Aviat Networks, Inc. Form 10-Q Summary
Reporting period: Quarter and three quarters ended March 28, 2014, compared with the corresponding periods ended March 29, 2013. The filing is for fiscal 2014 third quarter, notwithstanding the request metadata identifying “2013 Q3.” Results are unaudited.
Business context
Aviat designs, manufactures and supports wireless networking products, digital microwave systems, network management software and related services for communications providers, private networks, government agencies, utilities, transportation, public safety and broadcast customers worldwide. The company operates as one reportable segment and sells through North America, Africa and the Middle East, Europe and Russia, and Latin America and Asia Pacific.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | First 3 Quarters FY2014 | First 3 Quarters FY2013 |
|---|---|---|---|---|
| Total revenue | $81.4 million | $118.3 million | $260.6 million | $362.3 million |
| Gross margin | $20.9 million | $34.1 million | $65.3 million | $106.5 million |
| Gross margin percentage | 25.7% | 28.8% | 25.1% | 29.4% |
| Operating income (loss) | $(14.8) million | $(1.0) million | $(38.9) million | $4.6 million |
| Net loss | $(14.8) million | $(1.7) million | $(38.3) million | $(9.2) million |
| Net loss per share | $(0.24) | $(0.03) | $(0.62) | $(0.15) |
| Operating cash flow | Not separately provided | Not separately provided | $(32.1) million | $5.5 million |
Q3 revenue declined 31.2%, while revenue for the first three quarters declined 28.1%. Product sales fell 41.0% in Q3 and 37.0% year to date; services revenue declined 6.3% in Q3 and 4.3% year to date. The Q3 operating margin was approximately negative 18.2%, compared with negative 0.8% in the prior-year quarter. The year-to-date operating margin was approximately negative 14.9%, compared with positive 1.3% in the prior-year period.
Q3 operating expenses were $35.7 million, including $4.2 million of restructuring charges. Year-to-date operating expenses were $104.2 million, including $9.0 million of restructuring charges. Research and development and selling and administrative expenses declined, but not enough to offset lower gross profit and restructuring costs.
Revenue and geographic changes
- North America: Q3 revenue declined 29.3% to $37.4 million; year-to-date revenue declined 21.1% to $104.9 million. Management cited completion of certain LTE build-outs and timing of government, utility and private-network purchases.
- Africa and Middle East: Q3 revenue declined 42.4% to $21.7 million; year-to-date revenue declined 43.8% to $84.7 million, primarily due to lower customer capital spending.
- Europe and Russia: Q3 revenue increased 1.1% to $9.5 million; year-to-date revenue declined 9.4% to $28.1 million.
- Latin America and Asia Pacific: Q3 revenue declined 30.1% to $12.8 million; year-to-date revenue declined 10.1% to $42.9 million.
MTN Group accounted for more than 10% of revenue and accounts receivable. Management cautioned that losing the MTN Group relationship could materially affect results, cash flows and financial position.
Liquidity, debt and balance sheet
| Balance sheet item | March 28, 2014 | June 28, 2013 |
|---|---|---|
| Cash and cash equivalents | $47.5 million | $90.0 million |
| Total current assets | $222.4 million | $274.3 million |
| Short-term debt | $6.0 million | $8.8 million |
| Total liabilities | $139.9 million | $155.9 million |
| Stockholders’ equity | $115.3 million | $149.9 million |
Cash decreased $42.5 million during the first three quarters, primarily because of $32.1 million used in operations, $7.8 million of capital expenditures and $2.8 million of debt repayments. Approximately 83.8% of cash was held outside the United States.
On March 28, 2014, Aviat amended and restated its Silicon Valley Bank credit facility. The facility provides committed capacity of up to $40.0 million, with $23.8 million available at quarter-end after considering a $34.3 million borrowing base, $6.0 million of borrowings and $4.5 million of outstanding letters of credit. The facility matures September 26, 2016 and contains minimum adjusted quick-ratio and EBITDA covenants. Aviat was in compliance at quarter-end, but classified the $6.0 million borrowing as current because of uncertainty regarding future covenant compliance and subjective acceleration provisions.
Management stated that existing cash, available credit and expected customer collections should fund working capital and capital expenditures for the next 12 months and the foreseeable future. Management also acknowledged that liquidity could be impaired if operating cash flow weakens or covenant compliance is not maintained.
Cash flow, restructuring and unusual items
- Operating cash flow changed from $5.5 million provided in the first three quarters of FY2013 to $32.1 million used in FY2014.
- A $13.2 million tax payment related to a Singapore tax assessment was a significant use of cash. The company continues to contest the underlying tax positions.
- A new Fiscal 2014-2015 restructuring plan was initiated in Q3 in response to lower revenue and a reduced near-term forecast. The plan is expected to cost approximately $6.0 million in total, of which $4.0 million had been incurred by March 28, 2014.
- Combined restructuring charges were $4.2 million in Q3 and $9.0 million year to date. Restructuring liabilities totaled $6.8 million, including $4.5 million expected to be paid within 12 months.
- The discontinued WiMAX operation generated income of $0.3 million in Q3 and $0.7 million year to date, primarily from recovery of previously written-down deferred costs.
- The company recorded a $2.2 million second-quarter adjustment to correct immaterial historical errors related to income taxes and uncertain tax positions.
Outlook and principal risks
Management expects continued quarter-to-quarter volatility and seasonal weakness in the third fiscal quarter because customers often spend more heavily near their fiscal year-end. Management intends to improve operating efficiency, streamline facilities and processes, invest in new products and expand managed services. No specific revenue or earnings guidance was provided.
- Pricing pressure and margin erosion in the microwave transmission market.
- Weak telecommunications-sector spending, customer project timing and unfavorable geographic or product mix.
- Dependence on major customers, particularly MTN Group.
- Risk of failing credit-facility financial covenants, which could reduce availability or accelerate repayment.
- Supplier, subcontractor, component availability and new-product execution risks.
- Foreign exchange, political and economic risks in international markets.
- Open tax matters in Singapore and Nigeria, including potentially material assessments, fines or penalties. The filing does not provide a clear estimate of potential Singapore export-compliance penalties.
- $38.5 million of supplier or contract-manufacturer purchase obligations, $52.2 million of commercial commitments, and $20.3 million of future operating lease payments as disclosed at March 28, 2014.
Important facts for investors to verify
- Whether revenue declines and gross-margin pressure stabilize, particularly in Africa and the Middle East and North America.
- Progress and total cash cost of the Fiscal 2014-2015 restructuring plan.
- Compliance with the SVB facility’s adjusted quick-ratio and EBITDA covenants and continued availability of the $23.8 million credit capacity.
- Cash burn, customer collections and the company’s ability to return to positive operating cash flow.
- Status and ultimate cost of the Singapore tax assessment and export-compliance review, as well as the Nigeria tax examination.
- Dependence on MTN Group and other large customers, including concentration of accounts receivable.
- Execution of new products, managed-services initiatives and planned operating-cost reductions.