20-F 1 zk1312745.htm 20-F zk1312745.htm

Washington, D.C. 20549


for the fiscal year ended December 31, 2012
Commission File No. 0-28998

(Exact name of registrant as specified in its charter and translation of registrant’s name into English)

(Jurisdiction of incorporation or organization)
Advanced Technology Center, Haifa 31053, Israel
(Address of principal executive offices)

Joseph Gaspar
c/o Elbit Systems Ltd.
P.O. Box 539
Advanced Technology Center
Haifa 31053
Tel: 972-4-831-6404
Fax: 972-4-831-6944
E-mail: j.gaspar@elbitsystems.com
(Name, telephone, e-mail and/or facsimile number and address of Company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Ordinary Shares, nominal value 1.0 New Israeli Shekels per share
(Title of Class)
The NASDAQ Global Select Market
(Name of each Exchange on which registered)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Not Applicable
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Not Applicable

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 41,881,745 Ordinary Shares

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  x    No  o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One).
Large accelerated filer   x
Accelerated filer   o
Non-accelerated filer   o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP  x
International Financial Reporting  o
Standards as issued by the International
Accounting Standards Board
Other  o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17  o    Item 18   No  o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x

Table of Contents

General Disclosure Standards
The consolidated financial statements of Elbit Systems Ltd. (Elbit Systems) included in this annual report on Form 20-F are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). Unless otherwise indicated, all financial information contained in this annual report is presented in U.S. dollars. References in this annual report to the “Company”, “we”, “our”, “us” and terms of similar meaning refer to Elbit Systems and our subsidiaries unless the context requires otherwise.
Cautionary Statement with Respect to Forward-Looking Statements
This annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to our current plans, estimates, strategies, goals and beliefs and as such do not relate to historical or current fact. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.
Forward-looking statements contained herein generally are identified by the words “believe”, “project”, “expect”, “will likely result”, and “strategy”, “plan”, “may”, “should”, “will”, “would”, “will be”, “will continue”, “will likely result” and similar expressions. Forward-looking statements are based on management’s current expectations, estimates, projections and assumptions, are not guarantees of future performance and involve certain risks and uncertainties, the outcomes of which cannot be predicted. Therefore, actual future results, performance and trends may differ materially from these forward-looking statements due to a variety of factors, including, without limitation:
the scope and length of customer contracts;
governmental regulations and approvals;
changes in governmental budgeting priorities;
general market, political and economic conditions in the countries in which we operate or sell, including Israel and the United States among others;
differences in anticipated and actual program performance, including the ability to perform under long-term fixed-price contracts;
the impact on our backlog from export restrictions by the Government of Israel;
inventory write-downs and possible liabilities to customers from program cancellations due to political relations between Israel and countries where our customers may be located; and
the outcome of legal and/or regulatory proceedings.
The factors listed above are not all-inclusive, and further information about risks and other factors that will affect our future performance is contained in this annual report on Form 20-F. All forward-looking statements speak only as of the date of this annual report. We expressly disclaim any obligation to update or review any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable law.


Item 1.                 Identity of Directors, Senior Management and Advisers.
Information not required in annual report on Form 20-F.
Item 2.                 Offer Statistics and Expected Timetable.
Information not required in annual report on Form 20-F.
Item 3.                 Key Information.
Selected Financial Data
The following selected consolidated financial data of the Company as of and for the years ended December 31, 2008, 2009, 2010, 2011 and 2012 are derived from our audited consolidated financial statements, including our audited consolidated financial statements as of December 31, 2011 and 2012, and for each of the years ended December 31, 2010, 2011 and 2012, which appear in Item 18 in this annual report on Form 20-F. You should read the audited consolidated financial statements appearing in Item 18 together with the selected financial data set forth below. (For non-GAAP financial data see Item 5. Operating and Financial Review and Prospects – Non-GAAP Financial Data.)
Years Ended December 31,
__ 2011
(U.S. dollars in millions except for per share amounts)
Income Statement Data:
  $ 2,638.3     $ 2,832.4     $ 2,670.1     $ 2,817.5     $ 2,888.6  
Cost of revenues
    1,870.9       1,982.9       1,872.2       2,085.5       2,072.7  
Gross profit
    767.4       849.5       797.9       732.0       815.9  
Research and development expenses, net
    185.0       216.8       234.1       241.1       233.4  
Marketing and selling expenses
    198.2       250.9       230.0       235.9       241.9  
General and administrative expenses
    134.2       119.3       131.2       139.3       137.5  
Acquired in-process research and development (IPR&D) and other expenses (income)
    1.0             (4.7 )            
Total operating expenses
    518.4       587.0       590.6       616.3       612.8  
Operating income
    249.0       262.5       207.3       115.7       203.1  
Financial expenses, net
    36.8       15.6       21.3       13.6       26.1  
Other income, net
    94.3       0.4       13.3       1.9       0.1  
Income before taxes on income
    306.5       247.3       199.3       104.0       177.0  
Taxes on income
    54.3       38.1       24.0       13.6       17.1  
Equity in net earnings of affiliated companies
    14.4       19.3       18.8       15.4       11.2  
Net income from continuing operations, net
    266.6       228.5       194.1       105.8       171.1  
Income (loss) from discontinued operations, net
                0.9       (16.0 )     (0.6 )
Net income
    266.6       228.5       195.0       89.8       170.5  
Less: net income (loss) attributed to non-controlling interests
    62.4       13.6       11.1       (0.5 )     2.6  
Income attributed to Elbit Systems’ shareholders
    204.2 *     214.9       183.5       90.3       167.9  
Earnings per share:
Basic net earnings (loss) per share
Continuing operations
  $ 4.85 *   $ 5.08     $ 4.29     $ 2.33     $ 3.99  
Discontinued operations
                0.01       (0.22 )     (0.01 )
  $ 4.85 *   $ 5.08     $ 4.30     $ 2.11     $ 3.98  
Diluted net earnings (loss) per share
Continuing operations
    4.78 *     5.00       4.24       2.31       3.98  
Discontinued operations
                0.01       (0.22 )     (0.01 )
  $ 4.78 *   $ 5.00     $ 4.25     $ 2.09     $ 3.97  

*Including $74 million in net income ($1.73 diluted net earnings per share) from the sale of Mediguide Inc. (Mediguide) shares in 2008.


December 31,
(U.S. dollars in millions except for per share amounts)
Balance Sheet Data:
Cash, cash equivalents, short-term bank deposits and marketable securities
  $ 278     $ 280     $ 215     $ 224     $ 265  
Working capital
    290       392       382       236       375  
Long-term deposits, marketable securities and other receivables
    41       44       52       12       19  
Long-term trade and unbilled receivables
          17       90       163       230  
Property, plant and equipment, net
    384       405       504       518       501  
Total assets
    2,940       3,054       3,616       3,721       3,811  
Long-term debt
    270       389       292       302       174  
Series A Notes, net of current maturities
                273       235       409  
Capital stock
    300       284       294       245       249  
Elbit Systems shareholders’ equity
    724       833       967       898       1,017  
Non-controlling interests
    76       24       39       29       34  
Total equity
    800       857       1,005       928       1,051  
Number of outstanding ordinary shares of NIS 1 par value (in thousands)
    42,079       42,531       42,693       42,608       41,882  
Dividends paid per ordinary share with respect to the applicable year
  $ 1.42     $ 1.82     $ 1.44     $ 1.44     $ 1.20  


Risk Factors
General Risks Related to Our Business and Market
Our revenues depend on a continued level of government business. We derive most of our revenues directly or indirectly from government agencies, mainly the Israeli Ministry of Defense (IMOD), the U.S. Department of Defense (DoD) and defense ministries of certain other countries, pursuant to contracts awarded to us under defense-related programs. The funding of these programs is subject to government budgeting decisions affected by numerous factors, including geo-political events and macro-economic conditions that are beyond our control. Government spending under such contracts may cease or may be reduced, which would cause a negative effect on our revenues, results of operations, cash flow and financial condition.
The current worldwide economic and financial situation as well as reductions in U.S. and European defense expenditures may have a material adverse effect on our results. Over the past few years many of the world’s economies and financial institutions have experienced a reduction in economic activity, a decline in asset prices, liquidity problems and limited availability of credit. Also, in recent years the U.S. and a number of  European governments have reduced defense budgets, and the U.S. defense budget has been reduced by the sequestration provisions that became effective in March 2013 under the U.S. Budget Control Act of 2011.  Such factors may result in a reduction in demand and downward pressure on pricing in some of our markets, which could adversely affect our business, results of operations and financial condition. The general economic and financial situation may: (i) cause the value of our investments in our pension plans to decrease, requiring us to increase our funding of those pension plans; (ii) result in a lower return and value on our assets; (iii) increase the cost or hinder our ability to finance future projects; and (iv) negatively impact our customers, which in turn could negatively impact our ability to collect accounts receivable.
Our contracts may be terminated for convenience of the customer. Our contracts with governments often contain provisions permitting termination for convenience of the customer. Our subcontracts with non-governmental prime contractors sometimes contain similar provisions. In a minority of these contracts, an early termination for convenience would not entitle us to reimbursement for all of our incurred contract costs or for a proportionate share of our fee or profit for work performed.
We depend on governmental approval of our exports. Our international sales as well as our international procurement of skilled human resources, technology and components depend largely on export license approvals from the governments of Israel, the U.S. and other countries. If we fail to obtain material approvals in the future, if material approvals previously obtained are revoked or expire and are not renewed or if government export policies change, our ability to sell our products and services to overseas customers and our ability to obtain goods and services essential to our business could be interrupted, resulting in a material adverse effect on our business, revenues, assets, liabilities and results of operations. (See Item 4. Information on the Company – Governmental Regulation.)
As a government contractor, we are subject to a number of procurement and anti-bribery rules and regulations. We are required to comply with specific government contracting rules and regulations, including those relating to cost accounting, anti-bribery, procurement integrity and others, which increase our performance and compliance costs. (See Item 4. Information on the Company – Governmental Regulation.) If these rules and regulations change, our costs of complying with them could increase and reduce our margins. In addition, failure to comply with these rules and regulations could result in reductions of the value of contracts, contract modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of operations and financial condition. Failure to comply with these rules and regulations, for example in the area of anti-bribery, could also lead to suspension or debarment from government contracting or subcontracting for a period of time as well as other possible sanctions, which could have a negative impact on our results of operations, financial condition and reputation.

We depend on international operations. We expect that international sales will continue to account for a significant portion of our revenues for the foreseeable future. As a result, changes in international, political, economic or geographic events could result in significant shortfalls in orders or revenues. These shortfalls could cause our business, financial condition and results of operations to be harmed. In addition to the other risks from international operations set forth in these Risk Factors, some of the risks of doing business internationally include:
unexpected changes in regulatory requirements;
termination or non-renewal of export licenses;
changes in governmental defense budgets and national priorities;
imposition of tariffs and other barriers and restrictions;
burdens of complying with a variety of foreign laws;
political and economic instability; and
changes in diplomatic and trade relationships.
Some of these factors, such as the ability to obtain foreign government approvals, termination of export licenses and changes in diplomatic relationships, may be affected by Israel’s overall political situation. (See “Risks Related to Our Israeli Operations” below.) In addition, the economic and political stability of the countries of our major customers and suppliers may impact our business.
We have risks related to our pension plans, which could impact our liquidity. Funding obligations for certain of our pension plans are impacted by the performance of the financial markets and interest rates. When interest rates are low, or if the financial markets do not provide long-term returns as expected, there is an increased likelihood we may be required to make additional contributions to these pension plans. Because of the volatility in the equity markets, our estimate of future contribution requirements can change dramatically in relatively short periods of time. (See Item 18. Financial Statements – Notes 2(S) and 17.)
We face currency exchange risks. As more of our revenues are generated in currencies other than the U.S. dollar (which is the functional currency we use for financial reporting purposes), mainly in New Israeli Shekels (NIS), Great Britain Pounds (GBP) and Euros, we are subject to increasingly significant foreign currency risks. For example, we could be negatively affected by exchange rate changes during the period from the date we submit a price proposal until the date of contract award or until the date(s) of payment. Moreover, since a significant portion of our expenses is denominated in NIS, if we do not adequately hedge against exchange rate risks, our financial results could be adversely affected. Accordingly, our level of revenues and profits may be adversely affected by exchange rate fluctuations. (See below “Risks Related to Our Israeli Operations – Changes in the U.S. Dollar – NIS Exchange Rate” and Item 5. Operating and Financial Review and Prospects – Impact of Inflation and Exchange Rates.)
We operate in a competitive industry. The markets in which we participate are highly competitive and characterized by technological change. If we are unable to improve existing systems and products and develop new systems and technologies in order to meet evolving customer demands, our business could be adversely affected. In addition, our competitors could introduce new products with innovative capabilities, which could adversely affect our business. We compete with many large and mid-tier defense contractors on the basis of system performance, cost, overall value, delivery and reputation. Many of these competitors are larger and have greater resources than us, and therefore may be better positioned to take advantage of economies of scale and develop new technologies. Some of these competitors are also our suppliers in some programs.
Due to significant consolidation in our industry, we are more likely to compete with certain potential customers. As the number of companies in the defense industry has decreased in recent years, the market share of some prime contractors has increased. Some of these companies are vertically integrated with in-house capabilities similar to ours in certain areas. Thus, at times we could be seeking business from certain of these prime contractors, while at other times we could be in competition with some of them. Failure to maintain good business relations with these major contractors could negatively impact our future business.

We face risks of changes in costs under fixed-price contracts. Most of our contracts are fixed-price contracts, as opposed to cost-plus or cost-share type contracts. Generally, a fixed-price contract price is not adjusted as long as the work performed falls within the original contract scope. Therefore, under these contracts, we generally assume the risk that increased or unexpected costs may reduce profits or generate a loss. The risk can be particularly significant under a fixed-price contract involving research and development for new technology, where estimated gross profit or loss from long-term projects may change and such changes in estimated gross profit/loss are recorded on a cumulative catch-up basis. (See Item 5. Operating and Financial Review and Prospects – General – Critical Accounting Policies and Estimates – Revenue Recognition.) To the extent we underestimate the costs to be incurred in any fixed-price contract, we could experience a loss on the contract, which would have a negative effect on our results of operations, financial position and cash flow.
We face fluctuations in revenues and profit margins. The level of our revenues may fluctuate over different periods due to changes in pricing or sales volume or our mix of projects during any given period. Moreover, since certain of our project revenues are recognized in connection with achievement of specific performance milestones, we may experience significant fluctuations in year-to-year and quarter-to-quarter financial results. Similarly, our profit margins may vary significantly from project to project as a result of changes in estimated project gross profits that are recorded in results of operations on a cumulative catch-up basis pursuant to the percentage-of-completion accounting method. (See Item 5. Operating and Financial Review and Prospects – General – Critical Accounting Policies and Estimates – Revenue Recognition.) As a result, comparisons of our financial results for prior periods may not provide a reliable indicator of our future results. Moreover, our share price may be subject to significant fluctuation in response to period-to-period variations in our financial results.
Our backlog of projects under contract is subject to unexpected adjustments and cancellations. Our backlog includes revenue we expect to record in the future from signed contracts and certain other commitments. Many projects may remain in our backlog for an extended period of time because of the size or long-term nature of the contract. In addition, from time to time, projects are delayed, scaled back, stopped or cancelled for reasons beyond our control, which may adversely affect the revenue and profit that we ultimately receive from contracts reflected in our backlog.
We may experience production delays or liability if suppliers fail to make compliant or timely deliveries. The manufacturing process for some of our products largely consists of the assembly, integration and testing of purchased components. Some components are available from a small number of suppliers, and in a few cases we work with suppliers that are effectively our sole source. If a supplier stops delivery of such components, finding another source could result in added cost and manufacturing delays. Moreover, if our subcontractors fail to meet their design, delivery schedule or other obligations we could be held liable by our customers, and we may be unable to obtain full or partial recovery from our subcontractors for those liabilities. The foregoing risks could have a material adverse effect on our operating results. In addition, the current global economic situation could impair the ability of our suppliers to meet their obligations to us.
We may be affected by failures of our prime contractors. We often act as a subcontractor, and a failure of our prime contractor to meet its obligations may affect our ability to receive payments under our subcontract.
Undetected problems in our products could impair our financial results and give rise to potential product liability claims. If there are defects in the design, production or testing of our or our subcontractors’ products and systems, including our products sold for public safety purposes in the homeland security area, we could face substantial repair, replacement or service costs and potential liability and damage to our reputation. Our efforts to implement appropriate design, testing and manufacturing processes for our products or systems may not be sufficient to prevent such occurrences, which could have a material adverse effect on our business, results of operations and financial condition.

Our future success depends on our ability to develop new offerings and technologies for our current and future markets. To achieve our business strategies and continue to grow our revenues and operating profits, we must successfully develop new, or adapt or modify our existing, offerings and technologies for our current core defense markets and our future markets, including adjacent and emerging markets. Accordingly, our future performance depends on a number of factors, including our ability to:
identify emerging technological trends in our current and future markets;
identify additional uses for our existing technology to address customer needs in our current or future markets;
develop and maintain competitive products and services for our current and future markets;
enhance our offerings by adding innovative solutions that differentiate our offerings from those of our competitors;
develop, manufacture and bring solutions to the market quickly at cost-effective prices;
develop working prototypes as a condition to receiving contract awards; and
effectively structure our business, through the use of joint ventures, teaming agreements and other forms of alliances, to reflect the competitive environment.
To remain competitive in the future, we believe we will need to invest significant financial resources to develop new, and adapt or modify our existing, offerings and technologies, including through internal research and development, acquisitions and joint ventures or other teaming arrangements. In addition, our customers more frequently require demonstration of working prototypes prior to awarding contracts for new programs. Expenditures for new, adapted or modified offerings and technologies and for production of prototypes could divert our attention and resources from other projects and may not ultimately lead to the timely development of new offerings and technologies or new contracts. Due to the design complexity of our products, we may experience delays in completing the development and introduction of new products. Any delays could result in increased costs and development, deflect resources from other projects or increase the risk that our competitors may develop competing technologies, which gain market acceptance in advance of our products. If we fail in our new product development efforts, or our products or services fail to achieve market acceptance more rapidly than our competitors, our ability to procure new contracts could be negatively impacted, which would negatively impact our results of operations and financial condition.
Our business depends on proprietary technology that may be infringed. Many of our systems and products depend on our proprietary technology for their success. Like other technology oriented companies, we rely on a combination of patents, trade secrets, copyrights and trademarks, together with non-disclosure agreements, contractual confidentiality clauses, including those in employment agreements, and technical measures to establish and protect proprietary rights in our products. Our ability to successfully protect our technology may be limited because:
some foreign countries may not protect proprietary rights as comprehensively as the laws of the United States and Israel;
detecting infringements and enforcing proprietary rights may be time consuming and costly, diverting management’s attention and company resources;
measures such as non-disclosure agreements afford only limited protection;
unauthorized parties may copy aspects of our products or technologies to develop similar products or technologies or obtain and use information that we regard as proprietary;
our patents may expire, thus providing competitors access to the applicable technology;
competitors may independently develop products that are substantially equivalent or superior to our products or circumvent our intellectual property rights; and
competitors may register patents in technologies relevant to our business areas.

In addition, others may allege infringement claims against us. The cost of defending against infringement claims could be significant, regardless of whether the claims are valid. To the extent we are not successful in defending such claims, we may be prevented from the use or sale of certain of our products, subject to liabilities for damages and required to obtain licenses, which may not be available on reasonable terms, any of which may have a material adverse impact on our business, results of operation or financial condition.
Systems and information technology interruptions or cyber attacks could adversely impact our ability to operate. Our operations rely on computer, information and communications technology and related systems. From time to time, we may experience system interruptions and delays. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure and take other steps to improve the efficiency of and protect our systems, our operations could be interrupted or delayed. Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures, acts of war, terrorism or similar events or disruptions. Any of these or other events could cause system interruption, delays and loss of critical data, or delay or stoppage of our operations, and adversely affect our operating results.
In addition, we face the ongoing threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber attacks and other security problems and system disruptions. We have devoted and will continue to devote significant resources to the security of our computer systems, but they may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
We sometimes have risks relating to financing for our programs. A number of our major projects require us to arrange, or to provide, guarantees in connection with the customer’s financing of the project. These include commitments by us as well as guarantees provided by financial institutions relating to advance payments received from customers. Customers typically have the right to drawdown against advance payment guarantees if we were to default under the applicable contract. In addition, some customers require that the payment period under the contract be extended for a number of years, sometimes beyond the period of contract performance. We may face difficulties in issuing guarantees or providing financing for our programs. Moreover, if we are required to provide significant financing for our programs, this could result in increased leverage on our balance sheet. (See Item 4. Information on the Company – Financing Terms.)
We are subject to buy-back obligations. A number of our international programs require us to meet “buy-back” obligations. (See Item 5. Operating and Financial Review and Prospects – Off Balance Sheet Transactions.) Should we be unable to meet such obligations we may be subject to contractual penalties, and our chances of receiving further business from the applicable customers could be reduced or, in certain cases, eliminated.
We sometimes participate in risk-sharing contracts. We sometimes participate in “risk-sharing” type contracts, in which our non-recurring costs are only recoverable if there is a sufficient level of sales for the applicable product, which level of sales typically is not guaranteed. If sales do not occur at the level anticipated, we may not be able to recover our non-recurring costs under the contract.
We would be adversely affected if we are unable to retain key employees. Our success depends in part on key management, scientific and technical personnel and our continuing ability to attract and retain highly qualified personnel. There is competition for the services of such personnel. The loss of the services of key personnel, and the failure to attract highly qualified personnel in the future, may have a negative impact on our business. Moreover, our competitors may hire and gain access to the expertise of our former employees.
We may face labor relations disputes or not be able to amend collective bargaining agreements in a timely manner. A number of our subsidiaries in Israel and certain other countries are parties to collective bargaining agreements that cover a substantial number of our employees. These agreements contain a range of conditions that vary depending on the applicable company and are for various periods of time. Disputes with trade unions or other labor relations difficulties as well as failure to timely amend or extend collective bargaining agreements could lead to worker disputes, slow-downs, strikes and other measures, which could negatively impact our results of operations.

