Business context and reporting period
Gilat Satellite Networks Ltd. (NASDAQ: GILT; TASE) filed this annual report on Form 20-F for the fiscal year ended December 31, 2020. It is a full-year report, not a standalone fourth-quarter filing. Gilat supplies satellite communications equipment, networks and managed services across Fixed Networks, Mobility Solutions and Terrestrial Infrastructure Projects, including rural broadband infrastructure projects in Peru. Financial statements are audited and prepared under U.S. GAAP.
Key financial metrics
Amounts are U.S. dollars; financial statement figures are in millions unless otherwise indicated.
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $165.9 | $263.5 |
| Gross profit / margin | $41.2 / 24.8% | $95.9 / 36.4% |
| Operating income | $37.6 | $25.6 |
| Net income | $34.9 | $36.5 |
| Basic / diluted EPS | $0.63 / $0.63 | $0.66 / $0.65 |
| Cash from operating activities | $43.2 | $34.8 |
| Cash, cash equivalents and restricted cash | $116.0 | $102.0 |
| Working capital | $86.1 | $102.5 |
Revenue comprised $94.0 million of products and $71.9 million of services. Revenue by segment was $92.7 million Fixed Networks, $54.2 million Mobility Solutions and $19.0 million Terrestrial Infrastructure Projects. Operating expenses were $3.6 million, including a $53.6 million net credit for merger, acquisition and related litigation items tied to the Comtech settlement. Excluding that credit, operating expenses were approximately $57.2 million and operating results imply a loss of approximately $16.0 million. Management said net income excluding the net Comtech proceeds would have been a net loss of $18.7 million.
Cash used in investing activities was $4.7 million, principally capital expenditures; cash used in financing activities was $24.1 million, including a $20.0 million dividend and loan repayments. At year-end, the company had $4.0 million of current loan maturities and no long-term loan balance. It also had $111.4 million of outstanding bank guarantees and surety bonds, including $108.7 million for Peru projects, supported in part by $25.8 million of restricted cash and pledged assets. Management stated working capital was sufficient for anticipated needs over the next 12 months.
Material changes versus the prior comparable period
- Revenue fell 37.0% year over year. Fixed Networks declined 27.2%, Mobility Solutions 48.2% and Terrestrial Infrastructure Projects 39.7%.
- COVID-19 reduced IFC demand and delayed or postponed other orders and fieldwork. Peru lockdowns slowed PRONATEL construction; the Colombia Ministry of ITC project had also concluded in 2019.
- Gross margin fell to 24.8% from 36.4%, reflecting lower volumes, unfavorable segment and product mix, and delays and updated cost bases on Peru projects. Mobility Solutions gross margin declined to 30.4% from 49.1%; Fixed Networks to 33.2% from 37.1%. Terrestrial Infrastructure Projects remained loss-making.
- Reported operating income rose to $37.6 million from $25.6 million, primarily because of the Comtech settlement credit; without it, operating performance was loss-making. Net income was lower than 2019 despite the settlement, as 2019 included a $13.6 million tax benefit, mainly from recognizing deferred tax assets.
- Operating cash flow included approximately $56.3 million of net Comtech settlement proceeds. Excluding those proceeds, operating cash flow would have been negative $13.1 million, compared with positive $34.8 million in 2019.
Outlook, commentary, risks and unusual items
The company provided no numerical revenue or earnings guidance. Management expected vaccination and easing travel restrictions to help, but warned COVID-19 could continue to depress demand—especially from aviation, government and enterprise customers—and cause delays or cancellations. The company reduced headcount and employee work scopes and implemented other cost controls. It reported no goodwill or long-lived asset impairment in 2020, but warned that forecast shortfalls could prompt future impairment reviews.
- Comtech transaction: The proposed merger agreement was terminated in October 2020 following a dispute and Delaware litigation. Comtech paid $70 million; the reported $53.6 million net income credit reflects related expenses. Gilat paid a $0.36-per-share dividend in December 2020 and declared a further $0.63-per-share dividend, paid in January 2021. Future dividends are not assured.
- Customer and project concentration: PRONATEL accounted for 20% of 2020 revenue and a large U.S. system integrator for 11%; together they represented 31%. Six PRONATEL projects were expected to generate $549 million over extended periods, but construction delays, financing needs and performance requirements create execution and cash-flow risks. The company reported approximately $93.3 million of guarantees associated with PRONATEL.
- Peru matters: A 2018 award of approximately $14 million in arbitration against the Peruvian government remained subject to enforcement proceedings expected to continue for five years or more; additional related arbitration was pending. A challenge to two PRONATEL awards, worth approximately $154 million, remained pending, although management viewed the chances of cancellation as remote.
- Other risks and contingencies: The filing identifies supplier and satellite-capacity dependencies, customer credit and cancellations, competitive and technology shifts including NGSO, foreign-exchange exposure, political and regulatory risks, and tax disputes. A Brazilian tax claim against an inactive subsidiary totaled approximately $6.8 million, including interest and penalties; management cited limitations defenses against further collection actions. Tax examinations and other litigation were also ongoing.
- Controls: Management and the independent auditor concluded internal control over financial reporting was effective as of year-end, and the auditor issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Reconcile the $70 million gross Comtech payment, $53.6 million reported net credit and $56.3 million net operating cash proceeds, including related costs and timing.
- Track revenue recovery, gross margins and order trends by segment, particularly Mobility Solutions/IFC, and distinguish recurring operations from settlement effects.
- Review updated schedules, estimated costs, collections, cash requirements and guarantees for each PRONATEL project; assess exposure if delays persist or amendments are not agreed.
- Monitor customer concentration, receivables and contract assets, and the financial condition of major customers and satellite-capacity suppliers.
- Follow progress and potential recoveries or liabilities in the Peruvian arbitration and bid challenge, Brazilian tax claim and other tax examinations.
- Confirm liquidity after dividends and project funding needs, restricted-cash availability, debt repayments, covenant compliance and any future dividend decisions.