Elbit Systems (ESLT) Risk Factors

We derive a significant portion of our revenues from international sales. Entry into new markets as well as changes in international, political, economic or geographic conditions could cause significant reductions in our revenues. In addition to the other risks from international operations set forth elsewhere in these risk factors, some of the risks of doing business internationally include international trade sanctions, imposition of tariffs and other trade barriers and restrictions. Imposition of import restrictions or tariffs by any government could lead to retaliatory actions by other countries with broad effects in many industries and economies internationally. Broad-based international trade conflicts, as well as conflicts involving the State of Israel, such as the "Swords of Iron" war, could have negative consequences on the demand for our products and services outside Israel as well as on exports from other countries to Israel (including by our suppliers) (see "Conditions in Israel and the Middle East may affect our operations" below). Some of our global subsidiaries and their employees and business partners are also subject from time to time to protests and vandalism that are aimed against Israel, Elbit and Israeli defense contractors. Other risks of doing business internationally include political and economic instability in the countries of our customers and suppliers, changes in diplomatic and trade relationships, increasing instances of terrorism worldwide and armed conflicts, some of which may be affected by Israel's overall political situation (see "Risks Related to Our Israeli Operations and Environment" below). Although we generally do not conduct business in Russia and Ukraine, an escalation or expansion of this conflict could continue to affect additional regions and increase the volatility of global economic conditions. In addition, sanctions by the Israeli government, the U.S. government or by other governments or international organizations that apply with respect to our counterparties to certain contracts may make it difficult or impossible to complete these or other related contracts. Trade restrictions applied by the Israeli government with respect to certain countries sometimes also limit our sales to other governments that did not apply the same restrictions. All of these could, in turn, affect our business. As of the date of this annual report we are unable to predict the full impact of the conflict between Russia and Ukraine nor the "Swords of Iron" war on the economy or on our business and operations. Any of the foregoing risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.

In recent years, the Covid-19 pandemic has adversely impacted the global economy, the markets in which we operate and our operations, including a slow-down in our commercial aviation business. The pandemic's macro-economic implications included disrupted transportation networks and global supply chains and shortages of components, which have caused us increased costs and extended lead times, and also prompted us to increase our inventories. The emergence of new variants or other pandemics, as well as possible governmental responsive actions, such as quarantines, lockdowns, restrictions on holding large-sale events and travel restrictions, could create business disruptions for us and our customers, supply chain and other business partners, potentially resulting in cessation, reduction or delay of business and an increase of our costs and may also impact government priorities and budgets and the demand for our products. These could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.

We generate a substantial amount of our revenues in currencies other than the U.S. dollar (our financial reporting currency), mainly New Israeli Shekels (NIS), Great Britain Pounds (GBP), Euro, Brazilian reals and Australian dollars, and we incur a substantial amount of our expenses (primarily human resources, operational and supply chain expenses) in currencies other than the U.S. dollar, mainly NIS. To the extent we derive our revenues or incur our expenses in currencies other than the U.S. dollar, we are subject to exchange rate fluctuations between the U.S. dollar and such other currencies. For example, we are sometimes negatively affected by exchange rate changes during the period from the date we submit a price proposal until the date of contract award or until the date(s) of payment. Certain currency derivatives we use to hedge against exchange rate fluctuations may not fully protect against sharp exchange rate fluctuations, and in some cases we are not be able to adequately and cost-effectively hedge against all exchange rate fluctuations. In addition, our international operations expose us to the risks of price controls, restrictions on the conversion or repatriation of currencies, or even devaluations or hyperinflation in the case of currencies issued by countries with unstable economies. All of these currency-related risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. See below "Risks Related to Our Israeli Operations and Environment – We may be affected by changes in Israel's economy" and Item 5. Operating and Financial Review and Prospects – Impact of Inflation and Exchange Rates.

The markets we serve are highly competitive and characterized by rapid changes in technologies and evolving industry standards. In addition, some of our systems and products are installed on platforms that may have a limited life or become obsolete. Unless we develop new offerings or enhance our existing offerings, we may be susceptible to loss of market share resulting from the introduction of new or enhanced offerings by our competitors. We compete with many large and mid-tier defense, homeland security and commercial aviation contractors on the basis of system performance, cost, overall value, delivery and reputation. Many of these competitors are larger and have greater resources than us, and therefore may be better positioned to take advantage of economies of scale and develop new technologies. Some of these competitors are also our suppliers in some programs. Accordingly, our future success will require that we: - identify emerging technological trends;- identify additional uses for our existing technology to address customer requirements;- develop, upgrade and maintain competitive products and services;- add innovative solutions that differentiate our offerings from those of our competitors;- bring solutions to the market quickly at cost-effective prices;- develop working prototypes as a condition to receiving contract awards; and - structure our business, through joint ventures, teaming agreements and other forms of alliances, to reflect the competitive environment. We need to continually invest significant human capital and financial resources to pursue these goals, and there can be no assurance that adequate resources will continue to be available to us or be prioritized for these purposes. We may experience difficulties that delay or prevent our development, introduction and marketing of new or enhanced offerings, and such new or enhanced offerings may not achieve adequate market acceptance. Moreover, new technologies or changes in industry standards or customer requirements could render our offerings obsolete or unmarketable. Any new offerings and technologies are likely to involve costs and risks relating to design changes, the need for additional capital and new production tools, satisfaction of customer specifications, adherence to delivery schedules, specific contract requirements, supplier performance, customer performance and our ability to predict program costs. New products sometimes lack sufficient demand or experience technological problems or production delays. Our customers frequently require demonstrations of working prototypes prior to awarding contracts for new programs or require short delivery schedules which sometimes causes us to purchase long-lead items or materials in advance of the contract award, without any certainty of receiving the award. Moreover, due to the design complexity of our products, we sometimes experience delays in developing and introducing new products. Such delays sometimes result in increased costs and development efforts, deflect resources from other projects or increase the risk that our competitors may develop competing technologies that gain market acceptance in advance of our products. If we fail in our new product development efforts, or our products or services fail to achieve market acceptance more rapidly than the products or services of our competitors, our ability to obtain new contracts could be negatively impacted. Any of the foregoing costs and risks could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.

