Aviat Networks, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Aviat Networks designs, manufactures, and sells wireless networking products, solutions, and services for communications providers, private networks, government agencies, utilities, transportation, public safety, and other customers globally. The filing covers the three and six months ended December 27, 2019, representing the second quarter and first six months of fiscal 2020. Fiscal 2020 will contain 53 weeks and end July 3, 2020.
Key Financial Metrics
| Metric | Three Months Ended Dec. 27, 2019 | Six Months Ended Dec. 27, 2019 |
|---|---|---|
| Revenue | $56.0 million | $114.6 million |
| Gross profit | $18.3 million | $40.9 million |
| Gross margin | 32.7% | 35.7% |
| Operating income (loss) | $(1.5) million | $0.02 million |
| Net income (loss) | $(1.7) million | $(1.6) million |
| Diluted EPS | $(0.31) | $(0.30) |
| Cash flow from operations | Not separately provided for the quarter | $10.8 million |
Product revenue was $34.2 million for the quarter and $70.7 million for the six-month period; service revenue was $21.8 million and $43.9 million, respectively. Selling and administrative expense was $14.5 million for the quarter and $29.1 million for the six-month period. Research and development expense was $5.0 million and $10.2 million, respectively. Restructuring charges were $0.4 million for the quarter and $1.6 million year to date.
At December 27, 2019, cash and cash equivalents were $38.1 million, or $38.3 million including restricted cash. Total assets were $179.8 million and total equity was $68.5 million. Debt under the Silicon Valley Bank credit facility was $9.0 million, with $14.5 million of availability; the facility expires June 29, 2020. The company was in compliance with its financial covenants at quarter-end. Capital expenditures were $2.4 million year to date, and approximately $3.6 million of additional fiscal 2020 capital expenditures were expected.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 14.0% to $56.0 million; six-month revenue declined 8.7% to $114.6 million.
- Quarterly product revenue fell 18.6%, while service revenue fell 5.6%. Year-to-date product and service revenue declined 12.7% and 1.5%, respectively.
- Quarterly gross margin decreased from 34.6% to 32.7%, primarily because of lower product mix and increased supply-chain costs. Six-month gross margin improved from 32.2% to 35.7%.
- The company moved from quarterly net income of $2.3 million to a net loss of $1.7 million, and from six-month net income of $1.6 million to a net loss of $1.6 million.
- North America revenue declined 2.3% in the quarter but increased 17.1% year to date. International revenue declined across all reported regions, including a 48.8% year-to-date decline in Latin America and Asia Pacific.
- Operating cash flow improved from a use of $0.6 million to generation of $10.8 million year to date, principally reflecting working-capital movements, including collections of accounts receivable and changes in unearned revenue.
- The company adopted ASC 842 lease accounting on June 29, 2019, recording right-of-use assets and lease liabilities. December 27, 2019 right-of-use assets were $5.6 million and lease liabilities totaled approximately $5.9 million.
Guidance, Outlook, Risks, and Unusual Items
Management expected fiscal 2020 revenue to be higher in North America but lower internationally. North American momentum was supported by private-network projects, rural broadband and wireless internet service providers, public safety deployments, and anticipated 5G-related investment. International revenue expectations remained conservative because of lower capital spending, competitive pressure—particularly from Chinese vendors—and limited visibility into project timing.
Product revenue was adversely affected by a cyberattack at a contract manufacturing vendor, which constrained capacity for approximately three weeks and contributed to lower-than-expected results. The company stated that the issue had been fully remediated.
The fiscal 2020 restructuring plan is intended to consolidate product development and right-size international and support resources. Restructuring liabilities were $1.9 million at quarter-end, with approximately $1.7 million classified as current and expected to be paid within 12 months.
Principal risks include pricing and margin erosion, customer and geographic concentration, timing and collection of customer payments, supplier and subcontractor performance, component shortages, global telecommunications spending, foreign currency and political risks, financial covenant compliance, tax uncertainties, intellectual-property claims, and the outcome of restructuring activities. The company had $61.2 million of off-balance-sheet commercial commitments, $18.6 million of supplier and contract-manufacturer purchase obligations, and $2.1 million of software-license obligations.
Remaining performance obligations were approximately $73.8 million at December 27, 2019, of which approximately 70% was expected to be recognized as revenue within the next 12 months. Customer advance payments and unearned revenue totaled $27.9 million, with approximately 45% expected to be recognized during fiscal 2020.
The company disclosed an approximately $1.0 million Austrian customer claim concerning allegedly defective products, for which the reasonably possible loss could not be estimated. An Indian regulatory enforcement matter remained ongoing, with only an immaterial probable loss accrued.
Important Facts for Investors to Verify
- Whether North American growth offsets continued weakness and competitive pressure in international markets.
- Whether the manufacturing-vendor cyberattack remains fully remediated and whether related supply-chain costs normalize.
- Renewal, extension, or replacement of the $25.0 million SVB credit facility before its June 29, 2020 expiration.
- Compliance with minimum adjusted quick-ratio and profitability covenants and the resulting borrowing-base availability.
- Conversion of the $73.8 million performance-obligation balance into revenue and cash collections.
- Execution and cash costs of the fiscal 2020 restructuring plan.
- Potential effects of tax audits, uncertain tax positions, deferred-tax-asset valuation allowances, and the disclosed legal and regulatory matters.
- Whether the $61.2 million of commercial commitments and customer performance guarantees create material future cash requirements.