We face acquisition and integration risks. We have made in the past and plan to continue to make equity or asset acquisitions and investments in companies and technology ventures that we believe complement our business. (See Item 4. Information on the Company – Recent Acquisitions, Mergers and Divestitures.) Acquisitions typically involve a certain amount of risks and uncertainties such as:
the difficulty in integrating newly-acquired businesses and operations in an efficient and cost-effective manner and the risk that we encounter significant unanticipated costs or other problems associated with integration;
failure to meet the challenges of achieving strategic objectives, cost savings and other benefits expected from acquisitions could lead to impairment of intangible assets related to the acquired companies;
the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets;
the risk that we assume significant liabilities that exceed the enforceability or other limitations of applicable indemnification provisions, if any, or the financial resources of any indemnifying parties, including indemnity for regulatory compliance issues that may result in our incurring successor liability;
the potential loss of key employees of the acquired businesses;
the risk of diverting the attention of senior management from our existing operations; and
the risk that certain of our newly acquired operating subsidiaries in various countries could be subject to more restrictive regulations by the local authorities after our acquisition.
Our acquisitions are subject to governmental approvals. Most countries require local governmental approval of acquisitions of domestic defense businesses, which approval may be denied, or unfavorable conditions imposed, if the local government determines the acquisition is not in its national interest. We may also be unable to obtain antitrust approvals for certain acquisitions as our operations expand. Failure to obtain such governmental approvals could negatively impact our future business and prospects.
Our due diligence in acquisitions may not adequately cover all risks. There may be liabilities or risks that we fail to discover in performing due diligence investigations, or that may arise following an acquisition, relating to businesses we have acquired or may acquire in the future. Examples of these liabilities include employee benefit contribution obligations, estimated costs to complete contracts, environmental liabilities, regulatory compliance liabilities or liabilities for infringement of third party intellectual property rights for which we, as a successor owner, may be responsible. Such risks may include changes in estimated costs to complete programs and estimated future revenues. In addition, there may be additional costs relating to acquisitions including, but not limited to, possible purchase price adjustments provided in the applicable acquisition agreement or impairment write downs, if the value of the acquired company were to decrease after the acquisition, or after follow-on investments in that company. Such liabilities could have a material adverse effect on our business, financial condition, results of operations or prospects. In addition, there may be situations in which our management determines, based on market conditions or other applicable considerations, to pursue an acquisition with limited due diligence or without performing any due diligence at all.
Our share price may be volatile and may decline. Numerous factors, some of which are beyond our control and unrelated to our operating performance or prospects, may cause the market price of our ordinary shares to fluctuate significantly. Factors affecting market price include, but are not limited to: (i) variations in our operating results and whether we have achieved our key business targets; (ii) sales or purchases of large blocks of stock; (iii) changes in securities analysts’ earnings estimates or recommendations; (iv) differences between reported results and those expected by investors and securities analysts; and (v) changes in our business including announcements of new contracts by us or by our competitors. In the past, securities class action litigation has been instituted against companies following periods of volatility in the market price of their securities.

Other general factors and market conditions that could affect our stock price include changes in: (i) the market’s perception of our business; (ii) the businesses, earnings estimates or market perceptions of our competitors or customers; (iii) the outlook for the defense industry; (iv) the general market or economic conditions unrelated to our performance; (v) the legislative or regulatory environment; (vi) government defense spending or appropriations; (vii) military or defense activities worldwide; (viii) the level of national or international hostilities; and (ix) the general geo-political environment.
We have risks related to our issuance of Series A Notes under an Israeli debt offering. We face various risks relating to our issuance of Series A Notes (the Notes). (See Items 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Israeli Debt Offering.) The risks we face include our ability to generate sufficient cash flow to make payments on the Notes.
We have risks related to the inherent limitations of internal control systems. Despite our internal control measures, we may still be subject to financial reporting errors or even fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and any design may fail to achieve its stated goals, under some or all future conditions. Over time, a control may be inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected. (See Item 15. Controls and Procedures.)

Risks Related to Our Israeli Operations
Conditions in Israel may affect our operations.  Political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel, a number of armed conflicts have taken place between Israel and its Arab neighbors. An ongoing state of hostility, varying in degree and intensity has led to security and economic problems for Israel. For a number of years there have been continuing hostilities between Israel and the Palestinians including with the Islamic movement Hamas in the Gaza Strip, which have adversely affected the peace process and at times have negatively influenced Israel’s economy as well as its relationship with several other countries. Israel also faces threats from Hezbollah militants in Lebanon, from the government of Iran and other potential threats from neighboring countries, some of whom have recently undergone or are undergoing significant political changes, such as Egypt and Syria.  In recent years there has also been a change in the relations between Israel and Turkey. These political, economic and military conditions in Israel could have a material adverse effect on our business, financial condition, results of operations and future growth.
Political relations could limit our ability to sell or buy internationally. We could be adversely affected by the interruption or reduction of trade between Israel and its trading partners. Some countries, companies and organizations continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Foreign government defense export policies towards Israel could also make it more difficult for us to obtain the export authorizations necessary for our activities. Also, over the past several years there have been calls in Europe and elsewhere to reduce trade with Israel. In addition, the Israeli defense budget may be adversely affected by reductions in U.S. foreign military assistance due to the sequestration process in the U.S.  See above “General Risks Related to Our Business and Market.” There can be no assurance that restrictive laws, policies or practices directed towards Israel or Israeli businesses will not have an adverse impact on our business.
Reduction in Israeli government spending or changes in priorities for defense products may adversely affect our earnings. The Israeli government may reduce its expenditures for defense items or change its defense priorities in the coming years. In addition, the Israeli defense budget may be adversely affected by reductions in U.S. foreign military assistance due to the sequestration process in the U.S. See above "General Risks Related to Our Business and Market." There is no assurance that our programs will not be affected in the future if there is a reduction in Israeli government defense spending for our programs or a change in priorities to products other than ours.
Israel’s economy may become unstable. Over the years, Israel’s economy has been subject to periods of inflation, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. For these and other reasons, the government of Israel has intervened in the economy employing fiscal and monetary policies, import duties, foreign currency restrictions, controls of wages, prices and foreign currency exchange rates and regulations regarding the lending limits of Israeli banks to companies considered to be in an affiliated group. The Israeli government has periodically changed its policies in these areas. Reoccurrence of previous destabilizing factors could make it more difficult for us to operate our business as we have in the past and could adversely affect our business.

Changes in the U.S. dollar – NIS exchange rate. The exchange rate between the NIS and the U.S. dollar has fluctuated in recent years. For example, at the end of 2010, 2011 and 2012, the NIS/U.S. dollar exchange rate was 3.549, 3.821 and 3.733, respectively. This represented a devaluation of the NIS against the U.S. dollar of approximately 8% in 2011 and a strengthening of the NIS against the U.S. dollar of approximately 2% in 2012.  During 2012, the NIS/U.S. dollar exchange rate fluctuated. For example, at the end of each of the fiscal quarters of 2012, the exchange rate of the NIS against the U.S. dollar was 3.715, 3.923, 3.912 and 3.733, respectively. During the first two months of 2013, the NIS strengthened against the U.S. dollar by approximately 0.7%, and the NIS/U.S. dollar exchange rate as of February 28, 2013 was 3.708. While most of our sales and expenses are denominated in U.S. dollars, a significant portion of our expenses is paid in NIS, and most of our sales to customers in Israel are in NIS. Our primary expenses paid in NIS that are not linked to the dollar are employee expenses in Israel and lease payments on some of our Israeli facilities. As a result, if we do not hedge our position in NIS, a change in the value of the NIS compared to the dollar, which over the past year has undergone numerous fluctuations, could affect our research and development expenses, manufacturing labor costs and general and administrative expenses. (See Item 5. Operating and Financial Review and Prospects – Impact of Inflation and Exchange Rates – Inflation and Currency Exchange Rates.)

Israeli government programs and tax benefits may be terminated or reduced in the future. Elbit Systems and some of our Israeli subsidiaries participate in programs of the Israeli Office of the Chief Scientist (OCS) and the Israel Investment Center, for which we receive tax and other benefits as well as funding for the development of technologies and products. The benefits available under these programs depend on meeting specified conditions. (See Item 4. Information on the Company – Conditions in Israel – Chief Scientist (OCS) and Investment Center Funding.) If we fail to comply with these conditions, we may be required to pay additional taxes and penalties, make refunds and may be denied future benefits. From time to time, the government of Israel has discussed reducing or eliminating the benefits available under these programs, and therefore these benefits may not be available in the future at their current levels or at all.
Israeli law regulates acquisition of a controlling interest in Israeli defense industries. Israeli legislation regarding the domestic defense industry requires Israeli government approval of an acquisition of a 25% or more equity interest (or a smaller percentage that constitutes a “controlling interest”) in companies such as Elbit Systems. Moreover, the Israeli government may  issue specific orders to a domestic defense industry under this legislation that could impose additional conditions relating to transfers of ownership. This could limit the ability of a potential purchaser to acquire a significant interest in our shares. (See Item 4. Information on the Company – Governmental Regulation – Approval of Israeli Defense Acquisitions.)
Israel has stringent export control regulations. In recent years the Israeli government adopted laws and regulations regarding enhanced defense export controls and the export of “dual use” items (items that are typically sold in the commercial market but that may also be used in the defense market). If government approvals required under these laws and regulations are not obtained, including revocation of or failure to renew authorizations previously granted, our ability to export our products from Israel could be negatively impacted, thus causing a reduction in our revenues and a potential material negative impact on our financial results. (See Item 4. Information on the Company – Governmental Regulation – Israeli Export Regulations.)
We may rely on certain Israel “home country” corporate governance practices which may not afford stockholders the same protection afforded to shareholders of U.S. companies.  As a foreign private issuer for purposes of U.S. securities laws, Nasdaq rules allow us to follow certain Israeli “home country” corporate governance practices in lieu of the corresponding Nasdaq corporate governance rules.  Such home country practices may not afford shareholders the same level of rights or protections in certain matters as those of shareholders of U.S. domestic companies.  In 2011, we notified Nasdaq of our intent to follow Israeli home country practice in connection with an amendment to our 2007 Stock Option Plan, which was approved by our board of directors as permitted by Israeli law without approval by our shareholders.  To the extent we are entitled to elect to follow Israeli law and practice rather than corresponding U.S. law or practice, such as with regard to the requirement for shareholder approval of changes to stock option plans, our shareholders may not be afforded the same level of rights they would have under U.S. practice. (See Item 16.G. Corporate Governance.)

Many of our employees and some of our officers are obligated to perform military reserve duty in Israel. Generally, Israeli adult male citizens and permanent residents are obligated to perform annual military reserve duty up to a specified age. They also may be called to active duty at any time under emergency circumstances, which could have a disruptive impact on our workforce.
It may be difficult to enforce a non-Israeli judgment against us, our officers and directors. We are incorporated in Israel. Our executive officers and directors are not residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce against us or any of those persons in an Israeli court a U.S. court judgment based on the civil liability provisions of the U.S. federal securities laws. It may also be difficult to effect service of process on these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to enforce civil liabilities under U.S. federal securities laws in original actions filed in Israel. (See below – Item 4. Information on the Company – Conditions in Israel – Enforcement of Judgments.)

Item 4.                      Information on the Company.
Business Overview
Principal Activities
We are an international defense electronics company engaged in a wide range of programs throughout the world. The Company, operates in the areas of aerospace, land and naval systems, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), unmanned aircraft systems, advanced electro-optics, electro-optic space systems, electronic warfare (EW) suites, airborne warning systems, electronic intelligence systems, data links, artillery systems, military communications systems and radios. We also focus on the upgrading of existing military platforms and developing new technologies for defense, homeland security and commercial aviation applications. In addition, we provide a range of support services.
Our major activities include:
military aircraft and helicopter systems;
helmet mounted systems;
commercial aviation systems and aerostructures;
unmanned aircraft systems;
land vehicle systems;
command, control, communications, computer and intelligence (C4I) and cyber systems;
electro-optic and countermeasures systems;
homeland security systems;
EW and signal intelligence systems; and
various commercial activities.
Many of these major activities have a number of common and related elements. Therefore, we often jointly conduct marketing, research and development, manufacturing, performance of programs, sales and after sales support among these areas of activities.
Principal Market Environment
We operate primarily in the defense and homeland security arenas. The nature of military actions in recent years, including low intensity conflicts and ongoing terrorist activities, as well as budgetary pressures to focus on leaner but more cutting-edge defense forces, has caused a shift in the defense priorities for many of our major customers. As a result we believe there is a greater demand in the areas of C4I, as well as intelligence, surveillance and reconnaissance (ISR), including network centric information systems, intelligence gathering systems, border and perimeter security systems, airborne systems, unmanned aircraft systems (UAS), unmanned surface vessels (USVs), remote controlled systems, cyber-based systems, space and satellite based defense capabilities and homeland security applications. There is also a growing demand for cost effective logistic support and training and simulation services. We believe our synergistic “one-company” approach of finding solutions that combine elements of our various activities positions us to meet evolving customer requirements in several of these areas.
We tailor and adapt our 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, we provide customers with cost-effective solutions, and our customers are able to improve their technological and operational capabilities within limited defense budgets. We are experienced in providing “systems of systems”, which enables us to provide overall solutions in a range of areas to meet our customers’ comprehensive defense and security needs.


The worldwide defense market has been characterized in recent years by significant consolidation and merger and acquisition activities. Part of our growth strategy includes our continued activity in mergers and acquisitions both in Israel and internationally. We operate as a multi-domestic, “global – local (GloCal)” organization in order to meet the needs of our customers around the world. The Company’s structure enables us to benefit from the synergy of our overall capabilities while at the same time focus on local requirements.
Company History
We have many decades of operational experience. Our predecessor Elbit Ltd. was incorporated in Israel in 1966 as Elbit Computers Ltd. We were formed in 1996, as part of the Elbit Ltd. corporate demerger, under which Elbit Ltd.’s defense related assets and business were spun-off to us. From its founding in 1966 until the demerger, Elbit Ltd. was involved in a wide range of defense-related airborne, land, naval and C4I programs throughout the world. We continue these activities today, together with the activities of companies we have acquired and activities relating to newly developed areas, as the largest non-government-owned defense company in Israel. Several of our subsidiaries in Israel and around the world have decades of experience in their respective markets. Our companies have collectively been awarded the Israel Defense Prize ten times, recognizing extraordinary contributions to defense technological innovations.
Elbit Systems Ltd. is a corporation domiciled and incorporated in Israel where we operate in accordance with the provisions of the Israeli Companies Law – 1999 (the Companies Law).
Trading Symbols and Address
Our shares are traded on the Nasdaq National Market (Nasdaq), as part of the Nasdaq Global Select Market, under the symbol “ESLT” and on the Tel-Aviv Stock Exchange (TASE).
Our main offices are in the Advanced Technology Center, Haifa 31053, Israel, and our main telephone number at that address is (972-4) 8315315. Our website home page is www.elbitsystems.com. We make our website content available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this annual report on Form 20-F.
Our principal offices in the United States are the headquarters of Elbit Systems of America, LLC at 4700 Marine Creek Parkway, Fort Worth, Texas 76179-6969, and the main telephone number at that address is 817-234-6799.
The table below shows our consolidated revenues by major areas of operations for the years ended December 31, 2010, 2011 and 2012:
Airborne systems:                          
  $ 791     $ 970     $ 1,054  
Land systems:                                                                   
    363       405       375  
C4ISR systems:                                                                   
    1,019       996       1,018  
Electro-optic systems:                                                                   
    369       300       324  
Other (mainly non-defense engineering and production services):                                                                   
    128       146       118  
  $ 2,670     $ 2,817     $ 2,889  
The following table provides our consolidated revenues by geographic region, expressed as a percentage of total revenues for the years ended December 31,  2010, 2011 and 2012:

    18%       25%       24%  
North America (U.S. and Canada)                              
    31%       31%       32%  
    20%       20%       20%  
Latin America                                                  
    9%       6%       6%  
    20%       16%       17%  
    2%       2%       1%  
Subsidiary Organizational Structure
Our beneficial ownership interest in our primary subsidiaries and investees is set forth below. Our equity and voting interests in these entities are the same as our beneficial ownership interests.
The following is a general description of our principal subsidiaries.

As of February 28, 2013, Tor was owned 100% by the Company, but we are in process of transferring 50% of the ownership interest to Israel Aerospace Industries Ltd.


U.S. Subsidiaries
Elbit Systems of America
We conduct most of our U.S. business through Elbit Systems of America, LLC (Elbit Systems of America), a Delaware limited liability company, and its major wholly-owned subsidiaries including: EFW Inc. (EFW), Kollsman, Inc. (Kollsman), KMC Systems, Inc. (KMC), International Enterprises, Inc. (IEI), Innovative Concepts, Inc. (ICI), M7 Aerospace LLC (M7)  and Real-Time Laboratories, LLC (RTL). We hold our 100% interest in Elbit Systems of America through intermediate Delaware holding companies. Elbit Systems of America provides products and system solutions focusing on U.S. military, commercial aviation, homeland security and medical instrumentation customers. Elbit Systems of America is organized along a number of main business lines operating out of several primary operational facilities. The major business lines include Airborne Solutions, Land and C4I Solutions, Sensor and Electro-Optics Solutions, Unmanned Aircraft Systems, Services and Support Solutions, Commercial Aviation – Kollsman and Medical Instruments – KMC Systems. Elbit Systems of America’s main operation centers include its facilities in Fort Worth, Texas; San Antonio, Texas; Merrimack, New Hampshire;  Boca Raton, Florida; Talladega, Alabama; and McLean, Virginia.
Elbit Systems of America acts as a contractor for U.S. Foreign Military Financing (FMF) and Foreign Military Sales (FMS) programs. (See below “Governmental Regulations – Foreign Military Financing.”) Each of Elbit Systems of America’s major operational facilities has engineering and manufacturing capabilities. Elbit Systems of America’s facilities in Alabama and Texas have significant maintenance and repair capabilities. (See below “Manufacturing” and “Customer Satisfaction and Quality Assurance.”)
Elbit Systems of America, Elbit Systems and intermediate Delaware holding company subsidiaries are parties to a Special Security Agreement (SSA) with the DoD. The SSA provides the framework for controls and procedures to protect classified information and export controlled data. The SSA allows the Elbit Systems of America companies to participate in classified U.S. government programs even though, due to their ownership by Elbit Systems, the Elbit Systems of America companies are considered under the control of a non-U.S. interest. Under the SSA, a Government Security Committee of Elbit Systems of America’s board of directors was permanently established to supervise and monitor compliance with Elbit Systems of America’s export control and national security requirements. The SSA also requires Elbit Systems of America’s board of directors to include outside directors who have no other affiliation with the Company. Elbit Systems of America’s board of directors also contains officers of Elbit Systems of America and up to two inside directors, who have other affiliations with the Company. The SSA requires outside directors and officers of the Elbit Systems of America companies who are directors, and certain other senior officers, to be U.S. resident citizens and eligible for DoD personal security clearances.
VSI/RCEVS. Elbit Systems of America and Rockwell Collins Inc. (Rockwell Collins) each own 50% of Vision Systems International LLC (VSI) and Rockwell Collins ESA Vision Systems LLC (RCVES), joint venture companies with operations in Fort Worth, Texas and Cedar Rapids, Iowa. VSI was established in 1996, and RCVES was established in November 2012. VSI and RCEVS act on a world-wide basis on behalf of Rockwell Collins and Elbit Systems/ Elbit Systems of America in the area of helmet mounted display systems for fixed-wing military and paramilitary aircraft. Elbit Systems, Elbit Systems of America and Rockwell Collins each have provided VSI and RCEVS with licenses to use their helmet mounted display technologies. In general, VSI and RCEVS  subcontract product development and production to its owners on an approximately equal basis. Each owner has equal representation in VSI and RCEVES management.
Israeli Subsidiaries
Elop. Based in Rehovot, Israel, our wholly-owned subsidiary Elbit Systems Electro-Optics Elop Ltd. (Elop) (formerly Elop Electro-Optics Industries Ltd.) designs, engineers, manufactures and supports a wide range of electro-optic systems and products mainly for defense, space and homeland security applications. With more than 75 years of operational experience, Elop has a broad customer base, both in Israel and internationally.
ESLC. Elbit Systems Land and C4I Ltd. (ESLC) is a wholly-owned Israeli subsidiary, with headquarters in Netanya, Israel. ESLC is engaged in the worldwide market for land-based systems and products for military vehicles, artillery and mortar systems, C4I systems and communications systems and equipment.

