
2007 amounted to $883 million to be performed over a period of up to 10
years. In the opinion of the Company’s management, the actual amount
of the investments and purchases is anticipated to be less than that
mentioned above, since certain investments and purchases can result in
reducing the overall undertaking on more than a one-to-one
basis.
|
|
•
|
The future minimum lease commitments of the Company under
various non-cancelable operating lease agreements in respect of premises,
motor vehicles and office equipment are as of December 31, 2007 as follows:
$26 million for 2008, $23 million for 2009, $19 million for 2010 and $28
million for 2011 and thereafter.
|
|
•
|
In connection with bank credits and loans, including
performance guarantees issued by banks and bank guarantees in order to
secure certain advances from customers, Elbit Systems and certain
subsidiaries are obligated to meet certain financial covenants. Such
covenants include requirements for shareholders' equity, current ratio,
operating profit margin, tangible net worth, EBITDA, interest coverage
ratio and total leverage. As of December 31, 2007, Elbit Systems and its
subsidiaries, except Elisra, were in compliance with all
covenants.
|
As at December 31, 2007 and 2006, Elisra did not comply with the
above-mentioned financial covenants. As a result, the banks requested to register a general
floating lien on the assets of Elisra. In February 2007 Elisra’s Board of Directors
approved the banks’ request. Subsequent to balance sheet date, Elisra granted first
priority liens and/or floating liens on all of its property and assets with no limitations
as to amount.
|
•
|
As of December 31, 2007, guarantees in the amount of
approximately $963 million were issued by banks on behalf of the Company in
order to secure certain advances from customers and performance
bonds.
|
11
|
•
|
As of December 31, 2007 and 2006, the Company had purchase
commitments that amounted to approximately $906 and $681 million,
respectively. These purchase orders and subcontracts are typically in a
standard format proposed by the Company, with the subcontracts and purchase
orders also reflecting provisions from the Company’s applicable prime
contract that are appropriate to flow down to subcontractors and vendors.
The terms typically included in these purchase orders and subcontracts are
consistent with Uniform Commercial Code provisions in the United States for
sales of goods, as well as with specific terms called for by the
Company’s customers in international contracts. These terms include
our right to terminate the purchase order or subcontract in the event of
the vendors’ or subcontractors’ default, as well as the
Company’s right to terminate the order or subcontract for the Company
‘s convenience (or if the Company’s prime contractor has so
terminated the prime contract). Such purchase orders and subcontracts
typically are not subject to variable price provisions.
|
|
•
|
As a result of cancellation of the export authorization in
2006 to a foreign country (“the Customer”), Elisra and one of
its subsidiaries were forced to terminate four projects. Most of the
activity in respect of the projects, the total amount of which was
approximately $40 million, has already been executed and the deliveries
have been made to the Customer. For those projects, Elisra and its
subsidiary provided to the Customer advances and performance guarantees
issued by banks and financial institutions. As of December 31, 2007, the
total amounted to approximately $7 million (as of December 31, 2006 - $10
million). Elisra’s and the Company’s management, based on the
opinion of its legal advisors, believes that the financial impact of the
four projects’ termination in excess of the accruals recorded in the
financial statements will not have a material adverse effect on the
financial position or results of operations of the Company. The Customer
financed the projects by means of bank loans. The banks received indemnity
letters as security for repayment of the loans. Most of the indemnity was
provided to the banks by International Foreign Trade Risks Insurance
Company (“IFTRIC”) (since renamed “ASHRA”) and the
balance was provided by Elisra and its subsidiary. In addition, Elisra
provided indemnity letters to IFTRIC that can be exercised upon the
occurrence of specific unusual events and is subject to IFTRIC fulfilling
its commitments to the banks. In the opinion of Elisra’s and the
Company’s management, no provisions are required in respect of these
indemnity letters.
|
|
J.
|
Acquisitions and Divestitures During
2007
|
|
•
|
On April 26, 2007, the Company completed its Cash Tender
Offer (the “Offer”) for the balance of the ordinary shares of
Tadiran, which prior to the completion of the Offer was a publicly traded
company in Israel, held 42% by the Company and recorded the investment as
an equity investee.
|
Tadiran is active mainly in the defense communication area. The Company is
active in the radio communication and computer area, and is using integrated communication
equipment in its systems. The Company foresees synergies between its land C
4
I
systems operations and Tadiran, by providing advanced integrated network and communication
solutions to its customers.
As a result, Tadiran became a private, wholly-owned subsidiary of the
Company. The total amount paid by the Company for the Tadiran shares relating to the Offer
was approximately $383 million. The results of Tadiran are consolidated in the
Company’s financial statements commencing the beginning of the month after the date
of completion of the Offer.
The table below summarizes the Purchase Price Allocation
(“PPA”), for the aggregate assets acquired, and liabilities assumed, in
connection with the acquisition of the Tadiran shares as follows:
12
|
Acquired share of book value
in Tadiran
|
Excess
cost
|
Total
|
Expected useful lives
|
|
(in thousands of U.S. dollars)
|
Working capital
|
$ 67,600
|
(17,400)
|
$ 50,200
|
|
Long-term assets and investments
|
34,800
|
-
|
34,800
|
|
Property, plant and equipment
|
9,300
|
1,100
|
10,400
|
20 years
|
Long-term liabilities
|
(53,000)
|
800
|
(52,200)
|
|
Brand name
|
5,700
|
18,200
|
23,900
|
15 years
|
Customer relationships and backlog
|
-
|
96,800
|
96,800
|
2-10 years
|
Technology
|
2,700
|
40,800
|
43,500
|
10 years
|
IPR&D
|
-
|
16,600
|
16,600
|
Immediate write-off
|
Deferred taxes
|
-
|
(35,100)
|
(35,100)
|
|
Goodwill
|
32,800
|
161,300
|
194,100
|
Indefinite – subject to
annual impairment test
|
|
|
|
|
|
$ 99,900
|
$283,100
|
$ 383,000
|
|
The assets and liabilities recorded in connection with the PPA for the
Tadiran acquisition were based upon estimates of fair values for contracts in process,
inventories, estimated costs in excess of estimated contract value to complete contracts in
process in a loss position, contingent assets and liabilities, identifiable intangibles,
goodwill, property, plant and equipment and deferred income taxes.
Following the acquisition of the Tadiran shares in the second quarter of
2007, the Company identified and wrote-off duplicated inventories and equipment and accrued
termination costs in a total amount of $10,482, which was recorded as restructuring costs
in the cost of revenues.
The following unaudited proforma data is based on historical financial
statements of the Company and Tadiran and is provided for comparative purposes only. The
proforma information does not purport to be indicative of the results that actually would
have occurred had the purchase of the shares been consummated prior to the beginning of the
reported periods.
The proforma information reflects the results of the Company's operations
assuming that Tadiran’s results were included in the Company’s consolidated
results prior to each of the reported periods and under the following
assumptions:
|
(1)
|
Intangible assets (customer relationships, backlog, brand
name and technology) arising from the acquisition of the Tadiran shares of
approximately $228,000, net of related deferred taxes of approximately
$57,000, is amortized over a period of 2-15 years.
|
|
(2)
|
Excess of cost over equity purchased allocated to real
estate assets of approximately $1,800, net of related deferred taxes of
approximately $450, is amortized over a period of 20 years.
|
|
(3)
|
The cost attributed to purchase IPR&D projects, in the
amount of approximately $16,560, was charged to operations immediately as a
non-recurring item and is not included in the proforma consolidated
results.
|
|
(4)
|
Intercompany balances and transactions, if any, have been
eliminated.
|
13
|
Year ended
|
|
|
|
|
(in thousands of U.S. dollars)
|
Proforma sales
|
$2,067,805
|
$1,775,247
|
Proforma income
|
$96,802
|
$79,534
|
Proforma earnings per share
|
|
|
Basic
|
$2.30
|
$1.92
|
Diluted
|
$2.29
|
$1.90
|
|
•
|
On July 27, 2007, the Company reported that it acquired the
entire share capital of the U.K. company FTL for £15 million
(approximately $31 million).
|
Based on a PPA performed by an independent advisor, the purchase price was
attributed to the fair value of the assets acquired and liabilities assumed as
follows:
|
Acquired share of book value
in FTL
|
Excess
cost
|
Total
|
Expected
useful
lives
|
(in thousands of U.S. dollars)
|
Working capital
|
$ 3,873
|
$ 582
|
$ 4,455
|
2 year
|
Long-term assets and investments
|
3,845
|
3,376
|
7,221
|
20 years
|
Non-competition
|
-
|
436
|
436
|
2 years
|
Brand name
|
-
|
1,119
|
1,119
|
15 years
|
Customer relationships and backlog
|
-
|
8,933
|
8,933
|
4-15 years
|
Technology
|
-
|
750
|
750
|
15 years
|
Deferred taxes
|
-
|
(4,559)
|
(4,559)
|
|
Goodwill
|
|
|
|
Indefinite – subject to
annual impairment test
|
|
|
|
|
|
Proforma information has not been provided, since the effect of FTL was not
material to the revenues and net income of the Company.
|
K.
|
Employee Stock Option Plans
|
|
•
|
On January 11, 2007, the Company’s shareholders
approved the Company’s 2007 Option Plan (the “Plan”). The
purpose of the Plan is to provide the benefits arising from ownership of
share capital by Elbit Systems and certain of its subsidiaries’
employees, who are expected to contribute to the Company’s future
growth and success. The Options were allocated, subject to the required
approvals, in two tracks as follows: (i) Regular Options - up to 1,250,000
options exercisable into 1,250,000 Ordinary Shares of Elbit Systems in
consideration for the exercise price, all or any portion of which may be
granted as Incentive Stock Options (“Regular Options”) and (ii)
Cashless Options - up to 1,250,000 options, which entitle the participant
to exercise options for an amount reflecting only the benefit factor
(“Cashless Options”). Each of the participants is granted an
equal amount of Regular Options and Cashless Options. The exercise price
for Israeli participants is the average closing price of Elbit
Systems’ shares during 30 trading days proceeding the options grant
date. The exercise price of options granted to a non-Israeli participant
residing in the United States is the fair market value of the share on the
day the options are granted.
|
According to the Plan, the options granted on a certain date (the
“Commencement Date”) will become vested and exercisable in accordance with the
following vesting schedule:
14
(1) Fifty percent (50%) of the options will be vested and exercisable from
the second anniversary of the Commencement Date;
(2) An additional twenty-five percent (25%) of the options will be vested
and exercisable from the third anniversary of the Commencement Date; and
(3) The remaining twenty-five (25%) of the options will be vested and
exercisable from the fourth anniversary of the Commencement Date.
The Company grants options to Israeli participants in accordance with the
provisions of Section 102 of the Israeli Tax Ordinance related to the Capital Gains Tax
Track.
In 2007, the Company granted to its employees 2,381,300 option under the
Plan. The weighted average exercise price of the options was $33.27.
The compensation cost related to the options granted in 2007 is estimated at
approximately $20 million. That cost is expected to be recognized over a period of four
years. During 2007, the Company recognized expenses related to the Plan in the amount of
$4.8 million.
|
•
|
In December 2007, Elbit Systems U.S. Corp ("ESC"), a
wholly-owned U.S. subsidiary of the Company, adopted a Stock Appreciation
Rights Plan for Non-Employee Directors of Elbit Systems of America, LLC
(the "SAR Plan"). ESC owns the shares of Elbit Systems of America, LLC
("ESA"). The purpose of the SAR Plan is to facilitate the retention of
qualified and experienced persons to serve as "Non-Employee Directors" of
ESA by providing them additional financial incentives. A "Non-Employee
Director" is a director of ESA who is not an officer or employee of ESA, or
any of its affiliated companies.
|
Under the Plan, the Board of ESC may grant Stock Appreciation Rights
("SARs") from time to time to Non-Employee Directors of ESA. A SAR is a right that, in
accordance with the terms of the SAR Plan, entitles the holder to receive on the exercise
date of the SAR cash in an amount equal to the excess of the "Fair Market Value" of the
"Stock" corresponding to the SAR at the time of exercise of the SAR over the "Initial Value
of the Stock". "Stock" means Elbit Systems. Ordinary Shares. Each SAR corresponds to a
share of Stock. "Fair Market Value" with respect to the Stock means the closing price of
the Stock on the Nasdaq on the applicable date. "Initial Value" of a SAR means the Fair
Market Value of one share of Stock on the grant date of the SAR.
A SAR may only be exercised after it becomes vested. 25% of any SAR's
granted are exercisable on the first anniversary of the grant date and an additional 25% on
each subsequent anniversary. The maximum term of a SAR is five years from the grant date.
SAR's do not provide any rights as a shareholder in the Stock.
On January 2, 2008, the Board of Directors of ESC issued a total of 21,000
SARs to Non-Employee Directors of ESA, at an Initial Value of $61.42 per SAR.
15
|
L.
|
Summary of Financial Results
|
The following table sets forth the consolidated statements of operations of
the Company for the three-month periods and years ended December 31, 2007 and December 31,
2006. The financial statements of the Company include consolidation of Tadiran’s
financial results, commencing May 1, 2007, therefore Tadiran’s results are included
in 2007 results and are not included in the 2006 results, which were prior to the date of
the acquisition.
|
For the year
ended on December 31
|
For the three months
ended on December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars except per share
data)
|
Total revenues
|
1,981,761
|
100.0
|
1,523,243
|
100.0
|
591,056
|
100.0
|
467,388
|
100.0
|
Cost of revenues
|
1,454,913
|
73.4
|
1,149,768
|
75.5
|
434,891
|
73.6
|
367,163
|
78.5
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Research and development (R&D)
expenses
|
155,303
|
7.8
|
115,648
|
7.6
|
49,284
|
8.3
|
33,283
|
7.1
|
Less - participation
|
|
|
|
|
|
|
|
|
R&D expenses, net
|
126,995
|
6.4
|
92,232
|
6.1
|
39,401
|
6.6
|
27,869
|
5.9
|
Marketing and selling expenses
|
157,411
|
7.9
|
111,880
|
7.3
|
44,277
|
7.5
|
30,853
|
6.6
|
General and administrative expenses
|
107,447
|
5.4
|
77,505
|
5.1
|
34,265
|
5.8
|
20,051
|
4.3
|
IPR&D write-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
107,953
|
5.5
|
91,858
|
6.0
|
38,222
|
6.5
|
21,452
|
4.6
|
Finance expenses, net
|
(19,329)
|
(1.0)
|
(21,456)
|
(1.4)
|
(10,632)
|
(1.8)
|
(6,093)
|
(1.3)
|
Other income (expenses), net
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
88,992
|
4.5
|
72,216
|
4.7
|
27,876
|
4.7
|
16,782
|
3.6
|
Taxes on income
|
|
|
|
|
|
|
|
|
|
75,182
|
3.8
|
51,522
|
3.4
|
35,377
|
6.0
|
12,733
|
2.7
|
Minority interest in loses (gains) of
Subsidiaries
|
(13,038)
|
(0.7)
|
5,977
|
0.4
|
(7,995)
|
(1.4)
|
4,673
|
1.0
|
Equity in net earnings (losses) of
affiliated companies and partnership
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
16
Revenues
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.
The Company’s consolidated revenues increased by 30%, from $1,523.2
million in 2006 to $1,981.8 million in 2007.
|
The following table sets forth the Company’s revenue
distribution by areas of operation:
|
|
|
|
|
|
|
$ millions
|
%
|
$ millions
|
%
|
Airborne systems
|
596.0
|
30.1
|
547.8
|
35.9
|
Land systems
|
381.0
|
19.2
|
317.7
|
20.9
|
C
4
ISR systems
|
582.0
|
29.4
|
313.5
|
20.6
|
Electro-optics
|
271.3
|
13.7
|
223.3
|
14.7
|
Other
(mainly non-defense engineering
and production services)
|
151.5
|
7.6
|
120.9
|
7.9
|
Total
|
1,981.8
|
100.0
|
1,523.2
|
100.0
|
The changes in revenue distribution by areas of operation are due mainly to
the inclusion of the results of Tadiran in the C
4
ISR category, starting in the
second quarter of 2007.
|
The following table sets forth the Company’s
distribution of revenues by geographical regions:
|
|
|
|
|
|
|
$ millions
|
%
|
$ millions
|
%
|
Israel
|
408.9
|
20.6
|
407.1
|
26.7
|
United States
|
702.7
|
35.5
|
609.5
|
40.0
|
Europe
|
485.2
|
24.5
|
233.7
|
15.3
|
Other countries
|
385.0
|
19.4
|
272.9
|
18.0
|
Total
|
1,981.8
|
100.0
|
1,523.2
|
100.0
|
The changes in revenues by geographic distribution were influenced by the
consolidation of Tadiran’s results with strong international content, and increased
revenues in Europe, mainly from United Kingdom UAV operations related revenues.
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.
Gross profit in 2007 was $516.4 million (with a gross profit margin of
26.1%), as compared to $373.5 million (gross profit margin of 24.5%) in 2006. In 2007,
gross profit includes restructuring expenses of $10.5 million (which constitute 0.5% of
revenues).
17
Research and Development (“R&D”)
The Company continually invests in R&D in order to maintain and further
advance its technologies, in accordance with a long-term plan, based on its estimate of
future market needs.
The Company’s R&D included programs which are partially funded by
third parties, including the Israeli Ministry of Defense (“IMOD”), the Office
of the Chief Scientist (“OCS”) and bi-national and European development funds.
The R&D was performed in all major areas of core technological activities of the
Company and mainly in the areas of advanced airborne systems, cutting edge electro-optics
technology and products for surveillance, aerial reconnaissance, lasers and space based
sensors, radio communication equipment and homeland security technologies and
products.
Gross R&D expenses in 2007 totaled $155.3 million (7.8% of revenues), as
compared with $115.6 million (7.6% of revenues) in 2006.
Net R&D expenses (after deduction of third party participation) in 2007
totaled $127 million (6.4% of revenues), as compared to $92.2 million (6.1% of revenues) in
2006.
