Bezhalel Machlis - President, Chief Executive Officer Joseph Gaspar - Executive Vice President, Chief Financial Officer Ehud Helft - GK Investor Relations

Gilad Alper - Excellence Michael Klahr - Citibank Ella Fried - Bank Leumi

Welcome to Elbit Systems Third Quarter 2015 Results conference call. All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company’s press release. If you have received it, please contact Elbit’s investor relations team at GK Investor Relations or view it in the News section of the company’s website, www.elbitsystems.com. I would now like to hand over the call to Mr. Ehud Helft with GK Investor Relations. Ehud, please go ahead.

Thank you, Operator, and good day to everybody. On behalf of all investors, I would like to thank Elbit Systems management for hosting this call. Joining us on the call today are Mr. Butzi Machlis, Elbit’s President and CEO, and Mr. Joseph Gaspar, Elbit Systems’ Chief Financial Officer. Joseph will begin by providing a discussion of the financial results of the third quarter of 2015, followed by Butzi who will talk about some of the significant events during the quarter and beyond. We will then turn over the call to the question and answer session. Before we begin, I’d like to point out that the Safe Harbor statement in the company’s press release issued earlier today also refers to the content of this conference call. With that, I would like now to turn over the call to Joseph. Joseph, please?

Thank you, Ehud. Hello everyone and thank you for joining us today. As we do every quarter, we will provide you with our regular GAAP financial data as well as certain supplemental non-GAAP information. Following the recent acquisition of the cyber activities of Nice Systems and our incorporation of such activities’ financial results starting in the third quarter, certain non-GAAP measures are further emphasized, and we adopted the format change in today’s press release by presenting the non-GAAP measure before the corresponding GAAP measure. You can find all the detailed financial data in the press release. Overall, we are pleased with our performance in the third quarter of 2015, in particular the growth in revenues as well as the continuous growth in backlog and improvements in profitability. I will now highlight and discuss some of the key figures and trends. Our third quarter 2015 revenues were $764.8 million, an increase of 5.8% compared with the $722.7 million reported in the third quarter of 2014. More than half of the growth was organic and the rest was due to the acquisition of the cyber and intelligence business of Nice. In terms of revenue breakdown across our areas of operation in the quarter, [indiscernible] systems was 38%, C4ISR 31%, armored vehicles was 22%, electro-optics was 10%, and the rest was 2%. In terms of geographic breakdown in the third quarter, Israel was 20% of our revenues, North America was 28%, Europe was 15%, Asia-Pacific 28%, Latin America 8%, and the rest of the world was 1%. Compared with the third quarter of last year, in the overall mix we saw a major increase in armored vehicles. This was primarily due to a high level of sales of these systems to the Asia-Pacific region. I should add that the land systems growth included the significant element of electro-optics subsystems. There was also a lower level of sales for the C4ISR systems to the Latin American region. For the third quarter, the non-GAAP gross margin was 30.5% compared with 28.8% in the third quarter of 2014. Our GAAP gross margin was 29.2% compared to 28.1% as reported in the third quarter of last year. The improvement in the gross margin was due to a number of factors, including continuous effort to improve profitability and maintain efficient operations and control of our costs, as well as due to some more favorable exchange rate environment compared with last year. The non-GAAP operating income in the third quarter of 2015 was $80.3 million or 10.5% of revenues compared with $70.8 million or 9.8% of revenues in the third quarter of 2014. GAAP operating income was $65.3 million with an operating margin of 8.5%. This is compared with operating income of $60.1 million and an operating margin of 8.3% in the third quarter of 2014. In terms of breakdown of our expenses, our net R&D expenses for the third quarter of 2015 were 8% of our revenues compared with 7.7% in the third quarter of last year. Marketing and selling expenses were 7.9% of our revenues in the quarter compared with 7.2% in the third quarter of last year. Our G&A expenses in the quarter were 4.8% of revenues compared with 4.9% of revenues in the third quarter of last year. Total operating expenses for the quarter were 20.7% of revenues compared with 19.8% of revenues in the third quarter of last year. Financial expenses for the third quarter of 2015 were $6.1 million compared to financial expenses of $23.2 million in the first quarter of last year. I note that in the third quarter of last year, our financial expenses were unusually high due to accelerated appreciation of the Israeli currency and the company’s hedging activities. Our tax expenses were $10.3 million, representing an effective tax rate of 17.3% this quarter compared with $105,000 in the third quarter of last year. The significantly lower tax rate in the third quarter of 2014 was mainly a result of settlements of tax audits in the various companies of the corporation. Non-GAAP net income for the quarter was $62.3 million or a net margin of 8.1%. This is compared with $43.9 million or a net margin of 6.1% in the third quarter of last year. Non-GAAP diluted earnings per share was $1.46 compared with $1.03 in the third quarter of last year. Net income on a GAAP basis was $49.3 million or net margin of 6.5%. This is compared with net income of $55 million or net margin of 4.8% in the third quarter of last year. Income per diluted share for the third quarter of this year was $1.16 as compared with $0.82 for the third quarter of last year. Our backlog of orders as at quarter end was $6.42 billion, $191 million higher than the backlog at the end of the third quarter of last year. Approximately 48%, or $3.1 billion worth of the current backlog is scheduled to be performed during the remainder of this year and 2016. Operating cash flow for the quarter was $139 million as compared to a negative operating cash flow of $60 million in the same quarter last year. The strong cash flow was due to solid collections in the quarter. The board of directors declared a dividend of $0.37 per share for the third quarter of 2015. That ends my summary, and I shall now turn over the call to Mr. Machlis. Butzi, please?

