FORTY Formula Systems 1985 Ltd

Formula Systems (1985) Ltd. (Nasdaq and TASE: FORTY), a global information technology group engaged, through its subsidiaries and affiliates, in providing software consulting services and computer-based business solutions and developing proprietary software products, today announced its results for the second quarter and six month-period ended June 30, 2022.

Financial Highlights for the Second Quarter Ended June 30, 2022

• Consolidated revenues for the second quarter ended June 30, 2022 increased by 9.6% to $644.6 million, compared to $587.9 million in the second quarter of the previous year.

• Consolidated operating income for the second quarter ended June 30, 2022 increased by 97.0% to $99.5 million, compared to $50.5 million in the second quarter of the previous year. Operating income for the second quarter of 2022 included a capital gain realized from the disposition of a Matrix IT subsidiary in an amount of $44.2 million. Excluding such impact, consolidated operating income for the second quarter ended June 30, 2022, increased by 9.5% compared to the second quarter of the previous year.

• Consolidated net income attributable to Formula’s shareholders for the second quarter ended June 30, 2022 increased by 147% to $32.9 million, or $2.12 per fully diluted share, compared to $13.3 million, or $0.86 per fully diluted share, in the second quarter of the previous year. Net income for the second quarter of 2022 was positively impacted by approximately $17.1 million of income realized from the disposition of a subsidiary of Matrix IT Ltd. Excluding such impact, consolidated net income attributable to Formula’s shareholders for the second quarter ended June 30, 2022 increased by 18.9% year over year compared to the second quarter of the previous year.

Financial Highlights for the Six Month-Period Ended June 30, 2022

• Consolidated revenues for the first half ended June 30, 2022 increased by 12.2% to $1.3 billion, compared to $1.16 billion in the first half of the previous year.

• Consolidated operating income for the first half ended June 30, 2022 increased by 62.2% to $158.9 million, compared to $98.0 million in the first half of the previous year. Operating income for the first half of 2022 included a capital gain realized from the disposition of a Matrix IT subsidiary in an amount of $44.2 million. Excluding such impact, consolidated operating income for the first half ended June 30, 2022, increased by 17.1% compared to the first half of the previous year.

• Consolidated net income attributable to Formula’s shareholders for the first half ended June 30, 2022 increased by 90.9% to $49.2 million, or $3.18 per fully diluted share, compared to $25.8 million, or $1.66 per fully diluted share, in the first half of the previous year. Net income for the first half of 2022 was positively impacted by approximately $17.1 million of income realized from the disposition of a subsidiary of Matrix IT Ltd. Excluding such impact, consolidated net income attributable to Formula’s shareholders for the first half ended June 30, 2022 increased by 24.6% year over year compared to the first half of the previous year.

• As of June 30, 2022, Formula held 48.7%, 43.9%, 46.3%, 100%, 50%, 90.1%, 80% and 100% of the outstanding ordinary shares of Matrix IT Ltd., Sapiens International Corporation N.V., Magic Software Enterprises Ltd., Michpal Micro Computers (1983) Ltd., TSG IT Advanced Systems Ltd., Insync Staffing Solutions, Inc., Ofek Aerial Photography Ltd. and ZAP Group Ltd., respectively.

• Consolidated cash and cash equivalents, short-term bank deposits and investments in marketable securities totaled approximately $451.5 million as of June 30, 2022, compared to $512.5 million as of December 31, 2021.

• Total equity as of June 30, 2022 was $1.16 billion (representing 44.5% of the total consolidated statements of financial position), compared to $1.18 billion (representing 42.9% of the total consolidated statements of financial position) as of December 31, 2021.

Debentures Covenants

As of June 30, 2022, Formula was in compliance with all of its financial covenants under the debenture series issued by it, based on the following achievements:

Covenant 1

• Target equity attributable to Formula’s shareholders (excluding non-controlling interests): above $215 million.

• Actual equity attributable to Formula’s shareholders as of June 30 was equal to $540.7 million.

Covenant 2

• Target ratio of net financial indebtedness to net capitalization (in each case, as defined under the indenture for Formula’s Series A and C Secured Debentures): below 65%.

• Actual ratio of net financial indebtedness to net capitalization, as of June 30, 2022, was equal to 8.6%.

Covenant 3

• Target ratio of net financial indebtedness to EBITDA (based on the accumulated calculation for the four most recent quarters): below 5.

• Actual ratio of net financial indebtedness to EBITDA (based on the accumulated calculation for the four most recent quarters and excluding a capital gain of $44.2 million realized from the disposition of a Matrix IT subsidiary), as of June 30, 2022, was equal to 0.25.