Marketing and Selling Expenses
The Company maintains its activities in developing new markets and pursues
at any given time various business opportunities according to the Company’s
plan.
Marketing and selling expenses in 2007 were $157.4 million (7.9% of
revenues), as compared to $111.9 million (7.3% of revenues) in 2006.
General and Administrative (“G&A”)
Expenses
G&A expenses in 2007 were $107.4 million (5.4% of revenues), as compared
to $77.5 million (5.1% of revenues) in 2006.
The increase in G&A expenses in 2007 compared to 2006 was related to the
cost of various exploratory merger and acquisition, legal, audit and control activities,
including expenses related to compliance with the Sarbanes-Oxley Act.
Operating Income
The Company’s operating income in 2007 was $108 million, as compared
to $92 million in 2006. As a result of the restructuring expenses and an IPR&D
write-off of $27 million (which constituted 1.3% of revenues) in the second quarter of
2007, the operating income margin in 2007 decreased to 5.5%, as compared to 6.0% in
2006.
Financing Expenses (Net)
Net financing expenses in 2007 were $19.3 million, as compared to $21.5
million in 2006.
The net finance expenses include the impact of a write-off relating to
Auction Rate Securities in the amount of $10 million (see Liquidity and Capital Resources
below).
18
Other Income (Expenses) (Net)
Other income in 2007 was a $0.4 million gain, as compared to a $1.8 million
in 2006, which was mainly as a result of the capital gain related to the sale of Soltam
Systems Ltd. shares in 2006.
Taxes on Income
The Company’s tax rate represents a weighted average of the tax rates
to which the various Company entities are subject. The change in the effective tax rate is
attributable mainly to the mix of the tax rates in the various tax jurisdictions in which
the Company entities generating the taxable income operate.
Provision for taxes in 2007 was $13.8 million (tax rate of 15.5%), as
compared to a provision for taxes of $20.7 million (tax rate of 28.7%) in 2006. The change
in the effective tax rate is attributable mainly to a reduction of approximately $10
million related to prior years adjustments raised from executing tax settlements by Elbit
Systems and some of its subsidiaries in the last quarter of 2007, and to the mix of the tax
rates in the various tax jurisdictions in which the Company entities generating the taxable
income operate. This decrease was partly offset by the IPR&D write-off in the second
quarter of 2007, related to the acquisition of the Tadiran shares not being deductible for
tax purposes.
Company’s Share in Earnings of Affiliated
Entities
In 2007, the Company had income of $14.6 million from its share in earnings
of affiliated entities, as compared to $14.7 million in 2006.
The companies and partnerships, in which the Company holds 50% or less in
shares or voting rights and are therefore not consolidated in its financial statements,
operate in complementary areas to the Company’s core business activities, including
electro-optics and airborne systems. The Company’s share in Tadiran’s earnings
was included until the date of acquisition.
Net Earnings and Earnings Per Share
(“EPS”)
Net earnings in 2007 were $76.7 million (3.9% of revenues), as compared to
reported net earnings of $72.2 million (4.7% of revenues) in 2006. Diluted EPS was $1.81 in
2007, as compared to $1.72 in 2006.
The number of shares used for computation of diluted EPS in the year ended
December 31, 2007 was 42,342 thousand shares, as compared to 41,880 thousand shares in the
year ended December 31, 2006.
The net earnings in 2007 include $24.4 million in IPR&D and
restructuring net expenses (representing $0.58 per share), due to the acquisition of
Tadiran in April 2007.
|
M
.
|
Liquidity and Capital Resources
|
The Company’s net cash flow generated from operating activities in
2007 was $261 million, resulting mainly from net income and advances received from
customers, which were partially offset, mainly by an increase in inventories.
Net cash flow used for investment activities in 2007 was $262.6 million,
which was used mainly for the acquisition of the Tadiran and FTL shares.
19
Net cash flow from financing activities in 2007 was $281 million, resulting
mainly from long-term loans received.
On December 31, 2007, the Company had total borrowings in the amount of
$460.4 million, including $431.3 million in long-term loans, and $963 million in guarantees
issued on its behalf by banks, mainly in respect of advance payment and performance
guarantees provided in the regular course of business. On December 31, 2007, the Company
had a cash balance amounting to $363.9 million.
As of December 31, 2007, the Company had working capital of $156.9 million
and its current ratio was 1.12.
In addition, the Company (through Tadiran) had $31.7 million of principal
invested in Auction Rate Securities (“ARS”). The ARS held by the Company are
private placement securities with long-term nominal maturities for which the interest rates
are reset through a “dutch” auction each month. The monthly auctions
historically have provided a liquid market for these securities. The Company's investments
in ARS represent interests in collateralized debt obligations supported by pools of
residential and commercial mortgages or credit cards, insurance securitizations and other
structured credits, including corporate bonds. Some of the underlying collateral for the
ARS held by the Company consists of sub-prime mortgages.
ARS investments held by the Company all had AAA/Aaa credit ratings at the
time of purchase. With the liquidity issues experienced in global credit and capital
markets, the ARS held by the Company at December 31, 2007 have experienced multiple failed
auctions as the amount of securities submitted for sale has exceeded the amount of purchase
orders.
The estimated market value of the Company's ARS holdings at December 31,
2007 was $20.8 million, which reflects a $10.9 million adjustment to the principal value of
$31.7 million. Although the ARS continue to pay interest according to their stated terms,
based on third-party valuation and an analysis of other-than-temporary impairment factors,
the Company recorded an impairment charge of approximately $10 million in the fourth
quarter of 2007, reflecting the portion of ARS holdings that the Company concluded have an
other-than-temporary decline in value. In addition, the Company recorded an unrealized
pre-tax loss of approximately $0.9 million in other comprehensive income, reflecting an
adjustment to certain ARS holdings that the Company concluded to have a temporary decline
in value.
Historically, given the liquidity created by the auctions, ARS were
presented as current assets under marketable securities on the Company’s balance
sheet. As a result of the failed auctions in recent periods, the Company's ARS are illiquid
until there is a successful auction for them. Accordingly, the entire amount of such
remaining ARS has been reclassified from current to non-current assets on the Company's
balance sheet.
|
N.
|
Derivatives and Hedges
|
Market risks relating to the Company’s operations result primarily
from changes in interest rates and exchange rates. The Company typically uses financial
instruments to limit its exposure to those changes. The Company also typically enters into
forward contracts in connection with transactions that are denominated in currencies other
than U.S. dollars and New Israeli Shekels (“NIS”). The Company may enter from
time to time into forward contracts related to NIS, based on market conditions.
20
On December 31, 2007, the Company’s liquid assets were comprised of
bank deposits and short and long-term bonds. The Company’s deposits and loans are
based on variable interest rates, and their value as of December 31, 2007 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 the liabilities and the return on the assets that are based on variable
rates.
The Company’s functional currency is the U.S. dollar. On December 31,
2007, the Company had exposure due to liabilities denominated in NIS of $144.7 million in
excess of its NIS denominated assets. These liabilities represent mostly wages and trade
payables. The amount of the Company’s exposure to the changes in the NIS-U.S. dollar
exchange rate varies from time to time, and as indicated above, impacted the
Company’s expenses for 2007.
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, 2007 by
forward contracts. On December 31, 2007, the Company had forward contracts for the sale and
purchase of such foreign currencies totaling $354.2 million ($176.3 million in Euro, $170.4
million in GBP and $7.5 million in other currencies). The financial derivative activities
in 2007 resulted in an unrealized net loss of approximately $15.1 million, which was
recorded as other comprehensive income.
|
O.
|
Corporate Secretary Appointment
|
On February 1, 2008, the Company appointed Ronit Zmiri as Corporate
Secretary, replacing Yaniv Baram who accepted the position of General Counsel of
Elisra.
The Board of Directors declared on March 10, 2008 a dividend of $0.18 per
share for the last quarter of 2007. The total dividend declared for 2007 was $0.67 per
share.
* * * * * * * * * * * * * *
21
Elbit
Systems Ltd.
Management report on Internal Control over Financial
Reporting
for the Year-ended December 31, 2007
Elbit
Systems’ management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. Our internal control over financial reporting is a process to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those
policies and procedures that:
•
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
our assets,
|
|
|
•
|
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors, and
|
|
|
•
|
provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial
statements.
|
Our
management recognizes that there are inherent limitations in the effectiveness of any
system of internal control over financial reporting, including the possibility of human
error and the circumvention or override of internal control. Accordingly, even
effective internal control over financial reporting can provide only reasonable assurance
with respect to financial statement preparation, and may not prevent or detect all
misstatements. Further, because of changes in conditions, the effectiveness of
internal control over financial reporting may vary over time.
Our
management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007. In conducting its assessment of internal control over financial
reporting, management based its evaluation on the framework in “Internal Control
– Integrated Framework” issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO.) In conducting such assessment, our management has
excluded from its assessment the effectiveness of internal control over financial reporting
of Tadiran Communications Ltd. (“Tadiran”), and Ferranti Technologies (Group)
Limited (“FTL”), as Tadiran and FTL were acquired by us in 2007, and because we
have not integrated Tadiran and FTL’s internal control over financial reporting and
related processes by December 31, 2007. Tadiran and FTL are now wholly-owned
subsidiaries of Elbit, and are included in our 2007 consolidated financial statements, and
constituted approximately $560 million, or 20% of our total assets, as of December 31,
2007, and $188 million of our revenues in 2007. Refer to Notes 1(D) and 1(E) to our
consolidated financial statements for further discussion of this acquisition and its impact
on our consolidated financial statements. Our management has concluded, based on its
assessment, that our internal control over financial reporting was effective as of December
31, 2007, based on the framework in “Internal Control – Integrated
Framework” issued by COSO.
The
effectiveness of our internal control over financial reporting as of December 31, 2007, has
been audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst & Young Global),
an independent registered public accounting firm. Kost, Forer, Gabbay &
Kasierer’s attestation report with respect to the Company’s internal control
over financial reporting is set forth within its Report of Independent Registered Public
Accounting Firm included with our Consolidated Financial Statements.
22
Exhibit
3
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
as of
December 31, 2007
(In U.S.
dollars)
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
CONSOLIDATED FINANCIAL
STATEMENTS
as of December 31,
2007
In U.S.
dollars
C O N T E N T
S
|
Page
|
|
|
|
|
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
2 - 3
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS:
|
|
|
|
Consolidated Balance Sheets
|
4 - 5
|
|
|
Consolidated Statements of Income
|
6
|
|
|
Statements of Changes in Shareholders’
Equity
|
7 - 8
|
|
|
Consolidated Statements of Cash Flows
|
9 - 10
|
|
|
Notes to the Consolidated Financial Statements
|
11 – 63
|
# # # # # # #
1
|
•
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
|
•
Phone:
972-3-6232525
Fax: 972-3-5622555
|
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
|
U. S. dollars (In thousands)
|
|
A.
|
Elbit Systems Ltd. (“Elbit Systems”) is an
Israeli corporation, 45.4% owned by the Federmann Group. Elbit
Systems’ shares are traded on the Nasdaq National Market in the
United States (“Nasdaq”) and on the Tel Aviv Stock Exchange
(“TASE”). Elbit Systems and its subsidiaries (collectively the
“Company”) are engaged mainly in the field of defense
electronics, homeland security and commercial aviation. Elbit
Systems’ principal wholly-owned subsidiaries are the Elbit Systems of
America, LLC (“ESA”) companies, Elbit Systems Electro-Optics
Industries Elop Ltd. (“Elop”) and Tadiran (see Note 1(D)).
Elbit Systems also owns 70% of Elisra Electronic Systems Ltd.
(“Elisra”), see Note 1(C).
|
|
B.
|
A majority of the Company’s revenues are derived from
direct or indirect sales to governments or to governmental agencies. As a
result, a substantial portion of the Company’s sales is subject to
the special risks associated with sales to governments or to governmental
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 Company’s products and for its
suppliers. As for major customers, refer to Note 19(C).
|
|
C.
|
On November 30, 2005, the Company completed the purchase of
all of the shares of Koor Industries Ltd. (“Koor”) in Elisra
for approximately $68.8 million in cash. Following the completion of the
transaction, the Company owns 70% of Elisra.
|
Elisra is the leading airborne electronic warfare
(“EW”) company in Israel with advanced technology and significant market
presence. Elisra has significant complementary technologies and customer installment base
to those of the Company in areas including ELINT systems, EW suites, airborne warning
systems and data links. As such, the Company’s management believes that
Elisra’s business is very synergetic with several of the Company’s areas of
operations as the aforementioned technologies and customer installment base will enable the
Company to offer more comprehensive turnkey solutions to its customers and strengthen its
competitive position. Consequently, the acquisition of Elisra resulted in goodwill
amounting to $24,500 (see below).
Based on a Purchase Price Allocation (“PPA”)
performed by an independent advisor, the purchase price was attributed to the fair value of
the assets acquired and liabilities assumed as follows:
11
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands, except per share
data)
|
|
Book value
in Elisra
|
Excess
cost
|
Total
|
Expected useful lives
|
Current monetary liabilities net
of current monetary assets
|
$ (11,500)
|
$
-
|
$ (11,500)
|
-
|
Pre-acquisition contingency
|
15,530
|
-
|
15,530
|
|
Other long-term investments
and receivables
|
59,270
|
-
|
59,270
|
-
|
Long-term liabilities
|
(100,700)
|
-
|
(100,700)
|
-
|
Minority interest
|
(8,300)
|
-
|
(8,300)
|
-
|
IPR&D
|
-
|
7,500
|
7,500
|
Immediate write-off
|
Inventory
|
31,200
|
1,200
|
32,400
|
Up to 2 quarters
|
Property, plant and equipment
|
23,100
|
5,700
|
28,800
|
20 years
|
Customers base and backlog
|
-
|
11,800
|
11,800
|
10 years
|
Technology
|
-
|
9,500
|
9,500
|
10 years
|
Goodwill
|
-
|
24,500
|
24,500
|
Indefinite – subject to
|
|
$ 8,600
|
$ 60,200
|
$ 68,800
|
annual impairment test
|
The pre-acquisition contingency, which amount to $15,530, are
related to the compensation receivables in respect of the fire damage in Elisra (see Note 7
below).
The results of Elisra’s operations have been included
in the consolidated financial statements from the date of acquisition.
Following the acquisition of Elisra’s shares in the
fourth quarter of 2005, the Company identified and wrote-off in 2005 duplicated inventories
and equipment in the amount of $3,488 which was recorded as restructuring costs in the cost
of revenues.
|
D.
|
On April 26, 2007, Elbit Systems completed its Cash Tender
Offer (the “Offer”) for the balance of the ordinary shares of
Tadiran, which prior to the completion of the Offer was a publicly traded
company in Israel, held 42% by Elbit Systems and accounted for using the
equity method.
|
As a result of the Offer, Tadiran became a private,
wholly-owned subsidiary of Elbit Systems. The total amount paid by Elbit Systems for the
Tadiran shares relating to the Offer was approximately $383,000. The results of Tadiran are
consolidated in Elbit Systems’ financial statements commencing May 1,
2007.
Tadiran is a leading company active mainly in the defense
communications area. The Company is active in the command, control, communications,
computers, intelligence, surveillance and reconnaissance (“C
4
ISR”)
area, and is using integrated communication equipment in its systems. The Company foresees
synergies between its systems operations and Tadiran, by providing advanced integrated
network and communication solutions to its customers.
The table below summarizes the PPA, for the aggregate assets
acquired, and liabilities assumed, in connection with the acquisition of the Tadiran shares
as follows:
12
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands, except per share
data)
|
|
Acquired share of book value
in Tadiran
|
Excess
cost
|
Total
|
Expected useful lives
|
Working capital
|
$ 67,600
|
(17,400)
|
$ 50,200
|
|
Long-term assets and investments
|
34,800
|
-
|
34,800
|
|
Property, plant and equipment
|
9,300
|
1,100
|
10,400
|
20 years
|
Long-term liabilities
|
(53,000)
|
800
|
(52,200)
|
|
Brand name
|
5,700
|
18,200
|
23,900
|
15 years
|
Customer relationships and backlog
|
-
|
96,800
|
96,800
|
2-10 years
|
Technology
|
2,700
|
40,800
|
43,500
|
10 years
|
IPR&D
|
-
|
16,600
|
16,600
|
Immediate write-off
|
Deferred taxes
|
-
|
(35,100)
|
(35,100)
|
|
Goodwill
|
32,800
|
161,300
|
194,100
|
Indefinite – subject to
annual impairment test
|
|
$ 99,900
|
$ 283,100
|
$ 383,000
|
|
The assets and liabilities recorded in connection with the
PPA for the Tadiran acquisition are based upon preliminary estimates of fair values for
contracts in process, inventories, estimated costs in excess of estimated contract value to
complete contracts in process in a loss position, contingent assets and liabilities,
identifiable intangibles, goodwill, property, plant and equipment and deferred income
taxes. Actual adjustment will be based on the final appraisals and other analysis of fair
values, which are in process. Elbit Systems expects to complete the PPA by the end of the
first quarter of 2008. The Company does not expect the difference between the preliminary
and final PPA for this business acquisition to have a material impact on its results of
operations or financial position.
Following the acquisition of the Tadiran shares in the second
quarter of 2007, Elbit Systems identified and wrote-off duplicated inventories and
equipment and accrued termination costs in a total amount of $10,482, which was recorded as
restructuring costs in the cost of revenues.
The following unaudited proforma data is based on historical
financial statements of Elbit Systems and Tadiran and is provided for comparative purposes
only. The proforma information does not purport to be indicative of the results that
actually would have occurred had the purchase of the shares been consummated prior to the
beginning of the reported periods.