Thank you, Joseph. We are pleased with our third quarter results, demonstrating that our business remains on solid footing. In particular, we are happy with the 6% level of year-over-year revenue growth. This was due in part to our ongoing growth in backlog which has continued to expand over the past few years, and due to the acquisition of the cyber and intelligence business of Nice. Most importantly, our improving profitability is allowing more of our revenue growth to drop to the bottom line, enabling us to increase our profits. I note that while our non-GAAP gross margins were 29% in the first nine months of last year, in 2015 this figure was 29.9%, representing solid improvement. This improving level of [indiscernible] profitability is due to the ongoing and active process at Elbit. We constantly look to improve the way we work and increase our efficiency while keeping a tight rein on costs. This is part of the underlying reason for the long-term trend of improving margins. I would like to highlight some of the recent orders and activities in the various regions we operate. Asia-Pacific has performed very well and was the highest contributing region to revenue this quarter at 28%. This strong performance was in part driven by increased defense spending in this region over the past few years, something we anticipated and invested effort in early on. In particular, the Asia-Pacific region has played a large part in the growth of sales of our [indiscernible]. A few weeks ago, we announced a win of a $27 million contract in the region for command and control systems and ATMOS long-range artillery systems. This follow-on order enhanced our position as the leading artillery systems supplier with a variety of solutions. Europe, currently representing 15% of our revenue, is also a region where we see a renewal of interest, specifically in some of the intelligence solutions we are offering to the market. After a few years of stagnation in [indiscernible], we now see greater potential for growth in this region. To highlight a recent order for Europe, we won a $78 million contract for an unmanned aircraft solution-based intelligence solution. This contract was in fact won by our recently formed ISTAR division, combining our former electro-optics, Elop, and UAS divisions. Our ISTAR division enables an optimal integration between UAS and our intelligence systems, and has already enhanced our position as a world leader in intelligence solutions. As you can see, the synergies from the combination are already bringing benefits to customers in terms of a suite of intelligence solutions. Another contract we won in Europe was through our new Cyberbit division, which also includes the recently acquired cyber and intelligence business of Nice Systems. We achieved an order for a European police force as well as an African law enforcement agency for Cyberbit’s SIGINT system, which integrates our advanced Target 360 interception platform with cutting edge cyber domain collection capabilities. In the U.S. following several months of construction, integration and testing, our integrated fixed tower IFT border surveillance system successfully deployed on the Arizona border between the U.S. and Mexico, reaching the initial milestone of system acceptance. We are pleased with this first significant milestone for the development of IFT, and we are confident that the system will continue to meet provisional needs. As I have said in the past, I believe that this flagship order can potentially lead to further orders in this market segment. In Israel, we were recently awarded a contract valued at $115 million with the Israeli Ministry of Public Security and the Israeli Police to supply leasing and maintenance services for the Israel Police Force’s aircraft. While Latin America has [indiscernible] been a smaller contributor to revenue, in part due to the economic slowdown in this region, we still see ongoing interest in our solutions. We were recently awarded a $70 million contract for integrated intelligence systems for homeland security applications, including on our Hermes 900 UAS system as well as intelligence [indiscernible] system. In summary, our business continues to perform well. We feel positive about the developments, particularly our ongoing growth in revenue driven by long-term growth in [indiscernible] as well as improvements in profitability. I believe our long-term strategy remains sound. With that, I will be happy to take your questions.

[Operator instructions] The first question is from Gilad Alper of Excellence. Please go ahead.

Hi, thanks for taking my question. So I think most [indiscernible] is kind of positive, but I’m just wondering because revenue growth was only 6% or thereabouts, and that’s including the new cyber division, which I guess means that organic growth was very low. So is this just like a one-quarter incident, or are we actually see some kind of a slowdown in the overall business? Thanks.

In general, as you have seen, our backlog, which is the major driver of our revenues, continued to grow for several--for many quarters in a row, including this quarter as well. I think the spread of that backlog for the future quarters is varying, and there might be quarters with lower growth or higher growth. On average, we do see growth for the future based on the existing backlog.

Okay, thanks.

The next question is from Michael Klahr of Citibank. Please go ahead.

Hi everyone, good afternoon. A few questions. Firstly [indiscernible] you said the Nice acquisition, that’s two months, that’s July-August in the third quarter, and that accounted for half of your growth. Is that correct in terms of--

Actually the acquisition was closed at the beginning of the third quarter--

Beginning of the third quarter? Okay.