Elisra. Elbit Systems EW and SIGINT – Elisra Ltd. (Elisra) (formerly Elisra Electronic Systems Ltd.) is a wholly-owned  Israeli subsidiary located in Bnei Brak and Holon, Israel. Elisra and its subsidiaries provide a wide range of EW systems, signal intelligence (SIGINT) systems and C4ISR technological solutions for the worldwide market.
Cyclone. Elbit Systems – Cyclone Ltd. (Cyclone) is a wholly-owned Israeli subsidiary of Elbit Systems. Located near Karmiel, Israel, that designs and produces composite and metal aerostructure parts for civil and military aircraft and performs maintenance, integration and installation engineering for aircraft and helicopters. Cyclone also manufactures weapons pylons and external fuel tanks for fighter aircraft. Both directly and through our wholly-owned subsidiary Snunit Aviation Services Ltd., Cyclone supplies maintenance and operation services for fixed-wing aircraft and helicopter fleets.
ELSEC. Elbit Security Systems Ltd. (ELSEC) is a wholly-owned Israeli subsidiary of Elbit Systems. Located in Sderot, Israel, ELSEC operates mainly in the fields of homeland security, electro-optic surveillance systems, E-fences, border and coastal integrated security systems, airport security systems, other transportation security systems and strategic perimeter sites security.  ELSEC also manufactures a range of electro-optic products.
Kinetics. Kinetics Ltd. (Kinetics), based in Airport City, Israel, is a wholly-owned Israeli subsidiary. Kinetics develops technologies, systems and products in the field of advanced life support and environmental controls, such as climate control systems and nuclear, biological and chemical protection systems for combat vehicles. Also, Kinetics develops and manufactures other products for land vehicles, such as hydraulic, fuel, braking and suspension systems, an auxiliary power unit for land vehicle power pack systems and hydraulic systems for aircraft.
ITL Optronics. ITL Optronics Ltd. (ITL Optronics) is a wholly-owned Israeli subsidiary located in Rehovot, Israel, engaged in the area of soldier-oriented optronic systems.
SCD. Semi-Conductor Devices (SCD) is an Israeli registered partnership equally owned by Elbit Systems and Rafael Advanced Defense Systems Ltd. (Rafael). Located in Leshem, Israel, SCD develops and manufactures cooled and uncooled IR detectors for thermal imaging equipment and laser diodes used in defense and commercial applications.
Opgal. Opgal – Optronics Industries Ltd. (Opgal) is an Israeli company owned 50.1% by Elbit Systems and 49.9% by Rafael. Located in Karmiel, Israel, Opgal provides commercial applications of thermal imaging and electro-optic technologies, including an enhanced vision sensor designed to assist in landing aircraft under limited visibility and harsh weather conditions and thermal imaging cameras and systems for surveillance, industrial, medical and fire fighting applications. Opgal also produces IR subassemblies for forward-looking infrared (FLIR) sensors for defense applications.
Tor. Tor - Advanced Flight Training Limited Partnership (Tor) is an Israeli limited partnership based in Tel-Aviv, Israel, established to perform the Israeli Air Force’s future trainer aircraft program.  See below “Current Business Operations – Military Aircraft and Helicopter Systems – Programs.”  TOR is currently wholly-owned by Elbit Systems, but is in the process of having 50% of its ownership interest transferred to Israel Aerospace Industries Ltd. (IAI) pursuant to a limited partnership agreement.
Subsidiaries in Other Countries
Ferranti. Ferranti Technologies (Group) Limited (Ferranti), is a wholly-owned U.K. subsidiary. Located in Oldham, U.K, Ferranti’s principal activities include engineering, manufacturing and logistic support to aerospace and defense industries in the U.K. and internationally.
U-TacS. UAV Tactical Systems Ltd. (U-TacS) is a U.K. subsidiary located in Leicester, U.K., held 51% by Elbit Systems (through a wholly-owned U.K. holding company – Elbit Systems UK Limited), with the remaining 49% owned by Thales UK Limited, a subsidiary of Thales S.A. U-TacS’ main business is to perform a major part of the Watchkeeper Program and other related programs. See below “Current Business Operations – UAS –Programs.”
European Subsidiary (Belgium). The European Subsidiary (Belgium) is a wholly-owned Belgium subsidiary located near Ghent, Belgium. It develops, manufactures and supports electro-optical products, mainly for the defense and space markets.

European Subsidiary (Austria). The European Subsidiary (Austria) is a wholly-owned Austrian subsidiary located near Vienna, Austria. It is engaged in programs relating to airborne, land and C4I systems.
Elbit Systeme. Elbit Systems S.A. (Elbit Systeme) is a wholly-owned Romanian subsidiary located in Bucharest, Romania. Elbit Systeme serves as the base for our various defense and commercial operations and holdings in Romania.
Telefunken RACOMS. Telefunken Radio Communications Systems GmbH (Telefunken RACOMS) is a wholly-owned German subsidiary located in Ulm, Germany. Telefunken RACOMS is active in both military and civilian communications projects in Germany and internationally.
AEL. AEL Sistemas S.A. (AEL) is a 75%-owned Brazilian subsidiary, with the 25% balance of its shares owned by Embraer Defesa e Seguranca Participacoes S.A. (Embraer Defesa). Located in Porto Alegre, Brazil, AEL performs engineering, manufacturing and logistic support activities for defense and commercial applications.
Ares. Ares Aeroespacial e Defesa S.A. (Ares) is a wholly-owned Brazilian subsidiary located near Rio de Janeiro and is engaged in the area of defense electronic systems for the Brazilian military and other customers.
Harpia. Harpia Sistemas S.A. (Harpia) is a Brazilian subsidiary, 49% owned by AEL and 51% owned by Embraer Defesa. Based in Brasilia, Brazil, Harpia is engaged in the areas of UAS, avionics and simulation systems. In January 2013, an agreement was signed under which AEL will sell 9% of the ownership interest in Harpia to Avibras Divisao Aerea e Naval S.A.  (See below “Recent Acquisitions, Mergers and Divestitures – Mergers.”)
Elbit Systems of Australia. Elbit Systems of Australia Pty Ltd. (Elbit Systems of Australia) is a wholly-owned subsidiary. Located in Melbourne, Australia. it is engaged in defense electronic systems for the Australian armed forces and other customers.
HALBIT. HALBIT Avionics Private Limited (HALBIT) is an Indian company owned 26% by Elbit Systems, with the largest shareholder being Hindustan Aerospace Limited. Located in Bangalore, India, HALBIT is engaged in avionics programs for the Indian defense market.
Others. We have several other relatively small subsidiaries and investee companies in Israel and other countries that conduct marketing, manufacturing, logistic support and other activities principally in the subsidiary’s local market.
Recent Acquisitions, Mergers and Divestitures
During 2012 and the beginning of 2013, we continued to focus our capabilities through the enhancement of joint ventures in Israel, the U.S. and Brazil as well as the initiation of operations in technology-based investment companies in Israel.  We also divested certain non-core assets, and are in the process of divesting other non-core assets, in Israel and abroad.
Enhancement of Joint Ventures and Technology-based Investment Companies
During 2012, we began operational activities in Tor (see above “Israeli Subsidiaries”). Tor was established to perform the new aircraft trainer program for the Israeli Air Force, and in September 2012, it received its initial contract under that program. (See below “Military Aircraft and Helicopter Systems – Programs”.)
In November 2012, we established Rockwell Collins - ESA Vision Systems LLC, an additional joint venture in the U.S. with Rockwell Collins Inc., to pursue helmet mounted systems for fixed-wind military aircraft.  (See above “U.S. Subsidiaries – VSI/RCEVS”.)
In January 2013, we enhanced our Brazilian joint venture Harpia Sistemas S.A. (Harpia), by entering into agreements with Embraer Defesa and Avibras Divisão Aerea e Naval S.A. (Avibras), pursuant to which Avibras will acquire a 9% interest in Harpia from AEL.  Avibras will provide Harpia the right to use Avibras’ UAS related assets. Following completion of this transaction, Harpia will be owned 51% by  Embraer Defesa, 40% by AEL and 9% by Avibras.
During 2012, we launched activities in Incubit Technology Ventures Ltd., a wholly-owned Israeli subsidiary located in the High Technology Center in Beersheva, Israel, that will pursue investments in high technology startup companies.

Divestitures. During 2012 and the beginning of 2013, we divested and signed agreements to divest certain non-core assets.  These divestment transactions included an agreement to sell our approximately 59% ownership interest in Fraser-Volpe, LLC, a U.S. company engaged in certain optic-based products for military and commercial applications.  We also sold our approximately 19% interest in Chip PC Ltd., an Israeli company involved in “thin client” solutions related to server-based computer technologies.  We sold our ownership in a brand name relating to Soltam for houseware product  uses. We also sold the assets relating to AEL’s commercial fleet navigation business in Brazil. The consideration received from the sales of these ownership interests and assets was not material.
Current Business Operations
We generally operate and manage the major activities described below in an interrelated manner and on a project-oriented basis. This means that contracts are frequently performed by more than one operating subsidiary or division within the Company, on the basis of the multiple skills and available resources that may be needed or appropriate for the contract. Thus, the involvement of an operating subsidiary or division in the performance of a contract is not a function of management’s review for purposes of allocation of resources within the Company.
Military Aircraft and Helicopter Systems
We supply a comprehensive portfolio of advanced airborne electronic and electro-optic systems and products to leading military aircraft manufacturers and end users designed to enhance operational capabilities and extend aircraft life cycles. Our military airborne systems are compatible with emerging net-centric concepts supporting enhanced situational awareness, faster decision making and optimal response. Our airborne C4ISR solutions provide pilots with data, communications and real-time situation pictures, as well as the ability to share mission-critical data with ground and naval platforms, thus enhancing joint, effective operations between air to air, air to ground, manned and unmanned platforms via common avionics and C4I solutions. Our multidisciplinary approach extends to designing training and simulation systems that accommodate evolving missions and combine air and ground systems in a single architecture.
Our airborne systems provide a range of solutions from a single sensor to an entire cockpit avionics suite. We integrate our systems on fixed and rotary-wing, eastern and western, new and mature aircraft. Under our aircraft and helicopter upgrade programs, we integrate advanced weapon, communication, navigation, electro-optic and EW systems, providing advanced net-centric capabilities for fast, precise missions. We support life cycle extension of our customers’ fleets and  supply logistic support services for airborne platforms, including repair and maintenance centers, training and spare parts.
Systems Portfolio
Our systems and products for military fixed-wing aircraft and helicopters include a range of advanced avionics systems, electro-optic and aerial reconnaissance systems, precision guidance systems, fighter aircraft structural components, data links, training systems and simulators. This is in addition to our helmet mounted systems and EW airborne systems described below.
Avionics Systems. Our avionics systems include integrated flight deck systems (glass cockpits), mission and aircraft management computers, weapon delivery and navigation systems, large display systems, airborne C4I systems, digital map systems, enhanced vision systems, stores management systems and digital recording devices.
Electro-Optic Systems. Our airborne electro-optic systems include direct infrared countermeasures (DIRCM) systems, head-up displays, laser range-finders and laser designators, FLIR systems, payloads such as the CoMPASS family, countermeasures systems and aerial reconnaissance systems such as the CONDOR long-range oblique photography system.
Precision Guidance Systems. We supply a range of precision guidance systems for airborne applications including the Whizzard family (LIZARD and GAL) of laser-based precision guidance kits, semi-active laser (SAL) seekers, the STAR (smart tactical advance rocket) and the GATR (guided advanced tactical rocket).
Fighter Aircraft and Helicopter Structural Components. We supply external fuel tanks, pylons and structural parts for fighter aircraft such as the F-15, F-16 and  F-18,  and we supply structural parts for helicopters such as the UH-60 and CH-53.

Trainers and Simulators. Our training and simulation products and solutions for all military branches and homeland security include a variety of simulators, complete training centers for tactical, virtual, appended and embedded training, full mission trainers, partial task trainers and computer-based trainers. We also supply air defense simulators, naval embedded and tactical trainers and ACMI (air combat maneuvering instrumentation) pods.
Our programs for military fixed-wing aircraft and helicopters encompass full scale aircraft upgrades, system upgrades, system and product supply, training, simulators and logistic support. The customers and end users for our military fixed-wing aircraft and helicopters programs include the Israeli Air Force (IAF), the U.S. Air Force (USAF), the U.S. Navy (USN), the U.S. Army, the U.S. Marine Corps (USMC), the U.S. Coast Guard, air forces and other branches of the armed forces of the North American Treaty Organization (NATO) member governments and/or European Union (EU) member governments, Brazil, Korea as well as of other governments around the world. Our customers also include major fixed-wing aircraft and helicopter manufacturers such as Lockheed Martin Inc. (Lockheed Martin), the Boeing Company (Boeing), Raytheon Company (Raytheon), BAE Systems Inc. (BAE Systems), Embraer S.A. (Embraer), European Aerospace Defence and Space Company N.V. (EADS), EADS – CASA, Alenia Aermacchi S.p.A. (Aermacchi), Dassault Aviation S.A. (Dassault), Eurocopter S.A. (Eurocopter), Hindustan Aeronautics Limited (HAL), Bell Helicopters Textron Inc. (Bell Helicopters), Sikorsky Aircraft Company (Sikorsky) and Agusta S.p.A. (Agusta), among others.
We perform upgrade programs for numerous fixed-wing fighter, trainer and transport aircraft, as well as a wide range of helicopter platforms.  In 2012, our contract awards for aircraft upgrade programs included contracts for the upgrade of C-130H transport aircraft for the IAF and for the Republic of Korea’s Air Force. We also supply on a stand-alone basis advanced avionics systems such as mission computers, displays, moving maps, digital video recorders, tactical data links and operational flight protocol software for many fixed-wing and rotary-wing aircraft. This includes, among others, numerous systems for Lockheed Martin’s F-16 aircraft.  Other contracts awarded in 2012 include a contract for the redesign and upgrade of the Apache Longbow mission processor, as well as contracts for battle management systems and avionics for IAF helicopters. We were selected by Boeing to develop the Advanced Cockpit system consisting of a Large Area Display and a Low Profile Heads-Up Display for future F-15 and F/A-18 fighter aircraft.  During 2012, Cyclone was awarded orders by Boeing for the supply of several structural components for military aircraft.
We also supply a range of airborne electro-optic systems for fixed-wing fighter and trainer aircraft, including head-up display systems for aircraft such as the C-17, F-16 Block 50, F-15, F/A-18 and the KC-390, as well as airborne reconnaissance systems and combined airborne imagery intelligence (IMINT) systems for fighter aircraft. In addition, we supply various types of  precision guidance systems to several air forces and  missile manufacturers.
Our airborne, training and simulators programs include aircraft flight training solutions and operation of training aircraft for both fixed-wing trainers and helicopters under private financing initiative (PFI) and “power by the hour” (PBH) arrangements. In 2012, we were awarded a contract to integrate F-15 training capabilities  into the IAF’s Mission Training Center. We also supply several customers with EHUD ACMI systems for real-time autonomous air-to-air and air-to-ground combat training and debriefing. We supply simulation systems including  the IAF’s F-16I aircrew flight and system trainer and a mission training center as well as a B-200 simulator for the IAF. We will also supply the training system for the IAF’s future trainer aircraft program. We are supplying Boeing with the Virtual Mission Training system for the USN’s T-45 Goshhawk aircraft and numerous other fixed and rotary wing aircraft. We also supply Israel Defense Forces (IDF) ground forces with a tactical battle group trainer as well as tank appended trainers, and the IDF’s Home Front Command with a crises management simulator. Our naval training simulators are used by the Israeli Navy and several other navies world-wide.
Our logistic support services programs for fixed-wing aircraft and helicopters include repair and maintenance services and supply of spare parts for a range of air forces. Part of these services are performed as contractor logistic support (CLS) projects and performance based logistics (PBL). In 2012, Tor, our joint venture with IAI, was awarded a contract by the IMOD in the amount of approximately $603 million, to perform the IAF’s future trainer aircraft program. Our share of this contract is in the amount of approximately $420 million, of which approximately $110 million is to be performed in the establishment phase of the program over the next three years, and approximately $310 million during the operational phase of the program over a 20-year period. The program calls for establishment of an enhanced logistic support and maintenance structure for the new trainer aircraft as well as an advanced ground array. We operate and maintain the IAF’s Effroni trainer aircraft and the Israeli Police Force’s helicopter fleet. We also perform maintenance support activities for numerous products such as jammers, radar, 20 mm cannon and others. We provide on a turn-key basis aircraft procurement, operation and maintenance services to the IMOD for airborne fire fighting services.  

Through AEL, we provide CLS services for several aircraft of the Brazilian Air Force.  Through ESA’s subsidiary, M7, we provide aircraft level CLS to the U.S. Army, USAF and USN for a range of aircraft on a worldwide basis, including a recent award by BAE Systems to M7 to provide logistics support for USN T-34, T-44 and T-6 aircraft.

Helmet Mounted Systems
Overview.  We design and supply a range of advanced helmet mounted systems (HMS), including helmet mounted displays (HMDs) for fixed-wing aircraft and rotary aircraft pilots. These include tracking and display systems, both for day and night flying. Our systems measure the pilot’s line of sight, slave weapons and sensors to the target, identify target location and bring displays to the pilot’s eye level. We supply our HMS as part of our upgrade programs as well as on a stand-alone basis. Through our jointly-owned companies with Rockwell Collins, (see above “Principal Subsidiaries – VSI/RCEVS”), we are a leader in HMS for fighter aircraft.
Systems Portfolio
Fixed-Wing HMS. Examples of our fixed-wing HMS currently in operational use include the Display and Sight Helmet (DASH) family, the Joint Helmet Mounted Cueing System (JHMCS), the Night Vision Cueing Display (NVCD) system and the HMS for the F-35 Joint Strike Fighter (JSF). These systems enable slaving of various aircraft systems to the pilot’s line of sight, target location and identification and display of information. We have also developed TARGO®, a HMA (helmet mounted avionics) solution for fixed-wing trainer aircraft, and we supply the FACT® (fast action cockpit mapping tool) for electro-magnetic mapping of cockpits.
Helicopter HMS. For helicopters, our operational HMS include the Aviator Night Vision Imaging System Head-Up Display (ANVIS/HUD®) family, the Integrated Helmet and Display Sight System (IHADSS), Jedeye® and the Panoramic Night Vision Goggle (PNVG) based on our QuadEye® system. We also supply low visibility landing (LVL) solutions. These systems facilitate safety for night flights, weapon slaving, increased operational capabilities and performance of “head-out” missions.
We are engaged in a range of programs for HMS for fighter aircraft and helicopters. Customers and end users for our HMS include the IAF, USAF, U.S. Army, USN, USMC, U.S. Coast Guard, air forces of EU and NATO member governments and other governments’ air forces. Our customers also include aircraft and helicopter manufacturers such as Boeing, Lockheed Martin, Bell Helicopters, Sikorsky, Agusta and Aermacchi.
In the fighter aircraft area we supply various versions of our DASH systems for the IAF’s F-15I and F-16 (C, D and I) aircraft as well as for other air forces around the world. We supply the JHMCS through VSI for Boeing’s F-15 and F/A-18 aircraft and for Lockheed Martin's F-16 aircraft. Thousands of JHMCS production systems have been delivered and are in operational use by the USAF, the USN, the U.S. Air National Guard (ANG) and the air forces of more than 25 other countries including orders for additional lots received during 2012. Through VSI and RCEVS we are developing and supplying the HMS to Lockheed Martin for the U.S. F-35 Joint Strike Fighter (JSF) Program. VSI is also supplying the NVCD to the USN. The NVCD includes the PNVG, based on our QuadEye® system. In the trainer aircraft area we are supplying TARGO® for the M-346 Advanced Trainer. In the helicopter area we have supplied thousands of  operational ANVIS/HUD® systems for numerous customers. We also supply IHADSS to various users of Apache and Agusta 129 helicopters, as well as the Helmet Display and Tracking System for the weapon system of the USMC AH-1W helicopters, and the color helmet mounted system for the CV-22.
Commercial Aviation Systems and Aerostructures
Overview.  Leveraging our core competencies in airborne defense systems, as well as our legacy strengths in commercial aviation, we provide a range of systems and products for the commercial and business aviation market. These activities mainly include vision-based cockpit concept systems, other avionics systems, electrical systems, pressurization systems and aerostructure products.  Our commercial avionics systems are employed on numerous fixed-wing aircraft, as well as on commercial helicopters. Our aerostructure products are installed on a number of commercial aircraft.