The proforma information reflects the results of the
Company's operations assuming that Tadiran’s results, instead of the 42% previously
owned, were included in the Company’s consolidated results prior to each of the
reported periods and under the following assumptions:
|
(1)
|
Intangible assets (customer relationships, backlog, brand
name and technology) arising from the acquisition of the Tadiran shares of
approximately $228,000, net of related deferred taxes of approximately
$57,000, is amortized over a period of 2-15 years.
|
|
(2)
|
Excess of cost over equity purchased allocated to real
estate assets of approximately $1,800, net of related deferred taxes of
approximately $450, is amortized over a period of 20 years.
|
|
(3)
|
The cost attributed to purchased IPR&D projects, in the
amount of approximately $16,560, was immediately charged to operations
immediately as a non-recurring item and is not included in the proforma
consolidated results.
|
13
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands, except per share
data)
|
|
(4)
|
Intercompany balances and transactions, if any, have been
eliminated.
|
|
Year ended
|
|
2007
|
2006
|
Proforma sales
|
$ 2,067,805
|
$ 1,775,247
|
Proforma net income
|
$
97,575
|
$ 85,890
|
Proforma earnings per share
|
|
|
Basic
|
$
2.32
|
$
2.08
|
Diluted
|
$
2.30
|
$
2.05
|
Subsequent to Tadiran's acquisition, the Company has
integrated Tadiran's operations in the Land systems and C
4
ISR area of
operations. Restructuring activities were done in order to better utilize such integration.
As such Tadiran’s financial performance is no longer relevant on a stand-alone basis
and as such is not reviewed separately.
In November 2007, the Company announced that Elbit Systems'
Board of Directors approved a plan to merge Tadiran into Elbit Systems and for Tadiran's
Israeli operations to be combined with Elbit Systems Land and C4I Division under a new
wholly-owned subsidiary Elbit Systems Land & C4I - Tadiran Ltd. The merger plan is
subject to completion of certain approvals which are currently pending.
|
E.
|
On July 27, 2007,
Elbit Systems
acquired the entire share capital of the U.K. company Ferranti Technologies
(Group) Limited (“FTL”) for £15 million (approximately
$31,000).
|
FTL is a design and manufacturing company providing
engineering, manufacturing and logistic support to the aerospace and defense industries.
The Company’s management believes that FTL will enable the Company to offer its
products and solutions to FTL customers in the U.K.
Based on a PPA performed by an independent advisor, the
purchase price was attributed to the fair value of the assets acquired and liabilities
assumed as follows:
|
Acquired share of book value
in FTL
|
Excess
cost
|
Total
|
Expected useful lives
|
(in thousands of U.S. dollars)
|
Working capital
|
$ 3,873
|
$ 582
|
$ 4,455
|
|
Long-term assets and investments
|
3,845
|
3,376
|
7,221
|
20 years
|
Non-compete
|
-
|
436
|
436
|
2 years
|
Brand name
|
-
|
1,119
|
1,119
|
15 years
|
Customer relationships and backlog
|
-
|
8,933
|
8,933
|
4-15 years
|
Technology
|
-
|
750
|
750
|
15 years
|
Deferred taxes
|
-
|
(4,559)
|
(4,559)
|
|
Goodwill
|
-
|
12,055
|
12,055
|
Indefinite – subject to
annual impairment test
|
|
|
|
|
|
Proforma information has not been provided, since the effect
of FTL was not material to the revenues and net income of the Company.
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 Company, such
principles are substantially identical to accounting principles generally accepted in
Israel.
The preparation of financial statements requires the use of
estimates and assumptions, based on complex judgments that are considered reasonable, that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and contingent liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The most significant assumptions are
employed in estimates used in determining values of intangible assets, sales and return
accruals, legal contingencies, tax assets and tax liabilities, stock-based compensation
costs, retirement and post-retirement benefits (including the actuarial assumptions),
financial instruments with no observable market quotes, as well as in estimates used in
applying the revenue recognition policy. Actual results may differ from estimated
results.
|
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. Elbit
Systems’ 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 Elbit Systems is the U.S. dollar.
Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts. Transaction and balances in other
currencies have been remeasured into U.S. dollars in accordance with principles set forth
in SFAS No. 52 “Foreign Currency Translation”. All exchange gains and losses
from the remeasurement mentioned above are reflected in the statement of income in
financial income or expenses.
For those foreign subsidiaries whose functional currency has
been determined to be other than the U.S. dollar, assets and liabilities are translated at
year-end exchange rates and statement of income items are translated at average exchange
rates prevailing during the year. Resulting translation differences are recorded as a
separate component of accumulated other comprehensive income in shareholders’
equity.
|
C.
|
PRINCIPLES OF CONSOLIDATION
|
The consolidated financial statements include the accounts of
Elbit Systems and its wholly and majority-owned subsidiaries.
The consolidated subsidiaries include Elop, ESA, Elisra,
Tadiran and other Israeli and non-Israeli subsidiaries.
Intercompany transactions and balances, including profit from
intercompany sales not yet realized outside the Company, have been eliminated upon
consolidation.
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.)
|
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, which approximate fair value.
|
F.
|
AVAILABLE FOR SALE MARKETABLE SECURITIES
|
Elbit Systems accounts for marketable securities in
accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”. Elbit Systems determined the appropriate classification of all
marketable securities was “available-for-sale” at the time of purchase or at
the time marketable securities were first consolidated as a result of Tadiran’s
acquisition. As such, at December 31, 2007 and 2006, all of the Company’s
investments in marketable securities were reported at fair value. Fair value is determined
based on observable market value quotes or in case market value is not available using
valuation models including assessments of counterparty credit worthiness, credit default
risk, underlying security type of collaterals risk premium and overall capital market
liquidity conditions. Declines in fair value that are considered other-than-temporary are
charged to earnings and those that are considered temporary are reported, net of tax, as a
component of accumulated other comprehensive income (“OCI”) in
stockholders’ equity. The Company uses the average cost method of determining the
cost basis in computing realized gains and losses on the sale of its available-for-sale
securities. Realized gains and losses are included in financial income
(expense).
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 include
direct labor, material, subcontractors, other direct costs and an
allocation of overheads, which represent recoverable costs incurred for
production, allocable operating overhead cost and, where appropriate,
research and development costs (refer to Note 2(T)).
|
|
•
|
Labor overhead is generally included on a basis of updated
hourly rates and is allocated to each project according to the amount of
hours expended. Material overhead is allocated to each project based on the
value of direct material that is charged to the project.
|
Advances from customers are allocated to the applicable
contract inventories and are presented as net amounts. Advances in excess of related
inventories are classified as liabilities.
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.)
|
|
H.
|
INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES
|
Investments in non-marketable shares of companies in which
the Company holds less than 20% and the Company does not have the ability to exercise
significant influence over operating and financial policies of the companies are recorded
at cost.
Investments in companies and partnerships over which the
Company can exercise significant influence (generally, entities in which the Company holds
between 20% and 50% of voting rights) are presented using the equity method of accounting.
Profits on intercompany sales, not realized outside the Company, are eliminated. The
Company discontinues applying the equity method when its investment (including advances and
loans) is reduced to zero and it has not guaranteed obligations of the affiliate or
otherwise committed to provide further financial support to the
affiliate.
Investments in preferred shares, which are non in substance
common stock, are recorded on a cost basis according to EITF 02-14, “Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than Common
Stock.”
A change in the Company’s proportionate share of a
subsidiary's or investee's equity, resulting from issuance of common or in substance common
shares by the subsidiary or investee to third parties, is recorded as a gain or loss in the
consolidated income statements. If the realization is not assured, such as when the issuing
company is a development stage company, the gain from issuance is accounted for as an
equity transaction pursuant to SEC Staff Accounting Bulletin 51 “Accounting Sales of
Stock by a Subsidiary”.
Management evaluates investments in affiliates and other
companies for evidence of other-than- temporary declines in value. When relevant factors
indicate a decline in value that is other-than-temporary the Company records a provision
for the decline in value. A judgmental aspect of accounting for investments involves
determining whether an other-than-temporary decline in value of the investment has been
sustained. Such evaluation is dependent on the specific facts and circumstances.
Accordingly, management evaluates financial information (e.g. budgets, business plans,
financial statements, etc.) in determining whether an other-than-temporary decline in value
exists. Factors indicative of an other-than-temporary decline include recurring operating
losses, credit defaults and subsequent rounds of financings at an amount below the cost
basis of the investment. This list is not all inclusive and management weighs all
quantitative and qualitative factors in determining if an other-than-temporary decline in
value of an investment has occurred. The results of 2005 include an impairment loss related
to the investment in ISI (see Note 6(C)1)).
Long-term trade and other receivables, from extended payment
agreements, are recorded at their estimated present values (determined based on the
original market rates of interest).
|
J.
|
LONG-TERM BANK DEPOSITS
|
Long-term bank deposits are deposits with maturities of more
than one year. These deposits are presented at cost. Accumulated interest is recorded as
current assets, the deposits and accumulated interest approximate fair
value.
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.)
|
|
K.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment are stated at cost, net of
accumulated depreciation and investment grants. For equipment produced for the
Company’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
|
2-6.6
|
|
Instruments, machinery and equipment
|
6-33
|
|
Office furniture and other
|
6-33
|
|
Motor vehicles
|
12-20
|
(Mainly 15%)
|
Prepayment operating land rights and leasehold improvements
– generally over the term of the lease or the useful life of the assets, which ever
is shorter.
As a governmental incentive for industrial companies in
Israel, the “Investment Center”, which is a branch of the Israel Ministry of
Industry and Trade, permits industrial companies to submit a request to qualify as an
“Approved Enterprise”. An Approved Enterprise is entitled to certain benefits
in respect of capital investments. The benefits may be in the form of reduced tax rates and
of capital grants received as a percentage of the investments of the Approved Enterprise.
The amount of a capital grant is determined as a percentage of the Approved Enterprise
investment in property, plant and equipment. As a condition to the granting of these
benefits, the Approved Enterprise is obligated to perform the applicable industrial plan as
detailed in the request to the Investment Center (see Note 16(A)(3) and 17(J)). These
capital grants are non-royalty bearing and are not conditioned on the results of
operations. As the capital grants are a direct participation in the cost of the acquisition
of property, plant and equipment, they are offset against the cost of property, plant and
equipment.
Intangible assets are stated at cost net of accumulated
amortization. Intangible assets are amortized over their useful life using the
straight-line method, or the accelerated method, which ever reflect best use of cash flow
utilization.
|
N.
|
IMPAIRMENT OF LONG-LIVED ASSETS
|
The Company’s long-lived assets and identifiable
intangible assets are reviewed for impairment in accordance with SFAS No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets” whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to the future undiscounted cash flows expected to be
generated by the asset. If an asset is determined to be impaired, the impairment to
be
recognized is measured by the amount by which the carrying amount
of the asset exceeds its fair value. For each of three years in the period ended December
31, 2007, no impairment has been identified.
18
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 2 -
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Goodwill represents the excess of the cost of acquired
businesses over the net fair values of the assets acquired and liabilities assumed.
Goodwill is no longer amortized, but is instead tested for impairment at least annually (or
more frequently if impairment indicators arise).
SFAS 142 prescribes a two phase process for impairment
testing of goodwill. The first phase screens for impairment, while the second phase (if
necessary) measures impairment.
In the first phase of impairment testing, goodwill
attributable to each of the reporting units is tested for impairment by comparing the fair
value of each reporting unit with its carrying value. If the carrying value of the
reporting unit exceeds its fair value, the second phase is then performed. The second phase
of the goodwill impairment test compares the implied fair value of the reporting unit's
goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
Fair value of a reporting unit is determined using the
discounted future cash flows method. 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.
The Company identified several reporting unites based on the
guidance of SFAS 142, “Goodwill and Other Intangible Assets”.
For each of the three years in the period ended December 31,
2007, no impairment losses have been identified.
Under Israeli law and employment agreements, the
Company’s entities in Israel are required to make severance payments and, in certain
situations, pay pensions to terminated employees. The benefit is calculated based on the
employee’s latest salary and the period of his/her employment.
The Company’s entities in Israel record a liability for
the amount that would have to be paid to the employees as severance payment in the event of
the companies’ shut down.
The entities’ obligation for severance pay and pension
is funded by monthly deposits with insurance companies, pension funds and by an accrual.
The value of severance pay funds is presented in the balance sheet and includes profits
accumulated to balance sheet date. The amounts deposited may be withdrawn only after
fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements.
The values of the deposited funds are based on the cash surrendered value of these funds
and include profits.
Severance pay expenses for the years ended December 31, 2007,
2006 and 2005 amounted to approximately $19,553, $19,161 and $17,500,
respectively.
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.)
|
The Company generates revenues mainly from long-term
contracts involving the design, development, manufacture and integration of defense systems
and products. In addition, to a minor extent, the Company provides support and services for
such systems and products.
Revenues from long-term contracts are recognized based on
Statement of Position 81-1 “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts” (“SOP 81-1”) according to which
revenues are recognized on the percentage-of-completion basis.
Sales under long-term fixed-price contracts which provide for
a substantial level of development efforts in relation to total contract efforts are
recorded using the cost-to-cost method of accounting as the basis to measure progress
toward completing the contract and recognizing revenues. According to this method, sales
and profits are recorded based on the ratio of costs incurred to estimated total costs at
completion. In certain circumstances, when measuring progress toward completion, the
Company considers other factors, such as achievement of performance
milestones.
Sales and anticipated profit under long-term fixed-price
production type contracts are recorded on a percentage-of-completion basis, using the
units-of-delivery as the basis to measure progress toward completing the contract and
recognizing revenues. In certain circumstances, which involve long-term fixed-price
production type contracts for non-homogenous or small quantity of units, revenue is
recognized based on the achievement of performance milestones, which provide a more
reliable, and objective measure to the extent of progress toward
completion.
Sales and anticipated profit under long-term fixed-price
contracts that involve both development and production are recorded using the cost-to-cost
method and units-of-delivery method as applicable to each phase of the contract, as the
basis to measure progress toward completion. In addition, when measuring progress toward
completion under the development portion of the contract, the Company considers other
factors, such as achievement of performance milestones.
The percentage-of-completion method of accounting requires
management to estimate the cost and gross profit margin for each individual contract.
Estimated gross profit or loss from long-term contracts may change due to changes in
estimates resulting from differences between actual performance and original estimated
forecasts. Such changes in estimated gross profit are recorded in results of operations
when they are reasonably determinable by management, on a cumulative catch-up basis.
Anticipated losses on contracts are charged to earnings when determined to be
probable.
Sales under cost-reimbursement-type contracts are recorded as
costs are incurred. Applicable estimated profits are included in earnings in the proportion
that incurred costs bear to total estimated costs.
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.)
|
|
Q.
|
REVENUE RECOGNITION (Cont.)
|
Amounts representing contract change orders, claims or other
items are included in sales only when they can be reliably estimated and realization is
probable. Penalties and awards applicable to performance on contracts are considered in
estimating sales and profit rates and are recorded when there is sufficient information to
assess anticipated contract performance.
The Company believes that the use of the
percentage-of-completion method is appropriate as the Company 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 Company expects to perform its contractual obligations, and
its customers are expected to satisfy their obligations under the
contract.
In certain circumstances, sales under short-term fixed-price
production type contracts or sale of products are accounted for in accordance with SAB No.
104, "Revenue Recognition in Financial Statements" ("SAB 104"), and recognized when all the
following criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price to the buyer is fixed or determinable, no further obligation
exists and collectability is reasonably assured.
In cases where the contract involves the delivery of products
and performance of services, the Company follows the guidelines specified in EITF 00-21,
“Revenue Arrangements with Multiple Deliverables” in order to allocate the
contract revenues between the products accounted for under SOP 81-1, SAB 104 and the
services.
Management reviews periodically the estimates of progress
towards completion and project costs. These estimates are determined based on engineering
estimates and past experience, by personnel having the appropriate authority and expertise
to make reasonable estimates of the related costs. Such engineering estimates are reviewed
periodically for each specific contract by professional personnel from various disciplines
within the organization. These estimates take into consideration the probability of
achievement of certain milestones, as well as other factors that might impact the
contract’s completion.
A number of internal and external factors affect our 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 testing requirement changes. If any of the above factors were to change,
or if different assumptions were used in estimating progress cost and measuring progress
towards completion, it is likely that materially different amounts would be reported in the
Company’s consolidated financial statements.
As for research and development costs accounted for as
contract costs refer to Note 2(T).
Pre-contract costs are deferred and included in inventory,
only when such costs can be directly associated with a specific anticipated contract and if
their recoverability from the specific contract is probable according to the guidelines of
SOP 81-1.
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.)
|
The Company 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 Company does business. Factors that affect
the Company’s warranty liability include the number of delivered products,
engineering estimates and anticipated rates of warranty claims. The Company periodically
assesses the adequacy of its recorded warranty liability and adjusts the amount as
necessary. Specific warranty reserves are recorded in the period defect or potential
products failures are identified and recorded based on estimates made by management. The
estimates are evaluated on a periodic basis.
Changes in the Company’s provision for warranty, which
is included in Elbit Systems’ balance sheet, during the respective years, are as
follows:
|
|
2007
|
|
2006
|
Balance, at January 1
|
|
$ 44,417
|
|
$ 31,797
|
Warranties issued during the year
|
|
27,403
|
|
27,733
|
Warranties related to the acquisition of Tadiran and
FTL
|
|
18,720
|
|
-
|
Warranties forfeited or exercised during the year
|
|
(18,181)
|
|
(15,113)
|
Balance, at December 31
|
|
$ 72,359
|
|
$ 44,417
|
|
T.
|
RESEARCH AND DEVELOPMENT COSTS
|
Research and development costs, net of participations, are
charged to operations as incurred. Company sponsored research and development costs
primarily include independent research and development and bid and proposal
efforts.
Under certain arrangements in which a customer participates
in product development costs, the Company’s portion of such unreimbursed costs is
expensed as incurred. Customer-sponsored research and development costs incurred pursuant
to contracts are accounted for as part of the contract costs.
