Business context and reporting period
Gilat Satellite Networks Ltd. filed this Form 20-F for the fiscal year ended December 31, 2012, under U.S. GAAP. It is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide a clear set of Q4-only financial results. Gilat sells satellite communications equipment and provides managed connectivity services through Commercial, Defense and Services divisions. The company reported 41.7 million ordinary shares outstanding at year-end.
Key financial results
Amounts below are in U.S. dollars; millions unless otherwise stated.
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $348.4 | $339.2 |
| Gross profit / margin | $113.0 / 32.4% | $121.6 / 35.9% |
| Operating loss | $(25.1) | $(12.3) |
| Net loss | $(23.2); $(0.56) per diluted share | $(5.9); $(0.14) per diluted share |
| Cash from operating activities | $21.6 | $8.6 |
| Working capital | $83.7 | $62.7 |
| Total assets | $414.6 | $446.7 |
| Shareholders’ equity | $242.0 | $260.1 |
- Revenue rose 2.7%, but product revenue fell 15.9% to $169.6 million while service revenue grew 30.0% to $178.8 million.
- Operating expenses were $138.1 million, including $32.2 million of impairment and restructuring charges. The charges principally comprised $23.9 million of Wavestream goodwill impairment, $7.9 million of technology impairment and $0.3 million of restructuring costs.
- Net financial expense was $2.6 million. Other income was $2.7 million, mainly from settlement proceeds related to the terminated 2008 merger agreement; the comparable 2011 amount was $8.1 million.
- Year-end cash and cash equivalents were $67.0 million. Including restricted cash and trustee-held cash, and subtracting short-term bank credit, management reported approximately $70.1 million of cash.
- Long-term loans, including current maturities, totaled $48.7 million; short-term bank credit was an additional $3.5 million. The company repaid its remaining convertible subordinated notes in October 2012. It reported compliance with the financial covenants on its principal loans.
- Cash and cash equivalents increased $10.7 million during 2012. Investing cash outflow was $0.6 million, including $4.6 million of property and equipment purchases, substantially offset by releases of restricted cash. Financing cash outflow was $10.0 million.
Material changes and operating trends
- Commercial revenue increased $41.7 million to $158.9 million, mainly from the Australian National Broadband Network rollout. Defense revenue declined $23.9 million to $55.4 million, reflecting weaker Wavestream demand amid U.S. defense-budget pressure. Services revenue fell $8.7 million to $134.1 million, mainly due to lower Spacenet gaming-sector equipment sales, partly offset by Colombian government subsidies.
- Gross margin contracted from 35.9% to 32.4%. Management attributed the decline mainly to a less favorable equipment mix and lower profitability on certain Commercial equipment deals; lower Defense revenue also affected margins.
- Backlog was approximately $239 million at year-end, down from $265 million. It includes equipment orders and multi-year service contracts, excludes several categories of future service revenue, and is not necessarily indicative of future sales; many contracts are cancellable.
- Geographic revenue mix shifted: the U.S. share fell from 46% to 33%, while Asia and Asia Pacific rose from 15% to 24%. Latin America represented 33% of 2012 revenue.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management identifies Ka-band products, defense and satcom-on-the-move applications, airborne connectivity and emerging markets as strategic opportunities, while cautioning that market penetration and outcomes are uncertain.
- U.S. defense-budget reductions, including sequestration taking effect in 2013, could further pressure Wavestream and defense-related demand and potentially lead to additional impairment charges.
- Colombia contract exposure is material: the company said Colombian projects generated about 10% of 2012 consolidated revenue; key agreements were due to end in 2013, and it did not bid on a subsequent communitarian-services tender because it considered the terms unfavorable. The filing says revenue could materially decrease or cease if replacement business is not secured.
- Customer concentration warrants attention. The filing identifies a 14% customer in Commercial and a 10% customer in Services in its segment disclosures, but a risk-factor passage gives 12% for the Services customer. The source is inconsistent; verify the correct concentration.
- Year-end contractual cash obligations totaled $175.8 million, including $48.7 million of long-term loans, $3.5 million of short-term bank credit, $96.6 million of operating lease obligations and $20.8 million of purchase commitments. In March 2013, Spacenet separately obtained a $14.7 million partially non-recourse loan, secured principally by customer payments and bearing 7.55% interest.
- Performance guarantees included $11.6 million of bank guarantees, plus other guarantees and corporate guarantees supporting Colombian obligations. The company reported that no guarantees had been called.
- Contingencies include a Brazilian tax case with estimated exposure of $13.6 million, an Israeli lawsuit seeking approximately $12.4 million over the aborted merger, and a 2012 U.S. patent-infringement lawsuit for which exposure was not estimable. The company reported $8.1 million accrued for tax, legal and other contingencies; management said it believed the accrual was adequate.
- The company reported an accumulated deficit of $632.6 million and stated it may not achieve profitability. It has never paid cash dividends and does not anticipate doing so in the foreseeable future.
- Management and the independent auditor concluded that internal control over financial reporting was effective at December 31, 2012. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the filing’s conflicting disclosure of the Services customer’s revenue concentration (10% versus 12%).
- Track whether Colombia’s expiring projects were renewed or replaced, and the revenue and margin impact of any transition.
- Assess Wavestream’s operating performance against the assumptions underlying its impairment valuation and the risk of further charges.
- Review backlog conversion, cancellations and the profitability and cash-collection profile of the Australian network rollout.
- Confirm liquidity after the March 2013 Spacenet borrowing, debt-service requirements, loan covenants and the availability of restricted cash.
- Monitor outcomes and potential cash effects of the Brazilian tax dispute, merger-related litigation and patent claim.