Systems Portfolio
Vision-based Cockpit Systems. Our commercial aviation product line includes the Vision Based Cockpit concept, incorporating our Clear Vision multi-spectral enhanced vision system (EVS), our  EVS II and EVS-XP systems and our General Aviation – Vision System (GAViS®) ,which  improve an aircraft’s capability to safely land in bad weather and reduced visibility conditions. We also supply the Landing® system that enhances landing safely under a variety of conditions. Our commercial aviation products provide critical information to pilots including a family of commercial advanced head-up displays and unique synthetic vision and image-based applications.
Avionics, Electronic and Legacy Systems. We supply cabin pressurization control systems, air data test equipment, air data processor/sensor systems and flight instruments for the general aviation market. Our legacy products for commercial aircraft include altimeters, pressure meters, cockpit indicators and avionics test equipment.
Commercial Helicopter Systems. We produce full avionic suites, including displays, moving maps, electronic flight instrumentation systems and flight management systems for commercial helicopters.
Aerostructure Products. Our aerostructure parts include pressurized and non-pressurized doors, composite beams and composite landing gear doors, thrust reverse blocker doors, fan cowl doors and winglets for commercial aircraft manufactured by Boeing, Airbus, King Air and others, as well as aerostructures for UAS.
Hydraulic Components. We supply hydraulic and pneumatic components for aerial refueling, jet engines and missiles and rockets.
Customers for our commercial and business aviation systems and products include General Dynamics – Gulfstream Aerospace Corporation (Gulfstream), Boeing, Airbus S.A.S. (Airbus), Hawker Beechcraft Corporation, Eurocopter, Dassault,  Air Macchi, FedEx Express Inc. (FedEx Express), Embraer, Honeywell, Sikorsky, Piaggio America Inc. and Jetcraft Aviation Ltd. (Jetcraft). Customers for our aerostructure products for commercial aircraft include Spirit Aerosystems Inc. (Spirit Aero Systems), Airbus, Boeing, IAI and others.
Our programs in the area of commercial avionics and enhanced vision systems include a number of U.S. Federal Aviation Administration (FAA) certifications for installation of our EVS on a range of Gulfstream business jets and FedEx Express MD11 aircraft. EVS II also has received European Aviation Safety Agency (EASA) approval, and our GAViS® system has been FAA certified.
Elbit Systems of America maintains an FAA certified repair facilities for commercial avionics repairs. As the original manufacturer of the Fairchild Metro/Merlin aircraft, ESA’s subsidiary M7 provides ongoing spares and engineering support for over 700 aircraft around the world. Cyclone performs maintenance for commercial helicopters.
UAS (Unmanned Aircraft Systems) and USVs (Unmanned Surface Vessels)
Overview. We design and supply integrated UAS for a range of applications. We design and manufacture a variety of UAS platforms, including the Hermes® and Skylark® families of UAS. We supply UAS training systems with capabilities to simulate payload performance, malfunctions and ground control station operation. We design and supply command and control ground station elements, engines, data links, stabilized electro-optic payloads and electronic intelligence (ELINT) and communications intelligence (COMINT) payloads that can be adapted for various types of UAS. Our UAS technology has also been applied to our unmanned ground vehicle and USV activities. We also are developing USVs for a range of naval applications.
Systems Portfolio
Hermes® UAS Family. As part of our intelligence, surveillance, target acquisition and reconnaissance (ISTAR) solutions, we developed our Hermes® family of tactical UAS including Hermes® 450 (in various configurations) a tactical long-endurance UAS supporting ISTAR missions, Hermes® 900, a tactical medium altitude long-endurance (MALE) UAS, and  Hermes® 90, a tactical short-range UAS designed for long-endurance point-launch ISR missions.

Skylark® UAS Family. Our Skylark® family of mini-UAS includes electrically propelled and covert short-range UAS with ISR capabilities for company-brigade-level tactical echelons. The family is based on Skylark® I, a man-packed UAS for close-range surveillance and observation, Skylark® I LE, which provides longer endurance of the Skylark® I capabilities.
Ground Stations. Our UAS ground stations include mission command and control, payload operation and exploitation capabilities.
Engines. Our UAS engines include a family of Wankel rotary technology based engines providing UAS with the capability to carry multiple payloads with extended endurance.
Training Systems. Our UAS training systems include full air vehicle and payload high end operators and mission commanders training.
Data Links and Payloads. We develop and manufacture data links and payloads for our UAS as well as tactical data links and networking solutions for UAS.
USVs. We are developing USVs, such as the Silver Marlin and Stingray, for various maritime applications that adopt the capabilities of our UAS to sea-based applications.
We perform a broad range of development, supply, lease, support services and training activities relating to UAS. The principal customers for our UAS include the IDF, the U.K. Armed Forces through Thales U.K., the Brazilian Air Force and other customers (mainly governmental organizations) around the world.
We are performing under the U.K. Ministry of Defence’s (UK MOD) Watchkeeper and Lydian programs. U-TacS was awarded a contract by Thales U.K., the prime contractor to the UK MOD for the program. U-TacS is supplying the Watchkeeper subsystem comprised of the dual payload WK 450 UAS (based on the Hermes® 450).  U-TacS is also under contract for the UK MOD Lydian Program to supply service-based support to an ISR capability in an overseas theatre, including Hermes® 450 UAS, training and contractor logistics support and is performing an urgent operating capability (UOR) contract to provide the U.K. Armed Forces ISTAR support capability.
Our first large UAS program was providing Hermes® 450 to the IDF, which has been fully operational for more than a decade, providing the backbone of the IDF’s tactical UAS. Under this program the Hermes® 450 has accumulated over 200,000 flight hours. We also supply the IDF Hermes® 900 systems and Skylark® systems.
During 2012, we were awarded a number of UAS-related contracts including for the following programs.  We were awarded an approximately $160 million contract to supply UAS to a European customer over the next two years.  In addition, we were awarded a contract to supply Hermes® 900 and 450 UAS to a Latin American customer.
In January 2013, we were awarded contracts by the IMOD to supply the IDF with additional Hermes® 900 UAS, UAS maintenance services and to develop advanced UAS features.
In February 2013, the U.S. Army selected five companies, including Elbit Systems of America, as potential suppliers for the Army’s Small Unmanned Aircraft Systems (SUAS) program.  If awarded a contract under the SUAS program, Elbit Systems of America will supply Skylark® I-LE Block II UAS.
Land Vehicle Systems
Overview.  We upgrade and modernize tanks, other combat vehicles and artillery platforms both as a prime contractor and as a systems supplier to leading platform manufacturers. Our land vehicle and platform solutions cover the entire combat vehicle spectrum, from complete modernization, to system supply to maintenance depots and life cycle support services. Utilizing our experience from advanced avionics systems, electro-optic thermal imaging and C4I systems, we adapt and develop “tankionics” for land vehicles that shorten the “sensor to shooter” loop. Our systems are operational on a full range of tracked and wheeled combat vehicles including main battle tanks, medium and light tanks, light armored vehicles, armored personnel carriers, wheeled vehicles and artillery platforms. We offer a comprehensive range of fully integrated, modular artillery and mortar solutions, incorporating C4I and fire control systems and platform upgrades, as well as a complete range of artillery and mortar ammunition. We also develop and supply unmanned ground vehicles and robotic devices for a variety of land based missions. In addition, we supply training systems for tanks and fighting vehicles.

Systems Portfolio
Fire Control Systems. We supply fire control systems using day and night vision systems and displays for target identification, acquisition and engagement, incorporating thermal imaging, laser range-finders, day TV, digital ballistic computers and sensors.
Electric Gun and Turret Drive Systems. We supply electric gun and turret drive and stabilization systems for controlling electrically driven turrets and guns using advanced brushless technology and digital/software based servo systems.
Laser Warning and Threat Detection Systems. We provide a wide range of combat proven computer and display hardware products and situation awareness peripheral vision systems, including laser warning systems for identifying and pinpointing the angular direction of laser sources generated by laser range-finders and laser guided and laser beamrider missiles.
Unmanned Turrets and Remote Controlled Weapon Stations. We supply advanced unmanned turrets and overhead remote controlled weapon stations, including the UT30 configurable unmanned turret and the Overhead Remote Controlled Weapon Station (ORCWS) family of products, that enhance ground vehicle capabilities for urban warfare scenarios and convert armored personnel carriers to armored fighting vehicles with no penetration of the vehicle’s deck.
Unmanned Systems. We supply various unmanned ground vehicle (UGVs) platforms, including our small-size UGV – the Elbit Viper (Versatile Intelligent Portable Elbit Robot), a man-packed robot designated for urban combat support missions and mini-robotic devices used by land forces for tactical missions. Through G-NIUS, our jointly-owned company with IAI, we developed and supply a number of UGVs for combat mission support.
Smart All-Terrain Networked Detectors (SAND). We develop and supply SAND, an advanced, stand-alone, long-life, wireless security system that remotely monitors wide areas and detects and tracks both the movements of people as well as the movements of all types of vehicles.
C4I Systems. Our C4I systems for combat vehicles include battle management systems that process data and enhance situational awareness of land vehicle crews and commanders and include electro-optic-based laser range-finders, TOW night targeting sights, thermal imaging systems, flat paneled color displays, threat detection systems, gunner’ and commander’s sights, laser warning systems, reconnaissance systems and our “See-through Armor” system providing 360° panoramic observation for 360º location and identification and gun-turret direction, using day and night vision systems.
Surveillance, Reconnaissance and Targeting Systems and Sensors. We supply fully-customizable ground and mobile solutions for intelligence collection and dissemination comprised of a broad array of lightweight network-ready sensors and C4I systems, providing day and night observation, target detection and recognition, radar and identification of friendly forces. The sensors are fully controlled from the commander terminal, with digital maps for navigation and orientation. We also develop unattended ground sensors that detect human and vehicle activity.
Artillery Guns and Mortar Systems. We develop and supply a range of howitzers and artillery field guns. We also develop and supply a range of mortar systems for special forces, commando units and infantry forces.  We develop and supply a range of mortar ammunition, white phosphorus (WP) and smoke mortars and illuminating bombs
Counter-IED Measures. We develop and supply deployed vehicle mounted counter remote controlled improvised explosive devices (IEDs) electronic warfare systems, which protect vehicle crews from IEDs.
Driver Thermal Vision Systems. We develop and supply uncooled thermal imaging kits, fully ruggedized and suitable for a wide range of vehicle-mounted applications.

Auxiliary Power Units (APUs). We develop and supply APUs that improve the vehicle crew’s performance and safety by reducing fatigue and minimizing exposure to noise, heat and vibrations.
Life Support and Hydraulic Systems. We supply life support systems for land vehicles for environmental, climate and chemical, biological, radiological and nuclear (CBRN) protection and control. The systems include heating, ventilation and air conditioning (HVAC), water generation and fire suppression systems. We also supply hydraulic systems for vehicle fueling, braking, suspension and power pack operation.
We are engaged in a wide range of land vehicle systems programs, from comprehensive vehicle modernization programs, to stand-alone system supply to vehicle manufacturers to life cycle support programs. Customers for our land vehicle systems include the IDF, the U.S. Army, the USMC, the armed forces of numerous NATO and EU members, the Brazilian Army and armed forces of other countries, as well as major military vehicle manufacturers such as General Dynamics Corporation (General Dynamics), BAE Systems Inc. (BAE Systems), Lockheed Martin, Patria Oyj (Patria), Mowag GmbH (Mowag), Steyr GmbH (Steyr) and Iveco S.p.A. (Iveco). We supply a range of systems for all models of the IDF’s main battle tank, the Merkava. We also are supplying systems to BAE Systems for the U.S. Army’s Bradley A-3 fighting vehicle and to Lockheed Martin for the U.S. Army Multiple Launch Rocket System (MLRS) as well as for the U.S. Army’s and USMC’s High Mobility Artillery Rocket System (HMARS) and Light Armored Vehicle (LAV). We are supplying unmanned turrets for the Brazilian Army Land Forces’ Guarani Project and are performing  numerous land vehicle modernization programs for European and Asian customers. We supply a range of thermal imaging systems and generic commander sights for various tanks and armored personnel carriers.  
During 2012, we were awarded several contracts in the land vehicle and artillery platform areas, including for the following programs. We received a contract from the IMOD to supply Cardom electronic and artillery systems to the IDF.  We also received an order to supply artillery systems to a Far Eastern country.  Our Brazilian subsidiary AEL was awarded a production order to supply unmanned turrets for the Brazilian Army’s Guarani program, and our Brazilian subsidiary Ares was awarded a contract to supply REMAX remote controlled weapon stations to the Brazilian Army.
We also supply tank gunnery training systems, and ground forces trainers to other customers worldwide. We supply the U.S. Army and other customers, advanced life support systems, such as environmental and climate control and NBC protection systems, hydraulic, fuel, braking and suspension systems as well as an auxiliary power unit for a number of combat vehicles.  Through G-NIUS, we are developing and supplying UGVs, which perform a variety of missions in support of infantry forces’ combat operations.
C4I and Cyber Systems
Overview.  Building on in-house capabilities and core technologies, we provide net-centric compatible solutions for land-based C4I systems ranging from target acquisition, to battle management to communication systems. We supply our advanced land-based C4I systems as part of turn-key solutions as well as on a stand-alone basis. Our solutions cater to all types of land combatant forces and can be integrated into military vehicles. Providing comprehensive net-centric solutions for low intensity conflicts (LIC) and counter-terror activities, our systems connect intelligence data to combat forces via C4I networks and mobile command and control posts and support “terrain dominance”. Our integrated infantry systems provide infantry units with C4ISR, field intelligence, urban warfare and peacekeeping capabilities. We also design and supply military information technology (IT) systems and IT and integrated information gathering systems to various governmental agencies for border control and management systems, crime prevention and other governmental applications, including a range of cyber-based C4I solutions. We also have access to a full range of radio and military communications solutions.
Systems Portfolio
Digital Army’s “Systems of Systems.” We supply “systems of systems” such as the Digital Army Program (see below “Programs”), that incorporate advanced combat concepts geared to increase net-centric operational effectiveness and connectivity throughout all land forces echelons, in all combat situations. This includes TORC2H®, an integrated operational command control headquarters system, that closes the sensor to shooter loop and facilitates data collection and border patrol operations. It also includes our Tactical Intranet Geographic dissemination in Real-Time (Elbit TIGER®) advanced communication system and enhanced tactical computers.

Battle Management Systems (BMS). We supply a range of battle management systems that comprise advanced electro-optical sensors, multi-functional displays, command and control software, information and dissemination systems and advanced mission computers, for enabling coordination among fighting vehicles and combat forces.
Integrated Infantry Combat Systems. We supply systems that provide real-time net-centric information to infantry forces, including  our DOMINATOR® system that enables infantry units to send and receive real-time data, view-up-to the-minute common operational pictures on personal displays and live video from either our external electro-optic payload advanced stabilized system (CoMPASS) and our multi-sensor stabilized integrated system (MSIS), or from body sensors, as well as transmit images and positions back to the command post.
Artillery C4I Systems. We supply a range of systems for C4I applications among field artillery units, such as our Combat NG system, which are deployed from the platform to brigade levels, managing all aspects of artillery operations and fire control, including for theater missile defense applications.
MapCore®. We supply MapCore®, a software design kit providing mapping capabilities for application programmers, capable of manipulating 2D maps, 2.5D maps (2D maps with elevation) and 3D maps (terrain visualization) in the application’s user window and serving as an infrastructure for developing moving maps, mission planning and debriefing, C4ISR and simulator systems.
Observation and Ground Reconnaissance Systems. We supply electro-optic-based thermal imaging, day-night observation systems and tactical reconnaissance systems for border control and ground reconnaissance.
Enhanced Tactical Computers and RPDAs. We supply ruggedized enhanced tactical computers and ruggedized personal data assistants  (RPDAs) that bring the versatility of advanced personal computers and data assistants to the operational battlefield, including . the Tacter®-31D tactical computer in a tablet configuration supporting both vehicle mounted and dismounted applications and the Tacter®-31M computer on a Windows-based platform.
Ground Smart Display Unit (GSDU). We supply GSDU, a multi-function high brushless C4I display unit with supporting multiple video formats.
Tactical Multi-media Router (TMR). We supply TMR, a building block for execution of multi-media routing on a dynamic basis for command posts as well as combat vehicles.
Radio and Communications Systems and Products. Based in part on the Tadiran product line, we supply a range of tactical radio systems, software data radio systems, multi-channel radio systems, integrated radio communications systems, power HF communications systems, broadnet communications systems based on WiMAX technology, mobile net communications systems and tactical data communications systems and military wireless LAN systems for wide band data transmission. These systems are used for voice, data and video (multi-media) applications in a broad range of frequencies, starting at the VLF band though HF, VHF, UHF to the C-band and further on in the mm wave band, facilitating secured and ECCM immuned voice and broadband data communications. Our military communications product line also includes short and medium-range VHF radio systems, long-range HF radio systems, multi-band VHF-UHF handheld/man-pack radios, hand-held radios, soldier radios, line-of-sight multi-channel radio systems, ruggedized computers/communication terminals, integrated communications systems combining wireless (radio) and wired (telephony), IP/LAN/WAN networks situation awareness systems and radio network management systems.
Integrated Radio Communication System (IRCS). Our field proven IRCS enables all echelons, from high-ranking commanders down to the individual soldier in the field, to directly communicate throughout the military network. BRO@DNET. We develop and supply the BRO@DNET battle-proven broadband wireless communication infrastructure solution that enables secure broadband communication, integrating all echelons of military hierarchy into a unified communication solutions.
Satellite on the Move (SOTM). We supply SOTM solutions and antennas for combat platforms for continuous satellite communication.

Communications Support Products and Services. We supply a range of tactical radio power amplifiers for the AN/PRC-117F, AN/PSC-5 and Single Channel Ground and Airborne Radio Systems (SINCGARS).
Military IT Systems. We deliver and supply military IT systems such as the Integrated Component-based Exploitation (ICE) system that provides ISR centers with an end-to-end system for the entire operational cycle of multi-sensor imagery exploitation. We also supply a multi-satellite mission planning system for planning satellite operational missions.
Government IT Systems. We supply operational IT solutions to governmental agencies for border-control, anti-money laundering and intelligence applications, including intelligence knowledge management systems. This includes Wise Intelligence Technology (WiT), a technology solution supporting organizational doctrine and improving the intelligence process, that addresses all phases of the intelligence process including the reception, adaption and conversion of intelligence data from multiple sources as well as processing and disseminating intelligence reports.
Tactical Battle Company Training Systems. We supply trainers for commanders and staff from the company-level to battalion battle company and brigade-level operations.
Cyber-based C4I systems. We supply a range of C4-based cyber solutions.
We  perform a broad range of C4I battle management systems, soldier mounted systems and radio and communications programs with land-based applications. Our customers include the IDF, the U.S. Army, the USMC, the Australian Army and ground forces and governmental agencies of a wide range of NATO and EU member nations as well as those of other countries. In 2012, we received several contract awards in these areas, including a contract by the Finnish Army to supply advanced dismounted soldier systems, a contract by the Royal Australian Navy to supply battle management systems for landing craft and a contract by a Far Eastern country to supply personal radio systems.
We are performing a contract for the Department of Defence of the Commonwealth of Australia for the supply, integration, installation and support of a Battle Group and Below Command, Control and Communications (BGC3) system for the Australian Army’s Land 75/125 program.  
We are the prime contractor to the IMOD for the Israel Digital Army Program (DAP). Under the DAP, we are supplying the IDF with computerized systems down to the single soldier level. The systems facilitate transmission of integrated, real-time situation pictures to and from all battlefield and command echelons. The DAP includes a significant portion being performed under U.S. FMF funding.  We also are performing a contract for IMOD for the supply, upgrade and maintenance of communication equipment over a 20-year period.
Electro-Optic and Countermeasures Systems
Overview.   We design and manufacture a full range of electro-optic-based solutions for air, land, sea and space applications, covering the complete spectrum of electro-optic-based solutions with products ranging from laser and thermal imaging systems to head-up displays, countermeasure systems, through ISR systems – including payloads for space, airborne, naval and land-based missions – to ground integrated sights, electro-optic countermeasures and homeland security solutions. We are one of the few companies in the world that has engineering capability and facilities in-house in all major areas of electro-optics. In the space area, we also maintain in-house Israel’s national space electro-optics infrastructure.
Systems Portfolio
Thermal Imaging and NVG-based Systems and Products. We produce a range of FLIR systems for night observation for air, land and sea platforms, including stabilized payloads as well as hand-held and man-portable solutions. This includes, among others, the CORAL family of thermal imagers, the LVCR family of long-range man-portable reconnaissance systems and the Mini-Coral S uncooled thermal imager and target acquisition system. These systems are integrated into north finding solutions, such as the Atlas family of goniometers.