Certain Company entities 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. The grants are not to be repaid, but
instead the Company entities will be sometimes obliged to pay royalties as a percentage of
future sales if and when sales are generated from the funded projects. These grants are
recognized as a deduction from research and development costs at the time the applicable
entity is entitled to such grants on the basis of the research and development costs
incurred, since the payment of royalties is not probable when the grants are received. The
Company estimates the costs of royalties it would be obligated to pay for each individual
contract and records a liability in the amount of such costs, when the related revenues are
recognized.
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.)
|
The Company 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 asset and liability account balances are determined based on
differences between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, if necessary, to
reduce deferred tax assets to amounts that are more likely than not to be
realized.
Effective January 1, 2007, Elbit Systems adopted the
provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN
48 clarifies the accounting for uncertainties in income taxes by establishing minimum
standards for the recognition and measurement of tax positions taken or expected to be
taken in a tax return. Under the requirements of FIN 48, Elbit Systems must review all of
its tax positions and make a determination as to whether its position is
more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax
position meets the more-likely–than-not standard, then the related tax benefit is
measured based on a cumulative probability analysis of the amount that is
more-likely-than-not to be realized upon ultimate settlement or disposition of the
underlying issue. The impact on the Company’s consolidated financial position and
results of operations as a result of the adoption of the provisions of FIN 48 was $4,846,
which was recognized as an adjustment to opening retained earnings.
The Company recorded interest related to its unrecognized tax
benefit as income tax expense. Our January 1, 2007 unrecognized tax benefit included $
2,450 of interest ($1,404 and $806- interest exposure related to 2006 and 2005,
respectively).
|
V.
|
CONCENTRATION OF CREDIT RISKS
|
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents, short and
long-term deposits, marketable securities and trade receivables.
The majority of the Company’s cash and cash equivalents
and deposits are invested in dollar instruments with major banks in Israel and in the
United States. Management believes that the financial institutions that hold the Company
investments are financially sound, and accordingly, minimal credit risk exists with respect
to these investments.
The Company’s trade receivables are derived primarily
from sales to large and stable customers and governments located mainly in Israel, the
United States and Europe. The Company performs ongoing credit evaluations of its customers
and to date, has not experienced in recent years any unexpected material losses. An
allowance for doubtful accounts is determined with respect to those amounts that the
Company 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, except share and per share
data)
|
|
Note 2 -
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
W.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS No.
133”), requires companies to recognize all derivative instruments as either assets or
liabilities in the statement of financial position at fair value. The accounting for
changes in the fair value (i.e. gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship and further,
on the type of hedging relationship. For those derivative instruments that are designated
and qualify as hedging instruments, a company must designate the hedging instrument, based
upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.
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 effective portion of the gain and loss on thederivative 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 value. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the fair value of the asset or liability hedge, if any,
is recognized as financial expense in current earnings during the period of change. For
derivative instruments that are designated and qualify as a cash flow hedge (i.e. hedging
the exposure to variability in expected future cash flow that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and reclassified into earnings in the
same line item associated with the forecasted transaction in the same period or periods
during which the hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized as a financial expense in current
earnings during the period of change. The Company records any ineffectiveness of the
hedging instruments, which was immaterial during 2007, 2006 and 2005 in financial income
(expense) on its Consolidated Statements of Income. Cash flows from such hedges are
classified as operating activities.
For derivative instruments not designated as hedging
instruments, the gain or loss is recognized as a financial expense in current earnings
during the period of change.
As part of its hedging strategy, the Company enters into
forward exchange contracts in order to protect the Company from the risk that the eventual
dollar cash flows from the sale of products to international customers will be adversely
affected by changes in the exchange rates.
As of December 31, 2007, the Company had forward contracts
with a notional amount of approximately $354,200 to purchase and sell foreign currencies
($176,000 in Euro, $170,400 in Great Britain Pounds (“GBP”) and $7,500 in other
currencies). These foreign exchange forward contracts have maturities between one and five
years ($120,000 in 2008).
The fair value of the foreign exchange contracts and the
options as of December 31, 2007 is a liability of approximately $15,100.
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.)
|
|
X.
|
STOCK-BASED COMPENSATION
|
Effective January 1, 2006, Elbit Systems adopted the
provision of Statement No. 123 (revised 2004), “Share-Based Payment”
(“Statement 123(R)”) using the modified prospective method. The adoption of
Statement 123(R) had an immaterial effect on the Company’s financial position and
results of operations.
The fair value of options is estimated using a Black-Scholes
option pricing model for the options granted in 2005 and the bionomic model for options
granted in 2007 with the following weighted average assumptions:
|
|
2007
|
|
2006
|
|
2005
|
Divided yield
|
|
2.20%
|
|
-
|
|
2.25%
|
Expected volatility
|
|
28.50%
|
|
-
|
|
25.60%
|
Risk-free interest rate
|
|
4.70%
|
|
-
|
|
4.50%
|
Expected life
|
|
4 years
|
|
-
|
|
4 years
|
Forfeiture rate
|
|
0.56%
|
|
-
|
|
-
|
Suboptimal factor
|
|
2.67
|
|
-
|
|
-
|
|
Y.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The carrying amount reported in the balance sheet for cash
and cash equivalents, short-term bank deposits, trade receivables, short-term bank credit
and loans and trade payables approximate their fair values due to the short-term maturities
of such instruments.
Fair value of investment in marketable securities with quoted
market prices is based on quoted market prices. For marketable securities not actively
traded, fair values are estimated using values obtained from the Company’s asset
managers. To estimate the value of these investments the asset managers employ various
models that take into consideration such factors, among others, as the credit rating of the
issuer, effective maturity of the security, yields on comparably rated publicly traded
securities, availability of insurance and risk-free yield curves. The actual value at which
such securities could actually be sold or settled with a willing buyer or seller may differ
from such estimated fair values depending on a number of factors including, but not limited
to, current and future economic conditions, the quantity sold or settled, the presence of
an active market and the availability of a willing buyer or seller.
The carrying amount of the available for sale securities is
recorded according to its fair market value, as determined by quoted market prices on the
stock exchange.
The fair value of long-term loans is estimated by discounting
the future cash flows using current interest rates for loans of similar terms and
maturities. The carrying amount of the long-term loans approximates their fair
value.
The fair value of foreign currency contracts (used for
hedging purposes) is estimated by obtaining current quotes from investment
bankers.
25
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 2 -
|
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
Y.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont.)
|
It was not practicable to estimate the fair value of the
Company’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 as of December 31, 2007 and 2006 were $14,259 and $13,892, respectively, and
represent the original cost of acquisition. As noted in Note 2(H) above, management
continually monitors such investments for other-than-temporary decline in
value.
|
Z.
|
BASIC AND DILUTED NET EARNINGS PER SHARE
|
Basic earnings per share are computed based on the weighted
average number of ordinary shares outstanding during each year. Diluted earnings per share
is computed based on the weighted average number of ordinary shares outstanding during each
year, plus dilutive potential ordinary shares considered outstanding during the year.
Outstanding stock options are excluded from the calculation of the diluted earnings per
ordinary share when their effect is anti-dilutive. In all the years presented no stock
options were excluded.
|
AA.
|
VARIABLE INTEREST ENTITIES
|
FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin No. 51" (“FIN
46”) provides a framework for identifying Variable Interest Entities
(“VIEs”) and determining when a company should include the assets, liabilities,
non-controlling interests and results of activities of a VIE in its consolidated financial
statements.
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
its 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.
UAV Tactical Systems Ltd. (“U-TacS”), in the U.K.
is considered to be a variable interest entity. As Elbit Systems is the primary
beneficiary, U-TacS is consolidated in Elbit Systems’ financial
statements.
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.)
|
|
AB.
|
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
|
New pronouncements issued but not effective as of December
31, 2007 are not expected to have a significant effect on the Company’s consolidated
financial position or results of operations, with the possible exception of the following,
which are currently being evaluated by management:
|
1)
|
In September 2006, the FASB issued SFAS No. 157,
"Fair Value Measurements" (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and enhances fair value measurement disclosure. In
February 2008, the FASB issued FASB Staff Position (FSP) 157-1,
"Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13"
(“FSP 157-1”) and FSP 157-2, "Effective Date of FASB Statement
No. 157" (“FSP 157-2”). FSP 157-1 amends SFAS No. 157
to remove certain leasing transactions from its scope. FSP 157-2
delays the effective date of SFAS No. 157 for all non-financial
assets and non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis
(at least annually), until the beginning of the first quarter of fiscal
2009. The measurement and disclosure requirements related to financial
assets and financial liabilities are effective for the Company beginning in
the first quarter of 2008.
|
|
|
|
|
|
The resulting fair values calculated under
SFAS No. 157 after adoption may be different from the fair values
that would have been calculated under previous guidance. The Company is
currently evaluating the impact that SFAS No. 157 will have on
its consolidated financial statements when it is applied to non-financial
assets and non-financial liabilities beginning in the first quarter of
2009.
|
|
|
|
|
2)
|
In February 2007, the FASB issued SFAS No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities"
(“SFAS No. 159”). SFAS No. 159 permits
companies to choose to measure certain financial instruments and other
items at fair value. The standard requires that unrealized gains and losses
are reported in earnings for items measured using the fair value option.
SFAS No. 159 is effective for the Company beginning in the first
quarter of 2008. The adoption of SFAS No. 159 will not have a
significant impact on the Company’s consolidated financial
statements.
|
|
3)
|
In June 2007, the FASB ratified EITF 07-3,
“Accounting for Non-Refundable Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities”
(“EITF 07-3”). EITF 07-3 requires that nonrefundable
advance payments for goods or services that will be used or rendered for
future research and development activities be deferred, capitalized and
recognized as an expense as the goods are delivered or the related services
are performed. EITF 07-3 is effective, on a prospective basis, for
fiscal years beginning after December 15, 2007. The Company does not
expect any material impact on its consolidated results of operations and
financial condition from the adoption of EITF 07-3.
|
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.)
|
|
AB.
|
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
(Cont.)
|
|
4)
|
In December 2007, the FASB issued SFAS No. 141
(revised 2007), "Business Combinations"
(“SFAS No. 141(R)”). Under SFAS No. 141(R),
an entity is required to recognize the assets acquired, liabilities
assumed, contractual contingencies, and contingent consideration at their
fair value on the acquisition date. It further requires that
acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred
tax asset valuation allowances and acquired income tax uncertainties after
the measurement period impact income tax expense. In addition, acquired
IPR&D is capitalized as an intangible asset and amortized over its
estimated useful life. The adoption of SFAS No. 141(R) will
change the Company’s accounting treatment for future business
combinations consummated beginning in the first quarter of 2009. No early
adoption is permitted.
|
|
5)
|
In December 2007, the FASB issued FAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements —
an amendment of Accounting Research Bulletin No. 51
(“FAS 160”). FAS 160 addresses the accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable
to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated.
FAS 160 also establishes disclosure requirements that clearly identify
and distinguish between the interests of the parent and the interests of
the noncontrolling owners. FAS 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by the Company
in 2009. No early adoption is permitted. The Company is currently assessing
the impact of this standard on its future consolidated results of
operations and financial condition.
|
Certain financial statement data for prior years has been
reclassified to conform to current year financial statement presentation.
|
Note 3 -
|
TRADE RECEIVABLES, NET
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Open accounts (*)
|
|
$ 341,408
|
|
$ 315,254
|
Unbilled receivables
|
|
101,756
|
|
72,623
|
Less – allowance for doubtful accounts
|
|
(3,794)
|
|
(3,390)
|
|
|
$ 439,370
|
|
$ 384,487
|
(*) Includes affiliated
companies
|
|
$ 9,914
|
|
$
9,673
|
28
ELBIT SYSTEMS LTD. AND ITS
SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 4 -
|
OTHER RECEIVABLES AND PREPAID EXPENSES
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Deferred income taxes
|
|
$ 21,677
|
|
$ 11,972
|
Prepaid expenses
|
|
54,185
|
|
31,385
|
Government institutions
|
|
37,606
|
|
21,681
|
Employees
|
|
1,681
|
|
787
|
Others
|
|
12,184
|
|
13,011
|
|
|
$ 127,333
|
|
$ 78,836
|
|
Note 5 -
|
INVENTORIES, NET OF CUSTOMER ADVANCES
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Cost incurred on long-term contracts in progress
|
|
$ 508,273
|
|
$ 373,045
|
Raw materials
|
|
123,466
|
|
90,075
|
Advances to suppliers and subcontractors
|
|
65,597
|
|
41,037
|
|
|
697,336
|
|
504,157
|
Less -
|
|
|
|
|
Cost incurred on contracts in progress deducted
from customer advances (see Note 13)(*)
|
|
69,199
|
|
49,455
|
Advances received from customers (*)
|
|
131,177
|
|
77,246
|
Provision for losses on long-term contracts
|
|
16,357
|
|
5,494
|
|
|
$ 480,603
|
|
$ 371,962
|
The Company has transferred legal title of inventories to
certain customers as collateral for advances received.
(*)
Advances are allocated to the
relevant inventories on a per-project basis. In cases (projects) where the advances are in
excess of the inventories, the net amount is presented in customer advances. In cases where
the inventories are in excess of advances received, the net amount is included in
inventories.
|
Note 6 -
|
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND
OTHER
COMPANIES
|
|
A.
|
Investments in affiliated companies:
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Companies accounted for under the equity method
|
|
$ 51,902
|
|
$ 221,831
|
Companies accounted for on a cost basis
|
|
14,259
|
|
13,892
|
|
|
$ 66,161
|
|
$ 235,723
|
29
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 6 -
|
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND
OTHER
COMPANIES (Cont.)
|
|
B.
|
Investments in companies accounted for under the equity
method:
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Tadiran (1)
|
|
$
-
|
|
$ 176,374
|
SCD (2)
|
|
36,594
|
|
30,804
|
VSI (3)
|
|
4,671
|
|
5,398
|
Opgal (4)
|
|
5,992
|
|
4,705
|
Chip PC (5)
|
|
1,853
|
|
2,189
|
Others (6) (7)
|
|
2,792
|
|
2,361
|
|
|
$ 51,902
|
|
$ 221,831
|
|
(1)
|
Tadiran – until the Offer, Tadiran was a
publicly-traded 42%-owned investee registered in Israel. Tadiran is
involved in the worldwide market for military communications systems and
equipment and is also active in the civilian communications
market.
|
The summarized financial information regarding Tadiran (see Note 1(D)) is as
follows:
Balance Sheet Information:
|
|
December 31,
|
|
|
2006
|
Current assets
|
|
$ 340,204
|
Non-current assets
|
|
103,343
|
Total assets
|
|
$ 443,547
|
|
|
|
Current liabilities
|
|
$ 238,294
|
Non-current liabilities
|
|
36,548
|
Shareholders’ equity
|
|
168,705
|
|
|
$ 443,547
|
Income Statement Information:
|
December 31,
|
|
2006
|
2005
|
Revenues
|
$
258,608
|
$
271,424
|
Gross profit
|
$
105,567
|
$
120,510
|
Net income
|
$
42,117
|
$
29,879
|
As of December 31, 2006, the fair market value of Tadiran’s shares
held by Elbit Systems was $207,128. The results of Tadiran are consolidated in Elbit
Systems’ financial statements commencing May 1, 2007.
30
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 6 -
|
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND
OTHER COMPANIES (Cont.)
|
|
B.
|
Investments in companies accounted for under the equity
method (Cont.)
|
|
(2)
|
Semi Conductor Devices (“SCD”) is an Israeli
partnership, held 50% by the Company and 50% by Rafael Armaments
Development Authority Ltd. (“Rafael”). SCD is engaged in the
development and production of various thermal detectors and laser diodes.
SCD is jointly controlled and therefore is not consolidated in the
Company’s financial statements.
|
|
(3)
|
Vision Systems International LLC (“VSI”) based
in San Jose, is a California limited liability company that is held 50% by
ESA and 50% by a subsidiary of Rockwell Collins Inc. VSI operates in the
area of helmet mounted display systems for fixed-wing military aircraft.
VSI is jointly controlled and therefore is not consolidated in the
Company’s financial statements.
|
|
(4)
|
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.
|
|
(5)
|
Chip PC Ltd. (“Chip PC”) is an Israeli company,
of which approximately 19% is held by the Company. Chip PC develops and
manufactures “Post PC” solutions, focused on enabling
server-based-computing technologies to replace traditional PCs and deploy
and control large numbers of workstations. On July 2007, Chip PC completed
an initial public offering (“IPO”) on the TASE. Following the
offer, Chip PC became a publicly-traded company registered in Israel, in
which the Company holds approximately 19% of its shares (16.3% on a fully
diluted basis). In addition, the Company holds an option to purchase up to
an additional 5% of Chip PC’s ordinary shares as stipulated in the
agreement signed with Chip PC, As a result of the IPO, the Company
recognized an immaterial loss.
|
|
(6)
|
Mediguide Inc. (“Mediguide”) and its Israeli
subsidiary, Mediguide Ltd., were established in 2000 as a spin-off from the
Company. The share capital of Mediguide, consists of Common shares and
Preferred A, B, C and D shares. The Common shares and the Preferred shares,
both have voting rights. The Company holds all of the Common shares of
Mediguide which constitute approximately 55% (41% on a fully diluted basis)
of the voting rights of Mediguide. During 2001 - 2004, Mediguide issued
Preferred shares to other investors in consideration for approximately
$34,355. The Preferred shares issued entitle the other investors to
preference rights senior to all other classes of shares previously issued
by Mediguide in a liquidation or a deemed liquidation event. Therefore, the
Company did not record any gain as a result of the above transaction. In
addition, the Preferred shares entitle their holders to certain
participating rights. Accordingly, based on the guidance in EITF 96-16, the
Company does not consolidate Mediguide. The carrying value of the
investment in Mediguide is zero.
|
31
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 6 -
|
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND
OTHER COMPANIES (Cont.)
|
|
B.
|
Investments in companies accounted for under the equity
method (Cont.)
|
|
(7)
|
Starling Advanced Communications Ltd.
