Ladies and gentlemen, thank you for standing by. Welcome to Elbit Systems' Q1 2022 results conference call. All participants are present in listen-only mode. Following management formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded. You should have all received by now the company's press release that is available in the news section of the company's website, www.elbitsystems.com. I would now like to hand the call to Rami Myerson, Elbit Systems Investor Relations Director. Rami, please go ahead.
Thank you, operator. Good day, everyone, and welcome to our Q1 2022 earnings call. On the call with me today are Bezhalel Machlis, our president and CEO, Kobi Kagan, our CFO, and Joseph Gaspar, senior EVP, Business Management. Before we begin, I would like to point out that the safe harbor statement in the company's press release issued earlier today also applies to the content of this conference call. As we do every quarter, we will provide you with both our regular GAAP financial data, as well as certain supplemental non-GAAP information. We believe that this non-GAAP information provides additional detail to help understand the performance of the ongoing business. You can find all the detailed GAAP financial data, as well as the non-GAAP information and the reconciliation in today's press release.
Kobi Kagan will begin by providing a discussion of the financial results, followed by Bezhalel Machlis, who will talk about some of the significant events during the quarter and beyond. We will then turn the call over to a question and answer session. With that, I would like to ask now to turn the call over to Kobi Kagan. Kobi Kagan, please.
Thank you, Rami. Hello, everyone, and thank you for joining us today. It is both an honor and a privilege to present Elbit Systems' Q1 results to you today. I would like to thank Yossi Gaspar for his role in recent months. Yossi has retained responsibility for capital markets and investor relations. I look forward to meeting you Elbit Systems investors and analysts over the coming weeks and months. The first quarter results reflect a healthy market environment for Elbit Systems and sustained demand for our solutions from customers around the world. Revenue growth in the quarter was primarily due to the fulfillment of orders received in previous years and the Sparton acquisition. The Russian invasion of Ukraine in late February and proposed budget increases didn't have a material impact on order intake or revenues in the quarter.
Profitability in the quarter includes a sharp increase in expenses related to increased stock price-linked compensation plans. These plans help align employee compensation with share price performance, incentivizing our employees to generate long-term value for all of Elbit Systems' stakeholders. Our GAAP and non-GAAP results have always included these expenses. In the Q1 , compensation expenses were significantly larger than normal, following the appreciation in the share price after the Russian invasion of Ukraine. Reducing profitability in the quarter is noted in our Q4 and full year 2021 results press release published on March 29th, 2022. Assuming a decline in share price volatility, we expect that these stock price-linked compensation expenses to return to historic levels. I will now highlight and discuss some of the key figures and trends in our financial results.
Q1 revenues were $1,353 million, an increase by 21% year-over-year. A major part of the growth was organic, in addition to the contribution from Sparton, which was acquired in the Q2 of 2021. In terms of revenue breakdown across our area of operations, Airborne Systems accounted for 37% of total revenues and increased year-over-year, mainly due to airborne precision-guided munitions sales. Land Systems sales accounted for 22% of total revenues, a similar level of revenues to 2021. C4I ISR at 29% of revenues increased year-over-year, primarily due to the acquisition of Sparton and unmanned systems sales. Electro-Optics accounted for 9%, and other sales accounted for 3% of revenues. Our diverse geographic revenue base is important to the long-term sustainability of our business.
In the Q1 , North America contributed 27% of our revenues, Asia Pacific 30%, Israel was 21%, and Europe 19%. Asia Pacific revenues increased mainly due to sales of precision-guided munitions and UAS. The growth in European revenues was due primarily to training and simulation sales. The non-GAAP gross margin for the Q1 was 24.6%, compared to the Q1 of 2021 at 25.6%. GAAP gross margin in the Q1 was 24.2% of revenues, compared to 25.2% in the Q1 of 2021. GAAP and non-GAAP profit in the Q1 include approximately $20 million of expenses related to stock price-linked compensation plan.
Q1 non-GAAP operating income was $65.8 million or 4.9% of revenues, compared with $92.9 million or 8.3% of revenues last year. GAAP operating income for the Q1 was $58.6 million versus $83.8 million in the Q1 of 2021. GAAP and non-GAAP operating profit in the Q1 included expenses of approximately $35 million related to the stock price-linked compensation plans. The operating expense breakdown in the Q1 was as follows. Net R&D expenses were 7.4% of revenues versus 7.5% in 2021. Marketing and selling expenses increased to 6.4% of revenues from 4.6% last year due to the Sparton acquisition and the stock price-linked compensation expenses.