Laser-Based Systems. We develop and supply a range of laser designators, laser range-finders and laser radars for air, land and naval platforms based on solid state flash lamp or diode pumped technologies, both in the eye-safe and non-eye safe band.
Stabilized Payloads. We design and supply a number of payloads for air, land and sea-based observation, target acquisition, target engagement, training and fire control, using stabilized line-of-sight systems and incorporating laser range-finders or designators and thermal and HD/TV cameras, including our very long-range Advanced Multi-Sensor Payload System (AMPS) and our Compact Multi-Purpose Advanced Stabilized System (CoMPASS) family. Our payloads for naval applications provide a wide portfolio of solutions from the small Micro-CoMPASS 8”,  through the 15th generation D-CoMPASS payload, up to the large high end AMPS system that is used for very long-range stand-off observation.
Countermeasures Systems. Our electro-optic-based countermeasure systems (DIRCM – Directional IR Countermeasures)  include our Multi-Spectral Infrared Countermeasures System (MUSIC®) for installation on commercial (C-MUSIC) aircraft and military helicopters and transport aircraft for detection and jamming of anti-aircraft shoulder-launched missiles. We have also developed EO SHIELD, a soft kill countermeasures solution for armored vehicles.
ISR Systems. Our electro-optic-based ISR systems include aerial reconnaissance systems, such as the CONDOR 2- EO/IR LOROP – visible and IR long-range oblique photography systems. Our long-range day and night surveillance systems include LORROS® (Long-Range Reconnaissance and Observation System) for border protection and surveillance posts.
Space Cameras and Telescopes. We supply advanced panchromatic and multi-spectral cameras for high resolution, remote sensing satellites for commercial and military space IMINT, supplying high resolution ground images, and for scientific research.
Hyperspectral. We develop cutting edge hyperspectral sensors and systems for various airborne platforms, including UAS.
Infrared Sensors. SCD develops and manufactures infrared detectors and laser diodes for electro-optical applications. Opgal develops electro-optics “engines” (camera cores) that combine detectors with proprietary electronics, as well as IR solutions for commercial and defense applications.
 We perform a range of programs in the electro-optic and countermeasures systems area. Our customers include the IDF, the Israel Space Agency, the USMC, the USN, armed forces of many other governments as well as major defense contractors such as Lockheed Martin and Boeing. We supply a range of hand-held thermal imaging and binocular systems for long-range observation and reconnaissance devices to the IDF and the armed forces of the U.S., Canada, Germany, Spain and other countries. We supply AN/AVS-7 head-up display components to the U.S. armed forces and also are under contract with the USN for the repair and maintenance of various Night Targeting systems components for USMC AH-IW helicopters, as well as the upgrade of the AH-1W Night Targeting System to the NTSU configuration.  We supply the USMC with the JTAC compact hand-held designator, and we were selected by the USMC to supply a Common Laser Ranger-Finder - Integrated Capability.  We also supply laser designators and range-finders for air and ground applications to numerous customers such as the German Armed Forces, the USMC and Lockheed Martin.  In 2012, contract awards in this area included a contract to supply advanced observation and long-range target acquisition systems to the IDF. In addition, we supply long-range FLIR systems to the IDF for day and night observation.
Our electro-optic shipboard payloads are in use by several navy and maritime forces for both coastal surveillance and observation as well as fire control applications.
In the countermeasures area we are developing C-MUSIC, a laser-based countermeasure system for use on commercial passenger aircraft as well as military helicopters, transport aircraft and other commercial aircraft to protect against missiles using IR seekers. We are developing for implementation our C-MUSIC commercial DIRCM (direct infrared countermeasures) system for Israeli commercial aircraft, and in 2012 we  began test flights on an IAF platform. We supply a variety of high resolution cameras and telescopes for space applications. This includes cameras for the various versions of the IDF’s Ofek satellites, satellites of the Israel Space Agency and other countries’ space agencies and EROS satellites operated by ImageSat International N.V.  In 2012, we were awarded a contract to supply the space camera for the Italian OPTSAT 3000 Observation Satellite.

Homeland Security Systems
Overview. We design, manufacture and integrate a wide range of comprehensive homeland security and para-government systems and products covering diverse scenarios and applications. These include integrated land, maritime and coastal control and surveillance systems, airport and seaport security systems, border control systems, “safe city” systems, large venue security systems, access and border registration control systems, pilot identification systems, transportation security systems, C4I homeland security applications, facility perimeter security products, electronic fences, electro-optic surveillance systems, tactical mini-UAS and communications systems for defense, police, airport, border patrol and coast guard applications, training and simulation solutions, energy and critical infrastructure protection and other homeland security uses.
Systems Portfolio
Border Surveillance Systems. We supply a range of systems and products for border, surveillance, including day/night observation systems, smart fences, mini-UAS, surveillance land vehicles and C4I-based systems combining some or all of the above-mentioned systems. We also supply border control and management IT systems.
Safe City Systems. We offer “safe city” crime and terror detection and crisis management solutions combining fully integrated C4I systems with advanced electro-optic surveillance, UAS, communication solutions and other systems to provide city-wide event detection and operations coordination, management and control to municipal security forces.
Airport Security Systems. We supply a variety of solutions to secure airports and related aviation security facilities from undesired intrusions, supporting secure airport operations and facilitating pilot identification, while complying with the range of regulations that govern airport security.
Seaport and Coastal Surveillance Systems. We supply comprehensive surveillance systems for monitoring maritime traffic, prevention of smuggling, illegal shipments, customs violations and illegal immigration, controlling fishing activities and coordination of search and rescue.
Perimeter Security and Intrusion Detection Systems. We supply electronic alarm fences and virtual fences, combined with electro-optic pointing, verification and tracking to detect and deter attempts by intruders to breach secured facilities and critical infrastructures.
Transportation Security and Safety Systems. We provide security and safety solutions for railroad authorities, including railway security systems and anti-collision alert systems for crossing junctions.
Communications Systems. We supply MICOM HF radio communications systems for land and maritime-based security forces.
Training and Simulation Solutions. We supply training and simulation solutions for first responders, FEMA (Federal Emergency Management Administration) activities, crime prevention and counter-terrorism.
Programs.  We perform a range of homeland security-related programs for national, regional and municipal security authorities, including airport, border guard and coastal control authorities. Customers for our homeland security systems include the Israeli Ministry of Transportation, the IMOD, various commercial airports in Europe and Africa, border and security forces in Europe and Asia and security organizations of several other governments. We are engaged in several “smart” electronic deterrence projects for the Israeli government. We have developed and supplied the Israel Police with Israel’s Border Control Management System. We are performing programs relating to border security projects, coastal surveillance systems and integrated airport security systems for European and other governments.  We provide the emergency response training system for the IDF’s Homeland Security Command.  We also provide a system level security solution to the Israeli Railroad Authority for protecting many of its nationally deployed sites. We are also supplying a perimeter security system, with advanced command and control, for protection of the Port of Haifa in Israel.

EW and SIGINT Systems
Overview. We supply a range of multi-spectral self-protection suites and systems for airborne, ground and naval platforms including advanced EW and electronic countermeasures (ECM) systems, communications jammer solutions, missile warning systems, laser warning systems and radar warning receivers. We also furnish SIGINT systems, including ELINT, COMINT and direction finding (DF) systems, designed for air, ground and naval platforms and applications.

Systems Portfolio
EW Suites including ECMs. Our EW suites provide advanced self protection integrated capabilities for various types of combat aircraft, naval and ground platforms, combining defense aid suites (DAS) with ESM in a single unit, that cover multi-spectral bands and include radar warning receivers (RWR), passive IR missile warning systems, laser warning receivers, ECM systems and other measures. As part of our IR missile warning systems we supply additional operational capabilities such as our Situation Awareness Panoramic IR (SAPIR) system with collision avoidance for increased mission safety. We also supply a range of systems for self protection and electronic attack for airborne, naval and ground platforms including the SPJ (Self Protection Jammer) and the COMJAM (Communication Jammer) as well as electronic support measurements for threat identification and electro-magnetic analysis for surface ships and submarines.
SIGINT Systems. We develop and supply full electromagnetic spectrum SIGINT (ELINT and COMINT) systems for tactical and strategic intelligence gathering for airborne, ground and naval applications. Our SIGINT systems incorporate advanced receiving, signal processing and DF technologies, including different times of arrival (DTOA) and interferometer technologies.
Counter Improvised Explosive Devices (CIED). We develop and supply a range of electronic jammer anti-bomb products, including cellular selective jammer and protection systems against IEDs, such as the Electronic Jamming Anti-Bomb (EJAB) family of products.
Data Links and Video Dissemination Systems. We develop and supply smart data link solutions for unmanned platforms, guided weapons and satellites and video dissemination for airborne (including UAS), ground and naval applications.
Search and Rescue Systems. We develop and supply advanced solutions for pilots and rescue teams for the combat arena as well as personal search and rescue systems for non-combat situations.
Anti-Tactical Ballistic Missile Defense Systems. We are the developer of the command and control system for the Arrow missile program. We also are the developer of the core of the Israel Test Bed (ITB), a real-time simulator for tactical ballistic missile defense systems.
Radars. We provide radar solutions for various applications.
Programs. We supply a range of EW, SIGNIT, data links and search and rescue systems to defense forces around the world for airborne, ground and sea-based applications. Customers for these systems include the IDF, the armed forces of several other governments as well as major defense contractors. This includes supplying our airborne platform self-protection suites to the IAF and several other air forces around the world.  It also includes  the supply of  data links for airborne platforms including UAS and the supply of airborne search and rescue systems to various customers.  In 2012, our contract awards in this area included contracts to supply EW systems for IAF F-15 and F-16 aircraft and EW systems for Israeli Navy missile vessels.
Various Commercial Activities
We are engaged in applications of our defense technologies to commercial applications as well as other commercial activities. Our current commercial activities, in addition to the activities described under “Commercial Aviation Systems and Aerostructures” and elsewhere above, include medical equipment, commercial communications and mobile and wireless telephone network encryptions, SATCOM equipment, microwave technologies and components and spectrum monitoring and control systems, commercial automotive night vision enhancement equipment, super capacitor energy sources, smart grids for railroad transportation, manufacture of lasers for the cinematography industry  and general manufacturing and machinery services.

We own an approximately 89% interest in Brightway Vision Ltd., an Israeli company involved in developing night vision enhancement equipment for commercial automotive applications.  We also own a minority interest in certain companies that are engaged in activities primarily for the commercial market.  This includes an approximately 22% interest in DIR Technologies (Detection IR) Ltd., an Israeli company, spun off from SCD, that is engaged in identification through thermal imaging technologies of counterfeit pharmaceuticals. We also own an approximately 14% equity interest in ImageSat International N.V., a company incorporated in Netherlands Antilles, involved in the operation of satellites for commercial and other applications and providing satellite imagery. (Also see Item 8. Financial Information – Legal Proceedings – ImageSat.)  We own an approximately 15% interest in Capital Nature Ltd., an Israeli company involved in investments in renewable energy ventures.  In addition, our wholly-owned subsidiary Incubit Technology Ventures Ltd. recently began operations in investing in start-up ventures engaged in a range of high-tech commercial activities in Israel.
During 2012 and the beginning of 2013, we sold certain ownership interests and assets relating to some non-core commercial activities.   See above “Recent Acquisitions, Mergers and Divestitures – Divestitures.”
Property, Plant and Equipment
Facilities Owned or Leased by the Company
Other Countries(3)
2,158,000 square feet
710,000 square feet
891,000 square feet
1,896,000 square feet
631,000 square feet
303,000 square feet

Includes offices, development and engineering facilities, manufacturing facilities, maintenance facilities, hangar facilities and a landing strip in various locations in Israel used by Elbit Systems and our various majority-owned Israeli subsidiaries.
Includes offices, development and engineering facilities, manufacturing facilities and maintenance facilities of Elbit Systems of America primarily in Texas, New Hampshire, Florida, Alabama and Virginia. Elbit Systems of America’s facilities in Texas, New Hampshire and Alabama are located on a total of approximately 153 acres of land owned by Elbit Systems of America. This does not include properties not held by Elbit Systems of America, including approximately 6,000 square feet leased by our wholly-owned subsidiary Elmec Inc. in Massachusetts.
Includes offices, design and engineering facilities and manufacturing facilities  in Europe, Latin America, Australia and Asia.
Recent Investment in Facilities. Over the last two years the average annual net investment in our facilities, including building projects, equipment, machinery and vehicles, amounted to approximately $102 million. Each of our manufacturing facilities generally operates at or near full capacity. Accordingly, we believe that our current facilities are adequate for our operations as now conducted.
Governmental Regulation
Government Contracting Regulations. We operate under laws, regulations and administrative rules governing defense contracts, mainly in Israel and the United States. Some of these carry major penalty provisions for non-compliance, including disqualification from participating in future contracts. In addition, our participation in governmental procurement processes in Israel, the United States and other countries is subject to specific regulations governing the conduct of the process of procuring defense contracts.
Israeli Export Regulations. Israel’s defense export policy regulates the sale of a number of our systems and products. Current Israeli policy encourages exports to approved customers of defense systems and products such as ours, as long as the export is consistent with Israeli government policy. A license is required to initiate marketing activities. We also must receive a specific export license for defense related hardware, software and technology eventually exported from Israel. Israeli law also regulates export of “dual use” items (items that are typically sold in the commercial market but that also may be used in the defense market). In 2012, more than 50% of our revenue was derived from exports subject to Israeli export regulations.

U.S. and Other Export Regulations. Elbit Systems of America’s export of defense products, military technical data and technical services to Israel and other countries is subject to applicable approvals of the U.S. government. Such approvals are typically in the form of an export license or a technical assistance agreement (TAA). Other U.S. companies wishing to export defense products or military related services and technology to our Israeli and other non-U.S. entities are also required to obtain such export licenses and TAAs. This applies to data required by our non-U.S. entities to perform work for U.S. programs. Licenses are also required for Israeli nationals assigned to work in defense-related technical areas at our U.S. affiliated companies. An application for an export license or a TAA requires disclosure of the intended sales of the product and the use of the technology. The U.S. government may deny an export authorization if it determines that a transaction is counter to U.S. policy or national security. Other governments’ export regulations also affect our business from time to time, particularly with respect to end user restrictions of our suppliers’ governments.
Approval of Israeli Defense Acquisitions
The Israeli Defense Entities Law (Protection of Defense Interests) establishes conditions for the approval of an acquisition or transfer of control of an entity that is determined to be an Israeli “defense entity” under the terms of the law. Designation as a “defense entity” is to occur through an order to be issued jointly by the Israeli Prime Minister, Defense Minister and Trade, Industry and Labor Minister. Although no such orders have been issued as of the date of this annual report on Form 20-F, it is assumed that Elbit Systems and most of our Israeli subsidiaries will be designated as “defense entities” under the law and that the Israeli Government will issue such an order regarding our applicable Israeli companies. Under separate regulations, Elbit Systems and our major Israeli subsidiaries have been designated as “defense entities” by the Defense Minister with respect to Israeli law governing various aspects of defense security arrangements.
Orders to be issued under the Israeli Defense Entities Law will also establish other conditions and restrictions. It is anticipated that in the case of a publicly traded company such as Elbit Systems, Israeli government approval will be required for acquisition of 25% or more of the voting securities or a smaller percentage of shares that grant “means of control.” Means of control for purposes of the law include the right to control the vote at a shareholders’ meeting or to appoint a director. Orders relating to defense entities are also anticipated to, among other matters: (1) impose restrictions on the ability of non-Israeli resident citizens to hold “means of control” or to be able to “substantially influence” defense entities; (2) require that senior officers of defense entities have appropriate Israeli security clearances; (3) require that a defense entity’s headquarters be in Israel; and (4) subject a defense entity’s international joint ventures and various technology transfers to the approval of the IMOD.
Approval of U.S. and Other Defense Acquisitions. Many other countries also require governmental approval of acquisitions of local defense companies or assets by foreign entities. Mergers and acquisitions of defense related businesses in the U.S. are subject to the Foreign Investment and National Security Act (FINSA). Under FINSA, our acquisitions of defense related businesses in the U.S. require review, and in some cases approval, by the Committee on Foreign Investment in the United States (CFIUS).
“Buy American” Laws. The U.S. “Buy American” laws impose price differentials or prohibitions on procurement of products purchased under U.S. government programs. The price differentials or prohibitions apply to products that are not made in the United States or that do not contain U.S. components making up at least 50% of the total cost of all components in the product. However, a Memorandum of Agreement between the United States and Israeli governments waives the Buy American laws for specified products, including almost all the products currently sold in the United States by Elbit Systems and our Israeli subsidiaries.
Foreign Military Financing (FMF). Elbit Systems of America participates in United States FMF programs. These programs require countries, including Israel, receiving military aid from the United States to use the funds to purchase products containing mainly U.S. origin components. In most cases, subcontracting under FMF contracts to non-U.S. entities is not permitted. As a consequence, Elbit Systems of America generally either performs FMF contracts itself or subcontracts with U.S. suppliers. The U.S. government may authorize the IMOD to utilize a portion of the FMF budget under the United States Subcontracting Procurement (USSP) channel. In such cases, companies such as Elbit Systems or our Israeli subsidiaries, who are acting as the Israeli prime contractor to the IMOD under the NIS funded portion of an IMOD program, are authorized to negotiate and enter into a subcontract directly with a U.S. supplier. However, payment of the funds under a USSP channel subcontract is administered by the IMOD Purchasing Mission to the U.S. Elbit Systems of America also participates in U.S. Foreign Military Sales (FMS) programs.

Procurement Regulations. Solicitations for procurements by governmental purchasing agencies in Israel, the United States and other countries are governed by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of interest and corruption in the procurement process.
Anti-Bribery Regulations. Laws such as the Israel Penal Code, the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and corresponding legislation in other countries, prohibit providing personal benefits or bribes to government officials in connection with the governmental procurement process. Israeli defense exporters, such as Elbit Systems, are required to maintain an anti-bribery compliance program, including specific procedures, record keeping and training.
Audit Regulations. The IMOD audits our books and records relating to its contracts with us. Our books and records and other aspects of projects related to U.S. defense contracts are subject to audit by the U.S. Defense Contract Audit Agency. Such audits review compliance with government contracting cost accounting and other applicable standards. If discrepancies are found this could result in a downward adjustment of the applicable contract’s price. Some other customers have similar rights under specific contract provisions.
Antitrust Laws. Antitrust laws and regulations in Israel, the United States and other countries often require governmental approvals for transactions that are considered to limit competition. Such transactions may include cooperative agreements for specific programs or areas, as well as mergers and acquisitions.
Civil Aviation Regulations. Several of the products sold by Company entities for commercial aviation applications are subject to flight safety and airworthiness standards of the U.S. Federal Aviation Administration (FAA) and similar civil aviation authorities in Israel, Europe and other countries.
Federal Drug Administration Regulations. Medical products designed and manufactured by Elbit Systems of America’s Medical Instruments – KMC Systems business unit are subject to U.S. Federal Drug Administration (FDA) regulations.
As part of their standard contractual requirements for defense programs, several of our customers include “buy-back” or “offset” provisions. These provisions are typically obligations to make, or to facilitate third parties to make, various specified transactions in the customer’s country, such as procurement of defense and commercial related products, investment in the local economy and transfer of know-how. (For a description of these provisions, see Item 5. Operating and Financial Review and Prospects – Off-Balance Sheet Transactions.)
Financing Terms
Types of Financing. There are several types of financing terms applicable to our defense contracts. In some cases, we receive progress payments according to a percentage of the cost incurred in performing the contract. Sometimes we receive advances from the customer at the beginning, or during the course, of the project, and sometimes we also receive milestone payments for achievement of specific milestones. In some programs we extend credit to the customer, sometimes based on receipt of guarantees or other security. In other situations work is performed before receipt of the payment, which means that we finance all or part of the project’s costs for various periods of time. Financing arrangements may extend beyond the term of the contract’s performance. When we believe it is necessary, we seek to protect all or part of our financial exposure by letters of credit, insurance or other measures, although in some cases such measures may not be available.
Advance Payment Guarantees. In some cases where we receive advances prior to incurring contract costs or making deliveries, the customer may require guarantees against advances paid. These guarantees are issued either by financial institutions or by us. We have received substantial advances from customers under some of our contracts. In certain circumstances, such as if a contract is canceled for default and there has been an advance or progress payment, we may be required to return payments to the customer as provided in the specific guarantee. As part of the guarantees we provide to receive progress payments or advance payments, some of our customers require us to transfer to them title in inventory acquired with such payments. (See Item 5. Operating and Financial Review and Prospects – General – Long-Term Arrangements and Commitments – Bank Guarantees.)

Performance Guarantees. A number of projects require us to provide performance guarantees in an amount equal to a percentage of the contract price. In certain cases we also provide guarantees related to the performance of buy-back obligations. Some of our contracts contain clauses that impose penalties or reduce the amount payable to us if there is a delay or failure in performing in accordance with the contract or the completion of a phase of work, including in some cases during the warranty period. These types of guarantees may remain in effect for a period of time after completion of deliveries under the contract. Such guarantees are customary in defense transactions, and we provide them in the normal course of our business. (See Item 5. Operating and Financial Review and Prospects – General – Long-Term Arrangements and Commitments – Bank Guarantees.)
Private Finance Initiatives (PFI).  Some of our projects operate under  PFI financing arrangements where we provide long-term financing arrangements or facilities, with the repayment  generally made based on the project’s cash flow. PFI projects can be structured in several ways.  PFI projects may require us to pledge equity and enter into relatively complex financial and other agreements. Such financing may be raised either through banks or institutional lenders and carries various financial risks and exposures.  In addition, PFI projects may require us to draw upon our equity base and borrowing capacities.  In recent years we were  involved in several PFI-type projects in Israel, and we expect to participate in future PFI contracts both in Israel and other countries.
Financial Risks Relating to Our Projects. The nature of our projects and contracts creates some potential financial risks, including risks relating to dependence on governmental budgets, fixed-price contracts for development effort and production, schedule extensions beyond our control, termination for the customer’s convenience, potential for monetary penalties for late deliveries or failure to perform in accordance with the contract requirements and liability for subcontractors. In addition, we receive payments for some of our projects in currencies other than U.S. dollars. In such cases, we sometimes elect to adopt measures to reduce the risk of exchange rate fluctuations. (See Item 3. Key Information – Risk Factors – General Risks Related to Our Business and Market.)
Intellectual Property
Patents, Trademarks and Trade Secrets. We own hundreds of living patent families including patents and applications registered or filed in Israel, the United States, the European Patent Office and other countries. We also hold dozens of living trademark families relating to specific products. A significant part of our intellectual property assets relates to unique applications of advanced software-based technologies, development processes and production technologies. These applications are often not easily patentable, but are considered as our trade secrets and proprietary information. We take a number of measures to safeguard our intellectual property against infringement as well as to avoid infringement of other parties’ intellectual property. (For risks related to our intellectual property see Item 3. Key Information – Risk Factors – General Risks Related to Our Business and Market.)
Governmental Customers’ Rights in Data. The IMOD usually retains specific rights to technologies and inventions resulting from our performance under Israeli government contracts. This generally includes the right to disclose the information to third parties, including other defense contractors that may be our competitors. Consistent with common practice in the defense industry, approximately 35% of our revenues in 2012 was dependent on products incorporating technology that a government customer may disclose to third parties. When the Israeli government funds research and development, it usually acquires rights to data and inventions. We often may retain a non-exclusive license for such inventions. The Israeli government usually is entitled to receive royalties on export sales in relation to sales resulting from government financed development. However, if only the end product is purchased, we normally retain the principal rights to the technology. Sales of our products to the U.S. government and some other customers are subject to similar conditions. Subject to applicable law, regulations and contract requirements, we attempt to maintain our intellectual property rights and provide customers with the right to use the technology only for the specific project under contract.
Licensing. There are relatively few cases where we manufacture under license. Such licenses typically apply to the use of technologies that are the result of collaboration with academic institutions or where we are manufacturing another company’s product in accordance with that company’s specifications.  In such cases, the licensor typically is entitled to royalties or other types of compensation. In some cases where we have acquired business lines we obtain a royalty free license to use the applicable technology for specified applications. Occasionally, we license parts of our intellectual property to customers as part of the requirements of a particular contract. We also sometimes license technology to other companies for specific purposes or markets, such as the right to use certain of our intellectual property relating to our training and simulation systems.