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 IP, some of which is not formally protected. Our formally protected IP includes patents, trade secrets, copyrights and trademarks. We also utilize non-disclosure agreements, confidentiality provisions in sales, procurement, employment and other agreements and technical measures to establish and protect proprietary rights in our products. Our ability to successfully protect our IP may be limited because: - IP laws in certain jurisdictions may be relatively ineffective;- detecting infringements and enforcing proprietary rights may be difficult due to unavailability of details of competitors' technology and may divert management's attention and company resources;- contractual measures such as non-disclosure agreements and confidentiality provisions may afford only limited protection;- our patents may expire, thus providing competitors access to the applicable technology;- competitors may independently develop products that are substantially equivalent or superior to our products or circumvent our IP rights; and - IP not formally protected may be misappropriated or leaked to our competitors. In addition, sometimes third parties register patents in technologies relevant to our business areas and assert infringement claims against us. The cost of defending against infringement claims could be significant, regardless of whether the claims are valid. If we are not successful in defending such claims, we may be prevented from using or selling certain products of ours, be liable for damages and required to make adjustments to our software, technology or products, or to obtain licenses, which may not be available on reasonable terms, any of which may have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow.

A cyber or security attack or other similar incident resulting in a breach, disruption or failure in our or our supply chain's digital environment could adversely affect us. Our operations depend heavily on the continued and secure functioning of our varied digital environment software and hardware that stores, processes and transmits data within the Company and from and to us and our business partners. This digital environment is subject to breach, damage, destruction, disruption, malfunction or failure from, among other things, cyber-attacks and other unauthorized intrusions, power losses, telecommunications failures, earthquakes, fires and other natural disasters. We are continuously subjected to attempted cyber-attacks, ranging from standard phishing mails to sophisticated campaigns. Our computer and communications systems, databases and users face ongoing threats of malicious software (malware), social engineering, distributed denial of service (DDoS), malicious code, zero-day vulnerabilities and other security threats and system disruptions carried out by different threat actors. For example, in June 2022, our monitoring and protection systems detected a cyber-incident at our U.S. subsidiary involving unauthorized access by a ransomware group to our subsidiary's network that resulted in disclosure of certain personal data and a minimal amount of non-critical business data. The incident was contained through the implementation of various measures, including the immediate shut-down of the network, which was gradually restored. Relevant authorities were notified by our subsidiary. We believe this incident did not have a material impact on the Company. In particular, we are targeted by experienced and skilled computer programmers and hackers, including those sponsored by or acting for foreign governments or terrorist organizations. Such programmers and hackers attempt to penetrate or circumvent our cyber security defenses, obtain data and damage or disrupt our digital environment in order to, among other things, misappropriate or compromise our intellectual property or other proprietary or protected information or that of our employees, customers and other business partners, prevent us from being able to use such information in our operations or demand that we pay ransom. Our suppliers are also sometimes subject to cyber-attacks, which pose a risk to those of our systems and operations that are dependent on such suppliers. Governmental and other end users and customers are increasingly requiring us and our supply chain to meet specific computer system cyber protection and information assurance requirements and standards as a pre-condition to receive customer program-related information and enter into business contracts. We devote significant resources to configure, operate, maintain, monitor, upgrade and improve the security of our systems and databases and to meet applicable customer requirements regarding their protection. However, despite our efforts to secure our systems and databases and meet cyber protection and information assurance requirements, such as by adding data security obligations and data breach notification requirements in our agreements with certain third-party service providers, due to the complex and evolving nature of the cyber security risk landscape, we and our suppliers may still face system failures, data breaches, loss of intellectual property and interruptions in our operations, or fail to meet customer requirements, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. For information about our cybersecurity risk management, strategy and governance, see Item 16K. Cybersecurity.

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 competing with some of them. Decisions to consolidate business by these major contractors or our failure to maintain good business relations with them could negatively impact our business.

Our contracts with customers may be terminated, amended or delayed by our customers for various reasons, including for their convenience. Such terminations, amendments or delays which the Company from time to time faces, may be due to factors over which we have little or no control (see also "Our revenues depend on a continued level of government business" above). In some cases, termination would eliminate our right to payment under the contract and could also cause additional expenses, which could have a material adverse effect on our business, reputation, financial condition, results of operations and cash flow. On March 5, 2024, the Company reported an expected write-off in the fourth quarter of 2023 of approximately $34 million related to a discontinued project.