Aviat Networks, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended December 28, 2012, representing the second quarter and first two quarters of fiscal 2013. Comparative periods ended December 30, 2011. Results are unaudited. Aviat designs, manufactures and services wireless networking solutions globally.
Financial performance and liquidity
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Total revenue | $129.0 million | $105.0 million | $244.0 million | $216.4 million |
| Gross margin | $38.7 million; 30.0% | $31.9 million; 30.4% | $72.4 million; 29.7% | $64.6 million; 29.9% |
| Operating income (loss) | $4.9 million | $(8.6) million | $6.2 million | $(11.1) million |
| Loss from continuing operations | $(5.0) million | $(10.0) million | $(5.8) million | $(13.7) million |
| Net loss | $(5.3) million | $(12.8) million | $(7.5) million | $(19.6) million |
| Net loss per share | $(0.09) | $(0.22) | $(0.13) | $(0.33) |
| Cash flow from operations | Not separately provided | Not separately provided | $3.5 million | $(7.5) million |
Product revenue increased 27.1% in the quarter and 9.1% year to date; services revenue increased 12.6% and 24.1%, respectively. Gross margin dollars rose on higher volume and product mix, while margin percentages were broadly stable. The company remained loss-making primarily because of a $9.9 million quarterly tax provision related to increased uncertain tax positions.
Cash and cash equivalents were $94.8 million at December 28, 2012, compared with $96.0 million at June 29, 2012. Total debt was approximately $10.8 million, consisting of $6.0 million in advance borrowings and $4.8 million outstanding under a term loan. The company had $23.8 million of available capacity under its $40.0 million SVB facility and was in compliance with its liquidity and profitability covenants.
Total assets were $327.1 million and stockholders’ equity was $154.2 million at December 28, 2012. Receivables were $99.1 million, inventories were $56.4 million, and advance payments and unearned income were $52.6 million.
Material changes versus the prior comparable period
- Quarterly revenue increased $24.0 million, or 22.9%; six-month revenue increased $27.6 million, or 12.8%.
- Africa and Middle East revenue increased 166.3% in the quarter and 69.3% year to date, driven by mobile operators expanding network transmission capacity.
- North America revenue declined 6.3% in the quarter and 1.4% year to date. Europe and Russia declined 41.8% and 23.4%, respectively, while Latin America and Asia Pacific declined 31.0% and 27.0%.
- Operating results improved from losses to operating income, aided by higher revenue, lower selling and administrative expenses, and the absence of the $5.6 million goodwill impairment charge recorded in the prior-year quarter.
- Selling and administrative expenses declined 6.3% in the quarter and 7.0% year to date, reflecting prior restructuring actions and lower professional services and personnel costs.
- The tax provision increased to $9.9 million in the quarter and $11.4 million year to date, compared with $0.8 million and $1.8 million in the comparable periods, due primarily to uncertain tax positions.
- Losses from discontinued WiMAX operations declined to $0.3 million in the quarter and $1.7 million year to date, compared with $2.8 million and $5.9 million, respectively.
- Operating cash flow improved to $3.5 million year to date from an operating cash use of $7.5 million in the prior-year period, although receivables increased $10.3 million and accounts payable and accrued expenses declined by a combined $18.0 million.
Outlook, commentary, risks and unusual items
Management’s strategic focus for the second half of fiscal 2013 was to accelerate innovation, optimize the product portfolio, improve cost and operational efficiency, grow revenue, and build a sustainable profitable business model. Management expected continuing demand for mobile backhaul capacity, LTE-related deployments, and turnkey and after-sale support services.
Management anticipated that fiscal third-quarter revenue and orders would normally be lower than the second quarter because customers often spend capital budgets before their calendar year-end. The filing does not provide specific revenue or earnings guidance.
- Management expected approximately $7.5 million of capital expenditures during the remainder of fiscal 2013, primarily for product development equipment and information technology infrastructure.
- The company expected to complete remaining activities under its Fiscal 2011 restructuring plan during fiscal 2013. Estimated additional restructuring costs were $0.9 million.
- Management believed existing cash, available credit, and customer collections would be sufficient for working capital and capital expenditures for the next 12 months and the foreseeable future, but noted that future cash flow and operational improvements were not assured.
- Key risks included competitive price erosion, customer and geographic concentration, timing and mix of orders, global telecommunications weakness, customer payment timing, supply-chain constraints, product-development execution, foreign-exchange exposure, political instability, and dependence on key personnel and relationships.
- MTN Group accounted for more than 10% of revenue in the quarter and year-to-date periods and more than 10% of accounts receivable at December 28, 2012.
- Foreign-exchange forward contracts had aggregate notional value of $40.9 million. A 10% adverse currency movement was estimated to affect their fair value by approximately $3.1 million, before offsets from underlying exposures.
- Outstanding purchase obligations were $56.5 million, capital and service commitments were approximately $5.1 million, and off-balance-sheet commercial commitments were $52.8 million.
- The company recorded an $11.4 million reserve for uncertain tax positions year to date; the timing of any future payment was not determinable.
- A derivative shareholder litigation matter was dismissed with prejudice in December 2012, although the board was investigating a related demand.
Important facts for investors to verify
- Whether the strong Africa and Middle East revenue level is repeatable or reflects customer and year-end capital-spending timing.
- The sustainability of operating profitability after excluding favorable comparisons from the prior-year goodwill impairment and restructuring costs.
- The outcome, timing, and potential cash impact of the uncertain tax positions, including the $11.4 million year-to-date increase in the reserve.
- Customer concentration and credit exposure, particularly to MTN Group and customers with extended payment terms.
- Compliance with the SVB facility’s minimum liquidity and profitability covenants and the February 2014 facility expiration and January 2014 term-loan maturity.
- Execution of the remaining restructuring program and the planned $7.5 million of second-half capital expenditures.
- Working-capital trends, including receivables, advance payments, inventory, and the conversion of operating income into cash flow.
- Exposure to currency movements, political and economic conditions in international markets, and continued pricing pressure.