Aviat Networks, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended July 3, 2020, including 53 weeks. The request references “2019 Q4,” but the supplied filing is the fiscal 2020 Form 10-K; fourth-quarter fiscal 2020 data are included below. Fiscal 2019 ended June 28, 2019 and included 52 weeks.
Business Context and Reporting Period
Aviat designs, manufactures and sells microwave and millimeter-wave wireless networking products, software, professional services and support. Its customers include communications service providers, government agencies, utilities, transportation companies, public safety organizations and other private network operators. The company operates as one reportable segment and outsources manufacturing to contract manufacturers in the United States and Asia.
Management emphasized North American private-network, rural broadband, wireless internet service provider and emerging 5G opportunities, while maintaining a more conservative view of international markets because of capital-spending declines and competitive pressure, particularly from Chinese vendors.
Key Financial Metrics
| Fiscal year ended | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $238.6 million | $243.9 million | Down 2.1% |
| Product revenue | $153.8 million | $156.7 million | Down 1.9% |
| Services revenue | $84.8 million | $87.1 million | Down 2.6% |
| Gross margin | $84.7 million | $79.3 million | Up 6.8% |
| Gross margin percentage | 35.5% | 32.5% | Up 3.0 points |
| Operating income | $3.4 million | $1.4 million | Improved $2.0 million |
| Net income attributable to Aviat | $0.3 million | $9.7 million | Down $9.5 million |
| Diluted earnings per share | $0.05 | $1.73 | Down $1.68 |
| Cash provided by operations | $17.5 million | $2.9 million | Up $14.5 million |
Fiscal 2020 revenue benefited from North America, which increased 14.2% to $151.7 million, but was offset by declines in Africa and the Middle East, Europe and Russia, and Latin America and Asia Pacific. North America represented approximately 64% of revenue, compared with 54% in fiscal 2019.
Gross-margin improvement reflected higher product margins, cost-saving initiatives and a greater mix of higher-margin North American sales. Product margin increased to 38.0% from 33.9%; service margin increased to 30.9% from 29.9%.
Operating expenses included $19.3 million of research and development, $58.0 million of selling and administrative expense, and $4.0 million of restructuring charges. The effective tax rate was unusually high at 93.1%, primarily because of taxes on profitable foreign subsidiaries and an increase in reserves for uncertain tax positions. Fiscal 2019 benefited from an $8.2 million tax benefit, including a $7.5 million release of U.S. valuation allowances.
Balance Sheet, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $41.6 million at July 3, 2020, compared with $31.9 million at June 28, 2019. Cash, cash equivalents and restricted cash totaled $41.9 million.
- Total assets were $179.8 million and total equity was $68.7 million.
- Accounts receivable, net, declined to $44.7 million from $51.9 million; inventories increased to $14.0 million from $8.6 million.
- Outstanding borrowings under the Silicon Valley Bank facility were $9.0 million, with $13.3 million of available credit after borrowings and letters of credit. The facility matures June 28, 2021, and the company was in compliance with its amended covenants at year-end.
- The $9.0 million borrowing was repaid in July 2020. A $5.9 million Paycheck Protection Program loan received in April 2020 was repaid with interest on May 5, 2020.
- Fiscal 2020 investing cash use was $4.6 million, primarily capital expenditures. Management expected fiscal 2021 capital expenditures of $5.0 million to $6.0 million.
- Commercial commitments, primarily surety bonds and standby letters of credit, totaled $57.2 million and were not recorded on the balance sheet. Management stated that significant future payments were not expected based on historical experience.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but gross margin improved substantially because of mix, pricing and cost-reduction actions.
- Net income fell sharply because fiscal 2019 included significant discrete tax benefits, while fiscal 2020 included a $3.5 million tax expense.
- Operating cash flow increased materially to $17.5 million, aided by working-capital changes and noncash tax adjustments.
- Restructuring charges increased to $4.0 million from $0.7 million. New Q3 2020 and Q4 2020 restructuring plans were intended to reduce operating costs and improve profitability; remaining restructuring liabilities were $2.7 million at year-end and were expected to be paid in fiscal 2021.
- The company adopted lease accounting under ASC 842 in fiscal 2020, recording right-of-use assets of approximately $3.5 million and lease liabilities of approximately $3.7 million at year-end.
- Backlog increased to approximately $210 million from $160.1 million. Management expected to substantially fill the fiscal 2020 backlog during fiscal 2021, but noted that orders may be delayed or canceled without significant penalty.
- The stock repurchase program was suspended in February 2020. Fiscal 2020 repurchases totaled $1.8 million, and $3.4 million remained available under the authorization.
Fourth-Quarter Fiscal 2020 Data
| Quarter ended July 3, 2020 | Q4 FY2020 | Q4 FY2019 |
|---|---|---|
| Revenue | $62.7 million | $64.2 million |
| Gross margin | $21.9 million | $22.6 million |
| Operating income | $2.1 million | $2.5 million |
| Net income | $1.1 million | $3.8 million |
| Diluted earnings per share | $0.21 | $0.69 |
| Restructuring charges | $1.9 million | $(0.1) million recovery |
Guidance, Outlook, Risks and Unusual Items
Management anticipated modest fiscal 2021 revenue growth, supported by North American private-network backlog, rural broadband opportunities and potential 5G investment. No specific revenue or earnings guidance range was provided.
- COVID-19 reduced activity in parts of the business and created risks involving customer demand, field services, supply chains, manufacturing restrictions and employee availability. Management reported minimal supply-chain and order-fulfillment impact during the second half of fiscal 2020 but warned that future disruptions remained possible.
- Pricing pressure and margin erosion remained significant, particularly in international markets. Competition includes Ericsson, Huawei, NEC, Nokia, Ceragon and SIAE.
- Customer and telecommunications-industry consolidation could reduce order volumes, increase pricing leverage and delay purchasing decisions.
- International operations expose the company to foreign exchange, political, regulatory, trade, tariff, corruption, collection and geopolitical risks. The company reported 38% of fiscal 2020 sales to international customers.
- Customer credit risk was concentrated: MTN Group represented approximately 21% of accounts receivable at July 3, 2020, although no customer represented more than 10% of fiscal 2020 revenue.
- Tax assets remain subject to realization risk. The company reported $136.1 million of valuation allowances against deferred tax assets, $404.1 million of U.S. federal tax-loss carryforwards and $18.0 million of unrecognized tax benefits.
- Pending matters included an alleged defective-product customer claim and Indian regulatory enforcement actions involving intercompany receivables and payables. The company accrued only immaterial probable losses and could not estimate any additional loss range.
- The filing states that the company’s disclosure controls and internal control over financial reporting were effective as of year-end; the auditor was not required to provide an internal-control attestation because Aviat was a non-accelerated filer.
Most Important Facts for Investors to Verify
- Whether North American growth and the approximately $210 million backlog convert into fiscal 2021 revenue despite cancellation, delay and customer-acceptance risks.
- Whether gross-margin gains and restructuring savings offset continuing price competition and international-market weakness.
- The renewal and covenant compliance status of the Silicon Valley Bank credit facility after its June 2021 maturity date.
- Actual cash conversion, including collections from MTN Group and other concentrated telecommunications customers.
- The magnitude and timing of future restructuring payments, tax settlements, legal outcomes and commercial-guarantee exposure.
- The continuing effects of COVID-19, tariffs, supply-chain constraints and reduced customer capital spending.
- The comparability of fiscal 2019 results, because ASC 606 revenue accounting increased reported fiscal 2019 revenue versus the prior accounting method and fiscal 2020 contained an additional week.