G&A expenses were 6.2% of revenue, compared to 5.5% last year due to stock price-linked compensation expenses. Other operating income includes a capital gain of $3.7 million related to the disposal of a non-core business. Financial income was $1.1 million in the Q1 , compared to financial expenses of $200,000 in 2021. We recorded a tax expense of $8 million in the Q1 , compared to $10.8 million in 2021. The effective tax rate in the Q1 was 13.8%, compared to 13.4% in 2021. Our non-GAAP diluted EPS was $1.22 in the Q1 , compared with $1.72 last year.
The GAAP diluted EPS was $1.19, compared with $1.64 last year. The stock price-linked compensation expenses in the quarter were equivalent to approximately 72 cents on an EPS basis. Our backlog of orders as of March 31, 2022 was approximately $13.7 billion, $1.9 billion higher than the backlog at the end of March 2021, and at a similar level to the backlog at the end of 2021. Approximately 55% of the current backlog is scheduled to be performed during 2022 and 2023, and the rest is scheduled for 2024 and beyond. The percentage of short-term backlog declined in recent years following the receipt of more long-term contracts, improving our visibility for future revenues.
Operating cash flow for the Q1 was a $36 million inflow, compared to a $30 million outflow in the same quarter last year. The board of directors declared a dividend of $0.50 per share for the Q1 of 2022. I will now turn the call over to Mr. Machlis, Elbit CEO. Butzi, please go ahead.
Thank you, good Kobi, and good luck. Growth in the Q1 reflect the strong demand for our solutions from customers around the world. As Kobi mentioned, growth in the quarter does not include the impact of the Russian invasion of Ukraine or the proposed increase in defense spending by NATO countries. In recent months, we have witnessed a noticeable increase in our sales and incoming inquiries as militaries look to equip themselves with a range of Elbit's capabilities. We believe many of these will convert to orders and revenues over time. I expect elevated geopolitical tensions and growing defense budget will support the improved momentum in the businesses over the coming years. I would like to share my perspective on the profitability and compensation expenses in the quarter. Elbit Systems' 19,000 employees are the company's most important assets.
We continue to invest in recruiting, retaining and motivating a high quality workforce to realize the long-term potential of Elbit Systems. I believe it is important to align employee compensation and incentives to the share price to encourage long-term value creation for all stakeholders. We continue the work on a range of efficiency planning, as we have discussed with you in the past, as part of our effort to improve profitability and cash generation. Turning to recent geopolitical development, the Russian invasion of Ukraine was a wake-up call for many countries. I expect it to be a turning point for European and global defense spending. Elbit Systems has invested in a broad portfolio and global footprint and is well-positioned to benefit from faster defense budget growth proposed by government in Europe and in other parts of the world.
Elbit Systems has a global footprint of multiple operational subsidiaries that are an integral part of the domestic defense ecosystem in their home countries. They employ hundreds of local employees and support domestic supply chains. I expect that our subsidiaries will benefit from the increasing defense budget in their home countries as governments look to invest the increased funding in supporting the domestic defense industrial base. Our investment in R&D as a percentage of sales is higher than many of our peers to ensure we can provide a portfolio of technologically advanced, cost-effective solutions to our customers. Elbit Systems has demonstrated that it can leverage the significant operational experience of our engineers. Most of them are veterans with significant military experience. Many of them continue to serve in the reserve, often using Elbit products and systems. These provide a valuable short feedback loop between the field and lab.
The Ukraine conflict has highlighted the relevance of our portfolio. I would like to provide a few examples. Elbit Systems provides a broad range of systems that provide or enable protection of aerial, naval, and ground platforms from a range of threats. We provide electronic warfare system for aerial platform like the Missile Warning System for the U.S. Air Force, Air National Guard, F-16. In May, we were selected by Airbus to supply J-MUSIC DIRCM system for the A330 MRTT aircraft of European Air Force. Our DIRCM system defend military and commercial aircraft from ground-to-air missiles. We also supply chaff and flare for a range of aircraft. The Iron Fist active protection system has been selected by Israel, the Netherlands, Australia, and the U.S. to protect armed vehicles from a range of incoming threats.
