Gilat Satellite Networks Ltd. — FY 2017 Form 20-F
Reporting period: Year ended December 31, 2017; filed March 20, 2018. This is an annual report, not a standalone fourth-quarter earnings report, and the filing does not provide clear standalone Q4 financial results. Financial statements are audited and prepared under U.S. GAAP in U.S. dollars.
Business context
Gilat designs and manufactures satellite broadband ground equipment and provides communications solutions and managed services. In 2017 it reported Commercial, Mobility and Services divisions. From Q1 2018, it planned to report Fixed Networks, Mobility Solutions and Terrestrial Infrastructure Projects. FY 2017 revenue mix was 30% Commercial, 31% Mobility and 39% Services; 76% of revenue came from products and 24% from services.
Financial performance
| Metric (US$ millions, except per-share data) | 2017 | 2016 |
|---|---|---|
| Revenue | 282.8 | 279.6 |
| Gross profit / margin | 82.5 / 29.2% | 75.5 / 27.0% |
| Operating income / margin | 10.9 / 3.8% | 0.8 / 0.3% |
| Net income (loss) | 6.8 | (5.3) |
| Diluted earnings (loss) per share | $0.12 | $(0.10) |
| Cash from operating activities | 20.8 | 10.8 |
| Cash and cash equivalents at year-end | 53.0 | 40.1 |
| Total assets | 386.8 | 383.2 |
| Working capital | 99.0 | 92.6 |
| Long-term loans, including current maturities | 17.1 | 21.5 |
Revenue increased 1.1%. Mobility revenue rose 40.5% to $88.4 million, led by airborne/in-flight connectivity and Wavestream products. Commercial revenue fell 10.8% to $83.9 million, while Services revenue fell 9.9% to $110.5 million, mainly as FITEL project revenue declined. Product revenue was nearly flat at $214.5 million; service revenue increased 4.6% to $68.2 million.
Gross margin improvement reflected the larger contribution from higher-margin Mobility sales, partly offset by lower margins in Commercial and Services. Operating expenses declined to $71.6 million from $74.7 million, including lower general and administrative expenses; R&D spending increased to $28.0 million from $24.9 million. Net financial expense was $4.3 million, versus $4.8 million. The company reported a $0.2 million income tax benefit.
Operating cash flow was $20.8 million, versus $10.8 million in 2016. Investing activities used $4.0 million and financing activities used $4.0 million, chiefly for loan repayments. Year-end unrestricted cash exceeded total loans by approximately $35.9 million; restricted cash is not freely available. The company stated that working capital was sufficient for its anticipated requirements over the following 12 months.
Material changes, outlook and risks
- FITEL concentration and execution: Peruvian FITEL projects represented 28% of 2017 revenue, down from 34% in 2016. The four regional projects are expected to generate $393 million over approximately 13 years, but schedules were extended and revenue timing may be affected. Unbilled receivables related to these projects were $57.4 million at year-end; the company reported receiving $28.6 million for the project after year-end and by the report date.
- Guarantees and funding needs: Outstanding bank guarantees and surety bonds totaled $152.4 million, including $145.7 million for Peruvian subsidiaries. Restricted cash of $29.4 million collateralized guarantees. The company reported compliance with relevant covenants at year-end. Large projects may require substantial advance spending and guarantees.
- Market outlook: Management cited opportunities in in-flight connectivity, cellular backhaul, high-throughput satellite partnerships and rural broadband. It also warned that forecast sales and market growth are uncertain; terrestrial alternatives, increasing competition, price declines, technology shifts and lengthy sales cycles may pressure results. No specific 2018 revenue or earnings guidance is provided.
- Accounting and unusual items: No long-lived-asset or goodwill impairment was recorded in 2017; 2015 included $10.1 million of long-lived-asset impairment and $20.4 million of goodwill impairment. The company adopted ASC 606 on January 1, 2018, expected no material change in revenue-recognition patterns, and recorded a $1.5 million contract-cost asset and cumulative retained-earnings adjustment.
- Contingencies: A Brazilian tax claim against an inactive subsidiary totaled approximately $10.8 million, including interest and penalties; the company recorded no accrual, citing counsel’s view that redirection of collection was remote. A former subcontractor sought approximately $6.9 million in Colombian arbitration; the company said it had made adequate accruals. A separate Peruvian arbitration was awaiting an award; the filing does not give a clear claim value.
- Other exposures: Risks include customer and government contract concentration, foreign exchange and political conditions, supplier dependence, project cost overruns, tax examinations, export controls and cybersecurity. The company had an accumulated deficit of $703.0 million and stated it could not assure future profitability.
Most important facts for investors to verify
- FITEL project milestones, schedule extensions, collectability of unbilled receivables and the timing and margin of remaining project revenue.
- Whether the Mobility growth, particularly in-flight connectivity, can continue and offset weaker Commercial and Services results.
- Liquidity after distinguishing unrestricted cash from restricted cash, and the cash needs tied to guarantees, project spending and contractual commitments.
- Developments in the Brazilian tax matter, Colombian subcontractor arbitration and pending Peruvian arbitration, including any changes to recorded accruals.
- Effects of the 2018 segment reorganization and adoption of ASC 606 on reported segment trends and comparability.