Casa Systems(US:CASA)2020-02-27 21:17PART I Business The company provides broadband network solutions, but faced a revenue decline and net loss in 2019 despite expanding through an acquisition - The company offers end-to-end solutions for cable, fixed-line, and wireless networks, focusing on software-centric, converged architectures to help service providers increase network speed and capacity while reducing total cost of ownership1112 Key Financial Performance (2017-2019) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | $282.3M | $297.1M | $351.6M | | Net (Loss) Income | ($48.2M) | $73.0M | $88.5M | | Total Assets | $444.3M | $474.6M | $469.7M | - On July 1, 2019, the company acquired NetComm Wireless Limited for approximately AUD $162.0 million (USD $112.7 million) to expand its customer base, global footprint, and product portfolio39 - The company's solutions are commercially deployed in over 70 countries to more than 475 customers, including major Tier 1 service providers like Charter, Rogers, Sprint, Verizon, Liberty Global, and China Mobile1665 - As of December 31, 2019, the company had a backlog of $52.0 million, a significant increase from $28.6 million in 2018, primarily due to the inclusion of NetComm's backlog79 Risk Factors The company faces significant risks from technological shifts, customer concentration, intense competition, and international operations - The company's success is highly dependent on its ability to anticipate technological shifts and develop new products in a market characterized by rapid change and complex customer requirements91 - A substantial portion of revenue comes from a few large customers; in 2019, Charter Communications accounted for 14% of revenue and the National Broadband Network for 12%9597 - The company faces intense competition from larger, more established companies such as Adtran, Cisco, CommScope, Ericsson, Huawei, Inseego, Nokia, and Samsung108110111 - International operations are subject to risks including regulatory changes, tariffs (such as U.S.-China trade tariffs), currency fluctuations, and geopolitical instability122124127 - The recent coronavirus outbreak in China could disrupt business operations and cause inventory shipment delays199200 - As of December 31, 2019, the company was in default of the net leverage ratio covenant in its credit facility206364 - As of January 31, 2020, insiders beneficially owned approximately 62.6% of outstanding common stock, giving them significant influence over company matters219 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments240 Properties The company owns its headquarters in Massachusetts and leases other global facilities for manufacturing, R&D, and support - The corporate headquarters is an owned property of approximately 122,000 square feet in Andover, Massachusetts, subject to an $8.0 million mortgage loan with a remaining balance of $6.6 million as of December 31, 2019241 - The company leases additional facilities globally for manufacturing, R&D, and support in locations including Lawrence, MA; Salem, NH; Limerick, Ireland; Guangzhou, China; and Sydney, Australia242 Legal Proceedings The company is defending against class action lawsuits related to its 2017 IPO and 2018 Follow-on Offering - The company is facing four putative class action lawsuits alleging federal securities law violations related to its 2017 IPO and 2018 Follow-on Offering245247248 - The lawsuits allege that the registration statements and prospectuses for the offerings were materially misleading245247248 - As of December 31, 2019, no amounts have been accrued for these lawsuits, as the company does not believe the likelihood of a material loss is probable249 Mine Safety Disclosures This section is not applicable to the company's business - Not applicable250 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq, and a stock repurchase program was active in the fourth quarter of 2019 - The company's common stock trades on the Nasdaq Global Select Market under the symbol "CASA", commencing on December 15, 2017254 - A stock repurchase program of up to $75.0 million was authorized on February 21, 2019; during the fourth quarter of 2019, the company repurchased 495,000 shares for approximately $1.8 million261 - As of December 31, 2019, the company had not used any of the $79.3 million in net proceeds from its 2017 initial public offering263 Selected Financial Data This section presents five-year financial data showing revenue and net income declines from a 2017 peak Selected Consolidated Statement of Operations Data (2015-2019) | (in thousands, except per share amounts) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenue | $282,297 | $297,127 | $351,575 | $316,128 | $272,450 | | Gross profit | $162,532 | $217,966 | $258,064 | $218,311 | $192,836 | | (Loss) income from operations | ($9,119) | $78,966 | $136,222 | $114,772 | $103,071 | | Net (loss) income | ($48,206) | $73,006 | $88,500 | $88,668 | $67,921 | | Net (loss) income per share, diluted | ($0.57) | $0.79 | $0.26 | ($1.07) | $0.78 | Selected Consolidated Balance Sheet Data (As of Dec 31, 2015-2019) | (in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $113,638 | $280,587 | $260,820 | $343,946 | $92,496 | | Working capital | $213,977 | $328,400 | $324,710 | $286,652 | $162,981 | | Total assets | $444,312 | $474,649 | $469,697 | $583,035 | $283,097 | | Long-term debt, including current portion | $293,280 | $295,459 | $297,615 | $299,751 | $7,795 | | Total stockholders' equity (deficit) | $38,564 | $74,856 | $50,156 | ($71,703) | $82,458 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 5.0% revenue decrease, a significant drop in gross margin, and a net loss in 2019 Results of Operations Revenue decreased 5.0% in 2019 due to lower cable sales, while the NetComm acquisition lowered gross margins and increased operating expenses Revenue Comparison (2019 vs. 2018) | (in thousands) | 2019 | 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product Revenue | $241,377 | $256,989 | ($15,612) | (6.1)% | | Service Revenue | $40,920 | $40,138 | $782 | 1.9% | | Total Revenue | $282,297 | $297,127 | ($14,830) | (5.0)% | - The decrease in 2019 product revenue was