Gilat Satellite Networks Ltd. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Business context
Gilat designs and manufactures satellite communications equipment and provides network, connectivity and infrastructure services. From 2018 it reported three segments: Fixed Networks, Mobility Solutions and Terrestrial Infrastructure Projects. It reorganized segment reporting; comparative 2017 and 2016 segment data were recast. FY2018 revenue came 54% from Fixed Networks, 37% from Mobility Solutions and 9% from Terrestrial Infrastructure Projects.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $266.4 million | $282.8 million |
| Gross profit / margin | $94.0 million / 35.3% | $82.5 million / 29.2% |
| Operating income / margin | $21.3 million / 8.0% | $10.9 million / 3.8% |
| Net income | $18.4 million | $6.8 million |
| Operating cash flow | $32.0 million | $(17.2) million |
| Capital expenditures | $10.8 million | $3.7 million |
| Cash, cash equivalents and restricted cash | $104.2 million | $86.8 million |
| Total loans, including current maturities | $12.6 million | $17.1 million |
| Working capital | $105.8 million | $92.0 million |
| Total assets | $394.7 million | $391.6 million |
Products accounted for $174.0 million of revenue and services for $92.4 million. The 5.8% revenue decline reflected a $53.3 million reduction in Terrestrial Infrastructure Projects revenue, partly offset by growth in Fixed Networks ($28.1 million) and Mobility Solutions ($8.8 million). Fixed Networks revenue rose 24.2%; Mobility Solutions rose 9.9%; Terrestrial Infrastructure Projects fell 68.0%.
Gross margin improved primarily because lower construction-project revenue reduced the share of lower-margin Terrestrial Infrastructure Projects; Mobility benefited from higher-margin in-flight connectivity (IFC) products, and Fixed Networks from cellular backhaul growth. Terrestrial Infrastructure Projects recorded a $5.6 million gross loss in 2018, versus $6.4 million gross profit in 2017, with project delays contributing to additional costs and lower revenue. Net income included a $1.4 million income tax benefit; financial expenses were $4.3 million.
Operating cash flow improved by $49.2 million year over year, which management attributed principally to improved results and payments from Peru. Cash and equivalents alone were $67.4 million; the reported $104.2 million cash total includes restricted cash and trustee-held funds. Long-term debt was $8.1 million, plus $4.5 million of current maturities; the principal U.S.-dollar loan bears 4.77% interest and matures in 2021. Management said working capital was sufficient for anticipated requirements over the next 12 months.
Material changes, outlook and risks
- Customer and project concentration: Three customers accounted for substantial FY2018 revenue: a North American customer (15%), Colombia’s Ministry of ITC (13%) and Peru’s FITEL projects (10%). FITEL accounted for 28% of revenue in 2017. Management said delays in the 2015 Peru projects delayed revenue and collections, increased costs and hurt 2018 results.
- FITEL commitments and guarantees: The 2015 projects are expected to generate $393 million over an extended period of approximately 14–15 years; two projects awarded in 2018 are expected to generate about $154 million over 13–15 years. Guarantees and surety bonds outstanding totaled approximately $149.5 million, backed in part by $32.5 million of restricted cash. The 2018 awards faced a preliminary injunction following a losing bidder’s challenge; Gilat said counsel viewed the challenge’s prospects as remote.
- Management outlook: No quantified revenue or earnings guidance is provided in the supplied filing text. Management described opportunities in HTS/VHTS and NGSO satellite systems, IFC, cellular backhaul and rural broadband, while cautioning that competition, technology adoption and project execution make results uncertain.
- Other risks and contingencies: Reliance on a limited number of large customers and suppliers, government contract termination or payment risk, project cost and schedule overruns, competition from terrestrial networks and other satellite providers, foreign-exchange exposure, and regulatory/export-control requirements are highlighted. A Peruvian arbitration award of approximately $13.5 million in Gilat’s favor was being challenged. A Colombian subcontractor claim was approximately $6.6 million, with a counterclaim reported at approximately $7.9–8 million; the company said it had made adequate accruals. A Brazilian tax claim of approximately $9 million remained a disclosed exposure; management assessed further collection against other group entities as remote.
- Dividend and accounting: The board declared the company’s first cash dividend, $0.45 per share (approximately $25 million), payable in April 2019; future dividends are not assured and are subject to legal, covenant and board constraints. Gilat adopted ASC 606 in 2018 using the modified-retrospective method. The adoption had no material opening impact, but 2018 results under prior Topic 605 would have shown revenue $1.2 million lower and operating income $1.0 million lower. The 2019 lease standard was expected to add approximately $5.6 million of right-of-use assets and lease liabilities, without a material expected impact on earnings or cash flow.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at December 31, 2018.
Investor facts to verify
- Track FITEL construction schedules, acceptance milestones, collections, project margins and the status of the injunction affecting the 2018 awards.
- Assess how much of reported cash is available for general use: $36.8 million of the $104.2 million total was restricted or held by trustees.
- Monitor customer concentration and the status or renewal of the Colombian Ministry of ITC contract, whose latest extension was scheduled to end in the second quarter of 2019.
- Review the assumptions behind contract estimates and cost-to-cost revenue recognition, particularly for long-duration fixed-price projects.
- Confirm the dividend payment and applicable bank approvals, and review debt covenants and the substantial guarantee obligations.
- Reconcile the reported figures against the audited statements and notes, including the ASC 606 comparability adjustment and the differing dividend record dates stated in the filing text.