(“Starling”) develops products in the area of internet
communications through satellite transmissions and broad band information
transfer for commercial aircraft. On May 2007, Starling completed an IPO on
the TASE. Following the offering, Starling became a publicly-traded company
registered in Israel, and the Company’s share ownership in Starling
was diluted from approximately 21% to approximately 16% (or 10% on a fully
diluted basis). In addition, the Company holds 52,358 options of debenture
convertible into shares notes issued by Starling. As a result of
Starling’s IPO, the Company recorded a gain in the amount of
approximately $595 recorded as an increase to the shareholders equity,
since Starling is a development stage company.
|
|
(8)
|
Equity in net earnings (losses) of affiliated companies is
as follows:
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Tadiran (*)
|
|
$ 716
|
|
$ 3,988
|
|
$ (11,121)
|
SCD
|
|
7,922
|
|
5,466
|
|
5,115
|
VSI
|
|
4,590
|
|
5,354
|
|
4,641
|
Others
|
|
1,337
|
|
(65)
|
|
(271)
|
|
|
$ 14,565
|
|
$ 14,743
|
|
$ (1,636)
|
(*) The Company’s share in Tadiran’s 2006
results included a loss of $2,400 as a result of exercise of options in Tadiran. Until the
date of the Offer, Tadiran results were included under the equity method.
|
(9)
|
The summarized aggregate financial information of companies
accounted for under the equity method, excluding Tadiran (see Note
6(B)(1)), is as follows:
|
Balance Sheet Information:
|
|
December 31,
|
|
|
2007
|
|
2006
|
Current assets
|
|
$ 188,923
|
|
$ 165,411
|
Non-current assets
|
|
30,812
|
|
27,896
|
Total assets
|
|
$ 219,735
|
|
$ 193,307
|
|
|
|
|
|
Current liabilities
|
|
$ 95,692
|
|
$ 85,576
|
Non-current liabilities
|
|
23,787
|
|
7,929
|
Shareholders’ equity
|
|
100,256
|
|
99,802
|
|
|
$ 219,735
|
|
$ 193,307
|
Income Statement Information:
|
Year ended December 31,
|
|
2007
|
|
2006
|
|
2005
|
Revenues
|
$ 331,971
|
|
$ 298,499
|
|
$ 266,841
|
Gross profit
|
$ 89,960
|
|
$ 79,309
|
|
$ 63,938
|
Net income
|
$ 12,830
|
|
$ 18,902
|
|
$ 13,345
|
|
(10)
|
See Note 17(E) for guarantees.
|
32
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 6 -
|
INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND
OTHER COMPANIES (Cont.)
|
|
C.
|
Investments in companies accounted for on a cost
basis
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
ISI (1)
|
|
$ 1,830
|
|
$ 1,830
|
AAI (2)
|
|
-
|
|
1,000
|
Sandel (3)
|
|
12,414
|
|
11,047
|
Others
|
|
15
|
|
15
|
|
|
$ 14,259
|
|
$ 13,892
|
|
(1)
|
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. During the fourth quarter of 2005, the fair value of ISI
decreased as a result of a decrease in ISI’s backlog and estimated
future cash flows. Based on a valuation performed by an independent
appraiser, the Company wrote-off approximately $5,400 of its investment in
ISI in 2005. As of December 31, 2007, no impairment loss has been
identified.
|
|
(2)
|
AeroAstro Inc. (“AAI”), previously held 8.33%
(on a fully diluted basis), is a Delaware corporation 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. In the fourth quarter of 2007, the
Company sold its shares in AAI for $1,400, which was received in 2008. As a
result, the Company recorded a gain in the amount of $400.
|
|
(3)
|
Sandel Avionics, Inc. (“Sandel”) based in Vista,
California, produces specialized integrated display systems and other
products for the commercial aviation market. In 2006, ESA subsidiary
Kollsman Inc. (“Kollsman”) acquired Preferred B Shares of
Sandel, which constitute a 20% interest in Sandel on a fully diluted and as
converted basis. The investment in Sandel is accounted on a cost basis in
accordance with EITF 02-14.
|
|
Note 7 -
|
COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE,
NET
|
|
December 31,
|
|
2007
|
|
2006
|
Receivables from insurance company (A)
|
$ 25,884
|
|
$ 25,884
|
Net of contingent payment to Koor (B)
|
10,354
|
|
10,354
|
|
$ 15,530
|
|
$ 15,530
|
|
A.
|
On March 17, 2001, a fire broke out in the manufacturing
plants in two of Elisra’s subsidiaries ("the companies"). The fire
caused damage to equipment, building, inventory and work in progress. Up to
December 31, 2006 and 2007, advances were received from the insurance
company in the aggregate amount of approximately $10 million.
|
Upon the acquisition of Elisra in 2005, as part of the assets purchased in
the business combination, Elbit Systems recorded the receivables from the insurance company
at their estimated value of approximately $26 million considering the advances previously
received from the insurance companies in years prior to the acquisition.
33
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 7 -
|
COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE, NET
(Cont.)
|
The claim submitted by the companies to the insurance company, and which is
based on the terms of the insurance policy, also includes a demand for consequential
damages along with other damages that the companies believe are covered by the insurance
policy. Therefore, the total amount of the claim is much higher than the book value of the
damage and the cost of repairing the building.
The companies are taking legal action in order to receive the insurance
claim, and they have submitted a claim to the District Court of Tel-Aviv against the
insurance company and its assessors, in the aggregate amount of $96 million. In light of
the duration of the proceedings, the managements of the companies decided to classify the
balance of the compensation receivable from the insurance company as a long-term
receivable.
In April 2004, the companies filed a request with the Court, for issuance of
a partial judgment, in the amount of $33 million (in excess of the advances already paid by
the insurance company) based on the admission made by the insurance company and its
representatives of an obligation deriving from the insurance event, while the dispute
remains regarding the amount of the damages.
In December 2004, a hearing was held in the Court wherein the force of a
judgment was given to an agreement of the parties pursuant to which a separate bank account
was opened, in which the insurance company deposited $15 million. Every withdrawal from
such account requires approval of the Court until the proceedings on the claim are
concluded. In accordance with the aforesaid agreement, the claim was transferred for
mediation. A number of meetings took place during 2005 and 2006, including a visit of the
reinsurance representatives with the Company, however the mediation did not result in an
agreement between the parties.
In light of the failure of the mediation proceeding, on September 19, 2006
the mediator notified the Court of discontinuance of the proceeding.
On September 21, 2006, the Company requested from the Court to renew the
legal proceedings and requested that a ruling be made on the request for a partial ruling
that had been filed on April 21, 2004 as described above. In accordance with the decision
of the District Court in a pre-trial hearing held in March 1, 2007, the parties were
ordered to conclude the preliminary proceedings by the setting of a new schedule for a
hearing. The hearing took place in December 1, 2007. The next hearing is scheduled to April
1, 2008.
In the opinion of the companies, based on, among other things, the opinion
of their legal advisors regarding this matter, it is difficult to estimate the chances that
the companies will receive the full amount of the claim, even though it is considered to be
well founded. Nonetheless, the managements of the companies estimate, based on the opinion
of their legal advisors that the chances are good of receiving indemnification from the
insurance company, in an amount at least equal to the balance of the receivable which they
recorded as an asset in the financial statements.
34
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 7 -
|
COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE, NET
(Cont.)
|
|
B.
|
In the agreement Elbit Systems signed with Koor, for the
purchase of Elisra’s shares, it was agreed that Elbit Systems will
pay Koor 40% of the consideration received from the insurance company, up
to $30 million and 25%-27.5% of additional consideration
received.
|
|
C.
|
The receivables in respect of the fire damages and related
payable to Koor represent pre-acquisition contingencies that were
recognized in connection with the acquisition of Elisra in 2005, as part of
the PPA.
|
|
Note 8 -
|
LONG-TERM DEPOSITS AND SECURITIES
|
|
A.
|
Long–term bank deposits and trade
receivables
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Deposits with banks for loans granted to employees
(*)
|
|
$ 1,999
|
|
$ 1,287
|
Long-term trade and other receivables
|
|
1,345
|
|
4,701
|
Other deposits with banks
|
|
9,994
|
|
42
|
|
|
$ 13,338
|
|
$ 6,030
|
(*)
The deposits are linked to the Israeli CPI, bear
annual interest of 4% and are presented net of current maturities of $665 (2006 -
$429).
|
|
December 31,
|
|
|
2007
|
|
2006
|
Short-term available for sale marketable
securities
|
|
$ 2,830
|
|
$ 2,106
|
Long-term marketable securities
(*)
|
|
20,885
|
|
-
|
|
|
$ 23,715
|
|
$ 2,106
|
|
(*)
|
Auction Rate Securities (“ARS”) held by the
Company as a result of the acquisition of Tadiran are private placement
securities with long-term nominal maturities for which the interest
rates are reset through a “dutch” auction each month. The
monthly auctions historically have provided a liquid market for these
securities. The Company's investments in ARS represent interests in
collateralized debt obligations supported by pools of residential and
commercial mortgages or credit cards, insurance securitizations and
other structured credits, including corporate bonds. Some of the
underlying collateral for the ARS held by the Company consists of
sub-prime mortgages.
|
|
|
|
|
|
ARS investments held by Tadiran at
the date of the acquisition all had AAA/Aaa credit ratings at the time
of purchase. With the liquidity issues experienced in global credit and
capital markets, the ARS held by the Company at December 31, 2007 have
experienced multiple failed auctions as the amount of securities
submitted for sale has exceeded the amount of purchase
orders.
|
35
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 8 -
|
LONG–TERM BANK DEPOSITS AND TRADE RECEIVABLES
(Cont.)
|
The estimated market value of the Company's ARS holdings at December 31,
2007 was $20.9 million, which reflects a $10.9 million adjustment to the principal value of
$31.8 million. Although the ARS continue to pay interest according to their stated terms,
based on fair value indications received and valuation models applied by the investment
banks and an analysis of other-than-temporary impairment factors, the Company has recorded
an impairment charge of approximately $10 million in the fourth quarter of 2007, reflecting
the portion of ARS holdings that the Company has concluded have an other-than-temporary
decline in value, the cost was included in Finance Expenses net. In addition, the Company
recorded an unrealized pre-tax loss of approximately $900 in other comprehensive income,
reflecting an adjustment to ARS holdings that the Company concluded to have a temporary
decline in value.
Historically, given the liquidity created by the auctions, ARS were
presented as current assets under marketable securities on the Company’s balance
sheet. As a result of the failed auctions, in recent periods the Company's ARS are illiquid
until there is a successful auction for them. Accordingly, the entire amount of such
remaining ARS has been reclassified from current to non-current assets on the
Company’s balance sheet.
|
Note 9 -
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Cost (1):
|
|
|
|
|
Land, buildings and leasehold improvements (2)
|
|
$ 210,566
|
|
$ 185,408
|
Instruments, machinery and equipment (3)
|
|
453,988
|
|
355,365
|
Office furniture and other
|
|
55,571
|
|
44,042
|
Motor vehicles
|
|
58,766
|
|
53,955
|
|
|
778,891
|
|
638,770
|
Accumulated depreciation
|
|
(428,377)
|
|
(344,142)
|
Depreciated cost
|
|
$ 350,514
|
|
$ 294,628
|
Depreciation expenses for the years ended December 31, 2007, 2006 and 2005
amounted to $69,523, $50,323 and $44,576, respectively.
|
(1)
|
Net of investment grants received (mainly for instruments,
machinery and equipment) in the amounts of $22,678 and $33,409 as of
December 31, 2007 and 2006, respectively.
|
|
(2)
|
Includes rights in approximately 9,180 square meters of land
in Tirat Hacarmel, Israel. The land is held under a prepayment operating
lease 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 on its
name.
|
Includes rights in approximately 10,633 square meters of land in Rehovot,
Israel. The land is held under a prepayment operating lease 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 on its
name.
36
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 9 -
|
PROPERTY, PLANT AND EQUIPMENT, NET (Cont.)
|
Includes rights in approximately 10,386 square meters of land in Bnei Brak,
Israel. The land is held under a prepayment operating lease from the Israel Land
Administration (through the years 2010-2017) 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 Company for its own use
in the aggregate amount of $107,107 and $96,131 as of December 31, 2007 and
2006, respectively.
|
|
(4)
|
As for pledges of assets – see Notes 17(E) and
17(I).
|
|
Note 10 -
|
INTANGIBLE ASSETS, NET
|
|
|
|
Weighted average number
|
|
|
|
|
|
|
|
of years of amortization
|
|
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Original cost:
|
|
|
|
|
|
|
|
Technology
(1)
|
|
12
|
|
$ 167,478
|
|
$ 96,456
|
|
Customer relations
(2)
|
|
5
|
|
164,658
|
|
12,330
|
|
Trade marks
(3)
|
|
15
|
|
42,872
|
|
8,000
|
|
|
|
|
|
375,008
|
|
116,786
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
Technology
|
|
|
|
47,110
|
|
33,899
|
|
Customer relations
|
|
|
|
24,318
|
|
9,693
|
|
Trade marks
|
|
|
|
4,655
|
|
2,600
|
|
|
|
|
|
76,083
|
|
46,192
|
|
Amortized cost
|
|
|
|
$ 298,925
|
|
$ 70,594
|
|
Goodwill
(4)
|
|
|
|
$ 331,810
|
|
$ 58,401
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The technology acquired consists of five major items as
follows:
|
In 2000, Elbit Systems completed a merger with Elop. A portion of the
purchase price was allocated to technology ($45,000), based on an independent appraisal.
The technology acquired in the merger with Elop comprises various technologies relating to
diode pumped, detectors for thermal imaging devices, line of sight command, control and
stabilization systems employing computerized digital controllers, sophisticated image and
signal processing, utilizing modern equipment and software, high precision mechanical and
optical component design and manufacturing and aviation instruments.
In 2000, ESA’s subsidiary EFW Inc. (“EFW”) acquired from
Honeywell Inc. (“Honeywell”), Honeywell’s business relating to head-up
displays and tracking systems for pilot helmets. An amount of $9,300 was allocated to the
acquired technology based on its estimated fair value as prepared by the
Company.
37
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 10 -
|
INTANGIBLE ASSETS, NET (Cont.)
|
In 2001 and 2002, the Company acquired a Brazilian company which serves as a
center for the production and logistic support of defense electronics programs in Brazil.
An amount of $5,500 was allocated to technology related to the maintenance and support of
avionic equipment.
In 2002, Elbit Systems acquired the business of the Defense Systems Division
of Elron Telesoft in consideration for $5,700. An amount of $5,100 was allocated to the
technology related to the government information technology control systems software
developed by Elron Telesoft.
In 2005, the Elbit Systems acquired 70% of Elisra’s shares as detailed
in Note 1(C) above, in consideration for $68,800. An amount of $21,300 was allocated to the
technology related to EW systems, command communication (C
2
) systems and data
link
products.
In 2007, Elbit Systems acquired 58% of Tadiran’s shares, as detailed
in Note 1(D) above. An additional amount of $70,300 was allocated in 2007 to technology
related to communication equipment and C
4
ISR, resulting from the consolidation
of Tadiran.
|
(2)
|
Includes mainly customer relations resulting from the
acquisition of Tadiran ($143,000) and FTL ($9,000).
|
|
(3)
|
Includes trade marks in the amount of $8,000 acquired in the
merger with Elop in 2000, and an amount of $34,900 that was allocated to
trade marks resulting mainly from the acquisition of Tadiran in
2007.
|
|
(4)
|
Includes mainly goodwill resulting from the merger with Elop
($18,700) in 2000, goodwill acquired from Honeywell ($2,090) in 2000,
goodwill resulting from the acquisition of International Enterprises, Inc.
(“IEI”), an ESA subsidiary ($3,300) in 2001, goodwill resulting
from the acquisition of Elisra ($24,300) in 2005, and goodwill resulting
from the acquisition of Tadiran ($261,300) and FTL ($12,100) in
2007.
|
Changes in goodwill, during the years, are as follows:
|
|
2007
|
|
2006
|
Balance, at January 1
|
|
$ 58,401
|
|
$ 58,401
|
Goodwill acquired during the
year
:
|
|
|
|
|
Tadiran (*)
|
|
261,354
|
|
-
|
FTL
|
|
12,055
|
|
-
|
Balance, at December 31
|
|
$ 331,810
|
|
$ 58,401
|
(*) Including goodwill as a result of prior years acquisitions of Tadiran
shares.
38
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 10 -
|
INTANGIBLE ASSETS, NET (Cont.)
|
|
B.
|
Amortization expenses amounted to $29,891, $8,176 and $7,742
for the years ended December 31, 2007, 2006 and 2005,
respectively.
|
|
C.
|
The annual amortization expense relating to intangible
assets other than goodwill existing as of December 31, 2007 is estimated to
be as follows:
|
2008
|
|
$ 37,566
|
2009
|
|
33,293
|
2010
|
|
32,270
|
2011
|
|
32,216
|
2012
|
|
31,775
|
Thereafter
|
|
|
Total
|
|
|
|
Note 11 -
|
SHORT-TERM BANK CREDIT AND LOANS
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Short-term bank loans:
|
|
Interest Rate
|
|
|
|
|
In U.S. dollars
|
|
7.0-7.01%
|
|
4.75-7.86%
|
|
$ 7,915
|
|
$ 6,660
|
In Euro and GBP
|
|
6.7-7.14%
|
|
-
|
|
757
|
|
-
|
|
|
|
|
|
|
8,672
|
|
6,660
|
Short-term bank credit:
|
|
|
|
|
|
|
|
|
In NIS unlinked
|
|
-
|
|
7.25%
|
|
19
|
|
2,929
|
In U.S. dollars
|
|
5.8%
|
|
6.68-8.25%
|
|
1,727
|
|
8,213
|
|
|
|
|
|
|
1,746
|
|
11,142
|
|
|
|
|
|
|
$ 10,418
|
|
$ 17,802
|
Weighted Average Interest Rate
|
|
6.77%
|
|
6.74%
|
|
|
|
|
|
Note 12 -
|
OTHER PAYABLES AND ACCRUED EXPENSES
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Payroll and related expenses
|
|
$ 116,019
|
|
$ 78,514
|
Provision for vacation pay
|
|
58,882
|
|
39,841
|
Provision for income taxes, net of advance paid
|
|
25,599
|
|
21,096
|
Deferred taxes
|
|
2,183
|
|
-
|
Value added tax (VAT) payable
|
|
7,128
|
|
9,044
|
Provisions for royalties
|
|
30,024
|
|
23,344
|
Provision for warranty
|
|
72,359
|
|
44,417
|
Liability in respect of hedge transactions
|
|
15,943
|
|
13,442
|
Others (*)
|
|
126,412
|
|
45,101
|
|
|
$ 454,549
|
|
$ 274,799
|
(*)
Others, primarily includes provisions for
estimated future costs in respect of (1) provision for losses, penalties and the probable
loss from claims (legal or unasserted) in the ordinary course of business (e.g. damages
caused by the items sold and claims as to the specific products ordered), and (2) unbilled
services of service providers.
