Aviat Networks, Inc. — Form 10-Q Summary
Business context and reporting period
Aviat designs, manufactures, and sells wireless networking and access networking products, software, and services for telecommunications, private networks, government, transportation, utility, public safety, and broadcast customers worldwide. This filing covers the fiscal quarter ended December 29, 2023, and the six months then ended. Fiscal 2024 ends June 28, 2024. The filing is unaudited and should be read with the fiscal 2023 Form 10-K.
The company completed its acquisition of NEC Corporation’s wireless transport business on November 30, 2023. The acquired operations are included in reported results from the closing date.
Financial performance and key metrics
| Metric | Three months ended Dec. 29, 2023 | Three months ended Dec. 30, 2022 | Six months ended Dec. 29, 2023 | Six months ended Dec. 30, 2022 |
|---|---|---|---|---|
| Revenue | $95.0 million | $90.7 million | $182.6 million | $171.9 million |
| Product sales | $66.4 million | $65.6 million | $125.9 million | $120.7 million |
| Services revenue | $28.6 million | $25.1 million | $56.7 million | $51.3 million |
| Gross margin | $36.8 million; 38.8% | $32.2 million; 35.5% | $68.7 million; 37.6% | $61.7 million; 35.9% |
| Operating income | $5.0 million | $8.7 million | $10.5 million | $12.6 million |
| Net income | $2.9 million | $6.0 million | $6.9 million | $3.3 million |
| Diluted earnings per share | $0.24 | $0.51 | $0.57 | $0.28 |
Quarterly revenue increased 4.8%, while six-month revenue increased 6.2%. Product revenue rose 1.3% in the quarter and 4.4% year to date; services revenue rose 14.0% and 10.5%, respectively. Gross margin benefited from higher software revenue, favorable project mix, and moderating freight and material costs.
Quarterly operating income declined despite higher revenue because research and development, selling and administrative, restructuring, and acquisition-related costs increased. Quarterly selling and administrative expense included $3.7 million of NEC transaction costs; six-month transaction costs were $6.4 million. Six-month net income benefited from lower income tax expense and the absence of the prior-year $1.7 million loss on marketable securities.
For the six months, net cash provided by operating activities was $6.9 million, compared with cash used of $8.4 million in the prior-year period. Investing cash use was $33.5 million, primarily reflecting $32.2 million of cash consideration for the NEC acquisition. Financing cash provided was $50.3 million, primarily from the $50.0 million term loan.
Financial position, debt, and liquidity
- Cash and cash equivalents were $45.9 million at December 29, 2023, compared with $22.2 million at June 30, 2023. Including restricted cash, total cash for cash-flow purposes was $46.2 million.
- Accounts receivable were $149.9 million, unbilled receivables were $77.2 million, and inventories were $66.8 million, compared with $101.7 million, $58.6 million, and $33.1 million, respectively, at June 30, 2023.
- Total debt was $50.0 million gross, consisting of the term loan; no revolver borrowings were outstanding. The term loan had an effective interest rate of 8.2% and matures in May 2028.
- Available revolver capacity was $37.7 million after $2.3 million of outstanding letters of credit. The company was in compliance with its financial covenants.
- The company stated that cash, available credit, its shelf registration statement, and expected customer collections should fund anticipated requirements for at least the next 12 months and beyond.
- Commercial commitments not recorded on the balance sheet totaled $57.3 million, including $53.8 million of bonds and $3.5 million of letters of credit.
Material changes versus the prior comparable period
- Revenue growth was led by services and by Latin America and Asia Pacific, partially offset by a quarterly decline in North America and six-month softness in Africa and the Middle East.
- Gross margin expanded to 38.8% for the quarter from 35.5%, and to 37.6% for the six months from 35.9%.
- Quarterly research and development expense increased 38.8%, and selling and administrative expense increased 29.4%, primarily due to product development, NEC-related costs, and acquisition activity.
- Quarterly restructuring charges increased to $2.0 million from $0.9 million, primarily due to NEC-related restructuring. Fiscal 2024 restructuring plans are expected to continue through the end of calendar 2024.
- The NEC acquisition added approximately $54.5 million of closing consideration: $32.2 million in cash and $22.3 million in Aviat stock. The company estimates an additional $22.9 million of cash consideration will be paid in the fourth quarter of fiscal 2024, primarily for the post-closing working-capital adjustment.
- NEC received approximately 5.9% of Aviat’s outstanding common stock, has specified lock-up restrictions, and has the right to nominate a director for two years after closing.
Outlook, commentary, risks, and unusual items
Management identified mobile backhaul as the primary addressable market and cited demand from 5G and LTE deployments, public safety networks, private networks, utilities, and international mobile operators. Management also highlighted turnkey and after-sale services, software revenue, and the NEC acquisition as strategic factors. The filing does not provide a specific quantitative revenue or earnings forecast.
- Risks include competitive pricing pressure, macroeconomic conditions, foreign exchange exposure, customer capital-expenditure cycles, supply-chain and project timing risks, and execution and integration risks associated with the NEC transaction.
- The term loan carries variable-rate exposure; management estimates that a 10% change in interest rates would affect annual interest expense by approximately $0.4 million.
- Approximately $152.6 million of remaining performance obligations, excluding NEC-acquired contracts, was reported at December 29, 2023; approximately 50% is expected to be recognized within 12 months.
- Approximately $63.0 million of advance payments and unearned revenue was outstanding, with about 30% expected to be recognized during the remainder of fiscal 2024.
- Purchase price allocation for the NEC transaction remains preliminary, and acquired contracts and valuations are still under review.
- The company reported ongoing legal and tax matters, including an Indian regulatory enforcement matter, but recorded no significant legal accruals and believes current proceedings are unlikely to materially affect financial position. Actual outcomes could differ materially.
- No material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls and procedures were effective as of December 29, 2023.
Important facts for investors to verify
- Assess NEC integration, acquired-contract accounting, final purchase-price adjustments, and the expected additional $22.9 million payment to NEC.
- Monitor whether revenue growth and gross-margin improvement offset higher research and development, selling and administrative, restructuring, and interest costs.
- Evaluate working-capital needs, particularly the significant increases in receivables, unbilled receivables, and inventory.
- Review term-loan covenants, variable-rate exposure, scheduled maturities, and remaining revolver availability.
- Reconcile the $57.3 million of off-balance-sheet commercial commitments and assess potential performance-guarantee exposure.
- Review the company’s fiscal 2023 Form 10-K risk factors and subsequent filings for changes involving litigation, tax audits, foreign exchange, customer concentration, and acquisition execution.