Research and Development
We invest in research and development (R&D) according to a long-term plan based on estimated market needs. Our R&D efforts focus on anticipating operational needs of our customers, achieving reduced time to market and increasing affordability. We emphasize improving existing systems and products and developing new ones using emerging or existing technologies.

We perform R&D projects to produce new systems for the IMOD and other customers. These projects give us the opportunity to develop and test emerging technologies. We developed new tools for fast prototyping for both the design and development process. This permits the operational team members to effectively specify requirements and to automatically transfer them into software code. Examples of our ongoing defense-related R&D projects include those for night operation capabilities, laser systems, display systems, helmet mounted systems, other avionics systems, aerial, land and sea-based unmanned vehicles and robotics, space based cameras, ISR systems, C4I systems, electric tank and turret drive systems, unmanned turret systems, communication systems and homeland security systems. Examples of our R&D in commercial areas include projects relating to commercial aviation and commercial night vision products for automobiles. We employ thousands of software, hardware and systems engineers engaged in advance programs for airborne, ground and naval defense, homeland security and space applications. In addition, most of our program and business line managers have engineering backgrounds. More than 50% of our total workforce is engaged in research, development and engineering.
Our customers, the Office of the Israeli Chief Scientist (OCS) and other R&D granting authorities sometimes participate in our R&D funding. We also invest in our research and development activities. This investment is in accordance with our strategy and plan of operations. The table below shows amounts we invested in R&D activities for the years ended December 31, 2010,  2011 and 2012:
(U.S. dollars in millions)
Total Investment
  $ 268.6     $ 288.7     $ 276.5  
Less Participation*
    34.5       47.6       43.1  
Net Investment
  $ 234.1     $ 241.1     $ 233.4  
(Also see Item 5. Operating and Financial Review and Prospects – Summary of Operating Results – 2012 Compared to 2011 – Research and Development.)

See above – “Government Rights in Data” and see below – “Conditions in Israel – Chief Scientist (OCS) and Investment Center Funding.”
We manufacture and assemble our systems and products at our operational facilities in Israel, the U.S., Europe, Brazil and at certain of our subsidiaries in other countries. These facilities contain warehouses, electronic manufacturing areas, mechanical workshops, final assembly and test stations with test equipment. We also have supporting infrastructure including fully automated surface mount technology lines and clean rooms for electro-optic components, solid state components integration, environmental testing and final testing, including space simulation and thermal chambers. We also have computerized logistics systems for managing manufacturing and material supply. A number of our manufacturing activities are provided on a shared services basis by various of our in-house centers of excellence.
We also manufacture and assemble composite materials, metal parts and machinery. One of our Israeli subsidiaries has a high technology semiconductor manufacturing facility where it performs electronic integration and assembly of thermal imaging detectors and laser diodes. We also manufacture and repair test equipment.
We manufacture commercial avionics and aircraft components, as well as perform maintenance, repair and overhaul at our U.S. FAA registered facilities in the U.S., Europe and Israel. We also manufacture medical equipment at U.S. FDA registered facilities in the U.S.

Environmental Compliance
As part of overall Company policy, we are committed to environmental, health and safety standards in all aspects of our operations. This includes all regulatory requirements as well as ISO 14001 compliance. We also conduct a number of measures on an ongoing basis to promote environmentally friendly operational practices, including measures to reduce electrical, fuel and water consumption. There are no material environmental issues that affect the Company’s use of our facilities.

Although revenues may sometimes increase towards the end of a fiscal year, no material portion of the Company’s business is considered to be seasonal. The timing of revenue recognition is based on several factors. (See Item 5. Operating and Financial Review and Prospects – General – Critical Accounting Policies and Estimates – Revenue Recognition.)
Purchasing and Raw Materials
We conduct purchasing activities at most of our operational facilities. A number of purchasing and related support and logistic services are performed on a shared services basis by central service providers in the Company for various Company units and entities. We generally are not dependent on single sources of supply. We manage our inventory according to project requirements. In some projects, specific major subcontractors are designated by the customer. Raw materials used by us are generally available from a range of suppliers internationally, and the prices of such materials are generally not subject to significant volatility. We monitor the on-time delivery and the quality of our contractors and encourage them to continuously improve their performance.
Customer Satisfaction and Quality Assurance
We invest in continuous improvement of processes, with emphasis on prevention of deficiencies, to ensure customer satisfaction throughout all stages of our operations. This includes development, design, integration, manufacturing and services for software and hardware, for the range of our systems and products. Our quality teams are involved in assuring compliance with processes and administrating quality plans. These activities begin at the pre-contract stage and continue through the customer’s acceptance of the product or services.
We use a project management method under the guidelines of Theory of Constraints (TOC) in many of our development projects. Using advanced software, work plans are continuously updated and are available to all integrated product team members. This method makes management more efficient and improves our ability to meet schedule demands of complex projects. Another TOC methodology is used to manage our manufacturing lines at various facilities in  Israel. We also use methods such as Kaizen and Lean. Our processes are based on a cutting edge tool case and CAD-CAM tools. This infrastructure, together with well defined development methodology and management tools, assists us in providing high quality and on-time implementation of projects.
All Israeli operational sites are certified for one or more of the following: ISO-9001, ISO-90003 for software, AS9100 (for which we are certified for revision C), AS9006 for software ISO-14001, OSHAS 18001 and European Aviation Safety Agency (EASA) part 145 for maintaining civil products and part 21 G for production of civil products. We also comply with Capability Maturity Model Integration (CMMI) Level 3 of the U.S. Software Engineering Institute (SEI) and NATO AQAP. Representatives of our customers generally test our products before acceptance. Branches of the IDF and other customers have authorized us to conduct acceptance testing of our products on their behalf.
Quality certifications applicable to defense products of Elbit Systems of America’s operating units include certifications for CMMI Level 3 of the SEI, ISO-9001, AS9100 and compliance with NATO AQAP requirements. In the area of commercial aviation Elbit Systems of America’s operating units hold EASA certification as well as a variety of FAA certifications including FAA Part 21 approval and FAA Part 145 approved repair stations. In the medical equipment area, Elbit Systems of America is certified for ISO 13485:2003, is registered with the FDA as a GMP manufacturer and is FDA compliant with Quality Systems Regulations 21 CFR Parts 820, 803 and 806.


Service and Warranty
We instruct our customers on the proper maintenance of our systems and products. In addition, we often offer training and provide equipment to assist our customers in performing their own maintenance. When required, support may be provided by a local support team or by experts sent from our facilities. We also provide performance based logistics services.
We generally offer a one or two-year warranty for our systems and products following delivery to, or installation by, the customer. In some cases we offer longer warranty periods. We accrue for warranty obligations specifically determined for each project based on our experience and engineering estimates. These accruals are intended to cover post-delivery functionality and operating issues for which we are responsible under the applicable contract.
Marketing and Sales
We actively take the initiative in identifying the individual defense needs of our customers throughout the world. We then focus our research and development activities on systems designed to provide tailored solutions to those needs. We often provide demonstrations of prototypes and existing systems to potential customers.
We market our systems and products either as a prime contractor or as a subcontractor to various governments and defense contractors worldwide. In Israel, we sell our military systems and products mainly to the IMOD, which procures all equipment for the IDF. A number of marketing related support services are provided on a central shared services basis to various units in the Company. We are assisted in marketing our systems, products and services in other parts of the world through subsidiaries, joint ventures and representatives.
In the U.S., Elbit Systems of America leads our sales and marketing activities, from its facilities throughout the U.S. Elbit Systems of America operates under a Special Security Agreement that allows it and its subsidiaries to work on certain classified U.S. government programs. See above “Principal Subsidiaries – Elbit Systems of America.” Our subsidiaries in other countries typically lead the marketing activities in their home countries, often assisted by marketing and business development personnel based in Israel.
Over the past several years, a number of the major entities in the Company have entered into cooperation agreements with major defense contractors in Israel, the United States, Europe, Brazil and certain other key markets. These agreements provide for joint participation in marketing and performance of a range of projects. In other countries, we actively pursue business opportunities as either a prime contractor or a subcontractor, usually together with local companies. Often we enter into cooperation agreements with other companies for such opportunities.
We operate in a competitive environment for most of our projects, systems and products. Competition is based on product and program performance, price, reputation, reliability, life cycle costs and responsiveness to customer requirements. This includes the ability to respond to rapid changes in technology. In addition, our competitive position sometimes is affected by specific requirements in particular markets.
In recent years consolidation in the defense industry has affected competition. This has decreased the number but increased the relative size and resources of our competitors. We adapt to market conditions by adjusting our business strategy to changing defense market conditions. We also anticipate continued competition in defense markets due to declining defense budgets in many countries.
Competitors in the sale of some of our products to the government of Israel include IAI and Rafael among others. From time to time we also cooperate with some of our competitors on specific projects. Outside of Israel, we compete in a number of areas with major international defense contractors principally from the United States, Europe and Israel. Our main competitors include divisions and subsidiaries of Northrop Grumman Corporation, BAE Systems, Rockwell Collins, L-3 Communications Corporation, Thales S.A., EADS, Finmeccanica S.p.A., Harris Corporation, AAI Corporation, FLIR Systems, Inc., Rhode and Schwartz GmbH,  Rheinmetall AG, Kongsberg Defense and Aerospace A.S. and Safran Group – Sagem Defense Securite S.A. Many of these competitors have greater financial, marketing and other resources than ours. We also compete in the worldwide defense market with numerous smaller companies. In addition, we compete with a range of companies in the commercial avionics market. In certain cases we also engage in strategic cooperative activities with some of our competitors.

Overall, we believe we are able to compete on the basis of our systems development and technological expertise, our systems’ combat-proven performance and our policy of offering customers overall solutions to technological, operational and financial needs.
Major Customers
Sometimes, our revenues from an individual customer account for more than 10% of our revenues in a specific year. Our only such customer during the last three years was the IMOD, which accounted for  23% in 2010, 23% in 2011 and 15%  in 2012.
We conduct our business activities and develop Company policies based on a firm commitment to ethical practices. In addition to our Code of Conduct (see Item 16.B) and compliance with applicable laws and regulations, we have an active Company-wide ethics compliance program, incorporating policies and procedures, including for anti-bribery compliance.  Our compliance program also includes ongoing training and enforcement. We also expect our supply chain to follow ethical practices. We are active in a number of international organizations relating to ethics and compliance.
Social Responsibility and Sustainability
We place importance on social responsibility to the communities in which we live and work. This is consistent with our policy of emphasizing ethics in our business practices. Our policy encourages the voluntary efforts of our Company entities and employees who donate their time and efforts in the support of members of our communities who are in need. In this regard, we place priority on initiatives to promote educational advancement, particularly in the technology sectors. A major activity resulting from our social responsibility policy is facilitating the placement of our employees as tutors in peripheral communities and less developed neighborhoods, providing technology-related knowledge as well as other educational resources generally lacking in those areas. We also promote numerous other community support activities, including involvement on a national level basis in major charitable organizations in Israel and the U.S. We place emphasis on best practices in corporate governance, ethical conduct and fair employment practices.  We also pursue continuous improvement of our operations from an environmental perspective. Our commitment to social responsibility and sustainability initiatives has been reflected in our ongoing ranking among the top Israeli companies in the “Maala” social responsibility index. We periodically publish a Sustainability Report detailing our activities in the areas of corporate responsibility, ethics, environmental initiatives and community-related activities.
Conditions in Israel
Political, Military and Economic Risks. Our operations in Israel are subject to several potential political, military and economic risks. (See Item 3. Key Information – Risk Factors – Risks Related to Our Israeli Operations.)
Trade Agreements
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel also is a party to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from several countries. These preferences allow Israel to export products covered by such programs either duty-free or at reduced tariffs.
Israel and the European Community are parties to a Free Trade Agreement that provides some advantages for Israeli exports to most European countries and requires Israel to lower its tariffs on imports from these countries over a number of years. Israel and the United States entered into an agreement to establish a Free Trade Area that eliminates tariff and some non-tariff barriers on most trade between the two countries. An agreement between Israel and the European Free Trade Association (EFTA), established a free-trade zone between Israel and the EFTA member nations.

Chief Scientist (OCS) and Investment Center Funding
The government of Israel, through the OCS and the Israel Investment Center (the Investment Center), encourages research and development projects oriented towards export products and participates in the funding of such projects as well as company investments in manufacturing infrastructures.
Our Israeli companies receiving OCS funding for development of products usually pay the Israeli government a royalty at various rates and are subject to a number of conditions. (See Item 5. Operating and Financial Review and Prospects – Long-Term Arrangements and Commitments – Government Funding of Development.) Separate Israeli government consent is required to transfer to third parties technologies developed through projects in which the government participates in the funding of the development effort.
The Investment Center promotes Israeli export products and increased industrialization of peripheral areas through investment in industrial infrastructure. The Investment Center either provides grants for qualified projects or provides tax benefits for qualified industrial investments by Israeli companies.
Israeli Labor Laws. Our employees in Israel are subject to Israeli labor laws. Some employees are also affected by some provisions of collective bargaining agreements between the Histadrut – General Federation of Labor in Israel and the Coordination Bureau of Economic Organizations, which includes the Industrialists’ Association. These labor laws and collective bargaining provisions mainly concern the length of the work day, minimum daily wages for professional workers, insurance for work-related accidents, procedures for dismissing certain employees, determination of severance pay, employment of “manpower” employees and other conditions of employment.
Severance Pay. Under Israeli law, our Israeli companies are required to make severance payments to terminated Israeli employees, other than in some cases of termination for cause. The severance reserve is calculated based on the employee’s last salary and period of employment. A portion of the severance pay and pension obligation is covered by payment of premiums to insurance companies under approved plans and to pension funds. The deposits presented in the balance sheet include profits accumulated to the balance sheet date. The amounts deposited may be withdrawn only after fulfillment of the obligations under the Israeli laws relating to severance pay. However, Elbit Systems and our Israeli subsidiaries have entered into agreements with some of our employees implementing Section 14 of the Severance Payment Law, which agreements relate to the treatment of severance pay. (See Item 18. Financial Statements – Note 2(R).)
National Insurance Institute. Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. These amounts also include payments for national health insurance. As of December 31, 2012, the payments to the National Insurance Institute were equal to approximately 17.9% of wages, subject to a cap if an employee’s monthly wages exceed a specified amount. The employee contributes approximately 67%, and the employer contributes approximately 33%.
Enforcement of Judgments
Israeli courts may enforce U.S. and other foreign jurisdiction final executory judgments for liquidated amounts in civil matters, obtained after due process before a court of competent jurisdiction. This enforcement is made according to the private international law rules currently applicable in Israel, which recognize and enforce similar Israeli judgments, provided that:
adequate service of process has been made and the defendant has had a reasonable opportunity to be heard;
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;
an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court; and
the judgment is no longer subject to a right of appeal.
Foreign judgments enforced by Israeli courts generally will be payable in Israeli currency. The usual practice in Israel in an action to recover an amount in a non-Israeli currency is for the Israeli court to provide for payment of the equivalent amount in Israeli currency at the exchange rate in effect on the judgment date. Under existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli currency at the foreign currency’s exchange rate on the payment date or in foreign currency. Until collection, an Israeli court judgment stated in Israeli currency will ordinarily be linked to the Israeli Consumer Price Index (CPI) plus interest at the annual rate (set by Israeli regulations) in effect at that time. Judgment creditors must bear the risk of unfavorable exchange rates.
Item 4A.               Unresolved Staff Comments.

Item 5.                 Operating and Financial Review and Prospects.
The following discussion and analysis should be read together with our audited consolidated financial statements and notes appearing in Item 18 below.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Item 18. Financial Statements – Note 2.
Our results of operations and financial condition are based on our consolidated financial statements, which are presented in conformity with United States generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial statements requires management to select accounting policies as well as estimates and assumptions and to make judgments that involve the accounting policies described below that affect the amounts reported in the consolidated financial statements. Significant changes in assumptions and/or conditions and changes in our critical accounting policies could materially impact our operating results and financial condition.
We believe our most critical accounting policies relate to:
Revenue Recognition.
Business Combinations.
Impairment of Long-Lived Assets and Goodwill.
Other-Than-Temporary Decline in Value of Investments in Investee.
Useful Lives of Long-Lived Assets.
Taxes on Income.
Stock-Based Compensation Expense.
Revenue Recognition
We generate revenues principally from fixed-price long-term contracts involving the design, development, manufacture and integration of defense electronic systems and products. In addition, to a minor extent, we provide support and services for such systems and products.
Revenues from long-term contracts are recognized primarily using the Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) ASC 605-35 “Construction-Type and Production-Type Contracts” (ASC 605-35) according to which we recognize revenues on the percentage-of-completion basis.
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.
We believe that the use of the percentage of completion method is appropriate as we have 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 products and 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, revenue is recognized when we expect to perform our contractual obligations, and our customers are expected to satisfy their obligations under the contract.

Management periodically reviews 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 prices of materials, 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 project cost and measuring progress towards completion, it is likely that materially different amounts would be reported in our consolidated financial statements.
In certain circumstances, sales under short-term fixed-price production type contracts or sale of products are accounted for in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin (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, or other obligations, we follow the guidelines specified in ASC 605-25. “Multiple-Element Arrangements”, in order to allocate the contract consideration between the identified different elements using the relative selling price method to allocate the entire arrangement consideration. The selling price of each element would be allocated by using a hierarchy of: (i)  Vendor Specific Objective Evidence (VSOE); (ii) third-party evidence of the selling price for that element; or (iii) estimated selling price for individual elements of an arrangement when VSOE or third-party evidence of the selling price is unavailable.
Service revenues include contracts primarily for the provision of supplies or services other than associated with design, development or manufacturing and production activities. It may be a stand-alone service contract or a service element, which was separated from the design, development or production contract according to the criteria established in ASC 605-25. Our service contracts primarily include operation and maintenance contracts, outsourcing-type arrangements, return and repair contracts, training, installation service, etc. Revenue from services were less than 10% of consolidated revenues in each of the fiscal years 2010, 2011and 2012.
Business Combinations
In accordance with ASC 805 “Business Combinations”, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, as well as to IPR&D and contingent consideration, and non-controlling interest, based on their estimated fair values. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
We engage third-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Estimating the fair value of certain assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions, mainly with respect to intangible assets. Management makes estimates of fair value based upon market participants’ assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies, and although they are deemed to be consistent with market participants’ highest and best use of the assets in the principal or most advantageous market, they are inherently uncertain. While there are a number of different methods for estimating the value of intangible assets acquired, the primary method used is the discounted cash flow approach. Some of the more significant estimates and assumptions inherent in the discounted cash flow approach include projected future cash flows, including their timing, a discount rate reflecting the risk inherent in the future cash flows and a terminal growth rate. We also estimate the expected useful lives of the intangible assets, which requires judgment and can impact our results of operations. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
To the extent intangible assets are assigned longer useful lives, there may be less amortization expense recorded in a given period. Because we operate in industries which are extremely competitive, the value of our intangible assets and their respective useful lives are exposed to future adverse changes, which can result in an impairment charge to our results of operations.

