Aviat Networks, Inc. Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2019, with fourth-quarter results for the quarter ended June 28, 2019. The filing was signed August 27, 2019. Fiscal 2019 and fiscal 2018 each comprised 52 weeks. The filing adopts ASC 606 using the modified-retrospective method, so reported fiscal 2019 and fiscal 2018 revenue are not directly comparable without adjustment.
Business Context
Aviat designs, manufactures and sells microwave and millimeter-wave wireless networking products, software, professional services and support. Its customers include communications service providers, governments, utilities, transportation entities, public-safety agencies and other private network operators. The company operates as one reportable segment, with revenue managed geographically across North America, Africa and the Middle East, Europe and Russia, and Latin America and Asia Pacific.
Financial Performance and Liquidity
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $243.9 million | $242.5 million | 0.6% increase |
| Gross margin | $79.3 million; 32.5% | $80.5 million; 33.2% | Down $1.2 million; margin down 70 bps |
| Operating income | $1.4 million | $1.3 million | Up $0.1 million |
| Net income attributable to Aviat | $9.7 million | $1.8 million | Up $7.9 million |
| Diluted earnings per share | $1.73 | $0.33 | Improved |
| Cash flow from operations | $2.9 million | $8.2 million | Down $5.3 million |
| Capital expenditures | $5.2 million | $6.6 million | Down $1.3 million |
- Product revenue increased 3.3% to $156.7 million, while services revenue declined 4.1% to $87.1 million.
- Research and development expense rose 6.9% to $21.1 million, or 8.7% of revenue. Selling and administrative expense declined 3.6% to $56.1 million.
- The fiscal 2019 income tax benefit was $8.2 million, primarily reflecting a $7.5 million release of U.S. federal and state valuation allowances and a Brazil withholding-tax benefit. The unusually high benefit materially increased net income.
- At June 28, 2019, cash and cash equivalents totaled $31.9 million; cash, cash equivalents and short-term investments totaled $31.9 million as reported in liquidity disclosures. Approximately $15.0 million was held in the United States and $16.9 million internationally.
- Outstanding debt under the Silicon Valley Bank facility was $9.0 million, with $15.1 million of available credit. The company was in compliance with its financial covenants and repaid the $9.0 million borrowing in July 2019.
- Total assets were $169.2 million and total liabilities were $97.7 million at year-end. The company does not pay cash dividends.
Fourth-Quarter Results
| Metric | Q4 Fiscal 2019 | Q4 Fiscal 2018 |
|---|---|---|
| Revenue | $64.2 million | $62.5 million |
| Gross margin | $22.6 million | $23.2 million |
| Operating income | $2.5 million | $1.0 million |
| Net income attributable to Aviat | $3.8 million | $0.1 million |
| Diluted EPS | $0.69 | $0.01 |
Quarterly results remained volatile. Fiscal 2019 included a first-quarter loss, second-quarter profit, third-quarter profit benefiting from tax items, and a profitable fourth quarter. Fourth-quarter results included a $60,000 restructuring recovery, a $102,000 strategic-alternatives cost, a $65,000 WTM inventory recovery and a $432,000 release of valuation allowance.
Material Changes Versus the Prior Period
- Revenue was broadly stable, but geographic mix shifted substantially: North America rose 1.4% to $132.9 million; Africa and the Middle East declined 17.4% to $48.3 million; Europe and Russia declined 7.0% to $16.9 million; and Latin America and Asia Pacific increased 31.6% to $45.7 million.
- Gross margin declined because of lower service margin rates, particularly in North America, the Middle East and Africa.
- Operating expenses improved through lower selling and administrative costs, partly offset by higher R&D investment.
- Operating cash flow declined despite higher net income, reflecting changes in deferred tax assets, receivables, unbilled receivables, payables and other working-capital accounts.
- Inventory declined to $8.6 million from $21.3 million, while accounts receivable increased to $51.9 million from $43.1 million and unbilled receivables increased to $27.8 million from $14.2 million.
- ASC 606 adoption produced a $5.6 million net increase to opening accumulated deficit and changed the timing of bill-and-hold, professional-services, software and commission-related revenue and costs. Fiscal 2019 revenue was $243.9 million under ASC 606 versus $231.4 million on an ASC 605 basis.
- Backlog increased to approximately $160.1 million from $145.4 million, although orders may be rescheduled or canceled without significant penalty.
Outlook, Commentary and Risks
- Management expected fiscal 2020 North American revenue to increase, supported by private-network projects, rural broadband, wireless internet service providers and potential 5G deployments.
- Management took a more conservative view of international revenue because of lower capital spending, uncertain timing and increased competition, particularly from Chinese vendors.
- Management expected approximately $5.0 million of fiscal 2020 capital expenditures.
- On August 21, 2019, the board approved a fiscal 2020 restructuring plan expected to eliminate approximately 48 positions while adding selected employees in key areas. Estimated charges are approximately $1.7 million, primarily in the first half of fiscal 2020, with expected annualized savings of approximately $1.7 million in fiscal 2021.
- Key operating risks include intense price competition and margin erosion, customer consolidation, reliance on international and emerging markets, long and unpredictable sales cycles, customer credit and collection risk, supplier and contract-manufacturer dependence, sole-source components, foreign exchange exposure, regulatory and geopolitical uncertainty, cybersecurity, intellectual-property claims and dependence on new-product acceptance.
- MTN Group represented 11% of fiscal 2019 revenue and approximately 11% of year-end accounts receivable. International customers represented 47% of revenue.
- Commercial commitments totaled $60.5 million, primarily performance surety bonds. These commitments were not recorded as liabilities, and the company stated that significant future payouts were not probable based on historical experience.
- Austrian customer litigation seeks $1.0 million for alleged product defects. The company has recorded no accrual because the potential loss is not currently estimable.
- The company had $1.3 million of restructuring liabilities at year-end, of which $1.1 million was current. Contractual cash obligations totaled $38.3 million, including debt, purchase obligations, leases and uncertain tax positions.
- Most operating leases were expected to be recognized on the balance sheet upon adoption of ASC 842 in fiscal 2020. The filing did not provide a final quantified ASC 842 impact.
Investor Verification Priorities
- Reconcile fiscal 2019 performance under ASC 606 with the non-GAAP-comparable ASC 605 amounts and assess the effect on backlog, receivables, unbilled receivables and future revenue timing.
- Separate recurring operating profitability from the $8.2 million tax benefit, including the $7.5 million valuation-allowance release and Brazil tax benefit.
- Monitor operating cash conversion, receivable and unbilled-receivable collections, and the effect of customer payment terms on liquidity.
- Verify repayment and renewal status of the SVB credit facility, covenant compliance and borrowing-base availability after July 2019.
- Assess whether the fiscal 2020 restructuring achieves the projected $1.7 million annualized savings without impairing product development or international execution.
- Evaluate the sustainability of North American growth against international declines, pricing pressure and customer concentration.
- Review the $60.5 million of off-balance-sheet commercial commitments and the unresolved Austrian product claim.
- Track execution of the backlog, remaining performance obligations of approximately $71.7 million, and the timing of the expected fiscal 2020 revenue recognition.