Beginning of the third quarter, and--

So it’s three months, so it’s the full quarter of revenues.

Right.

Okay, and that was half of the growth in the quarter?

Less than half of the growth.

Okay, all right. Okay, thanks. Secondly, you spoke about a move to increase the prominence of the pro forma numbers as a result of that acquisition. What are the main differences in terms of the pro forma to the pro forma numbers?

It’s actually very close to what we had anticipated when we did our due diligence and decided to make the acquisition - very close to that, so far. Of course, it’s only one quarter in the life, but from point of view of business, new business, business performance and potential for the future, we are very satisfied with the acquisition.

Okay, but in terms of the accounting, what are the main differences that are in the pro forma?

In the accounting part, as you know, we have acquired the assets, so the equity part was very low, therefore the difference between the equity and the paid capital was divided between goodwill and the intangible assets that will be depreciated over a period varying between six to eight years. You can see in our balance sheet that actually the goodwill grew by about $90 million approximately, and the rest will be depreciated over a period of six to eight year.

Okay, so it’s mainly the amortization expense?

Exactly right.

That’s the main difference. Okay, thanks. My last question is there’s been a lot of talk in the Israeli media following the meeting in the U.S. between the Prime Minister and the President about Israel’s demands regarding the security, so a number of $50 billion over 10 years, I think. Just wondering how that compares to what’s been in the past - you know, can that have a meaningful impact on your business, and if so, in which way; or would it be spent somewhere else completely?

It can have a positive impact on our business. As you know, we are active in Israel as well as in the U.S., and via our subsidiary in the U.S., Elbit Systems of America, we are able to utilize [indiscernible] funds for the benefit of the Israeli forces. So if and when the additional funds will be given to Israel, we can certainly benefit from that - that’s one. Another angle to this question is of course if and when Israel will acquire additional F35, an additional F16 and other platforms, and our systems are on top of these platforms, which helps us to improve our position in the Israeli market as well as to improve our relationship with OEMs in the U.S.

Okay, thanks. Are you able to quantify--you know, in terms of this package, is it double the size of previous packages?

I think it’s too early to judge. We don’t yet know the details.

Okay, thanks. Sorry - one more question. I remember you had some sort of system that was being used in civilian aircraft in Israel, I think for blocking income missiles or radar. Just wondering, is that a meaningful part of your business today, and do you see increased interest given what’s being going on over the last few months?

The answer is yes. I guess you mean--you refer to our DIRCM system, our countermeasure system which Israel has on top of El Al, as well as Arkia and Israir aircraft. It’s a unique system [indiscernible] and can be used for civilian transportation as well as for military transport, military aircraft as well. We see a lot of demand for such systems all over the world, and we certainly see it as a growth engine for the company.

Okay, so today, is it meaningful, is it a few percentage points of sales, or could it become a few percentage points of sales?

Certainly. It’s a few percent of sales already--

Two?

A few percent--

A few percent, and it could double or triple, or--?

You can choose a number. We will grow in the near future.

All right. Thanks very much.

If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. There is a follow-up question from Gilad Alper of Excellence. Please go ahead.

Yes, just to expand on what Michael asked, there’s a lot of bad stuff happening around us, lots of tensions around China, basically all over the world. Are you guys actually seeing any real up trend or some kind of stronger interest in your products, because when you look at the numbers, it seems like more or less everything is normal course of business, which isn’t bad because business is good. But still, one would have expected something maybe healthier, stronger in such an extremely shaky world. So are you guys actually seeing anything? Thanks.

We see a lot of interest for our products, which demonstrates again that we are relevant. As I’ve said, Europe is starting to look for new technologies again to build their capabilities, those forces, the singles, also for [indiscernible]. So certainly we see more demand and more requirements, and I’m happy to say that we have the right products for the recent and for these new requirements.

Okay, thanks.

The next question is from Ella Fried from Bank Leumi. Please go ahead.

Good afternoon. Do you have any other potential acquisitions in the cyber field that you are looking at, because you seem to have very ambitious plans in this field and the Nice acquisition seems like a nice start, but are you looking at other companies? You had really relatively easy finances out of the current cash flow, so are there any other acquisitions of this kind in the future?

We are all the time looking for new acquisitions. It’s part of our strategy in the cyber domain, as well as in other domains as well. As you rightly said, our balance sheet can afford it, and we are evaluating possibilities all the time. We will announce new acquisitions when they will be relevant.

Okay, thank you.

There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the U.S., please call 1-888-326-9310. In Israel, please call 03-925-5900, and internationally please call 972-3925-5900. A replay of the call will also be available at the company’s website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?

I would like to thank all our employees for their continued hard work. To everyone on the call, thank you for joining us today and for your continued support and interest in our company. Have a good day, and goodbye.

Thank you. This concludes the Elbit Systems Ltd. Third Quarter 2015 Results conference call. Thank you for your participation. You may go ahead and disconnect.