Impairment of Long-Lived Assets and Goodwill
Our long-lived assets, including identifiable intangible assets, are reviewed for impairment in accordance with ASC 360-10-35 “Property, Plant and Equipment Subsequent Measurement” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If an asset is determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Fair value of non-financial assets is determined based on market participant assumptions. For each of the years ended December 31, 2010, 2011 and 2012, no material impairment was identified.
Goodwill represents the excess of the cost of acquired businesses over the fair values of the assets acquired and net of liabilities assumed. Goodwill is not amortized, but is instead tested for impairment at least annually (or more frequently if impairment indicators arise).
We review goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Such events or circumstances could include significant changes in the business climate of our industry, operating performance indicators, competition or sale or disposal of a portion of a reporting unit. The assessment is performed at the reporting unit level. Our annual testing date for all reporting units is December 31.
Performing the goodwill impairment test requires judgment, including how we define reporting units and determine their fair value. We consider a component of our business to be a reporting unit if it constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component. We estimate the fair value of each reporting unit using a discounted cash flow methodology that requires significant judgment. Forecasts of future cash flows are based on our best estimate of future sales and operating costs, based primarily on existing backlog, expected future contracts, contracts with suppliers, labor agreements and general market conditions. We base cash flow projections for each reporting unit using a five-year forecast of cash flows and a terminal value based on the Perpetuity Growth Model. The five-year forecast and related assumptions were derived from the most recent annual financial forecast for which the planning process commenced in our fourth quarter. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital and includes factors such as the risk-free rate of return and the return an outside investor would expect to earn based on the overall level of inherent risk. The determination of expected returns includes consideration of the beta (a measure of risk) of traded securities of comparable companies. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
We evaluate goodwill for impairment by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value exceeds the estimated fair value, we measure impairment by comparing the derived fair value of goodwill to its carrying value, and any impairment determined is recorded in the current period.
For each of the three years in the period ended December 31, 2012, no material impairment was identified.
Other-Than-Temporary Decline in Value of Investments in Investee
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 we recognize an impairment loss for the decline in value. We use our judgment in determining whether an other-than-temporary decline in the value of an 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 many quantitative and qualitative factors in determining if an other-than-temporary decline in value of an investment has occurred.

During 2012 no material impairment was recognized. During 2011, an impairment loss was recorded in the amount of  $9.5 million relating to our investment in Fraser-Volpe LLC, a subsidiary that is classified as held-for-sale. During 2010, no material impairment was recognized.
Useful Lives of Long-Lived Assets
Identifiable intangible assets and property, plant and equipment are amortized over their estimated useful lives. Determining the useful lives of such assets involves the use of estimates and judgments. In determining the useful lives we take into account various factors such as the expected use of the assets, effects of obsolescence, including technological developments, competition, demand, and changes in business, acquisitions and other economic factors. If we estimate changes and the useful lives of such assets increase or decrease, it will affect our results of operations. (See above “Impairment of Long-Lived Assets and Goodwill” for further discussion of the effects of changes in useful lives.)
Taxes on Income
We record income taxes using the asset and liability approach, whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and of operating losses and credit carry-forwards, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are more likely than not to be realized. We have considered future taxable income on a jurisdiction by jurisdiction basis, prudent and feasible tax planning strategies and other available evidence in determining the need for a valuation allowance. In the event we were to determine that we would be able to realize these deferred income tax assets in the future, we would adjust the valuation allowance, which would reduce the provision for income taxes.
We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. As part of the determination of our tax liability, management exercises considerable judgment in evaluating tax positions taken by us in determining the income tax provision and establishes reserves for tax contingencies in accordance with ASC 740 "Income Taxes" guidelines. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate based on new information. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest and penalties.
Management’s judgment is required in determining our provision for income taxes in each of the jurisdictions in which we operate. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcomes will not be different than those which are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.
Stock-Based Compensation Expense
We apply ASC 718 “Compensation – Stock Based Compensation” (ASC 718), which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock options based on estimated fair values and cash-based awards linked to the share price. Stock-based compensation expense in 2012 was $3.3 million, in 2011 was $2.0 million and  in 2010 was $5.2 million. (See Item 18. Financial Statements – Notes 2(Z) and 21 for additional information.)
Under ASC 718, we estimate the value of employee stock options on the date of grant using a lattice-based option valuation model. The determination of fair value of stock option awards on the date of grant is affected by several factors including our stock price, our stock price volatility, risk-free interest rate, expected dividends and employee stock option exercise behaviors. If such factors change and we employ different assumptions for future grants, our compensation expense may differ significantly from what we have recorded in the current period.

In addition, our compensation expense is affected by our estimate of the number of awards that will ultimately vest. In the future, if the number of equity awards that are forfeited by employees are lower than expected, the expenses recognized in such future periods will be higher. (See Item 18. Financial Statements – Notes 2(Z) and 21 for further description of our assumptions used for calculation of stock-based compensation expense.)
Governmental Policies
Governmental policies and regulations applicable to defense contractors, such as cost accounting and audit, export control, procurement solicitation and anti-bribery rules and regulations, could have a material impact on our operations. (See Item 3. Risk Factors – General Risks Related to Our Business and Market and Item 4. Information on the Company – Governmental Regulation.) According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, we are required to include in our annual report on Form 20-F an assessment, as of the end of the fiscal year, of the effectiveness of our internal controls over financial reporting. (See Item 15. Controls and Procedures – Management’s Annual Report on Internal Control Over Financial Reporting.)
Recent Accounting Pronouncements
See Item 18. Financial Statements – Notes 2(AD).
Long-Term Arrangements and Commitments
Government Funding of Development. Elbit Systems and certain Israeli subsidiaries partially finance our research and development expenditures under programs sponsored by the Government of Israel Office of the Chief Scientist (OCS) for the support of research and development activities conducted in Israel. At the time the funds are received, successful development of the funded projects is not assured. In exchange for the funds, Elbit Systems and the subsidiaries pay 2% – 5% of total sales of the products developed under these programs. The obligation to pay these royalties is contingent on actual future sales of the products. Elbit Systems and some of our subsidiaries may also be obligated to pay certain amounts to the IMOD and others on certain sales including sales resulting from the development of some of the technologies developed with such respective entity’s funds. (See Item 4. Information on the Company – Conditions in Israel – Chief Scientist (OCS) and Investment Center Funding.)
Lease Commitments. The future minimum lease commitments of the Company under various non-cancelable operating lease agreements for property, motor vehicles and office equipment as of December 31, 2012 were as follows:  $34.1million for 2013, $29.2 million for 2014, $21.0 million for 2015, $18.7 million for 2016, $13.8 million for 2017 and $93.1 million for 2018 and thereafter. (See below “Contractual Obligations”.)
Bank Covenants. In connection with bank credits and loans, including performance guarantees issued by banks and bank guarantees in order to secure certain advances from customers, Elbit Systems and certain subsidiaries are obligated to meet certain financial covenants. (See below – “Liquidity and Capital Resources – Financial Resources”). Such covenants include requirements for shareholders’ equity, current ratio, operating profit margin, tangible net worth, EBITDA, interest coverage ratio and total leverage. (See Item 18. Financial Statements – Note 20(F).)  As a result of recognition of the expense due to the cessation of a program with a foreign customer in December 2011 (see Item 18. Financial Statements -  Notes 1(C) and 20(F)), as of December 31, 2011, we did not meet one of our covenants.  During the first quarter of 2012, the banks waived such covenant through March 31, 2013, and accordingly, as of December 31, 2011, our bank credits and loans were not negatively affected. As of December 31, 2012, the Company met all financial covenants.
Bank Guarantees. As of December 31, 2012 and 2011, guarantees in the aggregate amount of approximately $1,070 million and $1,040 million, respectively, were issued by banks on behalf of several Company entities primarily in order to secure certain advances from customers and performance bonds.
Purchase Commitments. As of December 31, 2012 and 2011, we had purchase commitments of approximately  $949 million and $1,026 million, respectively. These purchase orders and subcontracts are typically in standard formats proposed by us. These subcontracts and purchase orders also reflect provisions from the applicable prime contract that apply to subcontractors and vendors. The terms typically included in these purchase orders and subcontracts are consistent with Uniform Commercial Code provisions in the United States for sales of goods, as well as with specific terms requested by our customers in international contracts. These terms include our right to terminate the purchase order or subcontract in the event of the vendor’s or subcontractor’s default, as well as our right to terminate the order or subcontract for our convenience (or if our prime contractor has so terminated the prime contract). Such purchase orders and subcontracts typically are not subject to variable price provisions.

Acquisitions During 2012
See Item 4. Information on the Company – Recent Acquisitions, Mergers and Divestitures.
Backlog of Orders
Our backlog includes firm commitments received from customers for systems, products and projects that have yet to be completed. Our policy is to include orders in our backlog only when specific conditions are met. Examples of these conditions may include, among others, receipt of a letter of commitment, program funding, advances, letters of credit, guarantees and/or other commitments from customers. As a result, from time to time we could have unrecorded orders in excess of the level of backlog.
We reduce backlog when revenues for a specific contract are recognized. We reduce backlog as delivery or acceptance occurs or when contract milestones or engineering progress under the long-term contracts are recognized as achieved. In some cases we reduce backlog when costs are incurred. In the unusual event of a contract cancellation, we would also be required to reduce our backlog accordingly. The method of backlog recognition used may differ depending on the particular contract. Orders in currencies other than U.S. dollars are translated periodically into U.S. dollars and recorded accordingly.
Our backlog of orders as of December 31, 2012 was $5,683 million, of which 67%was for orders outside Israel. Our backlog as of December 31, 2011 was $5,528 million, of which 75% was for orders outside Israel. Approximately 68% of our backlog as of December 31, 2012 is scheduled to be performed during 2013 and 2014. The majority of the 32% balance is scheduled to be performed in 2015 and 2016. Backlog information and any comparison of backlog as of different dates may not necessarily represent an indication of future sales.
Trends in the defense electronics and homeland security markets in which we operate have been impacted by the nature of recent conflicts and terrorism activities throughout the world, increasing the focus of defense forces on low intensity conflicts, homeland security and cyber warfare. The defense market has also been impacted by the withdrawal of most of the allied forces from Iraq and a reduction of allied forces in Afghanistan.
In the defense electronics market, there is an increasing demand for products and systems in the areas of C4ISR and unmanned vehicles. Accordingly, while we continue to perform platform upgrades, in recent years more emphasis is being placed on C4ISR, including information systems, intelligence gathering, situational awareness, precision guidance, all weather and day/night operations, border and perimeter security, UAS, other unmanned vehicles, cyber-based systems, training and simulation, space and satellite based defense capabilities and homeland security systems. We believe that our core technologies and abilities will enable us to take advantage of many of these emerging trends, as well as to continue to participate in the “Current Force” legacy operations of our customers.
In recent years consolidation in the defense industry has affected competition. This consolidation has decreased the number but increased the relative size and resources of our competitors. We adapt to evolving market conditions by adjusting our business strategy. Our business strategy also anticipates increased competition in defense markets due to declining defense budgets in certain countries. As a result of recent worldwide financial developments, current indications are that overall defense spending is unlikely to increase in the coming  years, and many governments recently have reduced their defense budgets. However, we believe in our ability to compete on the basis of our systems development, technological expertise, combat-proven performance and policy of offering customers overall solutions to technological, operational and financial needs and at the same time enhancing the industrial capabilities in certain of our customers’ countries.
Our future success is dependent on our ability to meet our customers’ expectations and anticipate emerging customer needs. We must continue to successfully perform on existing programs, as past performance is an important selection criteria for new competitive awards. We also must anticipate customer needs so as to be able to develop working prototypes in advance of program solicitations. Such working prototypes are becoming an increasingly standard part of our competitive environment. This requires us to anticipate future technological and operational trends in our marketplace and efficiently engage in relevant research and development efforts.

Summary of Operating Results
The following table sets forth our consolidated statements of operations for each of the three years ended December 31, 2012.
    Year ended December 31,  
    2012     2011     2010  
    $     %     $     %     $     %  
(in thousands of U.S. dollars except per share data)
Total revenues
  $ 2,888,607       100.0     $ 2,817,465       100.0       2,670,133       100.0  
Cost of revenues
    2,072,742       71.8       2,085,451       74.0       1,872,263       70.1  
Gross profit
    815,865       28.2       732,014       26.0       797,870       29.9  
Research and development (R&D) expenses
    276,458       9.6       288,668       10.2       268,578       10.0  
Less – participation
    (43,071 )     (1.5 )     (47,576 )     (1.6 )     (34,447 )     (1.29 )
R&D expenses, net
    233,387       8.1       241,092       8.6       234,131       8.8  
Marketing and selling expenses
    241,911       8.4       235,909       8.4       229,942       8.6  
General and administrative expenses
    137,517       4.8       139,349       4.9       131,200       4.9  
Acquired IPR&D and other expenses
                            (4,756 )     (0.2 )
      612,815       21.2       616,350       21.9       590,517       22.1  
Operating income
    203,050       7.0       115,664       4.1       207,353       7.8  
Financial expenses, net
    (26,086 )     (0.9 )     (13,569 )     (0.5 )     (21,251 )     (0.8 )
Other income, net
    78       0.0       1,909       0.1       13,259       0.5  
Income before taxes on income
    177,042       6.1       104,004       3.7       199,361       7.5  
Taxes on income
    17,099       0.6       13,624       0.5       24,037       0.9  
      159,943       5.5       90,380       3.2       175,324       6.6  
Equity in net earnings of affiliated companies and partnerships
    11,160       0.4       15,377       0.6       18,796       0.7  
Income from continuing operations
  $ 171,103       5.9     $ 105,757       3.8       194,120       7.3  
Income (loss) from discontinued operations, net
    (616 )     (0.0 )     (15,977 )     (0.6 )     921        
Net income
    170,487       5.9       89,780       3.2       195,041       7.3  
Less – net loss (income) attributable to non-controlling interests
  $ (2,608 )     (0.1 )   $ 508               (11,543 )     (0.4 )
Net income attributable to the Company’s shareholders
  $ 167,879       5.8     $ 90,288       3.2       183,498       6.9  
Diluted net earnings (loss) per share:
Continuing operations
  $ 3.98             $ 2.31               4.24          
Discontinued operations
    (0.01 )             (0.22 )             0.01          
  $ 3.97             $ 2.09             $ 4.25          
2012 Compared to 2011
Our sales are primarily to governmental entities and prime contractors under government defense programs. Accordingly, the level of our revenues is subject to governmental budgetary constraints.
The following table sets forth our revenue distribution by areas of operation:
Year ended
December 31, 2012
December 31, 2011
$ millions
$ millions
Airborne systems
    1,054.5       36.5       969.4       34.4  
Land systems
    374.5       13.0       405.3       14.4  
C4ISR systems
    1,017.6       35.2       996.4       35.4  
Electro-optic systems
    324.1       11.2       300.2       10.6  
Other (mainly non-defense engineering and production services)
    117.9       4.1       146.2       5.2  
    2,888.6       100.0       2,817.5       100.0  

         Our consolidated revenues increased by 2.5% from $2,817.5 million in 2011 to $2,888.6 million in 2012.
The leading contributors to our revenues were the airborne systems and C4ISR systems areas of operations.  The major increase was in the airborne systems area of operations, primarily due to increased revenues in North America for avionic systems, aerostructures and maintenance services.  The decrease in the land systems area of operations was mainly due to a decline in revenues for fire control and life support systems in Israel and North America.
The following table sets forth our distribution of revenues by geographical regions:
Year ended
December 31, 2012
December 31, 2011
$ millions
$ millions
    519.9       18.0       697.2       24.8  
North America                                                                 
    909.4       31.5       890.7       31.6  
    561.1       19.4       552.4       19.6  
Latin America                                                              
    258.8       9.0       165.5       5.9  
    568.4       19.7       460.0       16.3  
    71.0       2.4       51.7       1.8  
    2,888.6       100       2,817.5       100.0  
        The distribution of revenues by geographical regions has been modified in certain respects from our reports in prior years. The regions of " Israel" and "Europe" remain unchanged. The "U.S." region has been changed to "North America", which includes the U.S. and Canada. We now also include two new regions: "Latin America" and "Asia-Pacific" (east of the Caspian Sea.) The remaining markets are included in "Other".
The decline in revenues in Israel was mainly a result of reduced revenues relating to fire control and command and control systems. The increased revenues in Asia-Pacific was mainly related to electro-optics and communication equipment. The increased revenues in Latin America was mainly due to UAS and command and control systems.
Cost of Revenues and Gross Profit
Cost of revenues in 2012 was $2,072.7 million (with a gross profit margin of 28.2%) as compared to $2,085.5 million (with a gross profit margin of 26.0%) in 2011. Cost of revenues in 2011 included an expense of $72.8 million related to the cessation of a program with a foreign customer (See Item 18. Financial Statements – Note 1(C).)
Gross profit for the year ended December 31, 2012 was $815.9 million (28.2% of revenues), as compared with gross profit of $732.0 million (26.0% of revenues) in the year ended December 31, 2011. The gross profit margin in 2012 increased mainly as a result of the mix of programs sold in the year. The gross profit in 2011 was reduced by an expense of $72.8 million related to the cessation of a program with a foreign customer.
Research and Development (R&D)
We continually invest in R&D in order to maintain and further advance our technologies, in accordance with our long-term plans, based on our estimate of future market needs. Our R&D costs, net of participation grants, include costs incurred for independent research and development and bid and proposal (B&P) efforts and are expensed as incurred.
Gross R&D expenses in 2012 totaled $276.5 million (9.6% of revenues) as compared with $288.7 million (10.2% of revenues) in 2011.
Net R&D expenses (after deduction of third party participation) in 2012 totaled $233.4 million (8.1% of revenues), as compared to $241.1 million (8.6% of revenues) in 2011.
Marketing and Selling Expenses
We are active in developing new markets and pursue at any given time various business opportunities according to our plans.
Marketing and selling expenses in 2012 were $241.9 million (8.4% of revenues), as compared to $235.9 million (8.4% of revenues) in 2011.

General and Administration (G&A) Expenses
G&A expenses in 2012 were $137.5 million (4.8% of revenues), as compared to $139.3 million (4.9% of revenues) in 2011.
Operating Income
Our operating income in 2012 was $203.1 million (7.0% of revenues), as compared to $115.7 million (4.1% of revenues) in 2011. The lower amount and margin of operating income in 2011 was mainly a result of the cessation of the program mentioned above.
Financial Expense (Net)
Net financing expenses in 2012 were $26.1 million, as compared to $13.6 million in 2011. The increase in 2012 is related to interest on the additional issued Series A Notes. The financial expenses in 2011 were lower as a result of income primarily from currency hedging activities and the settlement of the ImageSat transaction.
Other Income (Net)
Other income, net in 2012 was a $0.1  million gain, as compared to a gain of $1.9 in 2011.
Taxes on Income
Our tax rate represents a weighted average of the tax rates to which our various entities are subject.
Income taxes in 2012 were $17.1 million (effective tax rate of 9.7%) as compared to an income taxes of $13.6 million (effective tax rate of 13.1%) in 2011.  The effective tax rate was affected by prior years adjustments of $5.5 million. The change in the effective tax rate was also affected by the mix of the tax rates in the various jurisdictions in which the Company’s entities generate taxable income. We continue to enjoy a lower effective Israeli tax rate and the benefits of an “Approved and Privileged Enterprise”, which resulted in savings of $26.1  million and $11.5 million, respectively, in 2012 and 2011, significantly influencing our effective tax rates.
Company’s Share in Earnings of Affiliated Entities
The entities, in which we hold 50% or less in shares or voting rights (affiliates), and are therefore not consolidated in our financial statements, operate in complementary areas to our core business activities, including electro-optics and airborne systems.
In 2012, we had income of $11.2 million from our share in earnings of affiliates, as compared to income of $15.4 million in 2011.
Loss from Discontinued Operations, Net
Loss from discontinued operations for the year ended December 31, 2012, amounted to $0.6 million.  The net loss from discontinued operations (after deducting the minority interest) amounted to $0.4 million.
Net Income and Earnings Per Share (EPS)
Net income in 2012 was $167.9 million (5.8% of revenues), as compared to net income of $90.3 million (3.2% of revenues) in 2011. The net income in 2011 included the net effect of the cessation of a program which amounted to $62.2 million. (See Item 18. Financial Statements – Note 1(C).)  Diluted EPS was $3.97 in 2012, as compared to $2.09 in 2011.
The number of shares used for computation of diluted EPS in the year ended December 31, 2012 was 42,277,000  shares, as compared to 43,131,000 shares in the year ended December 31, 2011.

2011 Compared to 2010
The following table sets forth our revenue distribution by areas of operation:
Year ended
December 31, 2011
    December 31, 2010  
$ millions
$ millions
Airborne systems
    969.4       34.4       791.1       29.6  
Land systems
    405.3       14.4       363.2       13.6  
C4ISR systems
    996.4       35.4       1,019.1       38.2  
Electro-optic systems
    300.2       10.6       368.8       13.8  
Other (mainly non-defense engineering and production services)
    146.2       5.2       127.9       4.8  
    2,817.5       100.0       2,670.1       100.0  
Our consolidated revenues increased by 5.5% from $2,670.1 million in 2010 to $2,817.5 million in 2011.
The leading contributors to our revenues were the C4ISR and airborne areas of operations.  The major increase was in the airborne area of operations, which included in 2011 revenues resulting from M7’s operations acquired in the fourth quarter of 2010 and which contributed to the revenue growth in 2011.  The decrease in the electro-optic systems area of operations was mainly due to reduced revenues in reconnaissance systems and night vision products.
The following table sets forth our distribution of revenues by geographical regions:
Year ended
December 31, 2011
December 31, 2010
$ millions
$ millions
    697.2       24.8       651.0       24.4  
North America
    890.7       31.6       844.0       31.6  
    552.4       19.6       541.7       20.3  
Latin America
    165.5       5.9       152.1       5.7  
    460.0       16.3       459.6       17.2  
Other countries
    51.7       1.8       21.7       0.8  
    2,817.5       100.0       2,670.1       100.0  
Cost of Revenues and Gross Profit
Cost of revenues in 2011 was $2,085.5 million (with a gross profit margin of 26%), as compared to $1,872.3 million (with a gross profit margin of 29.9%) in 2010. Cost of revenues in 2011 included an expense of $72.8 million related to the cessation of a program with a foreign customer. Gross profit for the year ended December 31, 2011 was $732.0 million (26.0% of revenues), as compared with gross profit of $797.9 million (29.9% of revenues) in the year ended December 31, 2010. The decrease in the amount of gross profit in 2011 resulted primarily from the above-mentioned expense as well as reduced gross profit in the mix of programs underlying our revenues in 2011.
Research and Development (R&D)
Gross R&D expenses in 2011 totaled $288.7 million (10.2% of revenues) as compared with $268.6 million (10.0% of revenues) in 2010.
Net R&D expenses (after deduction of third party participation) in 2011 totaled $241.1 million (8.6% of revenues), as compared to $234.1 million (8.8% of revenues) in 2010.