39
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 13 -
|
CUSTOMERS ADVANCES IN EXCESS OF COSTS INCURRED ON
CONTRACTS IN PROGRESS
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Advances received
|
|
$ 848,234
|
|
$ 603,194
|
Less -
|
|
|
|
|
Advances presented under long-term liabilities
|
|
137,296
|
|
126,769
|
Advances deducted from inventories
|
|
131,177
|
|
77,246
|
|
|
579,761
|
|
399,179
|
Less -
|
|
|
|
|
Costs incurred on contracts in progress (see Note
5)
|
|
69,199
|
|
49,455
|
|
|
$ 510,562
|
|
$ 349,724
|
As for guarantees and liens, see Notes 17(E) and (F).
|
Note 14 -
|
LONG-TERM LOANS
|
|
|
Interest
|
Years of
|
|
|
|
|
|
|
|
Banks
|
U.S. dollars
|
Libor +
0.75-1.
25%
|
mainly
2-3
|
$ 412,040
|
$ 135,355
|
|
GBP
|
Libor +
1-1.25%
|
mainly
2-3
|
37,931
|
-
|
|
Other
|
|
|
|
110
|
|
|
|
|
449,971
|
135,465
|
Less-current maturities
|
|
|
18,659
|
10,199
|
|
|
|
|
$ 431,312
|
$ 125,266
|
The Libor rate as of December 31, 2007 was 4.2%.
The maturities of these loans after December 31, 2007 are as
follows:
|
|
|
2008– current maturities
|
|
$ 18,659
|
2009
|
|
398,708
|
2010
|
|
30,247
|
2011
|
|
180
|
2012
|
|
185
|
2013 and thereafter
|
|
1,992
|
|
|
$ 449,971
|
See Note 17(F) for covenants.
In order to secure liabilities to banks as well as guarantees to customers
and performance guarantees, a subsidiary granted first priority liens and/or floating liens
on all of its property and assets with no limitation as to amount, and specific liens on
its short-term investments (see Notes 17(F) and 17(G)).
40
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 15 -
|
BENEFIT PLANS AND OBLIGATIONS FOR TERMINATIONAL
INDEMNITY
|
The Company’s subsidiaries ESA, Telefunken and a European subsidiary
sponsored benefit plans for their employees in the U.S., Germany and Belgium, respectively,
as follows:
Defined Benefit Retirement Plan based on Employer’s
Contributions
a) ESA has three defined benefit pension plans (the
“Plans”) which cover the employees of EFW and Kollsman. 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 through a financial institution, as the investment manager of the
Plans’ assets. Pension expense is allocated between cost of sales and general and
administrative expenses, depending on the responsibilities of the employee. The measurement
date for the EFW and Kollsman benefit obligation is December 31, 2007.
b) Telefunken Radio Communication Systems GmbH & Co.
(“Telefunken”), a wholly-owned German subsidiary, has mainly one defined
benefit pension plan (the “P3-plan”) which covers all employees. The P3-plan
provides for yearly cash balance credits equal to a percentage of participant’s
compensation which accumulate together with the respective interest credits on the
employee’s cash balance accounts. In case of an insured event (retirement, death,
disability) the benefits can be paid as a lump sum, in installments or as a life-long
annuity. The P3-plan is an unfunded plan.
Under the P3-plan, employees are eligible to contribute salary deductions in
order to increase their pension benefits. The plan provisions are similar to those for
employer’s contributions. No funding takes place for those benefits.
In addition, Telefunken sponsored an early retirement program –
Altersteilzeit Plan (the “ATZ-plan”) that allows employees within a certain age
group, to transition from (full or part-time) employment into retirement before the legal
retirement age. The ATZ-plan benefits are granted for a period between 24 and 60 months to
all eligible employees, who signed an individual ATZ-plan contract. The employee is
required to work regular work hours during a working phase (active period), which is
followed by a non-working phase of the same length (inactive period). The total benefits
are comprised of:
|
1)
|
the ordinary 50% salary for the ATZ-plan – paid during
the active and inactive period,
|
|
2)
|
an annual salary bonus (“Aufstockungsbetrag”)
and additional contributions into the German government pension scheme
– paid during the active and inactive period, and
|
|
3)
|
a compensation payment – paid at the end of the
ATZ-plan period.
|
The German government provides a subsidy (reimbursement) to an employer for
the bonuses paid to the employee and the additional contributions paid into the German
government pension scheme. To receive this subsidy, an employer must meet certain criteria
(typically, an employer must hire replacement employees from currently registered
unemployed persons or former trainees).
Member contributions are not required. The ATZ-plan is an unfunded
plan.
c) A wholly-owned European subsidiary in Belgium has a defined
benefit pension plan, which is divided into two categories:
41
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 15 -
|
BENEFIT PLANS AND ACCRUED TERMINATIONAL LIABILITY
(Cont.)
|
|
1)
|
Normal retirement benefit plan, with eligibility at age 65.
The lump sum is based on the employee contributions of 2% of the final
pensionable salary up to certain breakpoint, plus 6% exceeding the
breakpoint at a maximum of 5% of pensionable salary, and the employer
contributions, with a maximum of 40 years. The vested benefit is equal to
retirement benefit calculated with the pensionable salary and pensionable
service observed at the date of leaving service.
|
|
2)
|
Pre retirement death benefit to employees.
|
|
The plan is funded and includes profit sharing.
|
The following table sets forth the Plans’ funded status and amounts
recognized in the consolidated financial statements for the years ended December 31, 2007
and 2006:
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
Changes in benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
|
$
|
56,779
|
|
|
|
$
|
51,305
|
|
Newly consolidated subsidiaries
|
|
|
|
|
12,905
|
|
|
|
|
—
|
|
Service cost, end of year
|
|
|
|
|
5,615
|
|
|
|
|
3,869
|
|
Interest cost
|
|
|
|
|
4,017
|
|
|
|
|
2,981
|
|
Amendments
|
|
|
|
|
—
|
|
|
|
|
73
|
|
Actuarial losses
|
|
|
|
|
(1,854
|
)
|
|
|
|
(228
|
)
|
Benefits paid
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Plan
Assets
:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Plans assets at beginning of year
|
|
|
|
|
43,154
|
|
|
|
|
33,344
|
|
Newly consolidated subsidiaries
|
|
|
|
|
1,718
|
|
|
|
|
—
|
|
Actual return on Plan assets (net of expenses)
|
|
|
|
|
4,605
|
|
|
|
|
4,450
|
|
Employer contribution
|
|
|
|
|
6,384
|
|
|
|
|
6,581
|
|
Benefits paid
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Plans assets at end of year
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost, end of
year
:
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
|
|
(19,864
|
)
|
|
|
|
(13,625
|
)
|
Unrecognized prior service cost
|
|
|
|
|
543
|
|
|
|
|
215
|
|
Amortization of net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost, end of year
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized in the statement of financial
position:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
|
|
|
(19,950
|
)
|
|
|
|
(13,625
|
)
|
Deferred tax assets
|
|
|
|
|
4,203
|
|
|
|
|
4,731
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions:
|
|
|
|
|
Discount rate as of December 31,
|
|
6.09%
|
|
5.75%
|
Expected long-term rate of return on Plan’s
assets
|
|
7.62%
|
|
8.50%
|
Rate of compensation increase
|
|
2.83%
|
|
3.00%
|
42
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 15 -
|
BENEFIT PLANS AND ACCRUED TERMINATIONAL LIABILITY
(Cont.)
|
|
|
Year ended
December
31,
|
|
|
2007
|
|
2006
|
Components of net periodic pension cost:
|
|
|
|
|
Service cost
|
|
$ 5,615
|
|
$ 3,869
|
Interest cost
|
|
4,017
|
|
2,981
|
Expected return on Plans assets
|
|
(3,761)
|
|
(2,938)
|
Amortization of prior service cost
|
|
(99)
|
|
-
|
Amortization of transition amount
|
|
63
|
|
14
|
Recognized net actuarial loss
|
|
757
|
|
846
|
Total net periodic benefit cost
|
|
$ 6,592
|
|
$ 4,772
|
|
|
Year ended
December
31,
|
Additional information:
|
|
2007
|
|
2006
|
Accumulated benefit obligation
|
|
$ 69,637
|
|
$ 51,702
|
Asset Allocation by Category as of December 31:
|
2007
|
2006
|
Asset Category
|
|
|
Equity Securities
|
53.0%
|
61.0%
|
Debt Securities
|
41.5%
|
34.5%
|
Other
|
5.5%
|
4.5%
|
Total
|
100%
|
100.0%
|
The investment policy of ESA is directed toward a broad range of securities.
The diversified portfolio seeks to maximize investment return while minimizing the risk
levels associated with investing. The investment policy is structured to consider the
retirement plan’s obligations and the expected timing of benefit payments. The target
asset allocation for the Plan years presented is as follows:
|
2007
|
2006
|
Asset Category
|
|
|
Equity Securities
|
60.0%
|
60.0%
|
Debt Securities
|
37.0%
|
37.0%
|
Other
|
3.0%
|
3.0%
|
Total
|
100%
|
100.0%
|
In developing the overall expected long-term rate of return on assets
assumption, ESA used a building block approach in which rates of return in excess of
inflation were considered separately for equity securities, debt securities, real estate
and all other assets. The excess returns were weighted by the representative target
allocation and added along with an approximate rate of inflation to develop the overall
expected long-term rate of return. It is the policy of ESA to at least meet the ERISA
minimum contribution requirements for a Plan year. The minimum contribution requirements
for the 2007 Plan year and the quarterly contributions requirements for the 2007 Plan year
have been satisfied as of December 31, 2007. However, ESA anticipates that it will make an
additional discretionary contribution of approximately $162 during 2008 in order to
increase the Plan’s funded status percentage. Benefit payments over the next five
years are expected to be $2,180 in 2008; $2,657 in 2009; $2,816 in 2010, $2,930 in 2011 and
$3,157 in 2012.
43
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 15 -
|
BENEFIT PLANS AND ACCRUED TERMINATIONAL LIABILITY
(Cont.)
|
Retiree Medical Plan
Effective January 1, 2003, ESA commenced offering retiree medical benefits
to a limited number of retirees at EFW, in accordance with benefits agreed upon as part of
union negotiations in late 2002.
The measurement date for ESA benefit obligation is December 31, 2007. The
following table sets forth the Plans’ funded status and amounts recognized in the
consolidated financial statements for the year ended December 31, 2007 and 2006.
|
December 31
2007
|
|
December 31
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
1,387
|
|
$
|
1,589
|
|
Service cost
|
|
|
67
|
|
|
82
|
|
Interest cost
|
|
|
75
|
|
|
84
|
|
Actuarial (gain) / loss
|
|
|
9
|
|
|
(241
|
)
|
Benefits paid
|
|
|
(141
|
)
|
|
(127
|
)
|
Benefit obligation at end of period
|
|
$
|
1,397
|
|
$
|
1,387
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
—
|
|
$
|
—
|
|
Actual return on plan assets (net of expenses)
|
|
|
—
|
|
|
—
|
|
Employer contribution
|
|
|
141
|
|
|
127
|
|
Benefits paid
|
|
|
(141
|
)
|
|
(127
|
)
|
Fair value of plan assets at end of period
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost, end of period:
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(1,397
|
)
|
$
|
(1,387
|
)
|
Unrecognized net actuarial gain
|
|
|
(352
|
)
|
|
(381
|
)
|
Initial unrecognized transition obligation
|
|
|
—
|
|
|
—
|
|
Unrecognized prior service cost
|
|
|
523
|
|
|
674
|
|
Accrued benefit cost, end of period
|
|
$
|
(1,226
|
)
|
$
|
(1,094
|
)
|
Amounts recognized in the statement of financial
position:
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(1,397
|
)
|
$
|
(1,387
|
)
|
Deferred tax asset
|
|
|
65
|
|
|
41
|
|
Accumulated other comprehensive loss
|
|
|
106
|
|
|
252
|
|
Net amount recognized
|
|
$
|
(1,226
|
)
|
$
|
(1,094
|
)
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
122
|
|
$
|
272
|
|
Non Current
|
|
$
|
1,104
|
|
$
|
822
|
|
44
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 15 -
|
BENEFIT PLANS AND ACCRUED TERMINATIONAL LIABILITY
(Cont.)
|
|
December 31
|
|
2007
|
2006
|
Components of net periodic pension cost (for
period):
|
|
|
Service cost
|
$
67
|
$ 82
|
Interest cost
|
76
|
84
|
Expected return on plan assets
|
-
|
–
|
Amortization of prior service cost
|
150
|
150
|
Recognition of net actuarial gain
|
(20)
|
-
|
Total net periodic benefit cost
|
$ 273
|
$ 316
|
Additional information:
|
|
|
Accumulated benefit obligation
|
$ 1,397
|
$ 1,387
|
Weighted-average assumptions as of end of period:
|
|
|
Discount rate
|
6.00%
|
5.75%
|
Health care cost trend rate assumed for next year
|
8.00%
|
8.00%
|
Ultimate health care cost trend rate
|
5.00%
|
5.00%
|
|
The effect of a 1% change in the health care cost trend rate
at December 31, 2007 is as follows:
|
|
1% increase
|
1% decrease
|
Net periodic benefit cost
|
$
15
|
$ (14)
|
Benefit obligation
|
$
98
|
$ (88)
|
Defined Contribution Plan
The 401(k) savings plan (“401(k) plan”) is a defined
contribution retirement plan that covers all eligible ESA employees, as defined in section
401(k) of the U.S. Internal Revenue Code. Employees may elect to contribute a percentage of
their annual gross compensation to the 401(k) plan. ESA may make discretionary matching
contributions as determined by ESA. Total expense under the 401(k) plan amounted to $2,738
and $2,503 for the years ended December 31, 2007 and 2006, respectively. Expense for
the deferred 401(k) plan is allocated between cost of sales and general and administrative
expenses depending on the responsibilities of the related employees.
Non-Qualified Defined Contribution Plan
In 2007, ESA implemented two new benefit plans for the executives of the
organization. The non-qualified, defined contribution plan is structured under Section
409(A). The plan provides the employees at vice president level and above the opportunity
to defer up to 100% of their salary and bonus or any amount below that to the 409(A) plan.
ESA will provide a match of 50 cents on the dollar up to 10% of the employees’ total
salary and incentive based compensation. The contribution can be made into the 401(k) plan,
the 409(A) plan or both plans. The intent was to provide comparable defined contribution
plan benefits across the three ESA locations for the senior management. The 409(A) plan
funds are contributed to several life insurance policies. Participant contributions
transferred into the plan totaled $485 in 2007, and the total ESA contribution to the plan
was $92 for 2007. The cash surrender value of these life insurance policies was $1,414 at
December 31, 2007.
45
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 15 -
|
BENEFIT PLANS AND ACCRUED TERMINATIONAL LIABILITY
(Cont.)
|
The second plan implemented is a non-qualified, defined benefit plan for the
top four executives of ESA. The plan provides a calculated, guaranteed payment in addition
to their regular pension through the company upon retirement. The plan is funded with
several life insurance policies. They are not segregated into a trust or otherwise
effectively restricted. These policies are corporate owned assets that are subject to
the claims of general creditors and cannot be considered as formal plan assets. The
defined benefit plan put in place meets the ERISA definition of an unfunded deferred
compensation plan maintained for the benefit of a select group of management or highly
compensated employees. The plan assets currently are valued at $651. Related liability for
the pension payments is $535. As of December 31, 2007, no executives had vested in the
plan.
Liability for Elisra’s Employees
In February 2007, Elisra’s Board of Directors approved the framework
of a new efficiency plan, including a reduction in the number of employees with a potential
efficiency plan cost of up to $16,000. Elisra’s Board of Directors determined that
execution of the reduction in the number of employees is subject to preparation of a
detailed list of the specific employees, the adequate availability of financing for the
execution of the plan and the expected return on such expense in the future.
As of the approved date of these financial statements, Elisra’s
management had not completed the above mentioned procedures and therefore was unable to
estimate the total extent of the efficiency plan and its execution period. The cost of the
plan will be expensed in the period that management commits to the plan.
|
Note 16 -
|
TAXES ON INCOME
|
|
(1)
|
Measurement of taxable income under Israel’s Income
Tax (Inflationary Adjustments) Law, 1985:
|
Results for tax purposes for the Company and certain of its Israeli
subsidiaries are measured and reflected in accordance with the change in the Israeli
Consumer Price Index (“CPI”). As explained above in Note 2(B), the consolidated
financial statements are presented in U.S. dollars. The differences between the change in
the Israeli CPI and in the NIS/U.S. dollar exchange rate cause a difference between taxable
income and the income before taxes reflected in the consolidated financial
statements.
