AVIAT NETWORKS, INC. — Form 10-Q Summary
Business Context and Reporting Period
Aviat Networks 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 October 2, 2015, the first quarter of fiscal 2016, compared with the quarter ended September 26, 2014.
Financial Results and Key Metrics
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total revenue | $79.6 million | $82.4 million |
| Product revenue | $53.7 million | $55.9 million |
| Services revenue | $25.9 million | $26.5 million |
| Gross margin | $21.0 million; 26.4% | $22.0 million; 26.7% |
| Operating loss | $1.6 million | $5.4 million |
| Loss from continuing operations | $1.5 million | $5.7 million |
| Net loss attributable to Aviat | $1.2 million; $0.02 per share | $5.5 million; $0.09 per share |
| Cash flow from operations | $1.8 million provided | $4.7 million used |
Product gross margin increased to 30.7% from 25.9%, primarily because of lower supply-chain costs, while service margin declined to 17.4% from 28.3%. R&D expense declined 16.7% to $5.5 million and selling and administrative expense declined 10.9% to $17.1 million. Restructuring charges were zero versus $1.5 million in the prior-year quarter.
Cash and cash equivalents were $35.8 million at October 2, 2015, compared with $34.7 million at July 3, 2015. Current assets were $196.5 million and current liabilities were $127.4 million. Debt was $9.0 million, and the company reported $19.4 million of available credit under its $40.0 million SVB facility. The facility expires September 26, 2016, and the company was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 3.4%, driven primarily by lower sales in North America, Europe and Russia, and Latin America and Asia Pacific. Africa and the Middle East increased 11.0%.
- North American revenue fell 8.8% because of reduced wireless-operator sales and slightly lower government and utility sales.
- Europe and Russia revenue declined 20.7%, with management citing reduced customer spending and euro devaluation.
- Gross margin dollars declined 4.5%, and consolidated gross margin declined 30 basis points to 26.4%.
- Operating loss improved by $3.8 million, primarily because of lower R&D and selling and administrative expenses and the absence of prior-year restructuring charges.
- Operating cash flow improved from a $4.7 million use to $1.8 million provided, although inventory increased $3.0 million and receivables increased $0.8 million during the quarter.
- Inventory and customer-service inventory write-downs declined to $1.0 million from $2.1 million.
- Income from discontinued WiMAX operations increased to $0.3 million from $0.2 million, primarily from recovery of previously written-down customer receivables.
Guidance, Outlook, Risks and Unusual Items
Management expects long-term demand for mobile-backhaul capacity to continue, while noting quarter-to-quarter volatility, seasonality and ongoing pricing pressure. Fiscal 2016 priorities include accelerating innovation, optimizing the product portfolio, reducing costs, improving operating efficiency, growing revenue and establishing a sustainable profitable business model. The company expects approximately $3.0 million of capital expenditures during the remainder of fiscal 2016.
Management stated that existing cash, available credit and expected customer collections should fund working capital and capital expenditures for at least the next 12 months. This assessment depends on continued operating cash generation, compliance with credit-facility covenants and renewal of the SVB facility, which management expects but cannot assure.
- The company remains dependent on a significant customer concentration: MTN Group accounted for more than 10% of revenue and accounts receivable. Loss of this business could materially affect results and liquidity.
- A fiscal 2015–2016 restructuring plan had incurred $3.4 million cumulatively and was expected to cost $5.0 million in total, with substantial completion targeted by fiscal year-end. Restructuring liabilities totaled $3.5 million at October 2, 2015.
- Outstanding commercial commitments included $14.8 million of future operating-lease payments, $26.4 million of supplier or contract-manufacturer purchase obligations, approximately $1.0 million under a major service agreement and $17.0 million of off-balance-sheet commercial commitments.
- The company reported continuing material weaknesses in internal control over financial reporting involving risk assessment and monitoring, account reconciliations, revenue recognition, revenue cut-off, project accruals and inventory existence. Disclosure controls were also deemed ineffective.
- Key risks include competitive price and margin erosion, customer and geographic concentration, global telecommunications-sector weakness, foreign-exchange exposure, supply-chain constraints, political instability, customer payment timing, product acceptance, covenant compliance and the effectiveness of restructuring and control-remediation efforts.
Important Facts for Investors to Verify
- Confirm the status and renewal terms of the SVB Credit Facility before its September 26, 2016 maturity and monitor covenant compliance.
- Assess whether revenue growth and margin improvement are achievable despite lower service margins, pricing pressure and regional weakness.
- Track MTN Group concentration, customer collections, receivables, unbilled costs and inventory levels.
- Review progress, cash costs and expected savings from the fiscal 2015–2016 restructuring plan.
- Verify remediation of the disclosed material weaknesses and whether future filings report effective internal and disclosure controls.
- Evaluate the effect of the $14.8 million lease commitment, $26.4 million purchase obligations and $17.0 million commercial commitments on liquidity.
- Consider foreign-exchange exposure, including $6.8 million of forward contracts and the reported $0.8 million translation loss in other comprehensive income.