Aviat Networks, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 27, 2013, the first quarter of fiscal 2014. The comparable quarter ended September 28, 2012. Both quarters comprised 13 weeks. Aviat designs, manufactures and services wireless networking products and solutions globally.
Financial Results and Liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $93.4 million | $115.0 million | Down 18.8% |
| Product sales revenue | $63.5 million | $83.8 million | Down 24.2% |
| Services revenue | $29.9 million | $31.2 million | Down 4.2% |
| Gross margin | $23.1 million | $33.7 million | Down 31.5% |
| Gross margin percentage | 24.7% | 29.3% | Down 4.6 percentage points |
| Operating income (loss) | $(13.4) million | $0.7 million | Declined $14.1 million |
| Net loss | $(13.6) million | $(2.2) million | Loss increased $11.4 million |
| Net loss per share | $(0.22) | $(0.04) | Worsened $0.18 |
| Cash used in operating activities | $(4.6) million | $(9.2) million | Improved $4.6 million |
- Operating expenses were $36.5 million versus $33.0 million, including $4.5 million of restructuring charges versus $0.3 million in the prior-year quarter.
- Research and development expense increased to $9.7 million from $9.3 million, while selling and administrative expense decreased to $22.2 million from $23.3 million.
- Income from discontinued WiMAX operations was $0.1 million versus a $1.4 million loss in the comparable period.
- Cash and cash equivalents declined to $79.3 million from $90.0 million at June 28, 2013. Capital expenditures were $3.8 million, debt repayments were $2.8 million, and the overall cash decrease was $10.7 million.
- At September 27, 2013, total assets were $297.8 million, total liabilities were $159.9 million, and stockholders’ equity was $137.9 million.
- Short-term debt was $6.0 million. Aviat had a $50.0 million credit facility, $4.9 million of outstanding letters of credit, and $39.1 million of stated available credit.
Material Changes Versus the Prior Comparable Period
- Revenue declined across every geographic region: North America fell 12.9%, Africa and the Middle East fell 24.5%, Europe and Russia fell 30.6%, and Latin America and Asia Pacific fell 5.4%.
- The largest revenue reduction was in Africa and the Middle East, primarily because Nigerian customers slowed purchases. Europe and Russia also reflected the completion of a large customer project and lower purchases by other customers.
- Gross margin percentage decreased because of lower service margins in North America, lower product margins in Africa and the Middle East, and less favorable supply-chain cost absorption from lower volume.
- The company incurred $4.5 million of restructuring charges under its fiscal 2013–2014 plan, consisting primarily of $3.9 million of facility-exit costs and $0.6 million of employee termination costs. The company estimated total costs under the plan of $9.0 million, with $2.7 million remaining at quarter-end.
- The amended and restated Silicon Valley Bank credit facility extended the facility term to September 26, 2016. Aviat was not in compliance with the facility’s financial covenants as of September 27, 2013, causing the $6.0 million borrowing to be classified as current debt. Following an October 29, 2013 amendment to the EBITDA covenant, management stated that Aviat was in compliance with all covenants.
- Inventory write-down charges decreased to $0.6 million from $2.5 million, while bad-debt expense decreased by approximately $1.0 million.
Outlook, Commentary, Risks and Unusual Items
- Management’s fiscal 2014 strategy focused on accelerating innovation, optimizing the product portfolio, improving costs and operational efficiency, growing revenue, and developing a sustainable profitable business model.
- Management cited continued demand for mobile backhaul capacity, LTE-related deployments, public-safety networks, utility networks, and turnkey and after-sale support services.
- The company expects quarter-to-quarter fluctuations and seasonal weakness, particularly in the third fiscal quarter, when customers commonly begin new fiscal years and reduce capital expenditures.
- Aviat expected to incur approximately $6.0 million of additional capital expenditures during the remainder of fiscal 2014, primarily for new-product development equipment and information-technology infrastructure.
- Management stated that cash, available credit and anticipated customer collections should be sufficient for working capital and capital expenditures over the next 12 months, but cautioned that this depends on generating expected cash flows and operational improvements.
- The company held $15.9 million of reserves for uncertain tax positions and expected to deposit approximately $4.5 million with a taxing authority in the near future. The timing and amount of remaining tax payments could not be estimated.
- Key risks include competitive pricing and margin pressure, customer ordering patterns and concentration, global telecommunications weakness, supply-chain constraints, new-product execution, customer acceptance, foreign exchange, political instability, collections, intellectual-property matters, and retention of key personnel.
- MTN Group accounted for more than 10% of revenue and accounts receivable. The loss of all MTN Group business could materially affect results, cash flows and financial condition.
- Outstanding purchase obligations were $61.8 million, other contractual obligations were approximately $4.1 million, and off-balance-sheet commercial commitments were $47.6 million. Total future minimum operating lease payments were $24.9 million.
Important Facts for Investors to Verify
- Confirm the post-quarter-end amendment to the SVB credit facility and the company’s continuing compliance with liquidity and EBITDA covenants.
- Assess whether the $4.5 million quarter-end restructuring charge and remaining estimated $2.7 million costs produce the expected operating savings.
- Monitor revenue recovery in Africa and the Middle East, completion of the European project transition, and the company’s dependence on MTN Group.
- Evaluate cash burn, the expected $6.0 million of remaining fiscal 2014 capital expenditures, and the potential $4.5 million tax deposit.
- Review gross-margin trends, particularly service margins, product pricing, geographic mix and supply-chain absorption.
- Assess the collectability and concentration of receivables, including MTN Group exposure and the $86.9 million net receivables balance.
- Review the filing’s forward-looking statements and the fiscal 2013 Form 10-K risk factors because management states that no material additions or changes were identified in the current quarter.