Aviat Networks, Inc. 10-Q Summary
Business Context and Reporting Period
Aviat designs, manufactures and supports wireless networking products, solutions and services for telecommunications providers, private networks, government agencies, utilities, transportation, public safety and broadcast customers worldwide. The filing covers the 13-week second quarter and six months of fiscal 2019 ended December 28, 2018. Fiscal 2019 ends June 28, 2019.
The company adopted ASC 606 revenue recognition effective June 30, 2018 using the modified retrospective method. Prior-period results were not restated, so year-over-year comparisons are not directly comparable.
Key Financial Metrics
| Metric | Q2 FY2019 | Q2 FY2018 | Six Months FY2019 | Six Months FY2018 |
|---|---|---|---|---|
| Revenue | $65.1 million | $61.7 million | $125.6 million | $117.9 million |
| Gross margin | $22.5 million | $21.9 million | $40.4 million | $39.2 million |
| Gross margin percentage | 34.6% | 35.5% | 32.2% | 33.2% |
| Operating income | $2.9 million | $2.9 million | $1.4 million | $1.7 million |
| Net income attributable to Aviat | $2.3 million | $5.1 million | $1.6 million | $4.4 million |
| Diluted EPS | $0.41 | $0.90 | $0.28 | $0.79 |
Q2 product revenue increased 11.2% to $42.0 million, while services revenue decreased 3.6% to $23.1 million. Product margin improved to 37.7%, but service margin declined to 28.9%, primarily because of lower margins on certain installation projects. Research and development expense increased 3.3% to $5.3 million; selling and administrative expense increased 1.3% to $14.3 million.
The six-month tax benefit of $0.2 million included a $1.6 million discrete benefit from releasing a valuation allowance associated with a potential Brazilian withholding-tax refund. Q2 tax expense was $0.5 million, compared with a $2.6 million tax benefit in the prior-year quarter.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $31.5 million at December 28, 2018, compared with $37.4 million at June 29, 2018. Total cash, cash equivalents and restricted cash were $31.8 million.
- Operating cash flow was negative $0.6 million for the first six months, versus positive $9.2 million in the prior-year period. Working-capital usage was driven principally by increases in accounts receivable and unbilled receivables.
- Capital expenditures were $3.2 million in the first six months. Management expects approximately $3.0 million of additional fiscal 2019 capital expenditures.
- The company had $9.0 million outstanding under its Silicon Valley Bank revolving credit facility, with $15.7 million of availability. The facility expires June 29, 2019; the company was in compliance with its financial covenants at quarter-end.
- Restructuring liabilities totaled $2.2 million, including $1.6 million classified as current. The company expects to substantially complete the related plan by fiscal year-end and pay the accrued amounts by the end of fiscal 2020.
- Management believes cash, available credit and expected collections will cover anticipated working-capital and capital-expenditure needs for at least the next 12 months, subject to covenant compliance, borrowing-base availability and cash generation.
Material Changes Versus the Prior Comparable Period
- Reported Q2 revenue increased 5.5%, and six-month revenue increased 6.5%; however, ASC 606 caused a significant comparability difference. Without ASC 606, reported revenue would have been approximately $63.0 million for Q2 and $112.9 million for six months.
- Q2 net income attributable to Aviat declined $2.8 million, primarily reflecting the prior-year tax benefit and the absence of the prior-year noncontrolling-interest presentation. Six-month net income declined $2.9 million.
- Gross margin percentage declined 90 basis points in Q2 and 100 basis points for six months, mainly because of weaker services margins.
- Regional Q2 revenue increased in Latin America and Asia Pacific by 29.9% and in Africa and the Middle East by 9.1%; North America was broadly flat, while Europe and Russia declined 15.2%.
- Six-month revenue increased substantially in Latin America and Asia Pacific, up 64.9%, while North America declined 4.3% and Europe and Russia declined 15.9%.
- Inventory declined to $8.6 million from $21.3 million at fiscal year-end, while accounts receivable and unbilled receivables increased to $48.6 million and $32.3 million, respectively.
- The company repurchased 91,585 shares for approximately $1.4 million during the first six months. Approximately $6.1 million remained available under the $7.5 million authorization.
Guidance, Outlook, Risks and Unusual Items
Management anticipates a return to top-line growth in fiscal 2019, supported by expansion of its solutions portfolio, broader addressable markets, customer-footprint gains and increasing demand for bandwidth. Management also highlighted opportunities related to LTE, emerging 5G deployments, managed services and network modernization. No specific revenue or earnings guidance was provided.
- Key risks include price and margin pressure, customer and project timing, international political and economic conditions, foreign exchange, customer payment timing, supply-chain constraints, customer acceptance of new products and dependence on key customer relationships.
- Mobile Telephone Networks Group represented 12% of Q2 and six-month revenue and 20% of accounts receivable at December 28, 2018, creating customer concentration exposure.
- Outstanding off-balance-sheet commercial commitments totaled $55.8 million, including performance-related surety bonds and standby letters of credit. Purchase obligations were $19.4 million and software-license commitments were approximately $1.8 million.
- The company disclosed an approximately $1.0 million customer claim in Austria concerning allegedly defective products. The reasonably possible loss or range of loss cannot currently be estimated, and no related accrual was recorded.
- The company has a full valuation allowance against U.S. deferred tax assets because future realization is not considered more likely than not. Tax audits are pending in several jurisdictions.
- ASC 606 reduced opening accumulated deficit by a net $5.6 million and materially changed the timing and classification of product, services, bill-and-hold and contract-related revenue.
Investor Verification Checklist
- Reconcile year-over-year revenue, earnings and margin trends using the ASC 606 impact tables rather than relying solely on reported comparisons.
- Monitor operating cash flow, collections of accounts receivable and unbilled receivables, and the conversion of $23.6 million of contract liabilities into revenue.
- Verify renewal or replacement of the $30.0 million credit facility before its June 29, 2019 expiration and continued compliance with its financial covenants.
- Assess whether services-margin weakness, competitive pricing and installation-project performance improve in subsequent quarters.
- Track customer concentration, particularly MTN Group, and geographic performance in Europe and Russia versus Asia Pacific and Africa.
- Evaluate the effect of restructuring payments, the Austrian customer claim, tax audits and $55.8 million of commercial commitments on liquidity.
- Confirm whether management’s expected fiscal 2019 top-line growth and planned capital expenditures are supported by orders, project milestones and cash generation.