Aviat Networks, Inc. — Fiscal 2018 Second-Quarter Form 10-Q Summary
Reporting period: Three and six months ended December 29, 2017, compared with the corresponding periods ended December 30, 2016. Fiscal 2018 is a 52-week year ending June 29, 2018. Aviat designs, manufactures and sells wireless networking products, solutions and services globally.
Financial performance and liquidity
| Metric | Three months ended Dec. 29, 2017 | Three months ended Dec. 30, 2016 | Six months ended Dec. 29, 2017 | Six months ended Dec. 30, 2016 |
|---|---|---|---|---|
| Total revenue | $61.7 million | $68.5 million | $117.9 million | $126.7 million |
| Gross margin | $21.9 million; 35.5% | $21.1 million; 30.8% | $39.2 million; 33.2% | $38.5 million; 30.4% |
| Operating income | $2.9 million | $2.5 million | $1.7 million | $(0.4) million |
| Net income attributable to Aviat | $5.1 million | $1.7 million | $4.4 million | $1.0 million |
| Diluted earnings per share | $0.90 | $0.31 | $0.79 | $0.20 |
| Cash flow from operations | Not separately provided | Not separately provided | $9.2 million | $8.3 million |
Product revenue declined 17.9% in the quarter and 9.8% year to date, while services revenue increased 6.3% in the quarter but declined 2.0% year to date. Gross margin improved despite lower revenue, reflecting better product and service execution, lower supply-chain costs, improved margins in Africa and a greater North American revenue mix.
Cash, cash equivalents and restricted cash totaled $42.5 million at December 29, 2017, including $40.4 million of cash and cash equivalents. Cash, cash equivalents and short-term investments totaled $42.8 million. Total assets were $160.2 million and total equity was $60.9 million.
Debt consisted primarily of $9.0 million outstanding under the Silicon Valley Bank credit facility. The facility had $11.7 million of available credit, expires June 30, 2018, and includes financial covenants. The company was in compliance with its covenants at December 29, 2017.
Material changes versus the prior comparable periods
- Quarterly revenue decreased $6.8 million, or 9.9%; six-month revenue decreased $8.8 million, or 7.0%.
- Quarterly operating income increased $0.4 million, and six-month results improved from a $0.4 million operating loss to $1.7 million of operating income.
- Quarterly gross margin increased 470 basis points to 35.5%; six-month gross margin increased 280 basis points to 33.2%.
- Quarterly product revenue fell $8.2 million, partly offset by a $1.4 million increase in services revenue.
- Research and development expense increased 14.9% in the quarter and 5.6% year to date. Six-month selling and administrative expense declined 4.8%.
- Restructuring expense changed to a $0.3 million recovery in the quarter and a $0.3 million recovery year to date, compared with charges in the prior-year periods.
- North America revenue was broadly flat year to date; Africa and the Middle East declined 16.0%, Latin America and Asia Pacific declined 23.8%, and Europe and Russia increased 12.9%.
Cash flow, commitments and unusual items
- Six-month operating cash flow was $9.2 million. Capital expenditures were $3.3 million, and financing activities provided $0.01 million net after $18.0 million of borrowings and $18.0 million of repayments.
- Management expects approximately $2.3 million of additional fiscal 2018 capital expenditures, primarily for development and manufacturing equipment and managed services support.
- The company expects existing cash, available credit and customer collections to support working capital and capital expenditures for at least the next 12 months, but renewal of the credit facility is not assured.
- The Tax Cuts and Jobs Act produced a $3.3 million discrete tax benefit in the second quarter from releasing a valuation allowance related to refundable AMT credits. A $1.3 million IRAS tax refund was recorded in the first quarter. The company also recorded provisional deferred-tax adjustments related to the reduced U.S. corporate tax rate.
- Management stated that accounting for certain Tax Act provisions, including GILTI, remained incomplete. The company had not recorded a provisional GILTI adjustment or selected an accounting policy for GILTI.
- Outstanding commercial commitments not recorded on the balance sheet were $51.9 million, including purchase obligations of $20.4 million and approximately $0.7 million of software-license commitments. Operating lease commitments totaled $7.3 million.
- A customer in Austria has asserted a $1.0 million product-defect claim. The company has recorded no liability because the potential loss was not estimable and believes it has contractual and legal defenses.
Outlook, management commentary and risks
Management expects continued long-term demand for mobile backhaul capacity and is focused on LTE readiness, product innovation, cost reduction, operational efficiency and growth in managed and after-sale services. However, the company expects seasonal weakness in the fiscal third quarter because customers typically spend less at the beginning of their fiscal years.
Key risks include intense price and margin competition, fluctuations in order timing and geographic or customer mix, weaker international demand and constrained U.S.-dollar availability in resource-dependent economies, customer payment delays, foreign-exchange exposure, supply-chain constraints, customer concentration, credit-facility renewal and covenant compliance, political and economic instability, litigation, intellectual-property matters and the ability to sustain profitability.
MTN Group represented 11% of quarterly revenue and 13% of six-month revenue. Motorola, MTN Group and T-Mobile represented 16%, 11% and 11%, respectively, of accounts receivable at December 29, 2017.
Important facts for investors to verify
- Whether the SVB Credit Facility was renewed after its June 30, 2018 expiration and on what terms.
- Whether revenue weakness in Africa, the Middle East, Latin America and Asia Pacific continued, and whether the expected third-quarter seasonality occurred.
- Whether gross-margin improvement was sustained without relying on favorable mix, currency stability or one-time effects.
- The final accounting impact of the Tax Cuts and Jobs Act, including GILTI, deferred taxes and refundable AMT credits.
- Collections from significant customers and the company’s ability to manage its $51.9 million of off-balance-sheet commercial commitments.
- The outcome or estimated exposure from the Austrian customer claim and other legal or contractual contingencies.