In accordance with paragraph 9(f) of SFAS No. 109, the Company has not
provided deferred income taxes on the above differences resulting from changes in exchange
rates and indexing for tax purposes.
|
(2)
|
Tax benefits under Israel’s Law for the
Encouragement of Industry (Taxes), 1969:
|
Elbit Systems and certain subsidiaries in Israel (mainly Elop and Cyclone
Aviation Products Ltd.) are “Industrial Companies”, as defined by the Law for
the Encouragement of Industry (Taxes), 1969, and as such, these companies are entitled to
certain tax benefits, mainly amortization of costs relating to know-how and patents over
eight years, accelerated depreciation and the right to deduct public issuance expenses for
tax
purposes.
46
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 16 -
|
TAXES ON INCOME (Cont.)
|
|
A.
|
APPLICABLE TAX LAWS (Cont.)
|
|
(3)
|
Tax benefits under Israel’s Law for the
Encouragement of Capital Investments, 1969:
|
Several expansion programs of Elbit Systems and certain of its Israeli
subsidiaries (“the companies”) have been granted “Approved
Enterprise” status under Israel’s Law for the Encouragement of Capital
Investments, 1959. For some expansion programs, the companies have elected the grants track
and for others they have elected the alternative tax benefits track, waiving grants in
return for tax exemptions.
Accordingly, certain income of the companies, derived from the
“Approved Enterprise” expansion programs is tax exempt for two-years and
subject to reduced tax rates of 25% for a five-year to eight-year period or tax exempt for
a ten-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, 2007, the tax benefits for these
exiting expansion programs will expire within the period of 2008 to 2013.
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 17(J)). As of December 31, 2007, the
Company’s management believes that the companies are meeting all conditions of the
approvals.
As of December 31, 2007, retained earnings included approximately $353,000
in tax-exempt profits earned by the companies’ "Approved Enterprises". If the
retained tax-exempt income is distributed, in manner other than liquidation, it would be
taxed at the corporate tax rate applicable to such profits as if Elbit Systems had not
elected the alternative tax benefits track (currently - 25%), and an income tax liability
would be incurred of approximately $88,000 as of December 31, 2007.
The companies’ boards of directors have decided that their policy is
not to declare dividends out of such tax-exempt income. Accordingly, no deferred income
taxes have been provided on income attributable to the companies’ "Approved
Enterprises", as such retained earnings are essentially permanent in duration.
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 29% in the
year 2007 (see also Note 16(I)).
Since the companies are operating under more than one approval, and since
part of their taxable income is not entitled to tax benefits under the above mentioned law
and is taxed at the regular tax rate of 29%, 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.
47
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 16 -
|
TAXES ON INCOME (Cont.)
|
|
B.
|
NON – ISRAELI SUBSIDIARIES
|
Non-Israeli subsidiaries are taxed based on tax laws in their countries of
residence (mainly in the U.S.).
|
C.
|
INCOME BEFORE TAXES ON INCOME
|
|
|
Year ended
December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
Income before taxes on income:
|
|
|
|
|
|
|
Domestic
|
|
$ 42,310
|
|
$ 44,712
|
|
$ 27,391
|
Foreign
|
|
46,682
|
|
27,504
|
|
23,125
|
|
|
$ 88,992
|
|
$ 72,216
|
|
$ 50,516
|
|
|
Year ended
December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
Taxes on income:
|
|
|
|
|
|
|
Current taxes:
|
|
|
|
|
|
|
Domestic
|
|
$ 26,658
|
|
$ 15,124
|
|
$ 5,161
|
Foreign
|
|
22,551
|
|
8,302
|
|
4,506
|
|
|
49,209
|
|
23,426
|
|
9,667
|
Adjustment for previous years:
|
|
|
|
|
|
|
Domestic
|
|
(12,671)
|
|
1,928
|
|
-
|
Foreign
|
|
2,937
|
|
-
|
|
-
|
|
|
(9,734)
|
|
1,928
|
|
-
|
Deferred income taxes:
|
|
|
|
|
|
|
Domestic
|
|
(18,667)
|
|
(3,856)
|
|
4,029
|
Foreign
|
|
(6,998)
|
|
(804)
|
|
2,639
|
|
|
(25,665)
|
|
(4,660)
|
|
6,668
|
|
|
$ 13,810
|
|
$ 20,694
|
|
$ 16,335
|
48
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 16 -
|
INCOME TAXES (Cont.)
|
|
E.
|
At December 31, 2007, Elbit Systems had a liability for
unrecognized tax benefits of $20,522 and an accrual of $2,321 for the
payment of related interest. The Company does not believe there will be any
material changes in its unrecognized tax positions over the next twelve
months.
|
During 2007, the Company and its subsidiaries were subject to examination by
various tax authorities in jurisdictions such as Israel, the United States and
Europe.
During 2007, the Company had settled certain income tax matters in Israel
covering multiple years. As a result of the settlement of the tax matters, the Company
recorded a reduction in “Provision for income taxes” of $16,081 related to
settlement of tax matters of which $15,409 was recorded in the statements of income in
“Provision for income taxes.”
A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows:
Balance as of January 1, 2007
|
$ 18,704
|
Additions based on tax positions taken during a prior
period
|
5,858
|
Reductions related to settlement of tax matters
|
(16,081)
|
Additions related to acquisition
|
10,500
|
Additions related to interest and currency
changes
|
2,116
|
Additions based on tax positions taken during the current
period
|
1,746
|
Balance at December 31, 2007
|
$ 22,843
|
The Company operates in multiple jurisdictions throughout the world, and its
tax returns are periodically audited or subject to review by both domestic and foreign
authorities. As a result of ongoing examinations, tax proceedings in certain countries,
additions to unrecognized tax benefits for positions taken and interest and penalties, if
any, arising in 2008, it is not possible to estimate the potential net increase or decrease
to the Company’s unrecognized tax benefits during the next twelve months. The
following describes the open tax years, by major tax jurisdiction, as of December 31,
2007:
United States
|
2001 - present
|
Israel
|
2003 - present
|
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 based on separate tax jurisdiction as follows:
49
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 16 -
|
INCOME TAXES (Cont.)
|
|
F.
|
DEFERRED INCOME TAXES (Cont.)
|
|
|
|
|
Deferred
(1)
Tax asset (liability)
|
|
|
Total
|
|
Current
|
|
Non-current
|
As of December 31, 2007
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Reserves and allowances
|
|
$ 48,726
|
|
$ 18,363
|
|
$
30,363
|
Inventory
|
|
4,158
|
|
3,192
|
|
966
|
Investment in affiliates
|
|
1,429
|
|
1,429
|
|
-
|
Other assets
|
|
7,360
|
|
2,826
|
|
4,534
|
Net operating loss carry forwards
|
|
|
|
|
|
|
|
|
98,466
|
|
44,555
|
|
53,911
|
Valuation allowance
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Intangible assets
|
|
(66,621)
|
|
-
|
|
(66,621)
|
Property, plant and equipment
|
|
(7,676)
|
|
-
|
|
(7,676)
|
Reserves and allowances
|
|
(7,102)
|
|
(2,183)
|
|
(4,919)
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Reserves and allowances
|
|
$ 23,904
|
|
$ 21,998
|
|
$ 1,906
|
Inventory
|
|
2,301
|
|
2,301
|
|
-
|
Investment in affiliates
|
|
1,300
|
|
1,300
|
|
-
|
Net operating loss carry forwards
|
|
|
|
|
|
|
|
|
46,243
|
|
25,927
|
|
20,316
|
Valuation allowance
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Intangible assets:
|
|
(9,780)
|
|
-
|
|
(9,780)
|
Property, plant and equipment
|
|
(7,774)
|
|
-
|
|
(7,774)
|
Reserves and allowances
|
|
(3,253)
|
|
-
|
|
(3,253)
|
Inventory and advance from customers
|
|
|
|
|
|
|
|
|
(21,261)
|
|
(454)
|
|
(20,807)
|
Net deferred tax assets (liabilities)
|
|
|
|
|
|
|
(1)
The current tax asset is included in other
receivables and prepaid expenses. Current tax liability is included in other payables and
accrued expenses.
|
G.
|
As of December 31, 2007, Elbit Systems’ Israeli
subsidiaries have estimated total available carry forward tax losses of
approximately $126,000, and its non-Israeli subsidiaries have estimated
available carry forward tax losses of approximately $9,500. These losses of
the Israeli subsidiaries can be offset against future taxable profits for
an indefinite period. Deferred tax assets in respect of the above carry
forward losses amount to approximately $36,800 in respect of which a
valuation allowance has been recorded in the amount of approximately
$35,600.
|
50
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 16 -
|
INCOME TAXES (Cont.)
|
|
H.
|
Reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to income of the Company,
and the actual tax expense as reported in the statements of operations, is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes as reported in the
consolidated statements of income
|
|
|
|
$
|
88,992
|
|
|
|
$
|
72,216
|
|
|
|
$
|
50,516
|
|
Statutory tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit arising from reduced rate as an
“Approved Enterprise” and other tax
benefits
|
|
|
|
|
(25,237
|
)
|
|
|
|
(17,261
|
)
|
|
|
|
(4,515
|
)
|
Tax adjustment in respect of different tax
rates for foreign subsidiaries
|
|
|
|
|
2,590
|
|
|
|
|
1,018
|
|
|
|
|
654
|
|
Operating carry forward losses for which
valuation allowance was provided
|
|
|
|
|
7,744
|
|
|
|
|
6,542
|
|
|
|
|
(818
|
)
|
Increase (decrease) in taxes resulting
from nondeductible expenses
|
|
|
|
|
15,013
|
|
|
|
|
1,926
|
|
|
|
|
1,309
|
|
Difference in basis of measurement for financial
reporting and tax return purposes
|
|
|
|
|
(2,025
|
)
|
|
|
|
4,548
|
|
|
|
|
2,547
|
|
Taxes in respect of prior years
|
|
|
|
|
(9,734
|
)
|
|
|
|
1,928
|
|
|
|
|
—
|
|
Other differences, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I.
|
AMENDMENT TO THE INCOME TAX ORDINANCE
|
On July 25, 2005, the Knesset (Israeli Parliament) approved the Law for the
Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among other
provisions, a gradual decrease in the corporate tax rate in Israel to the following tax
rates: in 2004 – 35%, in 2005 – 34%, in 2006 - 31%, in 2007 - 29%, in 2008 -
27%, in 2009 - 26% and in 2010 and thereafter - 25%.
In February 2008, the Knesset passed an amendment to the Income Tax
(Inflationary Adjustment) Law, 1985, which limits the scope of the law starting in 2008 and
thereafter. Beginning in 2008, the results for tax purposes will be measured in nominal
values, excluding certain adjustments for changes in the Consumer Price Index carried out
in the period up to December 31, 2007. The amended law includes, inter alia, the
elimination of the inflationary additions and deductions and the additional deduction for
depreciation starting in 2008.
|
J.
|
Final tax assessments have been received by the Company up
to and including the tax year ended December 31, 2005 and by certain
subsidiaries, for the years between 2002 - 2006 (subsidiaries that were
incorporated after 2000 have not received final assessments).
|
51
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 17 -
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
Elbit Systems and certain Israeli subsidiaries partially finance their
research and development expenditures under programs sponsored by the OCS for the support
of research and development activities conducted in Israel. At the time the participations
were received, successful development of the related projects was not assured.
In exchange for participation in the programs by the OCS, Elbit Systems and
the subsidiaries agreed to pay 2% - 5% of total sales of products developed within the
framework of these programs. The royalties will be paid up to a maximum amount equaling
100% to 150% of the grants provided by the OCS, linked to the dollar and for grants
received after January 1, 1999, also bearing annual interest at a rate based on LIBOR. The
obligation to pay these royalties is contingent on actual sales of the products, and in the
absence of such sales payment of royalties is not required.
In some cases, the Government of Israel’s 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.
Elbit Systems and certain of its subsidiaries may also be obligated to pay
certain amounts to the Israeli Ministry of Defense and others on certain sales including
sales resulting from the development of certain technologies.
Royalties’ expenses amounted to $1,573, $2,830 and $4,849 in 2007,
2006 and 2005, respectively.
|
B.
|
COMMITMENTS IN RESPECT OF LONG-TERM PROJECTS
|
In connection with long-term projects in certain countries, Elbit Systems
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, 2007 amounted to $882,700 to be performed over a period of up to nine years.
This amount is typically tied to a percentage (up to 100%) of the amount of a specific
contract.
In the opinion of the Company’s management, the actual amount of the
investments and purchases is anticipated to be less than that mentioned above, since
certain investments and purchases can result in reducing the overall undertaking on more
than a one-to-one basis.
52
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 17 -
|
COMMITMENTS AND CONTINGENT LIABILITIES
(Cont.)
|
Elbit Systems and its subsidiaries are involved in legal claims arising in
the ordinary course of business, including claims by employees, consultants and others. The
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 Company.
On November 6, 2007, a jury verdict was rendered in a trial in the U.S.
against several defendants, including Kollsman, brought by plaintiff Innovative Solutions
and Support, Inc. ("IS&S"). The trial involved primarily issues regarding
misappropriation of trade secrets relating to two models of a commercial air data computer.
The jury’s verdict awarded damages against all of the defendants, including an award
against Kollsman, jointly and severally with the other defendants, in the amount of
approximately $4,400. The verdict also allows for the possibility of the court’s
imposition of exemplary damages and other costs against any or all of the defendants based
on willful conduct as well as prejudgment interest on the actual damages amount. The court
has not yet rendered a final judgment and has set a hearing for March 14, 2008 on the
issues of the finding of willfulness and the possibility of awarding exemplary damages
and/or attorneys' fees. Kollsman has additional procedural avenues that it is pursuing,
including filing a motion for a new trial and a motion for judgment notwithstanding the
verdict. Moreover, Kollsman believes that it has several grounds for appealing any final
judgment and will continue to vigorously defend itself.
In July 2007, a claim was filed by certain minority shareholders and holders
of expired warrants of ImageSat in a U.S. Federal Court in New York against ImageSat,
Israel Aerospace Industries Ltd. (“IAI”), Elbit Systems and certain current and
former officers and directors of ImageSat. ImageSat’s largest shareholder is IAI,
holding approximately 46% of ImageSat’s issued share capital. Elop holds
approximately 14% (7% on a fully diluted basis) of ImageSat’s issued share capital
and is entitled to nominate one director to ImageSat’s board. The former and current
directors of ImageSat named as defendants include, among others, Michael Federmann, Joseph
Ackerman, Joseph Gaspar and the Estate of Jacob Toren (collectively the “Individual
Defendants”). Elop has not been named as a defendant. ImageSat is engaged in the
operation of satellites and in providing satellite imagery. IAI has manufactured and
supplied ImageSat two satellites. Elop has manufactured the cameras for those satellites,
as IAI's subcontractor. The claim contains various allegations that the defendants
allegedly breached their fiduciary and/or contractual obligations to the detriment of the
plaintiffs. The claim alleges various causes of action and damages aggregating hundreds of
millions of dollars, not all of which are alleged against Elbit Systems and/or each of the
Individual Defendants. Motions to dismiss on behalf of Elbit Systems and the Individual
Defendants were filed in October 2007. The court has yet to rule on those motions. Elbit
Systems believes that there is no merit to the allegations made against it or the
Individual Defendants.
For information on Elisra’s insurance claim for damage, as a result of
a fire in 2001, see Note 7.
53
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 17 -
|
COMMITMENTS AND CONTINGENT LIABILITIES
(Cont.)
|
The future minimum lease commitments of the Company under various
non-cancelable operating lease agreements in respect of premises, motor vehicles and office
equipment as of December 31, 2007 are as follows:
2008
|
$ 26,131
|
2009
|
23,077
|
2010
|
19,221
|
2011
|
14,428
|
2012
|
8,836
|
2013 and thereafter
|
|
|
|
Rent expenses for the years ended December 31, 2007, 2006 and 2005 amounted
to $25,989, $13,786 and $ 8,055, respectively.
A subsidiary of the Company signed an agreement for receipt of computer
services for a period of 10 years ending 2013, in exchange for an annual payment of
$1,000.
|
(1)
|
As of December 31, 2007, guarantees in the amount of
approximately $962,900 were issued by banks on behalf of Company’s
entities mainly in order to secure certain advances from customers and
performance bonds.
|
|
(2)
|
Elbit Systems has provided, on a proportional basis to its
ownership interest, guarantees for two of its investees in respect of
credit lines granted to them by banks amounting to $5,600 (2006 - $16,200),
of which $5,100 (2006 - $15,700) relates to a 50%-owned foreign investee.
The guarantees will exist as long as the credit lines are in effect. Elbit
Systems would be liable under the guarantee for any debt for which the
investee would be in default under the terms of the credit line. The fair
value of such guarantees as of December 31, 2007 is not
material.
|
|
(1)
|
In connection with bank credits and loans, including
performance guarantees issued by banks and bank guarantees in order to
secure certain advances from customers, Elbit Systems and certain
subsidiaries are obligated to meet certain financial covenants. Such
covenants include requirements for shareholders' equity, current ratio,
operating profit margin, tangible net worth, EBITDA, interest coverage
ratio and total leverage. As of December 31, 2007, Elbit Systems and its
subsidiaries, except Elisra, were in full compliance with all
covenants.
|
54
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 17 -
|
COMMITMENTS AND CONTINGENT LIABILITIES
(Cont.)
|
|
(2)
|
Elisra’s liabilities to banks are secured by negative
pledges. Pursuant to the terms of the negative pledges, Elisra committed to
comply with certain financial covenants (to be measured based on
Elisra’s stand-alone financial statements), which include, among
others, a minimum ratio of shareholders’ equity to total assets (as
defined in the agreement), a minimum current ratio, a minimum amount of
shareholders’ equity and a minimum amount of pre-tax income. In
addition, certain restrictions have been imposed on Elisra regarding the
provision of guarantees to third parties, creating new liens and on selling
or transferring assets in material amounts. As a result of the
non-compliance, Elisra’s long-term loans as of December 31, 2007, in
the amount of $14,704 (December 31, 2006 - $10,000), have been recorded as
short-term. As a result, the banks requested to register a general floating
lien on the assets of Elisra. In February 2007, Elisra’s Board of
Directors approved the banks’ request. In January 2008, Elisra
granted first priority liens and/or floating liens on all of Elisra’s
property and assets with no limitations as to amount.
|
|
G.
|
CONTINGENT LIABILITIES AND GUARANTEES
|
As a result of cancellation of the export authorization in 2006 to a foreign
country (“the Customer”), Elisra and one of its subsidiaries were forced to
terminate four projects. Most of the activity in respect of the projects, the total amount
of which was approximately $40 million, has already been executed and the deliveries have
been made to the Customer. For those projects, Elisra and its subsidiary provided to the
Customer advances and performance guarantees issued by banks and financial institutions in
the total amount to approximately $10 million. Elisra’s and the Company’s
management, based on the opinion of legal counsel, believes that termination of the
projects under such circumstances constitutes a termination by mutual agreement due to
force majeure, which provides a mechanism for mutual settlement between the
parties.