due to lower sales of cable products to existing customers, partially offset by sales from the NetComm acquisition, which also drove a 113.9% increase in Asia-Pacific revenue286310 Gross Profit and Margin Comparison (2019 vs. 2018) | (in thousands) | 2019 Amount | 2019 Margin | 2018 Amount | 2018 Margin | Change (bps) | | :--- | :--- | :--- | :--- | :--- | :--- | | Product Gross Profit | $128,318 | 53.2% | $182,639 | 71.1% | (1,790) | | Service Gross Profit | $34,214 | 83.6% | $35,327 | 88.0% | (440) | | Total Gross Profit | $162,532 | 57.6% | $217,966 | 73.4% | (1,580) | - The decrease in product gross margin was primarily due to sales of lower-margin NetComm fixed wireless access and FTTdp devices312 - Operating expenses increased significantly in 2019; R&D expenses rose 17.4% to $83.3 million, and SG&A expenses rose 29.8% to $88.3 million, both primarily driven by the NetComm acquisition314315316 Liquidity and Capital Resources Cash decreased significantly due to the NetComm acquisition, and the company's revolving credit facility is restricted by covenant limitations Cash and Working Capital Summary | (in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $113,638 | $280,587 | | Working capital | $213,977 | $328,400 | Consolidated Cash Flow Summary | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($39,022) | $98,545 | $95,008 | | Net cash (used in) provided by investing activities | ($118,022) | ($7,966) | $7,575 | | Net cash used in financing activities | ($9,527) | ($68,351) | ($172,661) | - The primary use of cash in investing activities in 2019 was the $112.7 million (net of cash acquired) for the acquisition of NetComm334348 - The company has a term loan facility with $291.0 million outstanding as of Dec 31, 2019, and its use of a $25.0 million revolving credit facility is restricted by a net leverage ratio covenant356360364 Critical Accounting Policies and Significant Judgments and Estimates Key accounting policies include revenue recognition under the newly adopted ASC 606, goodwill impairment, and inventory valuation - Effective January 1, 2019, the company adopted ASC Topic 606, Revenue from Contracts with Customers, resulting in a cumulative adjustment increasing the opening accumulated deficit by $2.15 million373572 - Under ASC 606, the company allocates the transaction price based on relative standalone selling prices (SSP) and recognizes revenue when control transfers to the customer376379 - The company capitalizes incremental costs of obtaining a contract, such as sales commissions, and amortizes them over the period of benefit391 - The 2019 qualitative assessment for goodwill from the NetComm acquisition concluded that impairment was not likely408409 - As of December 31, 2019, the company recognized a valuation allowance of $39.1 million against its net U.S. deferred tax assets412562 Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates and interest rate fluctuations on its variable-rate debt - The company has exposure to foreign currency risk from international operations and uses foreign currency forward contracts to mitigate volatility430 - The company is exposed to interest rate risk on its $291.0 million outstanding variable-rate term loan; a 10% change in the one-month Eurodollar rate would impact pre-tax earnings by approximately $0.5 million annually434 Financial Statements and Supplementary Data This section contains the audited consolidated financial statements and related notes for the past three fiscal years - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements442443 Consolidated Balance Sheet Summary (As of Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total current assets | $308,443 | $417,511 | | Total assets | $444,312 | $474,649 | | Total current liabilities | $94,466 | $89,111 | | Total liabilities | $405,748 | $399,793 | | Total stockholders' equity | $38,564 | $74,856 | Consolidated Statement of Operations Summary (Year Ended Dec 31) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenue | $282,297 | $297,127 | $351,575 | | Gross profit | $162,532 | $217,966 | $258,064 | | (Loss) income from operations | ($9,119) | $78,966 | $136,222 | | Net (loss) income | ($48,206) | $73,006 | $88,500 | - The acquisition of NetComm on July 1, 2019, for $112.7 million resulted in the recognition of $50.3 million in goodwill and $44.0 million in identifiable intangible assets583585 - As of December 31, 2019, the company had $297.6 million in total principal debt outstanding, primarily from its term loan facility621 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None701 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2019 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2019703 - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019706 - There were no material changes in internal control over financial reporting during the fourth quarter of 2019708 Other Information The company reports no other information for this item - None709 PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2020 proxy statement - The required information is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Stockholders712 Executive Compensation Information for this item is incorporated by reference from the company's 2020 proxy statement - The required information is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Stockholders714 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2020 proxy statement - The required information is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Stockholders715 Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2020 proxy statement - The required information is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Stockholders716 Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2020 proxy statement - The required information is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Stockholders717 PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the annual report - This item lists all exhibits filed with the Form 10-K, including the company's Restated Certificate of Incorporation, bylaws, credit agreements, and various stock incentive plans720721 Form 10-K Summary This section is not applicable - Not applicable725