Aviat Networks, Inc. FY2017 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017. The supplied metadata references “2016 Q4,” but the filing is the FY2017 annual report and includes quarterly data for FY2017 and FY2016.
Business context
Aviat designs, manufactures and supports microwave and millimeter-wave wireless networking products, network-management software and professional services for mobile operators, private networks, government, utilities, public safety and other communications customers. The company operates as one reportable segment and outsources manufacturing to contract manufacturers.
- Fiscal 2017 revenue mix was approximately 55% North America and 45% international.
- Employees totaled approximately 710 at June 30, 2017, versus approximately 720 at July 1, 2016.
- Backlog increased to $159.7 million from $153.6 million; management expected to substantially fill the FY2017 backlog during fiscal 2018, subject to cancellations and delivery changes.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $241.9 million | $268.7 million | Down 10.0% |
| Product revenue | $153.5 million | $167.8 million | Down 8.5% |
| Services revenue | $88.4 million | $100.9 million | Down 12.4% |
| Gross margin | $75.5 million; 31.2% | $61.7 million; 23.0% | Margin up 820 bps |
| Operating loss | $1.0 million | $27.4 million | Improved |
| Net loss attributable to Aviat | $0.8 million | $29.9 million | Improved |
| Loss per share | $0.16 | $5.71 | Improved |
| Cash flow from operations | $9.4 million | $0.4 million | Improved |
| Capital expenditures | $4.0 million | $1.6 million | Increased |
Gross-margin improvement reflected lower supply-chain costs, improved product and service pricing mix, restructuring-related process improvements and a $9.1 million reduction in inventory write-downs. FY2017 inventory and customer-service inventory charges totaled $1.1 million, versus $9.9 million in FY2016.
- Cash, cash equivalents and short-term investments totaled $35.9 million at June 30, 2017; total cash, cash equivalents and restricted cash were $36.6 million.
- Accounts receivable, net, declined to $45.9 million from $63.4 million, while unbilled receivables increased to $12.1 million from $5.1 million.
- Debt under the Silicon Valley Bank facility was $9.0 million, with $5.8 million of available credit after borrowing-base and letter-of-credit limitations. The company was in compliance with its covenants at year-end and repaid the $9.0 million borrowing in July 2017.
- The facility had a committed capacity of up to $30.0 million, expires June 30, 2018, and contains minimum adjusted quick-ratio and profitability covenants.
- Total contractual cash obligations were $38.2 million, including $17.8 million of purchase obligations and $7.6 million of operating lease commitments.
Material changes versus the prior comparable period
- Revenue fell $26.8 million, primarily because of lower international sales, customer capital-spending constraints, currency devaluation and reduced purchasing power in resource-dependent markets.
- North American revenue increased 5.3% to $132.1 million, driven by private-network customers, partially offset by lower wireless-operator revenue as LTE build cycles matured.
- Africa and Middle East revenue declined 27.3% to $60.2 million; Europe and Russia declined 31.2% to $14.1 million; Latin America and Asia Pacific declined 11.0% to $35.5 million.
- Research and development expense declined 10.2% to $18.7 million, while selling and administrative expense declined 13.2% to $57.2 million.
- Restructuring charges declined to $0.6 million from $2.5 million. The company stated that restructuring activities under its principal plans were substantially complete by year-end, with $1.7 million of restructuring liabilities remaining.
- Net loss improved substantially, aided in part by a $3.7 million Singapore tax assessment refund recorded as a discrete tax benefit and by lower inventory write-downs.
- MTN Group accounted for 14% of FY2017 revenue, down from 18% in FY2016, and approximately 26% of year-end accounts receivable.
Outlook, commentary, risks and unusual items
Management’s FY2018 priorities were to accelerate innovation, optimize the product portfolio, reduce costs, improve operational efficiency, grow revenue and establish a sustainable profitable business model. The filing does not provide quantitative FY2018 revenue or earnings guidance.
- Management expects approximately $5.3 million of FY2018 capital expenditures, primarily for product development, manufacturing support and managed services.
- Seasonality and long sales cycles may cause significant quarterly volatility; the third fiscal quarter has historically been weaker than the second fiscal quarter.
- Key risks include intense price competition and margin erosion, customer concentration, customer credit and payment risk, international political and currency exposure, supply-chain dependence, contract-manufacturer execution, product-transition risk and the company’s continued history of GAAP losses.
- International customers represented approximately 47% of FY2017 revenue. Currency weakness and shortages of U.S. dollars in certain emerging markets constrained customer spending and collections.
- Off-balance-sheet commercial commitments totaled $34.7 million, primarily performance surety bonds and standby letters of credit. The company historically has not paid significant amounts on performance guarantees, although it recorded a $0.4 million performance-bond expense in FY2017 and intends to pursue recovery.
- Austrian customer litigation involved a claimed $1.0 million of damages for alleged product defects; the potential loss could not be estimated. A separate African inventory dispute was settled for $0.2 million in April 2017.
- The company maintains substantial tax attributes, including U.S. federal tax loss carryforwards of $339.8 million, but a $198.0 million deferred-tax valuation allowance indicates uncertainty regarding realization. A further $1.3 million Singapore tax refund was received in the first quarter of FY2018 and is expected to be recognized then.
- The company adopted several accounting updates in FY2017 and expected to adopt the new revenue standard, ASC 606, in the first quarter of FY2019 using a modified retrospective method. Management expected changes principally in the timing of certain installation revenue and costs.
Most important facts to verify
- Whether FY2018 revenue growth and profitability materialized after the FY2017 revenue decline and near-break-even operating result.
- Renewal and covenant compliance of the SVB credit facility before its June 30, 2018 maturity, including available borrowing-base capacity.
- Conversion of the $159.7 million backlog into revenue and the extent of cancellations, delays or customer renegotiations.
- Collection quality and customer concentration, particularly MTN Group’s share of receivables and the elevated unbilled-receivables balance.
- Impact of ASC 606 adoption on installation revenue, contract costs, deferred revenue and reported margins.
- Resolution of the Austrian product-defect claim, performance-bond recovery efforts and other contingent liabilities.
- Ability to sustain gross-margin gains after the unusually large FY2016 inventory write-downs and completion of restructuring activities.