Last year, the U.K. MoD selected Elbit Systems U.K. to provide electronic warfare system that will help protect the Royal Navy ships. We expect an increase in demand for unmanned systems as a result of the conflict. Elbit Systems has a broad portfolio of unmanned aircraft. The IDF recently unveiled a new reconnaissance and attack companies that will incorporate Elbit Systems drones to identify and designate targets at a battalion level. A few months ago, the Hermes 450 was the first unmanned aircraft certified for commercial airspace. The conflict highlighted the need for advanced command and control systems that enable combined forces operations by connecting intelligence, maneuvering forces, and logistics across multiple domains.
Our C2 systems incorporate intelligence gathering, gathered by a range of sensors, utilize AI to identify targets, and connect to the relevant effector, shortening the sensor-to-shooter loop, and helping our customers to engage targets quickly and efficiently. Our command and control systems are in service with customers including Israel, Sweden, the Netherlands, the U.K., and the U.S. These are just a few examples, and I believe there are many other products and systems in Elbit Systems' portfolio that should benefit from increased demand as militaries around the world apply the lessons learned from the conflict in Ukraine. I would like to reiterate Elbit Systems' commitment to environmental, social, and governance best practices. At our recent Investor Day, we highlighted the investments we are making to reduce our environmental footprint.
We are also introducing electric vehicles for our employees after a very successful rollout of hybrid vehicle in few years ago. We are rolling out solar field at our new facility in the south of Israel, and PV panels on the roof of buildings around the world. We are also connecting sites to natural gas to reduce emissions. We are investing R&D to develop solutions that will help reduce fuel consumption and emission. One example of this R&D are our training and simulation systems that help reduce the flying hours required to train a pilot. I am proud to see the involvement of thousands of Elbit Systems employee all over the world in activities that benefit their communities. Last week, more than 70 Elbit employees organized, hosted, and monitored a hackathon to develop tools that protect children from violence on social media.
I visited the hackathon and was impressed to see how our employees leveraged Elbit's innovative and integration culture to develop tools to protect our children online. With that, I will be happy to take your questions. Operator?
Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you are using speaker equipment, kindly raise the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Scott Forbes of Jefferies. Please go ahead.
Hi. How are you kind of seeing demand signals come through as we think about the opportunities stemming from what's happening in Eastern Europe, particularly as we've started to get some clarity on NATO budgets? I mean, what do you see as really the largest areas of opportunity? I mean, whether that really be from a product perspective or more geographical.
It's a combination. I would say that we see in Europe growing demand for solutions to protect platforms and sites, which includes the EW solution, DIRCM system, active protection system, and Chaff and Flare and more. We also see growing demand for UAVs, for command and control system, for intelligence solutions, for cyber protection systems. Also for guided ammunition. Growing demand for guided ammunition in order to fill stocks again in Europe. This is not just Europe. We see growing demand also in the U.S., also in the Far East, as to support the forces to protect themselves against China. Actually we see growing demand.
Also here in Israel, we have a budget, we have a five-year planning, and we are getting also new programs and contracts here in our country. Altogether, we see growing demand for most of our portfolio, and we see also growing budgets and interests almost all over the world. The fact we have such a wide portfolio and so many facilities in the U.S., of course, in Canada, in the U.K., in Germany, in Austria, in Romania, in India, in Australia and many others, help us to be part of the local supply chain in all of these countries. The combination of wide portfolio, large footprint, is a strong strategy of the company for many years, and we are taking benefit of it now.
We expect to see many more contracts to the company and to continue the momentum we are seeing also in the coming quarters.
Just on the U.S. specifically, I mean, you got a chance to go out and take a more detailed look at the FY 2023 budget. We got a bit up this year. What were your initial takeaways, and how do you feel your product portfolio lines up to those priorities being shown in that budget?
I would say that we see a growing demand for naval activity and the power. The fact we have Sparton right now as part of the Elbit family helps us a lot to participate in this effort. Talking about airborne activities, just to remind all of us that we have systems like helmets, like part of the avionics on each and every F-35, F-16, F-18, V-22, F-16 of course, each Apache. We have a major part on the T-X, the T-7 of Boeing. So we have a strong position on many airborne platforms in the U.S.
We have also many systems to support the ground forces, which includes laser designator, which include night vision equipment for the soldier, target acquisition solution, guided ammunition, active protection system, which are all required to support the troops in Europe. Altogether we, I believe that we are well-positioned to take advantage of the growing need also in the U.S. market based on our strong position we have in the U.S. under Elbit Systems of America, which has more than 3,000 employees with it.