Elisra’s management, based on the opinion of its legal advisors,
believes that the financial impact of the four projects’ termination in excess of the
accruals recorded in the financial statements will not have a material adverse effect on
the financial position or results of operations of the Company.
The Customer financed the projects by means of bank loans. The banks
received indemnity letters as security for repayment of the loans. Most of the indemnity
was provided to the banks by the International Foreign Trade Risks Insurance Company
(“IFTRIC”) (since renamed “ASHRA”) and the balance was provided by
Elisra and its subsidiary (as of December 31, 2006, amount to approximately $4 million). In
addition, Elisra provided indemnity letters to IFTRIC that can be exercised upon the
occurrence of specific unusual events and is subject to IFTRIC fulfilling its commitments
to the banks. In the opinion of Elisra’s and Elbit Systems’ management, based
on legal advice, the likelihood that the indemnification provided to IFTRIC would be
exercised is remote, and no provisions are required in respect of these indemnity
letters.
55
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 17 -
|
COMMITMENTS AND CONTINGENT LIABILITIES
(Cont.)
|
|
H.
|
CONTRACTUAL OBLIGATIONS
|
Substantially all of the purchase commitments relate to obligations under
purchase orders and subcontracts entered into by the Company. These purchase orders and
subcontracts are typically in a standard format proposed by the Company, with the
subcontracts and purchase orders also reflecting provisions from the Company’s
applicable prime contract that are appropriate to flow down to subcontractors and vendors.
The terms typically included in these purchase orders and subcontracts are consistent with
Uniform Commercial Code provisions in the United States for sales of goods, as well as with
specific terms called for by its customers in international contracts. These terms include
the Company’s right to terminate the purchase order or subcontract in the event of
the vendor’s or subcontractor’s default, as well as the Company’s right
to terminate the order or subcontract for the Company’s convenience (or if the
Company’s prime contractor has so terminated the prime contract). Such purchase
orders and subcontracts typically are not subject to variable price provisions. As of
December 31, 2007 and 2006, the purchase commitments were $906,000 and $681,000
respectively.
|
I.
|
In order to secure bank loans and bank guarantees in the
amount of $962,900 as of December 31, 2007, certain Company entities
recorded fixed liens on most of their machinery and equipment, mortgages on
most of their real estate and floating charges on most of their
assets.
|
|
J.
|
A lien on the Company’s Approved Enterprises has been
registered in favor of the State of Israel (see Note 16(A)(3)
above).
|
56
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands, except share and share
data)
|
|
Note 18 -
|
SHAREHOLDERS’ EQUITY
|
Ordinary shares confer upon their holders voting rights, the right to
receive dividends and the right to share in equity upon liquidation of Elbit
Systems.
|
B.
|
2000 EMPLOYEE STOCK OPTION PLAN
|
In 2000, Elbit Systems adopted an employee stock option plan for Company
employees comprising options to purchase up to 2,500,000 ordinary shares. The exercise
price approximates the market price of the shares at the grant date. The plan included an
additional 2,500,000 options to issuable as “phantom” share options that grant
the option holders a number of shares reflecting the benefit component of the options
exercised, as calculated at the exercise date, in consideration for their par value only.
The 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.
|
C.
|
2007 STOCK OPTION PLAN
|
In January 2007, Elbit Systems’ shareholders approved Elbit
Systems’ 2007 Option Plan (the “Plan”). The purpose of the Plan is to
provide the benefits arising from ownership of share capital by Elbit Systems’ and
certain of its subsidiaries employees, who are expected to contribute to the
Company’s future growth and success. The options were allocated, subject to the
required approvals, in two tracks as follows: (i) Regular Options - up to 1,250,000 options
exercisable into 1,250,000 shares of Elbit Systems in consideration for the exercise price,
all or any portion of which may be granted as Incentive Stock Options (“Regular
Options”) and (ii) Cashless Options - up to 1,250,000 options, which entitle the
participant to exercise options for an amount reflecting only the benefit factor
(“Cashless Options”). Each of the participants is granted an equal amount of
Regular Options and Cashless Options. The exercise price for Israeli participants is the
average closing price of Elbit Systems’ share during 30 trading days preceding the
options grant date. The exercise price of options granted to a non-Israeli participant
residing in the United States is the fair market value of the share on the day the options
were granted.
According to the Plan, the options granted on a certain date (the
“Commencement Date”) will become vested and exercisable in accordance with the
following vesting schedule:
(1) Fifty percent (50%) of the options will be vested and exercisable from
the second anniversary of the Commencement Date;
(2) An additional twenty-five percent (25%) of the options will be vested
and exercisable from the third anniversary of the Commencement Date; and
(3) The remaining twenty-five (25%) of the options will be vested and
exercisable from the fourth anniversary of the Commencement Date.
Elbit Systems granted options to Israeli participants in accordance with the
provisions of Section 102 of the Israel Tax Ordinance related to the Capital Gains Tax
Track.
57
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands, except share and per share
data)
|
|
Note 18 -
|
SHAREHOLDERS’ EQUITY (Cont.)
|
|
D.
|
A summary of Elbit Systems’ share option activity
under the plans is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Number of options
|
|
Weighted
average
exercise
price
|
|
Number of
options
|
|
Weighted
average
exercise
price
|
|
Number of
options
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding –
beginning of the year
|
167,460
|
|
$ 16.45
|
|
1,602,752
|
|
$ 12.83
|
|
2,130,257
|
|
$ 12.60
|
Granted
|
2,381,300
|
|
33.27
|
|
-
|
|
-
|
|
22,000
|
|
19.36
|
Exercised
|
(53,624)
|
|
15.97
|
|
(1,366,809)
|
|
12.40
|
|
(549,505)
|
|
12.38
|
Forfeited
|
(108,310)
|
|
32.66
|
|
(68,483)
|
|
12.55
|
|
-
|
|
-
|
Outstanding –
end of the year
|
2,386,826
|
|
$ 32.51
|
|
167,460
|
|
$ 16.45
|
|
1,602,752
|
|
$ 12.83
|
Options exercisable at
the end of the year
|
68,498
|
|
$ 16.50
|
|
75,085
|
|
$ 15.70
|
|
1,470,752
|
|
$ 12.47
|
During 2007, 2,381,300 options were granted. Aggregate intrinsic value of
outstanding options and exercisable options as of December 31, 2007 amounted to $64,568 and
$2,950, respectively. The aggregate intrinsic value represents the total intrinsic value
(the difference between Elbit Systems' closing stock price on the last trading day of the
fourth quarter of fiscal 2007 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had all option
holders exercised their options on December 31, 2007. This amount changes, based on the
fair market value of Elbit Systems' stock. The total intrinsic value of options exercised
for the year ended December 31, 2007 was $2,337. As of December 31, 2007, there was $14,736
of total unrecognized compensation cost related to share-based compensation arrangements
granted under Elbit Systems' stock option plans. That cost is expected to be recognized
over a weighted average period of three years.
As of December 31, 2007, 2,374,000 options were vested and expected to be
vested at a weighted average exercise price of $32.51. The weighted average remaining
contractual life of exercisable options as of December 31, 2007 amounts to four year and
its aggregate intrinsic value is approximately $64,200.
|
E.
|
The options outstanding as of December 31, 2007, have been
separated into ranges of exercise prices, as follows:
|
|
|
|
|
Number outstanding as of December 31, 2007
|
Weighted average remaining contractual life
(years)
|
Weighted average exercise price per share
|
Number
outstanding as of
December 31, 2007
|
Weighted average exercise price
per share
|
$13.98 - $ 19.36
|
111,126
|
2.50
|
$ 16.78
|
68,498
|
$ 16.5
|
$33.10 - $ 44.96
|
|
|
$ 33.28
|
-
|
-
|
|
|
|
$ 32.51
|
68,498
|
$ 16.5
|
58
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands, except share and per share
data)
|
|
Note 18 -
|
SHAREHOLDERS’ EQUITY (Cont.)
|
Compensation expense net amounting to $4,778, $195 and $172 was recognized
during the years ended December 31, 2007, 2006 and 2005, respectively. The expenses before
tax were recorded as follows:
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Cost of revenues
|
|
$ 2,146
|
|
$ 75
|
|
$ 96
|
R&D and marketing expenses
|
|
850
|
|
-
|
|
34
|
General and administration expenses
|
|
1,782
|
|
120
|
|
42
|
|
|
$ 4,778
|
|
$ 195
|
|
$ 172
|
|
F.
|
The weighted average exercise price and fair value of
options granted during the years ended December 31, 2007, 2006 and 2005
were:
|
|
|
Less than market price
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006(*)
|
|
2005
|
Weighted average exercise price
|
|
$ 33.28
|
|
$
-
|
|
$
19.36
|
Weighted average fair value on
grant date
|
|
$
8.44
|
|
$
-
|
|
$
6.47
|
(*) During 2006, no options were granted.
|
G.
|
COMPUTATION OF BASIC AND DILUTED NET EARNINGS PER
SHARE:
|
|
Year ended
December 31, 2007
|
Year ended
December 31, 2006
|
Year ended
December 31, 2005
|
|
|
Net income to shareholders of ordinary
shares
|
Weighted averaged number of shares (*)
|
Per share
amount
|
Net income
to
shareholders of ordinary shares
|
Weighted averaged number
of
shares (*)
|
Per share
amount
|
Net income to shareholders of ordinary
shares
|
Weighted averaged number of shares (*)
|
Per share
amount
|
|
Basic net
earnings
|
$ 76,709
|
42,041
|
$1.82
|
$ 72,242
|
41,340
|
$ 1.75
|
$ 32,487
|
40,750
|
$0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
Employee stock
options
|
|
|
|
|
|
|
|
|
|
|
Diluted net
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) In
thousands
59
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 18 -
|
SHAREHOLDERS’ EQUITY (Cont.)
|
|
H.
|
In December 2007, Elbit Systems U.S. Corp ("ESC"), a
wholly-owned U.S. subsidiary of Elbit Systems, adopted a Stock Appreciation
Rights Plan for Non-Employee Directors of Elbit Systems of America, LLC
(the "SAR Plan"). ESC owns the shares of ESA. The purpose of the SAR Plan
is to facilitate the retention of qualified and experienced persons to
serve as "Non-Employee Directors" of ESA by providing them additional
financial incentives. A "Non-Employee Director" is a director of ESA who is
not an officer or employee of ESA, or any of its affiliated
companies.
|
Under the Plan, the Board of ESC may grant Stock Appreciation Rights
("SARs") from time to time to Non-Employee Directors of ESA. A SAR is a right that, in
accordance with the terms of the SAR Plan, entitles the holder to receive, on the exercise
date of the SAR, cash in an amount equal to the excess of the "Fair Market Value" of the
"Stock" corresponding to the SAR at the time of exercise of the SAR over the "Initial Value
of the Stock". "Stock" means Elbit Systems Ordinary Shares. Each SAR corresponds to a share
of Stock. "Fair Market Value" with respect to the Stock means the closing price of the
Stock on the Nasdaq on the applicable date. "Initial Value" of a SAR means the Fair Market
Value of one share of Stock on the grant date of the SAR.
A SAR may only be exercised after it becomes vested. 25% of any SAR's
granted are exercisable on the first anniversary from the grant date and an additional 25%
on each subsequent anniversary. The maximum term of a SAR is five years from the grant
date. SAR's do not provide any rights as a shareholder in the Stock. On January 2, 2008,
the Board of Directors of ESC issued a total of 21,000 SARs to Non-Employee Directors of
ESA, at an Initial Value of $61.42 per SAR.
Elbit Systems’ shares held by Elbit Systems and its subsidiaries are
presented at cost and deducted from shareholders’ equity.
Dividends declared by Elbit Systems are paid subject to statutory
limitations. Elbit Systems’ Board of Directors has determined not to declare
dividends out of tax exempt earnings
.
60
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 19 -
|
MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
|
The Company applies Statement of Financial Accounting Standards No. 131,
“Disclosures about Segments of an Enterprise and Related Information”
(“SFAS No. 131”). The Company operates in one reportable segment (see Note 1
for a brief description of the Company’s business).
|
A.
|
Revenues are attributed to geographic areas based on
location of the end customers as follows:
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Europe
|
|
$ 485,128
|
|
$ 233,736
|
|
$ 104,239
|
U.S.
|
|
702,721
|
|
609,492
|
|
397,479
|
Israel
|
|
408,920
|
|
407,113
|
|
315,376
|
Others
(*)
|
|
384,992
|
|
272,902
|
|
252,782
|
|
|
$ 1,981,761
|
|
$ 1,523,243
|
|
$ 1,069,876
|
(*)
Mainly Asia and South America
|
B.
|
Revenues are generated by the following product
lines:
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Airborne systems
|
|
$ 596,022
|
|
$ 547,772
|
|
$ 420,815
|
Land vehicles systems
|
|
380,958
|
|
317,731
|
|
117,358
|
(C
4
ISR) systems
|
|
581,983
|
|
313,493
|
|
217,343
|
Electro-optical systems
|
|
271,290
|
|
223,315
|
|
242,274
|
Others
(*)
|
|
151,508
|
|
120,932
|
|
72,086
|
|
|
$ 1,981,761
|
|
$ 1,523,243
|
|
$ 1,069,876
|
(*)
Mainly non-defense engineering and production
services.
|
C.
|
Revenues from single customers, which exceed 10% of total
revenues in
the reported years:
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Israeli Ministry Of Defense
|
|
21%
|
|
24%
|
|
26%
|
U.S. Government
|
|
8%
|
|
15%
|
|
10%
|
|
D.
|
Long-lived assets by geographic areas:
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Israel
|
|
$ 818,145
|
|
$ 319,620
|
|
$ 322,521
|
U.S.
|
|
92,726
|
|
86,373
|
|
87,998
|
Others
|
|
70,378
|
|
17,630
|
|
17,206
|
|
|
$ 981,249
|
|
$ 423,623
|
|
$ 427,725
|
|
|
|
|
|
|
|
61
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 20 -
|
RESEARCH AND DEVELOPMENT EXPENSES, NET
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Total expenses
|
|
$ 155,303
|
|
$ 115,648
|
|
$
92,375
|
Less – participations
|
|
(28,308)
|
|
(23,416)
|
|
(20,472)
|
|
|
$ 126,995
|
|
$
92,232
|
|
$
71,903
|
|
Note 21 -
|
FINANCIAL EXPENSES, NET
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Expenses:
|
|
|
|
|
|
|
On long-term bank debt
|
|
$ (21,131)
|
|
$ (10,975)
|
|
$ (6,359)
|
On short-term bank credit and loans
|
|
(3,983)
|
|
(4,610)
|
|
(3,433)
|
Impairment of auction rate securities
|
|
(10,027)
|
|
-
|
|
-
|
Others
|
|
(6,065)
|
|
(6,788)
|
|
(5,147)
|
|
|
(41,206)
|
|
(22,373)
|
|
(14,939)
|
Income:
|
|
|
|
|
|
|
Interest on cash, cash equivalents
and bank deposits
|
|
10,121
|
|
4,634
|
|
2,205
|
Gain on marketable securities
|
|
6,480
|
|
80
|
|
-
|
Others
|
|
2,797
|
|
951
|
|
-
|
|
|
19,398
|
|
5,665
|
|
2,205
|
Gain (loss) from exchange rate differences
|
|
2,479
|
|
(4,748)
|
|
1,262
|
|
|
$ (19,329)
|
|
$ (21,456)
|
|
$ (11,472)
|
Related Parties Transactions And Balances
Transactions:
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Income -
|
|
|
|
|
|
|
Sales to affiliated companies (*)
|
|
$ 60,870
|
|
$ 71,808
|
|
$ 63,007
|
Participation in expenses
|
|
$ 8,941
|
|
$ 3,497
|
|
$ 3,630
|
|
|
|
|
|
|
|
Cost and expenses -
|
|
|
|
|
|
|
Supplies from affiliated companies (**)
|
|
$ 26,538
|
|
$ 17,359
|
|
$ 19,031
|
Participation in expenses
|
|
$
-
|
|
$ -
|
|
$ 91
|
Balances:
|
|
|
2007
|
2006
|
Trade receivables and other receivables (*)
|
$ 11,792
|
$ 6,758
|
Trade payables (**)
|
$ 9,391
|
$ 1,641
|
62
ELBIT
SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONT.)
|
U. S. dollars (In thousands)
|
|
Note 22 -
|
RELATED PARTIES TRANSACTIONS AND BALANCES
(Cont.)
|
The purchases from related parties are made at arm length. The sales to the
Company’s related parties in respect of U.S. government defense contracts are made on
the basis of cost.
(*) The significant sales include sales of helmet mounted cueing systems
purchased from the Company by VSI.
(**) Include electro-optics components and sensors, purchased by the Company
from SCD, and electro-optics products purchased by the Company from Opgal.
# # # # #
# # #
63