Marketing and Selling Expenses
Marketing and selling expenses in 2011 were $235.9 million (8.4% of revenues), as compared to $229.9 million (8.6% of revenues) in 2010.
General and Administration (G&A) Expenses
G&A expenses in 2011 were $139.3 million (4.9% of revenues), as compared to $131.2 million (4.9% of revenues) in 2010.
The increase in G&A expenses in 2011 compared to 2010 was due to higher expenses related to our subsidiaries acquired in the last quarter of 2010.
Other operational income for the year ended December 31, 2010 amounted to $4.8 million. The amount reflects a net gain of $4.8 million in the second quarter of 2010, related to the revaluation of the previously held Azimuth shares at the acquisition date, due to its accounting treatment as a business combination achieved in stages. There was no other operational income in 2011.
Operating Income
Our operating income in 2011 was $115.7 million (4.1% of revenues), as compared to $207.4 million (7.8% of revenues) in 2010. The change in the amount of operating income was a result of the expense of $72.8 million mentioned above as well as the increases in operating expenses discussed above.
Financial Expense (Net)
Net financing expenses in 2011 were $13.6 million, as compared to $21.3 million in 2010.
The financial expenses in 2011 decreased as a result of income primarily from currency hedging activities and interest on the settlement of the ImageSat debt transaction.
Other Income (Net)
Other income, net in 2011 was a $1.9 million gain, as compared to a gain of $13.3 in 2010. The amount in 2010 included a gain of $12.8 million related to the sale of Mediguide shares in the first quarter of 2010.
Taxes on Income
Income taxes in 2011 were $13.6 million (effective tax rate of 13.1%) as compared to an income taxes of $24.0 million (effective tax rate of 12.1%) in 2010. Taxes on income in 2010 included an amount of approximately $10 million related to the first recognition of deferred tax assets for prior years’ losses in one of our subsidiaries.  The change in the effective tax rate was also affected by the mix of the tax rates in the various jurisdictions in which the Company’s entities generate taxable income. We continued to enjoy a lower effective Israeli tax rate and the benefits of an “Approved and Privileged Enterprise”, which resulted in savings of $11.5 million and $20.5 million, respectively, in 2011 and 2010, significantly influencing our effective tax rates.
Company’s Shares in Earnings of Affiliated Entities
In 2011, we had income of $15.4 million from our share in earnings of affiliates, as compared to income of $18.8 million in 2010.
Loss from Discontinued Operations, Net
Loss from discontinued operations for the year ended December 31, 2011, amounted to $16 million.  The amount reflects a net loss related to an impairment of held-for-sale investments acquired during 2010, as part of the acquisition of the Mikal group of companies.  The net loss from discontinued operations (after deducting the minority interest) amounted to $9.5 million.

Net Income and Earnings Per Share (EPS)
Net income in 2011 was $90.3 million (3.2% of revenues), as compared to net income of $183.5 million (6.9% of revenues) in 2010. The net income in 2011 included the net effect of the cessation of the above-mentioned program which amounted to $62.2 million.  Diluted EPS was $2.09 in 2011, as compared to $4.25 in 2010.
The number of shares used for computation of diluted EPS in the year ended December 31, 2011 was 43,131,000 shares, as compared to 43,217,000 shares in the year ended December 31, 2010.
Israeli Debt Offering
In June 2010, Elbit Systems completed a public offering in Israel on the TASE of NIS 1.1 billion (approximately $283 million) Series A Notes (the Series A Notes). The Series A Notes were offered and sold pursuant to a shelf prospectus filed in May 2010 with the Israeli Securities Authority and the TASE. The shelf prospectus allowed us, during a period of 24 months following its publication, to raise capital from the public in Israel, from time to time, by issuing notes or warrants that are exercisable into notes subject to the terms of the shelf prospectus and to the publication of a supplemental shelf offering report describing the terms of the securities offered and the details of the specific offering.
In March and May 2012, respectively, under the framework of the shelf prospectus, Elbit Systems completed both an additional public offering on the TASE and a private placement in Israel to Israeli institutional investors, of new Series A Notes, for an aggregate consideration of approximately NIS 926 million (approximately $249 million). All Series A Notes form a single series.
We account for the outstanding principal amount of our Series A Notes as long-term liability, in accordance with ASC 470, “Debt”, with current maturities classified as short-term liabilities. Debt issuance costs are capitalized and reported as deferred financing costs, which are amortized over the life of the Series A Notes using the effective interest rate method. As of December 31, 2012, the value of the Series A Notes was $450,727 million, less $58,275 million in current maturities and a fair value adjustment of $16,158 million from cross-currency interest rate swaps.
The Series A Notes are payable in ten equal annual installments on June 30 of each of the years 2011 through 2020. The Series A Notes bear a fixed interest rate of 4.84% per annum, payable on June 30 and December 30 of each of the years through 2020 (the first interest payment was made on December 30, 2010, and the last interest payment will be made on June 30, 2020). (See Item 8. Financial Statements – Note 16.)
The Series A Notes (principal and interest) are in NIS and are not linked to any currency or index. The Series A Notes are unsecured, non-convertible and do not restrict our ability to issue additional notes of any class or distribute dividends in the future. There are no covenants on the Series A Notes.
The Series A Notes are listed for trading on the TASE. However, the Series A Notes are not registered under the U.S. Securities Act of 1933, as amended (the Securities Act), and may not be offered or sold in the United States or to U.S. Persons (as defined in Regulation “S” promulgated under the Securities Act) without registration under the Securities Act or an exemption from the registration requirements of the Securities Act.
We also entered into ten-year cross currency interest rate swap transactions in order to effectively hedge the effect of interest and exchange rate differences resulting from the NIS Series A Notes that were issued in 2010 and the additional Series A Notes that were issued in 2012. Under the cross currency interest rate swaps, we receive fixed NIS at a rate of 4.84% on NIS 2 billion and pay floating six-month USD LIBOR plus an average spread of 1.84% on $450 million, which reflects the U.S. dollar value of the Series A Notes on the specific dates the transactions were entered. Both the debt and the swap instruments pay semi-annual coupons on June 30 and December 31. The purpose of these transactions was to convert the NIS fixed rate Series A Notes into USD LIBOR (6 months) floating rate obligations. As a result of these agreements, we are currently paying an effective interest rate of six-month LIBOR (0.45% at December 31, 2012) plus an average of 1.84% on the principal amount, as compared to the original 4.84% fixed rate. The above transactions qualify for fair value hedge accounting. (See also Item 11. Quantitative and Qualitative Disclosures about Market Risk.)

Cash Flows
Our operating cash flow is affected by the cumulative cash flow generated from our various projects in the reported periods. Project cash flows are affected by the timing of the receipt of advances and the collection of accounts receivable from customers, as well as the timing of payments made by us in connection with the performance of the project. The receipt of payments usually relates to specific events during the project, while expenses are ongoing. As a result, our cash flow may vary from one period to another. Our policy is to invest our cash surplus mainly in interest bearing deposits, in accordance with our projected needs.
In general, subsidiaries are able to freely transfer cash dividends, loans or advances to Elbit Systems, subject to tax considerations in their applicable jurisdiction and subject to management commitment not to distribute tax exempt earnings. Such tax considerations have not had in the past, and are not anticipated to have, a material impact on our ability to meet our obligations.
Our net cash flow generated from operating activities in 2012 was approximately $198.4 million, resulting mainly from our net income and the increase in advances received from customers.
Net cash flow used in investment activities in 2012 was approximately $117.6 million, which was used mainly to purchase property, plant and equipment and investment in available-for-sale marketable securities.
Net cash flow used for financing activities in 2012 was approximately $84.1 million, which was used mainly for purchase of treasury shares, repayment of Series A Notes and payment of dividends to shareholders.
Our net cash flow generated from operating activities in 2011 was approximately $190.9 million, resulting mainly from our net income and the increase in advances received from customers.
Net cash flow used in investment activities in 2011 was approximately $55.1 million, which was used mainly to purchase property, plant and equipment and acquisitions of subsidiaries and business operations.
Net cash flow used for financing activities in 2011 was approximately $84.3 million, which was used mainly for purchase of the non-controlling interest in Elisra, repayment of Series A Notes and payment of dividends to shareholders.
Our net cash flow generated from operating activities in 2010 was approximately $186.0 million, resulting mainly from net income and increases in trade and other payables, which were partially offset, mainly by an increase in short and long-term trade receivables and prepaid expenses, increase in inventories net and a decrease in advances received from customers, which was a result of lower advances received in new projects in 2010.
Net cash flow used in investment activities in 2010 was approximately $255.5 million, which was used mainly to purchase property, plant and equipment, investments in short-term deposits and acquisitions of subsidiaries and business operations.
Net cash flow provided by financing activities in 2010 was approximately $79.9 million, resulting mainly from the issuance of Series A Notes, part of which was used for repayment of long-term loans and payment of dividends to shareholders.
Financial Resources
The financial resources available to us include profits, collection of accounts receivable, advances from customers and government of Israel and other third parties’ programs such as the OCS and development grants. In addition, we have access to bank credit lines and financing in Israel and abroad based on our capital, assets and activities.

Elbit Systems and some subsidiaries are obligated to meet various financial covenants set forth in our respective loan and credit agreements. Such covenants include requirements for shareholders’ equity, current ratio, operating profit margin, tangible net worth, EBITDA, interest coverage ratio and total leverage. As a result of recognition of the expense due to the cessation of a program with a foreign customer in December 2011 (see Item 18. Financial Statements - Note 1(C)), as of December 31, 2011, we did not meet one of our covenants. Subsequent to our balance sheet date (December 31, 2011), in March 2012 the banks waived such covenant through March 31, 2013, and accordingly our bank credits and loans as of December 31, 2011, were not negatively affected. As of December 31, 2012, the Company met all financial covenants.
On December 31, 2012, we had total borrowings from banks and public institutes  in the amount of $206 million, including $174  million in long-term loans, of which most of the loans mature in 2014 and $1,070 million in guarantees issued on our behalf by banks, mainly in respect of advance payment and performance guarantees provided in the regular course of business. In addition, at December 31, 2012, we had $467 million in outstanding debt under our Series A Notes, including $58 million maturing in 2013. On December 31, 2012, we had a cash balance amounting to $199 million. We also have the ability to raise funds on the capital market and through expansion of our credit lines. (See above “Israeli Debt Offering.”)
As of December 31, 2012, we had working capital of $375 million and a current ratio of 1.25. We believe that our working capital and cash flow from operations will be sufficient to support our current requirements and financial covenants.
We believe that our current cash balances, cash generated from operations, lines of credit and financing arrangements will provide sufficient resources to meet our operational needs for at least the next fiscal year. However, our ability to borrow funds from the banking system may be impacted by the ongoing global financial and liquidity situation. See Item 3. Risk Factors – General Risk Related to Our Business and Market.
For further information on the level, maturity and terms of our borrowings, see Item 18. Financial Statements – Notes 12 and 15.
We believe our ability to access external capital resources should be sufficient to satisfy existing short-term and long-term commitments and plans, and also to provide adequate financial flexibility to take advantage of potential strategic business opportunities should they arise within the next year.
Pensions and Other Post-Retirement Benefits
We account for pensions and other post-employment arrangements in accordance with ASC 715 “Compensation – Retirement Benefits”. Accounting for pensions and other post-retirement benefits involves judgment about uncertain events, including estimated retirement dates, salary levels at retirement, mortality rates, rates of return on plan assets, determination of discount rates for measuring plan obligations, healthcare cost trend rates and rates of utilization of healthcare services by retirees. These assumptions are based on the environment in each country. (For our pension and other post-retirement benefit assumptions at December 31, 2012 and 2011, see Item 18 – Financial Statements – Note 17.)
At December 31, 2012 our termination obligations were $407.7 million, of which we had severance funds of $302.7 million set aside to satisfy potential obligations.
Auction Rate Securities.  As of December 31, 2010, we had approximately $31.6 million (before cumulative impairment losses of $28.6 million) of principal invested in ARS. The estimated market value of our ARS holdings at December 31, 2010 was $7.2 million. In the fourth quarter of 2011 we sold our investment in the ARS for a consideration of $9.4 million.
Material Commitments for Capital Expenditures.  We believe that we have adequate sources of funds to meet our material commitments for capital expenditures for the fiscal year ending December 31, 2013 and the subsequent fiscal year. (See above “Financial Resources.”) We believe our anticipated capital expenditures (which include mainly the purchase of equipment, vehicles and buildings) as of December 31, 2012 were at a similar level to those as of December 31, 2011. We plan to pay for such anticipated expenditures using cash from operations. (See also Item 18. Financial Statements – Consolidated Statements of Cash Flows and Note 10.)

Impact of Inflation and Exchange Rates
Functional Currency.  Our reporting currency is the U.S. dollar, which is also the functional currency for most of our consolidated operations. A majority of our sales are made outside of Israel in non-Israeli currency, mainly U.S. dollars, as well as a majority of our purchases of materials and components. A significant portion of our expenses, mainly labor costs, are in NIS. Some of our subsidiaries have functional currencies in Euro, GBP and other currencies. Transactions and balances originally denominated in U.S. dollars are presented in their original amounts. Transactions and balances in currencies other than the U.S. dollar are remeasured in U.S. dollars according to the principles set forth in ASC 830 “Foreign Currency Matters”. Exchange gains and losses arising from remeasurement are reflected in financial expenses, net, in the consolidated statements of income.
Market Risks and Variable Interest Rates
Market risks relating to our operations result mainly from changes in interest rates and exchange rates. We use derivative instruments to limit exposure to changes in exchange rates in certain cases. We also typically enter into forward contracts in connection with transactions where long-term contracts have been signed and that are denominated in currencies other than U.S. dollars or NIS. We also enter from time to time into forward contracts and other hedging instruments related to NIS based on market conditions.
We use financial instruments and derivatives in order to limit our exposure to risks arising from changes in exchange rates. The use of such instruments does not expose us to additional exchange rate risks since the derivatives are held against an asset (for example, excess assets in Euros). Our policy in utilizing these financial instruments is to protect the dollar value of our cash and cash equivalent assets rather than to serve as a source of income.
In the context of our overall treasury policy specific objectives apply to the management of financial risks. These objectives are disclosed under the headings below “NIS/U.S. Dollar Exchange Rates”, “Inflation and Currency Exchange Rates” and “Foreign Currency Derivatives and Hedging”.
On December 31, 2012, our liquid assets were comprised of bank deposits, and short and long-term investments. Our deposits and investments are based on variable interest rates, and their value as of December 31, 2012 was therefore exposed to changes in interest rates. Should interest rates either increase or decrease, such change may affect our results of operations due to changes in the cost of the liabilities and the return on the assets that are based on variable rates.
NIS/U.S. Dollar Exchange Rates.  We attempt to manage our financial activities in order to reduce material financial losses in U.S. dollars resulting from the impact of inflation and exchange rate fluctuations on our non-U.S. dollar assets and liabilities. Our income and expenses in Israeli currency are translated into U.S. dollars at the prevailing exchange rates as of the date of the transaction. Consequently, we are affected by changes in the NIS/U.S. dollar exchange rates. We entered into other derivative instruments to limit our exposure to exchange rate fluctuations, related mainly to payroll expenses incurred in NIS. (See Item 11. Quantitative and Qualitative Disclosure of Market Risks.) The amount of our exposure to the changes in the NIS/U.S. dollar exchange rate may vary from time to time. (See Item 3. Key Information – Risk Factors – Risks Relating to Our Israeli Operations.)
Inflation and Currency Exchange Rates
The U.S. dollar cost of our operations in Israel is influenced by any increase in the rate of inflation in Israel that is not fully offset by the devaluation of the NIS in relation to the U.S. dollar. Unless inflation in Israel is offset by a devaluation of the NIS, such inflation may have a negative effect on the profitability of contracts where Elbit Systems or any of our Israeli subsidiaries receives payment in U.S. dollars, NIS linked to U.S. dollars or other foreign currencies, but incurs expenses in NIS linked to the CPI. Inflation in Israel and currency fluctuations may also have a negative effect on the profitability of fixed-price contracts where we receive payments in NIS.
In the past, our profitability was negatively affected when inflation in Israel (measured by the change in the CPI from the beginning to the end of the calendar year) exceeded the devaluation of the NIS against the U.S. dollar and at the same time we experienced corresponding increases in the U.S. dollar cost of our operations in Israel. For example, in 2010, the inflation rate was approximately 2.7%, and the NIS strengthened against the U.S. dollar by approximately 6%. In 2011, the inflation rate was approximately 2%, and the NIS devalued against the U.S. dollar by approximately 8%. In 2012, the inflation rate was approximately 1.6%, and the NIS strengthened  against the U.S. dollar by approximately 2%. There can be no assurance that we will not be materially adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind increases in inflation in Israel.

A devaluation of the NIS in relation to the U.S. dollar also has the effect of decreasing the dollar value of any of our assets that consist of NIS or accounts receivable denominated in NIS, unless such assets or accounts receivable are linked to the U.S. dollar. Such a devaluation also has the effect of reducing the U.S. dollar amount of any of our liabilities that are payable in NIS, unless such payables are linked to the U.S. dollar. On the other hand, any increase in the value of the NIS in relation to the U.S. dollar will have the effect of increasing the U.S. dollar value of any unlinked NIS assets as well as the U.S. dollar amount of any unlinked NIS liabilities and expenses.
Foreign Currency, Derivatives and Hedging
While our functional currency is the U.S. dollar, we also have some non-U.S. dollar or non-U.S. dollar linked exposure to currencies other than NIS. These are mainly non-U.S. dollar customer debts, payments to suppliers and subcontractors, obligations in other currencies, assets or undertakings. Some subcontractors are paid in local currency under prime contracts where we are paid in U.S. dollars. The exposure on these transactions has not been in amounts that are material to us. However, when we view it necessary, due to anticipated uncertainty in the applicable foreign exchange rates, we seek to minimize our foreign currency exposure by entering into hedging arrangements, obtaining periodic payments upon the completion of milestones, obtaining guarantees and security from customers and sharing currency risks with subcontractors.
Most of our future cash flows that will be denominated in currencies other than the NIS and the U.S. dollar were covered as of December 31, 2012 by forward contracts. On December 31, 2012, we had forward contracts for the sale and purchase of Euro, GBP and various other currencies. On December 31, 2012, we had forward contracts for the sale and purchase of such foreign currencies totaling approximately $285 million ($192 million in Euros, $74 million in GBP and the balance of $19 million in other currencies).
We also use forward exchange hedging contracts and options strategies in order to limit our exposure to exchange rate fluctuation associated with payroll expenses, mainly incurred in NIS. These include forward contracts with notional amount of $386 million in NIS maturing in 2013. (See also Item 11. Quantitative and Qualitative Disclosure of Market Risks.) As of December 31, 2012, an unrealized net gain of approximately $16.2 million was included in accumulated other comprehensive income. As of December 31, 2012, all of the forward contracts are expected to mature during the years 2013 – 2018.
Regarding the measures taken to reduce the foreign currency exchange rate impact on our Series A Notes see above “Liquidity and Capital Resources – Israeli Debt Offering.”
The table below presents the balance of the derivative instruments held in order to limit the exposure to exchange rate fluctuations as of December 31, 2012 and is presented in millions of U.S. dollar equivalent terms:
Gain (Loss)
Buy US$ and Sell:
    131.7       2.2  
    28.3       (0.1 )
Other various currencies                                                                                               
    14.8       (1.3 )

Gain (Loss)
Sell US$ and Buy:
    60.7       (0.9 )
    45.3       1.2  
    386.1       17.2  
Other various currencies                                                                                               
    4.3       1.4  
*       Notional amount information is based on the foreign exchange rate at year end.

Contractual Obligations
Less than
More than
1 year
2-3 years
4-5 years
5 years
(U.S. dollars in millions)
1. Long-Term Debt Obligations
    32       174       2        
2. Series A Notes
    58       117       117       175  
3. Operating Lease Obligations*
    34       50       33       93  
4. Purchase Obligations*
    741       172       32       4  
5. Other Long-Term Liabilities Reflected on the Company’s Balance Sheet under U.S. GAAP**
6. Other Long-Term Liabilities***