Aviat Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first three quarters ended April 1, 2016, compared with April 3, 2015. The filing is a fiscal 2016 third-quarter report, despite request metadata identifying “2015 Q3.” Aviat designs, manufactures and sells wireless networking products, microwave radio systems, network management software and related services globally.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | First 3 quarters FY2016 | First 3 quarters FY2015 |
|---|
| Total revenue | $60.4 million | $74.8 million | $210.4 million | $248.1 million |
| Gross margin | $14.4 million | $16.0 million | $51.8 million | $62.0 million |
| Gross margin percentage | 23.8% | 21.4% | 24.6% | 25.0% |
| Operating loss | $7.6 million | $11.7 million | $14.2 million | $20.8 million |
| Net loss attributable to Aviat | $7.9 million | $13.1 million | $14.8 million | $23.1 million |
| Loss per diluted share | $0.13 | $0.21 | $0.24 | $0.37 |
- Q3 revenue declined 19.3%; product revenue decreased 23.0% to $36.2 million and services revenue decreased 12.9% to $24.2 million.
- First-nine-month revenue declined 15.2%; product revenue fell 15.5% and services revenue fell 14.6%.
- Q3 gross margin percentage improved because of better service margins and lower supply-chain costs, although gross margin dollars declined with lower volume. First-nine-month gross margin percentage decreased modestly.
- Research and development expense declined 21.9% in Q3 and 19.1% year to date, primarily from restructuring-related personnel and facility savings, partly offset by higher product-development costs.
- Selling and administrative expense declined 10.0% in Q3 and 15.2% year to date.
- Restructuring charges were $0.8 million in Q3 and year to date, versus $3.2 million and $4.7 million, respectively, in the comparable periods.
Revenue and operating trends
- Q3 revenue declined in all regions: North America decreased 15.0%, Africa and Middle East 20.9%, Europe and Russia 47.6%, and Latin America and Asia Pacific 7.7%.
- Year-to-date revenue was unchanged in Africa and the Middle East, but declined 17.9% in North America, 41.6% in Europe and Russia, and 15.2% in Latin America and Asia Pacific.
- Management cited the end of portions of North American customers’ LTE build cycles, lower customer capital spending, a non-recurring large European order in the prior year, currency effects and competitive pricing pressure.
- MTN Group represented more than 10% of revenue and accounts receivable. Loss of this customer relationship could materially affect results, cash flows and financial condition.
Cash flow, liquidity and capital structure
| Metric | April 1, 2016 | July 3, 2015 |
|---|
| Cash and cash equivalents | $39.7 million | $34.7 million |
| Total assets | $191.5 million | $224.7 million |
| Total liabilities | $121.4 million | $140.8 million |
| Stockholders’ equity attributable to Aviat | $69.7 million | $83.8 million |
| Short-term debt | $9.0 million | $9.0 million |
- First-nine-month operating cash flow was positive $7.1 million, compared with negative $9.5 million in the prior-year period.
- Capital expenditures were $1.3 million year to date; management expected approximately $0.7 million of additional capital expenditures during the remainder of fiscal 2016.
- Cash increased $5.0 million year to date after $0.8 million of unfavorable foreign-exchange effects.
- The Silicon Valley Bank credit facility was amended to reduce maximum capacity from $40.0 million to $30.0 million and modify the EBITDA covenant. Outstanding borrowings were $9.0 million, with $7.6 million of available credit as of April 1, 2016.
- The facility expires September 26, 2016. Aviat was in compliance with its amended covenants but stated that renewal is not assured.
- Approximately 67% of cash was held outside the United States. Management believed existing cash, available borrowing capacity and expected collections would fund working capital and capital expenditures for at least the next 12 months.
Material changes, outlook and unusual items
- On April 7, 2016, the board approved cost reductions expected to generate annual savings of $6.0 million to $7.0 million. The plan includes approximately 87 employee reductions and estimated restructuring charges of approximately $4.0 million, with approximately half expected in Q4 FY2016 and the remainder over the following three quarters.
- The company expects these cost reductions to be substantially completed by March 31, 2017.
- Aviat filed a proxy proposal for a 1-for-12 reverse stock split, targeted for June 2016, to address Nasdaq’s $1.00 minimum bid-price requirement.
- Aviat received a Nasdaq deficiency notice after its stock remained below $1.00 for 30 consecutive business days. The initial compliance deadline was July 5, 2016, subject to possible transfer or hearing procedures.
- Income from discontinued WiMAX operations contributed $0.2 million in Q3 and $0.5 million year to date, primarily from recovery of previously written-down customer receivables.
- Operating lease commitments totaled $14.9 million, including $10.8 million related to the Santa Clara headquarters. Purchase obligations were $22.5 million, and outstanding commercial commitments were $20.0 million, primarily letters of credit and similar arrangements.
- The company reported continuing material weaknesses in internal control over financial reporting, including risk assessment and monitoring, account reconciliations, revenue recognition and cutoff, project accruals, and inventory existence. Management concluded that internal controls and disclosure controls were not effective as of April 1, 2016.
Key risks and contingencies
- Continued revenue and margin pressure from competition, customer consolidation, macroeconomic weakness and reduced telecommunications capital spending.
- Liquidity risk if the credit facility is not renewed, borrowing availability declines, operating cash flow weakens or financial covenants are not met.
- Potential Nasdaq delisting, which could reduce share liquidity, impair access to financing and adversely affect the stock price.
- Customer concentration, especially exposure to MTN Group and the timing of customer payments.
- Foreign currency, political and economic risks in international markets; the company had $3.0 million of foreign-currency forward contracts outstanding.
- Supply-chain constraints, product acceptance, intellectual-property claims, litigation and execution risk associated with restructuring and new-product development.
- No material legal-loss accruals were recorded; management stated that current litigation was not expected to have a material adverse effect, although outcomes remain uncertain.
Investor verification checklist
- Verify the timing and realization of the announced $6.0 million to $7.0 million annual cost savings and approximately $4.0 million of restructuring charges.
- Monitor renewal or refinancing of the $30.0 million SVB facility before its September 26, 2016 expiration and continued covenant compliance.
- Assess whether revenue stabilizes after the North American LTE cycle and whether Europe, Russia and other challenged regions recover.
- Evaluate the company’s plan to remediate the continuing material weaknesses in internal controls.
- Confirm the outcome of the proposed 1-for-12 reverse stock split and Nasdaq listing compliance.
- Track MTN Group revenue and receivable concentration, cash held offshore, and the company’s ability to convert receivables into operating cash flow.
