Ceragon Networks Ltd. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. Filed April 30, 2014. This is an annual report, not a standalone fourth-quarter filing; the text does not provide a clear set of Q4 revenue or profit figures. Amounts below are U.S. dollars unless stated otherwise.
Business context and financial performance
Ceragon supplies microwave wireless backhaul and fronthaul equipment and related turnkey services to telecom operators and private networks. It reported one operating segment and operated in more than 130 countries.
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $361.8 million | $446.7 million |
| Gross profit / margin | $112.2 million / 31.0% | $138.3 million / 31.0% |
| Operating loss | $26.9 million | $18.6 million |
| Net loss | $47.5 million; $1.23 per share | $23.4 million; $0.64 per share |
| Net cash from (used in) operations | $(29.5) million | $7.2 million |
| Cash, deposits and marketable securities | $52.3 million | $51.6 million |
| Working capital | $106.8 million | $129.4 million |
| Total assets / shareholders’ equity | $366.0 million / $135.1 million | $393.6 million / $143.7 million |
FY2013 financial expenses, net, rose to $14.0 million from $3.5 million. Management attributed the increase principally to currency-related losses, costs associated with moving cash out of Argentina, higher interest expense and impairment/amortization of marketable securities. Income tax expense was $6.5 million, including a $4.0 million valuation-allowance adjustment on tax assets. The company recorded $7.7 million of other income after certain pre-acquisition indirect-tax exposures expired.
At year-end, short-term loans were $38.7 million, current maturities of long-term debt were $8.2 million and long-term debt was $10.3 million—about $57.2 million in total borrowings. The company had a $73.5 million loan facility and $40.2 million of bank-guarantee capacity; $57.2 million of loan lines were utilized. Capital expenditures were $16.4 million. Financing cash flow included $35.0 million net proceeds from a November share offering.
Material changes versus prior periods
- Revenue fell 19.0% year over year. Declines in India, Europe and Asia-Pacific outweighed growth in Africa; Latin American revenue was broadly flat.
- Gross margin remained at 31.0%, while operating expenses declined to $139.2 million from $156.9 million. The lower spending did not offset reduced gross profit, restructuring costs and other pressures; operating and net losses widened.
- Operating cash flow swung from $7.2 million provided in 2012 to $29.5 million used in 2013, with lower trade payables and deferred revenue among the cash uses.
- The November 2013 offering issued 15.6 million shares, including the underwriters’ option, for approximately $35.0 million net. Outstanding shares increased to 52.5 million from 36.6 million.
- Latin America rose to 34% of FY2013 revenue from 28% in 2012. One affiliated customer group represented 15.4% of revenue, compared with 11.6% in 2012.
Outlook, risks and unusual items
- Restructuring: Announced in Q4 2013, the plan incurred $9.3 million of charges in 2013, with approximately $1 million of further costs expected in the first half of 2014. Management estimated annual savings of about $25 million once completed; savings were not assured.
- Products: Ceragon launched its IP-20 platform in 2013 and shipped thousands of links during the year. Management identified production ramp-up, product quality, customer acceptance and commercial success as uncertainties.
- Customer and market outlook: Management expected 2014 business from the significant Latin American customer group to be substantially lower than in 2012 and 2013. The filing provides no general numerical revenue or earnings guidance. Telecom market shrinkage, competitive pricing, network sharing and customer capital-spending patterns could pressure demand and margins.
- Liquidity and covenants: Management said available liquidity was sufficient for at least 12 months, but the company had generated operating losses and negative operating cash flow. Banks approved temporary less restrictive covenants in October 2013 and April 2014; original covenants were scheduled to return in stages. The April amendment also provided for reductions in available loan facilities and further reduction if a specified Q3 2014 covenant was not met.
- Post-period events: In April 2014, Ceragon settled Nera acquisition-related claims with Eltek and received $17 million in cash. It also amended its credit facility. These are subsequent events, not FY2013 operating results.
- Other exposures: Currency controls and devaluations affected cash and earnings, particularly in Venezuela and Argentina; $6.4 million of year-end liquid assets was located in Venezuela and subject to restrictions on availability outside the country. Latin American indirect-tax provisions were $16.5 million, with up to an additional $26 million of reasonably possible, unreserved losses. The company also cited a major customer concentration, outsourced manufacturing and supplier dependence, fixed-price turnkey project and acceptance risks, and potential covenant breaches.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Whether the restructuring delivers the projected savings, and the full cash and earnings cost of completing it.
- Current liquidity, facility availability and compliance with the amended and subsequently reinstated bank covenants.
- The timing and extent of the expected decline in the largest affiliated customer group’s orders.
- Recoverability and accessibility of cash and investments exposed to Venezuelan and Argentine currency controls, and any further currency losses.
- Potential outcomes of the additional indirect-tax exposures and the realizability of deferred tax assets.
- Whether IP-20 production, customer acceptance and sales can support a recovery in revenue and profitability.