Comments of Management

Commenting on the results, Guy Bernstein, CEO of Formula Systems, said: “I am proud that the momentum we saw coming out of 2021 has continued throughout the first half of 2022, reflected in all-time high first half financial results across all our key financial indices. We continue to demonstrate strong results in 2022, delivering solid growth in revenue, reaching $644.6 million in revenues for the second quarter, with a record-breaking net income for the second quarter of $15.9 million that reflected 18.9% year over year growth, excluding the impact of the disposition of Infinity Labs Ltd, a subsidiary of Matrix IT Ltd. These outstanding results stand as a testament to our strong fundamentals and our pivotal role in influencing our customers’ growth strategies across all the areas in which we operate. Our broad investment portfolio allows us to carefully mitigate the current risks in the IT market, which are mainly the challenging macro-economic environment, as well as the fierce competition over talented IT workforce. We continue our efforts across our entire group to adhere to our core values of innovation, professionalism, agility and transparency, which allow us to continue to create significant value for our customers in managing, streamlining, accelerating and contributing to their growth. We continue to invest organically and inorganically in our service lines and are excited about the innovative capabilities we are building to drive continued long term profitable growth and shareholder value.”

Stand-Alone Financial Measures

This press release presents, further below, certain stand-alone financial measures to reflect Formula’s stand-alone financial position in reference to its assets and liabilities as the parent company of the group. These financial measures are prepared consistent with the accounting principles applied in the consolidated financial statements of the group. Such measures include investments in subsidiaries and a jointly controlled entity measured at cost adjusted by Formula’s share in the investees’ accumulated undistributed earnings and other comprehensive income or loss.

Formula believes that these financial measures provide useful information to management and investors regarding Formula’s stand-alone financial position. Formula’s management uses these measures to compare the Company’s performance to that of prior periods for trend analyses. These measures are also used in financial reports prepared for management and in quarterly financial reports presented to the Company’s board of directors. The Company believes that the use of these stand-alone financial measures provides an additional tool for investors to use in evaluating Formula’s financial position.

Management of the Company does not consider these stand-alone measures in isolation or as an alternative to financial measures determined in accordance with GAAP. Formula urges investors to review the consolidated financial statements which it includes in press releases announcing quarterly financial results, including this press release, and not to rely on any single financial measure to evaluate the Company’s business or financial position.

About Formula

Formula Systems, whose ordinary shares are traded on the Tel-Aviv Stock Exchange and ADSs are traded on the Nasdaq Global Select Market, is a global information technology holding company engaged, through its subsidiaries and affiliates, in providing software consulting services and computer-based business solutions and developing proprietary software products.

For more information, visit www.formulasystems.com.

Press Contact:

Formula Systems (1985) Ltd. +972-3-5389487 ir@formula.co.il

Forward Looking Statements

Certain matters discussed in this press release that are incorporated herein and therein by reference are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, that are based on our beliefs, assumptions and expectations, as well as information currently available to us. Such forward-looking statements may be identified by the use of the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “plan” and similar expressions. Such statements reflect our current views with respect to future events and are subject to certain risks and uncertainties. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to: adverse macro-economic trends, including inflation, rising interest rates and supply chain delays, triggered in part by the COVID-19 (coronavirus) pandemic, which trends may last for a significant period and materially adversely affect our results of operations; the degree of our success in our plans to leverage our global footprint to grow our sales; the degree of our success in integrating the companies that we have acquired through the implementation of our M&A growth strategy; the lengthy development cycles for our solutions, which may frustrate our ability to realize revenues and/or profits from our potential new solutions; our lengthy and complex sales cycles, which do not always result in the realization of revenues; the degree of our success in retaining our existing customers or competing effectively for greater market share; difficulties in successfully planning and managing changes in the size of our operations; the frequency of the long-term, large, complex projects that we perform that involve complex estimates of project costs and profit margins, which sometimes change mid-stream; the challenges and potential liability that heightened privacy laws and regulations pose to our business; occasional disputes with clients, which may adversely impact our results of operations and our reputation; various intellectual property issues related to our business; potential unanticipated product vulnerabilities or cybersecurity breaches of our or our customers’ systems; risks related to the insurance industry in which our clients operate; risks associated with our global sales and operations, such as changes in regulatory requirements, adverse consequences of international conflicts such as Russia’s invasion of the Ukraine, or fluctuations in currency exchange rates; and risks related to our principal location in Israel.

While we believe such forward-looking statements are based on reasonable assumptions, should one or more of the underlying assumptions prove incorrect, or these risks or uncertainties materialize, our actual results may differ materially from those expressed or implied by the forward-looking statements. Please read the risks discussed under the heading “Item 3.D Risk Factors” in our most recent Annual Report on Form 20-F, filed with the U.S. Securities and Exchange Commission on May 16, 2022, in order to review conditions that we believe could cause actual results to differ materially from those contemplated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, or to conform those statements to actual results or to changes in our expectations.

FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF PROFIT OR LOSS
U.S. dollars in thousands (except per share data)
	Three months ended				Six months ended
	June 30,				June 30,
	2022		2021		2022		2021
	Unaudited				Unaudited
Revenues	644,594		587,875		1,302,162		1,160,518
Cost of revenues	495,783		446,934		998,325		894,019
Gross profit	148,811		140,941		303,837		266,499
Research and development costs, net	17,848		16,321		35,198		32,325
Selling, marketing and general and administrative expenses	75,636		74,086		153,913		136,186
Capital gain from realization of a Matrix IT's subsidiary	44,208		-		44,208		-
Operating income	99,535		50,534		158,934		97,988
Financial expenses, net	3,716		5,940		8,399		11,043
Income before taxes on income	95,819		44,594		150,535		86,945
Taxes on income	21,421		10,844		32,923		20,193
Income after taxes	74,398		33,750		117,612		66,752
Share of profit of companies accounted for at equity, net	380		431		613		661
Net income	74,778		34,181		118,225		67,413
Net income attributable to non-controlling interests	41,835		20,846		69,048		41,659
Net income attributable to Formula Systems' shareholders	32,943		13,335		49,177		25,754
Earnings per share (basic)	2.16		0.87		3.24		1.68
Earnings per share (diluted)	2.12		0.86		3.18		1.66
Number of shares used in computing earnings per share (basic)	15,295,517		15,289,267		15,293,955		15,289,267
Number of shares used in computing earnings per share (diluted)	15,487,852		15,362,906		15,496,092		15,350,431

FORMULA SYSTEMS (1985) LTD.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands
		June 30,		December 31,
		2022		2021
		(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents	412,096		485,391
	Short-term deposits	38,322		25,924
	Marketable securities	1,049		1,142
	Trade receivables, net	656,504		696,321
	Other accounts receivable and prepaid expenses	70,653		72,118
	Inventories	36,744		21,221
Total current assets		1,215,368		1,302,117
LONG-TERM ASSETS:
	Deferred taxes	40,360		46,364
	Other investments, long-term accounts receivable and prepaid expenses	30,072		23,676
	Investments in companies accounted for at equity method	26,628		28,900
	Property, plants and equipment, net	53,096		56,886
	Right-of-use assets	97,427		115,833
	Net intangible assets and goodwill	1,144,895		1,174,790
Total long-term assets		1,392,478		1,446,449
TOTAL ASSETS		2,607,846		2,748,566
CURRENT LIABILITIES:
	Loans and credit from banks and others	223,387		175,696
	Debentures	36,402		48,455
	Current maturities of lease liabilities	37,798		41,655
	Trade payables	183,923		205,835
	Deferred revenues	135,373		140,660
	Employees and payroll accrual	188,039		207,553
	Other accounts payable	59,936		80,411
	Liabilities in respect of business combinations	12,138		7,773
	Put options of non-controlling interests	43,679		39,558
Total current liabilities		920,675		947,596
LONG-TERM LIABILITIES:
	Loans from banks and others	129,435		157,229
	Debentures	171,106		205,035
	Lease liabilities	68,939		84,839
	Other long-term liabilities	11,293		12,183
	Deferred taxes	70,366		78,135
	Deferred revenues	13,196		17,757
	Liabilities in respect of business combinations	25,668		21,644
	Put options of non-controlling interests	25,676		31,720
	Employees benefit liabilities, net	10,070		12,641
Total long-term liabilities		525,749		621,183
EQUITY
	Equity attributable to Formula Systems' shareholders	540,672		540,960
	Non-controlling interests	620,750		638,827
Total equity		1,161,422		1,179,787
TOTAL LIABILITIES AND EQUITY		2,607,846		2,748,566

FORMULA SYSTEMS (1985) LTD.
STAND-ALONE STATEMENTS OF FINANCIAL POSITION
U.S. dollars in thousands
			June 30,		December 31,
			2022		2021
			(Unaudited)
ASSETS
CURRENT ASSETS:
		Cash and cash equivalents	14,653		14,163
		Dividend receivable	2,286		-
		Other accounts receivable and prepaid expenses	5,182		4,513
Total current assets			22,121		18,676
LONG-TERM ASSETS:
		Investment in subsidiaries and a jointly controlled entity (*)
		Matrix IT Ltd.	164,379		154,391
		Sapiens International Corporation N.V.	219,464		231,130
		Magic Software Enterprises Ltd.	122,131		122,358
		Other	157,358		174,481
		Total investment in subsidiaries and a jointly controlled entity	663,332		682,360
		Long term receivables and other investments	2,263		2,547
		Property, plants and equipment, net	9		10
Total long-term assets			665,604		684,917
TOTAL ASSETS			687,725		703,593
CURRENT LIABILITIES:
		Loans from banks and others	10,000		-
		Debentures	15,273		28,654
		Trade payables	232		192
		Other accounts payable	7,570		5,339
		Put options of non-controlling interests	1,082		-
		Liability in respect of a business combination	1,022		-
Total current liabilities			35,179		34,185
LONG-TERM LIABILITIES:
		Debentures	111,874		126,049
		Put options of non-controlling interests	-		1,249
		Liability in respect of a business combination	-		1,150
Total long-term liabilities			111,874		128,448
EQUITY			540,672		540,960
TOTAL LIABILITIES AND EQUITY			687,725		703,593
(*)		The investments' carrying amounts are measured consistent with the accounting principles applied in the consolidated financial statements of the group and representing the investments’ cost adjusted by Formula's share in the investees' accumulated undistributed earnings and other comprehensive income or loss.