Gilat Satellite Networks Ltd. — FY2011 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared in U.S. dollars under U.S. GAAP; amounts below are U.S. dollars unless stated otherwise.
Business context
Gilat supplies satellite communications equipment and services, including VSAT networks, in-motion antennas, amplifiers and managed connectivity. Its 2011 reporting segments were Gilat International, Gilat Peru & Colombia, Spacenet and Wavestream. In 2012, management reorganized the business into Commercial Satcom, Defense Satcom and Services. Acquisitions included RAS and Wavestream in 2010 and CICAT in April 2011.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $339.2 million | $233.0 million |
| Gross profit / margin | $121.6 million / 35.9% | $79.9 million / 34.3% |
| Operating income (loss) | ($12.3 million) | ($6.2 million) |
| Net income (loss) | ($5.9 million) | $30.6 million |
| Operating cash flow | $8.6 million | $12.9 million |
| Cash and cash equivalents at year-end | $56.2 million | $57.2 million |
| Working capital at year-end | $62.7 million | $78.8 million |
Revenue grew 45.6%; products contributed $201.7 million (59%) and services $137.5 million (41%). Gross margin improved by about 1.6 percentage points, while operating loss widened. The net loss includes a $17.9 million Wavestream goodwill impairment and $1.6 million of restructuring costs; $8.1 million of other income, including settlement-related income and acquisition adjustments, partly offset losses.
At December 31, 2011, total assets were $446.7 million and shareholders’ equity was $260.1 million. The balance sheet reported $40.4 million of long-term loans, $19.1 million of current maturities of loans and convertible notes, and $3.0 million of short-term bank credit. Management cited total debt of approximately $59.5 million. Cash, cash equivalents and restricted cash were reported separately; restricted balances are not all freely available. The company said it met its loan covenants and believed working capital sufficient for current requirements.
Changes versus the prior year
- Revenue increased by $106.2 million. Growth reflected the full-year consolidation of Wavestream (included for only one month in 2010), higher Spacenet revenue from gaming-network deployments, and increased Peru and Colombia activity, including extensions of Colombian government agreements.
- Product revenue rose 67.7%; service revenue rose 22.0%. Segment mix and acquisitions materially affect comparability.
- Research and development expense increased to $31.7 million from $18.9 million, and selling and marketing expense rose to $46.5 million from $33.4 million.
- Operating cash flow declined by $4.3 million, which management attributed mainly to higher working-capital needs and lower cash receipts from the merger-termination settlement than in 2010.
- Cash and cash equivalents decreased by $1.0 million during 2011. Investing cash outflow was $8.0 million, including capital expenditures and the CICAT acquisition.
Outlook, risks and unusual items
- No quantified 2012 revenue or earnings guidance is provided in the supplied filing text. Management said it increased its 2012 R&D budget and began a restructuring plan intended to improve efficiency and reduce 2012 operating expenses.
- Management’s strategy focuses on defense satcom, Ka-band products, technology development and emerging markets. Execution depends on product acceptance, acquisition integration and winning competitive bids.
- Wavestream revenue declined versus forecast and 2010, amid uncertainty and pressure on U.S. defense spending; this prompted the goodwill impairment. Wavestream remains substantially exposed to government defense programs.
- Colombian service agreements were extended through September 2012; the projects generated 6% of 2011 revenue. Continuation, rebidding and contract economics remain uncertain.
- Backlog was approximately $265 million, up from $232 million, but includes cancelable contracts and is not necessarily indicative of future sales. Some contracts require further product development.
- Operating cash flow was positive but management noted significant contributions from one-time items in recent years. The company also faces substantial fixed space-segment and lease commitments, supplier concentration, currency exposure, competitive pricing and technology risks.
- Contingencies include a Brazilian tax exposure estimated at approximately $13.9 million, with $10.7 million accrued for aggregate legal and tax contingencies. An Israeli lawsuit seeks approximately $12.4 million; management considers it without merit. The California lawsuit by STM Group was dismissed, though a Peru action remained possible. The filing also describes performance guarantees and other commitments.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements and internal controls.
Key facts investors should verify
- How much of revenue growth and margin improvement reflects acquired businesses versus organic growth, and whether these trends continued after 2011.
- Current unrestricted liquidity, near-term debt maturities and covenant headroom, including the treatment and repayment of the $14.4 million convertible notes due in 2012.
- Wavestream’s subsequent performance, the assumptions supporting its valuation and any further impairment risk.
- Renewal or replacement terms for the Colombian projects after September 2012, and realization of the $265 million backlog.
- Final outcomes and potential cash impact of the Brazilian tax assessment, Israeli shareholder litigation and other disclosed contingencies.