Gilat Satellite Networks Ltd. — FY2016 Form 20-F
Period and scope: This is the annual report for the fiscal year ended December 31, 2016, prepared under U.S. GAAP; it is not a standalone fourth-quarter filing. The supplied filing text does not provide clear fourth-quarter-only financial results. Amounts below are U.S. dollars.
Business context
Gilat designs and manufactures satellite ground equipment and provides communications services and turnkey network projects. Its three divisions are Commercial, Mobility and Services. FY2016 revenue mix was approximately 34%, 22% and 44%, respectively. The Services business includes government-supported rural connectivity projects in Peru and Colombia.
Key financial metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $279.6 million | $197.5 million |
| Gross profit / margin | $75.5 million / 27.0% | $44.1 million / 22.3% |
| Operating income (loss) | $0.8 million | $(43.7) million |
| Net loss | $(5.3) million | $(52.3) million |
| Operating cash flow | $10.8 million | $(14.8) million |
| Cash and cash equivalents, year-end | $40.1 million | $18.4 million |
| Long-term loans, including current maturities, year-end | $21.5 million | $26.0 million |
Current assets were $239.3 million and current liabilities $146.7 million at year-end. Current assets included $62.2 million of restricted cash and $9.1 million of restricted cash held by trustees, so reported cash and working-capital totals should not be treated as wholly available liquidity. The company also reported $89.4 million of net trade receivables, including $41.7 million unbilled.
Changes versus prior periods
- Revenue rose 41.5% from 2015. Product revenue increased 66.2% to $214.3 million, while services revenue decreased 4.8% to $65.3 million.
- Services revenue grew to $122.6 million, mainly as deployment began on four Peruvian FITEL projects. Mobility revenue increased 53.0% to $62.9 million, led by airborne/in-flight connectivity and Wavestream products. Commercial revenue fell 6.9% to $94.0 million amid weaker Latin American sales and longer HTS deal cycles.
- Gross margin improved from 22.3% to 27.0%, in part because FY2015 included a $10.1 million impairment on a Colombian project. FY2015 also included a $20.4 million goodwill impairment and $1.5 million of restructuring costs; neither was recorded in FY2016.
- Despite the operating improvement, FY2016 remained loss-making. General and administrative expense increased $7.8 million, including a higher bad-debt allowance related to a Venezuelan government customer and increased U.S. trade-secrets litigation costs.
- Operating cash flow turned positive, but FY2016 cash generation included substantial working-capital movements, including a $48.5 million decrease in restricted cash directly related to operations, a $37.6 million increase in receivables, and a $53.1 million decrease in customer advances.
Outlook, risks and unusual items
- Management outlook: No quantified revenue, earnings or cash-flow guidance is provided. Management’s stated priorities include HTS operator partnerships, in-flight connectivity, LTE backhaul, rural broadband, China and end-to-end solutions. Management said working capital was sufficient for anticipated requirements over the next 12 months.
- Customer and project concentration: FITEL accounted for approximately 34% of FY2016 revenue, versus 11% in FY2015. The four Regional FITEL projects are expected to generate about $393 million over approximately 13 years, but schedules were extended after delays. The company reported $41.7 million of FITEL-related unbilled receivables, recognized using percentage-of-completion accounting; collection depends on project milestones.
- Funding and guarantees: FITEL and other performance obligations require significant guarantees. Outstanding bank guarantees and surety bonds totaled approximately $139.7 million, including $135.8 million for Peruvian subsidiaries; about $24.1 million of restricted cash collateralized guarantees. The company reported compliance with relevant covenants at year-end.
- Credit and collection: The allowance for doubtful accounts rose to $9.7 million from $2.2 million; the 2016 provision increase was $7.9 million, with a significant amount attributed to a Venezuelan governmental customer. Brazilian telecom customer Oi SA entered judicial reorganization in 2016, potentially affecting collection of pre-petition amounts.
- Other contingencies: A final Brazilian tax claim against an inactive subsidiary was about $10.1 million including interest and penalties; no accrual was recorded because management, relying on counsel, considered redirection of foreclosure to other group entities or managers remote. A Peruvian arbitration concerning older rural-telephony projects remained in the evidentiary stage. The company reported a $1.3 million provision for legal and tax contingencies.
- Operational and market risks: The filing highlights reliance on government contracts, political and economic conditions in Peru and other Latin American markets, competition and technology change, defense-budget exposure, foreign-exchange movements, supplier concentration, and the risk of cost overruns or further project delays. In 2016, Gilat moved almost all VSAT manufacturing to a single-source manufacturer; replacing it could take six to nine months.
- Capital and reporting: A March 2016 rights offering raised approximately $35.3 million gross and issued 9.9 million shares. The company reported an accumulated deficit of $709.7 million and no intention to pay dividends in the foreseeable future. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- FITEL milestone progress, revised schedules, the collectability and billing timing of the $41.7 million unbilled balance, and the economics of the $393 million multi-year awards.
- Cash availability after excluding restricted cash, guarantee collateral and trustee-held balances; also review the drivers and sustainability of operating cash flow.
- Receivable aging, the Venezuelan customer’s payment status, and potential recovery from Oi SA’s reorganization.
- Project-level margins and remaining exposure to Colombia project losses, cost overruns, penalties or additional impairments.
- Terms and covenant headroom on bank facilities, the financial impact of outstanding guarantees, and the effects of customer concentration and the single-source VSAT manufacturer.
- The potential effect of adopting the new revenue-recognition standard, which the company planned to implement in 2018 using the modified retrospective method.