Aviat Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended April 2, 2021, compared with April 3, 2020. The supplied metadata references “2020 Q3,” but the filing is for fiscal 2021 Q3. The quarter contained 13 weeks versus 14 weeks in the prior-year quarter. Aviat designs, manufactures, and sells wireless networking products, solutions, and services globally.
Financial Performance and Position
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Total revenue | $66.4 million | $61.4 million | $203.2 million | $176.0 million |
| Gross margin | $25.6 million | $22.0 million | $76.7 million | $62.8 million |
| Gross margin percentage | 38.5% | 35.8% | 37.8% | 35.7% |
| Operating income | $4.0 million | $1.2 million | $18.5 million | $1.3 million |
| Net income | $94.7 million | $0.7 million | $107.3 million | $(0.9) million |
| Diluted EPS | $8.00 | $0.07 | $9.31 | $(0.08) |
| Operating cash flow | Not separately provided | Not separately provided | $14.2 million | $14.6 million |
- Product revenue increased 10.5% in Q3 and 22.1% for the first nine months; services revenue increased 3.5% and 3.9%, respectively.
- Q3 operating expenses were $21.5 million, including $1.2 million of restructuring charges. Nine-month operating expenses were $58.3 million versus $61.6 million in the prior-year period.
- Cash and cash equivalents were $45.8 million at April 2, 2021, up from $41.6 million at July 3, 2020. Including restricted cash, total cash was $46.1 million.
- Inventories increased to $21.9 million from $14.0 million, primarily to mitigate supply-chain constraints. Unbilled receivables increased to $37.9 million from $28.1 million.
- There was no balance outstanding under the SVB Credit Facility at quarter-end. Available borrowing capacity was $23.5 million, net of $1.5 million of letters of credit. The facility matured June 28, 2021.
- Net cash used in investing activities was $2.4 million, consisting primarily of capital expenditures. Management expected approximately $1 million to $2 million of additional capital expenditures in Q4 FY2021.
Material Changes Versus Prior Comparable Period
- Revenue increased 8.2% in Q3 and 15.5% for the first nine months, led by North America and higher private-network activity.
- Gross margin expanded by 270 basis points in Q3 and 210 basis points for the nine-month period, primarily from higher private-network business and increased Aviat Store sales.
- Operating income improved substantially, reflecting revenue growth, gross-margin expansion, lower selling and administrative expenses, and restructuring savings.
- Net income was unusually high because the company recorded a $92.2 million discrete release of valuation allowance on U.S. federal and state deferred tax assets. The nine-month income-tax benefit was $88.6 million.
- Selling and administrative expenses declined 6.3% for the first nine months, while research and development expenses increased 3.1%.
- The company repaid $9.0 million of short-term debt in July 2020 and reinstated its stock repurchase program during Q3, repurchasing 8,300 shares for $0.5 million. Approximately $3.0 million remained available under the program.
- On April 7, 2021, Aviat effected a two-for-one stock split, and presented historical share and per-share amounts retrospectively.
Outlook, Commentary, Risks, and Unusual Items
- Management anticipated fiscal 2021 revenue growth, citing backlog entering the final quarter, momentum across verticals, rural broadband and wireless internet service provider opportunities, and investment supporting 5G deployments.
- Management reported a return to international growth and continued positioning for 5G and LTE deployments. No specific quantitative revenue or earnings guidance was provided.
- The fiscal 2021 restructuring plan is expected to reduce the workforce by approximately 30 employees through the second quarter of fiscal 2022. The company had $2.0 million of restructuring liabilities at quarter-end.
- COVID-19 had a minimal effect on supply-chain lead times and order fulfillment during the reported periods, but future constraints, manufacturing restrictions, field-service delays, and changes in customer demand remained possible.
- Key risks include competitive pricing and margin pressure, customer and geographic mix, supplier concentration and component shortages, covenant compliance, collections, global economic conditions, foreign exchange, political and regulatory developments, intellectual-property claims, and the success of restructuring efforts.
- The company had $31.4 million of supplier and contract-manufacturer purchase obligations, $1.5 million of software-license commitments, and $57.8 million of outstanding commercial commitments not recorded on the balance sheet.
- Remaining performance obligations were approximately $73 million at April 2, 2021, with approximately 60% expected to be recognized as revenue within 12 months.
- On April 13, 2021, the company filed a shelf registration statement that, once effective, would permit offerings of up to $200 million of securities.
Investor Verification Items
- Verify the sustainability of reported profitability excluding the $92.2 million deferred-tax valuation allowance release.
- Assess whether revenue growth, backlog, private-network demand, rural broadband activity, and 5G-related investments continue into fiscal 2022.
- Confirm renewal or replacement of the SVB Credit Facility after its June 28, 2021 maturity and the effect on liquidity.
- Monitor inventory, unbilled receivables, customer collections, and supplier concentration amid supply-chain constraints.
- Evaluate restructuring execution, the approximately 30 planned workforce reductions, and related cash payments.
- Review the $57.8 million of commercial commitments, $31.4 million of purchase obligations, letters of credit, tax audits, and the unresolved Indian regulatory matter.
- Consider customer concentration, including a U.S. state government customer representing 13.9% of accounts receivable at quarter-end.