Thank you.
Thanks, Scott.
The next question is from Ella Fried of Bank Leumi. Please go ahead.
Ella? Ella? Yes.
When I was offline, I congratulated you on the growth in this quarter, even so it is not necessarily representative of the year. We shall hope that it indicates a lot. I would like to ask you about the timeline that you spoke of of these opportunities that you spoke of. Because things in the defense industry usually are moving slowly and there's a feeling that this time some countries are very keen to get their orders as fast as possible. How much of it do you expect, or expect is too strong a word.
Do you think that will be translated into orders that we will see before the end of this year? Obviously, the next year we'll see lots of it, but presently, there's a feeling that a lot of is going on, but how much of it is actually translated into real orders that are visible in the near quarters?
Thank you, Ella. First, I want to remind all of us that you can see the numbers. I believe an impressive growth in revenue, which is prior to the invasion of Ukraine. The invasion of Ukraine took place in the end of February this year. What you can see in the numbers is a 21% year-over-year increase in revenue. If you take out the one-time expense we had for the phantom option, you can see also growth in the GP.
You can see growth in the GP from $281 million to $347 million. I'm talking GAAP number for a minute, and the OP from $84 million to $94 million. We see a significant growth in revenues and also, I mean, growth in profit that's before the incursion into Ukraine. With regard to your question, we see a lot of inquiries, and we see a growing demand for the system product we have. I can tell you that. We also see some urgent requirements, which I believe will lead to programs into contracts in a relatively short period of time, hopefully this year.
Of course, we also see growing budgets, which part of it will yield next week, next year as well. We see that the funnel of opportunities is growing, and I believe that part of it will be seen in our numbers in the coming quarters this year.
Okay. Thank you. I have also a financial question. In the gross margins were a bit more solid in this quarter. We know that there are lots of pressures that are the currency rate and the supply chains and a lot of inflation and many other reasons. Can we hope to see this level of above 26% throughout the year, or it's still? I know that you are doing your best to do it, but is it something that we can expect or we have to be careful there?
Hi, Ella. This is Yossi.
Hi, Yossi.
You know, Ella, from previous discussion that we are not providing guidance. However
Yeah.
Excluding the extraordinary incurrence of expenses due to the stock price that we discussed earlier, we have improved from previous quarter to this quarter by 0.4% our gross profit. We have improved by a significant amount also the operating profit. The one thing that I wanted to point out that I'm not sure that it was transmitted properly. In view of what Butzi just mentioned earlier, the increase in the funnel of the marketing opportunities, if you look at our results, you will see.
I noticed actually that it went up.
You will see an increase.
I saw that it was the opportunity.
Yeah. You have seen an increase of marketing expenses. Now, this is not just by spending money. This is, these are two things that are related one with another. When we have marketing opportunities growing, then definitely the company is spending the marketing efforts in order to catch this new business. There is a correlation, and these extraordinary expenses in the marketing, they definitely have affected our operating profit to some extent. Now, we want to catch the business. We want to do everything possible in order to benefit from what's happening in the business environment that we are experiencing now, which is very positive.
Maybe we have a little bit of a drag on our operating profit because of this element, but no doubt that increasing our backup and growing the top line, everything will be shown and will show up in the operating profit and bottom line as well in the future.
Thank you.
Ella, I also want to add to topics which I believe are important. We continue to work on efficiencies, to invest in new facilities. We know that we are building a new facility in the south for IMI, and we continue to deploy the new ERP system in the company, which I'm sure we'll benefit from it in the near future as well. Of course, the currency level as it is now is more favorable than it was in the first quarter, which I hope will also help us to create more profit in the future.
Okay. Thank you very much.
Thank you, Ella.
If there are any additional questions, please press star one. If you wish to cancel your request, please press star two. Please stand by while we pull for more questions. There are no further questions at this time. Before I ask Mr. Machlis to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available two hours after the conference ends. In the US, please call 1-888-782-4291. In Israel, please call 03-925-5900. Internationally, please call 972-3-925-5900. A replay of this call will also be available on the company's website, www.elbitsystems.com. Mr. Machlis, would you like to make your concluding statement?
Thank you. I would like to thank all our employees for their continued hard work and contribution to Elbit's success. To everyone on the call, thank you for joining us today and for your continued support and interest in our company. Have a good day and goodbye.
Thank you. This concludes the Elbit Systems Ltd. first quarter 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.