Aviat Networks, Inc. Form 10-Q Summary
Business Context and Reporting Period
Aviat designs, manufactures and sells wireless networking products, solutions and services for telecommunications operators, private networks, governments, utilities, transportation, public safety and broadcast customers worldwide. The filing covers the 13-week quarter ended September 30, 2016, the first quarter of fiscal 2017, compared with the 13-week quarter ended October 2, 2015. Results are unaudited and are not necessarily indicative of the full fiscal year.
Financial Performance and Position
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $58.2 million | $79.6 million | Down 26.8% |
| Product revenue | $34.7 million | $53.7 million | Down 35.3% |
| Services revenue | $23.5 million | $25.9 million | Down 9.2% |
| Gross margin | $17.4 million; 29.8% | $21.0 million; 26.4% | Dollar margin down; rate improved |
| Operating loss | $2.9 million | $1.6 million | Loss increased |
| Net loss attributable to Aviat | $0.6 million; $0.12 per share | $1.2 million; $0.23 per share | Loss narrowed |
| Cash flow from operations | $3.8 million | $1.8 million | Improved by $2.1 million |
Gross margin improvement reflected stronger service margins and lower supply-chain costs, partially offset by lower revenue volume and slightly lower product margins. Research and development expense declined 9.7% to $4.9 million, while selling and administrative expense declined 11.2% to $15.2 million. Restructuring charges were $0.2 million.
The company reported a $2.5 million income-tax benefit, including a discrete $3.7 million refund from the Singapore tax authority related to a prior $13.2 million assessment. Without this item, reported earnings would have been weaker. Prior-year results included $0.4 million of income from discontinued WiMAX operations; no such income was recorded in the current quarter.
At September 30, 2016, cash and cash equivalents were $31.8 million, short-term investments were $0.2 million and total current assets were $127.6 million. Accounts receivable declined to $49.7 million from $63.4 million at July 1, 2016, while inventory declined to $24.1 million from $27.3 million.
Outstanding borrowings under the Silicon Valley Bank facility were $8.0 million, down from $9.0 million. The facility has a $30.0 million commitment, but only $2.0 million was available after considering the borrowing base and $6.1 million of letters of credit. The company was in compliance with its amended covenants at quarter-end, but classified the borrowings as current because of uncertainty regarding future covenant compliance and subjective acceleration provisions.
Material Changes Versus the Prior Comparable Period
- Revenue declined $21.3 million, primarily because of lower product volumes in North America, Africa and the Middle East, and Europe and Russia.
- North America revenue decreased 18.8%, reflecting fewer wireless-operator orders as LTE build cycles approached completion.
- Africa and Middle East revenue decreased 47.4%, driven by lower sales to large operators, including MTN Group, and private-network customers.
- Europe and Russia revenue decreased 30.0%; Latin America and Asia Pacific revenue increased 1.5%.
- Gross margin percentage increased from 26.4% to 29.8%, although total gross profit decreased 17.4% because of lower sales volume.
- Operating loss increased despite lower operating expenses, reflecting the substantial revenue decline.
- Operating cash flow improved to $3.8 million, aided by collections of accounts receivable and working-capital changes.
- Cash increased $1.3 million to $31.8 million after capital expenditures of $1.3 million, net debt repayment of $1.0 million and unfavorable foreign-exchange effects of $0.2 million.
Outlook, Commentary, Risks and Unusual Items
Management’s fiscal 2017 priorities are to accelerate innovation, optimize the product portfolio, improve costs and operating efficiency, grow revenue and establish a sustainable profitable business model. No specific numerical revenue or earnings guidance was provided.
Management expects continued quarter-to-quarter volatility and seasonality. Customer capital spending is typically stronger near calendar year-end, while the fiscal third quarter has historically been weaker. International operations remain affected by constrained U.S.-dollar availability in economies dependent on resource exports, which has limited customer spending and delayed payments.
The company expects approximately $1.7 million of capital expenditures during the remainder of fiscal 2017, primarily for development, manufacturing equipment and managed services. It expects to fund working capital, capital expenditures and approximately $2.7 million of current restructuring obligations with cash and operating cash flow. Management stated that existing liquidity, available credit and expected collections should be sufficient for at least the next 12 months, but noted that future liquidity depends on cash generation, covenant compliance, borrowing-base availability and potential renewal of the credit facility.
Restructuring activities include workforce reductions and facility consolidation. The company vacated its former Santa Clara headquarters and agreed to pay a $1.9 million lease-termination fee over 14 months. Total restructuring liabilities were $3.3 million at quarter-end.
Key risks include pricing and margin erosion, customer and geographic concentration, delayed collections, weak telecommunications-sector spending, supplier or subcontractor disruptions, product-development and customer-acceptance risks, foreign-exchange volatility, political instability, covenant compliance and the ability to preserve net operating-loss tax benefits. MTN Group represented 10% of quarterly revenue and 11% of accounts receivable at quarter-end.
The company disclosed two early-stage customer disputes: a $1.0 million Austrian product-defect claim and a demand from an African customer to repurchase up to $1.0 million of inventory. No loss was accrued because the potential losses were not reasonably estimable, and management believes it has contractual and legal defenses.
Important Facts for Investors to Verify
- Whether the company can restore revenue growth after the decline in mobile-operator and international orders.
- Whether improved service margins can offset continued product pricing pressure and lower volumes.
- Future compliance with the SVB facility’s financial covenants and the amount of borrowing-base availability.
- The timing and amount of remaining restructuring payments and headquarters lease obligations.
- The sustainability of positive operating cash flow, excluding the benefit of the $3.7 million Singapore tax refund.
- Customer concentration and collection risk, particularly involving MTN Group and international customers.
- The potential financial effect of the Austrian defect claim and African inventory repurchase demand.
- The outcome of the tax-benefit preservation plan and related stock-transfer restrictions intended to protect net operating-loss carryforwards.