Aviat Networks, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2013, with comparison to fiscal 2012 ended June 29, 2012. The request metadata references “2012 Q4,” but the supplied filing is the fiscal 2013 annual report and includes fourth-quarter data for the quarter ended June 28, 2013.
Business context
Aviat designs, sells and supports microwave networking products, network-management software, third-party equipment and professional services for mobile and fixed operators, governments, utilities, transportation, public safety and other private networks. The company operates as one reportable segment and serves customers globally. Fiscal 2013 revenue was 38% North America and 62% international; approximately 1,000 employees were employed at year-end.
Key financial metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $471.3 million | $444.0 million | Up 6.1% |
| Product revenue | $336.7 million | $335.5 million | Up 0.4% |
| Services revenue | $134.6 million | $108.5 million | Up 24.1% |
| Gross margin | $140.1 million | $131.7 million | Up 6.4% |
| Gross margin percentage | 29.7% | 29.7% | Flat |
| Operating income (loss) | $1.7 million | $(13.3) million | Improved |
| Loss from continuing operations | $(10.9) million | $(15.5) million | Improved |
| Net loss | $(15.0) million | $(24.1) million | Improved |
| Net loss per share | $(0.25) | $(0.41) | Improved |
| Cash flow from operations | $8.4 million | $8.4 million | Flat |
| Capital expenditures | $10.4 million | $5.9 million | Higher |
North America revenue increased 9.5% to $180.5 million, while Africa and the Middle East increased 23.4% to $182.2 million. Europe and Russia declined 10.4% to $48.0 million, and Latin America and Asia Pacific declined 22.1% to $60.6 million. Product margin declined to 28.8% from 30.4% because of international pricing pressure, while service margin improved to 31.9% from 27.4%.
Research and development expense increased to $39.4 million, or 8.4% of revenue, from $36.0 million, or 8.1%. Selling and administrative expense declined to $95.5 million from $99.5 million. Restructuring charges increased to $3.1 million from $2.3 million. Fiscal 2013 also included a $13.3 million income-tax provision, primarily reflecting an $11.7 million increase in reserves for uncertain tax positions, foreign tax losses without recognized benefits and withholding taxes.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $90.0 million at June 28, 2013, down from $96.0 million.
- Operating cash flow was $8.4 million; cash was reduced by $10.4 million of capital expenditures and $4.1 million of debt repayments.
- The company had $8.8 million of outstanding borrowings and $26.0 million of available credit under a $40.0 million Silicon Valley Bank facility. The facility also supported $5.2 million of outstanding letters of credit.
- The debt facility was scheduled to expire February 28, 2014, and included minimum liquidity and profitability covenants. The company reported compliance as of June 28, 2013.
- Total assets were $305.8 million and total liabilities were $155.9 million. Inventory declined to $35.0 million from $56.8 million, while receivables declined to $86.3 million from $90.7 million.
- Total contractual cash obligations were estimated at $116.1 million, including $61.5 million of purchase obligations, $24.5 million of operating leases and $15.9 million of liabilities for uncertain tax positions.
Material changes versus the prior period
- Revenue returned to growth, primarily from higher services revenue and stronger North American and African demand.
- Operating results improved from an operating loss to modest operating income, although the company remained unprofitable on a net basis.
- Cash generation remained positive, but higher capital expenditures and debt repayments reduced year-end cash.
- Inventory fell substantially because of improved supply-chain efficiency and lower deferred cost of sales.
- The company initiated the Fiscal 2013-2014 restructuring plan, including headquarters and field-office downsizing and workforce reductions. Estimated total costs under the plan were $9.0 million, with $7.2 million of additional costs expected after year-end.
- The company’s backlog declined to $179.0 million from $208.5 million. Management expected to substantially fill the fiscal 2013 backlog during fiscal 2014, but orders could be delayed or canceled.
- Customer concentration increased in importance: MTN Group represented 25% of fiscal 2013 revenue and 17% of backlog; Verizon Wireless represented 11% of revenue.
Outlook, commentary and unusual items
- Management’s fiscal 2014 priorities were product innovation, portfolio optimization, cost reduction, operating efficiency, revenue growth and development of a sustainable profitable business model.
- The company expected first-quarter fiscal 2014 gross margin percentage to decline because of geographic mix and project timing, expected second-quarter margins to be broadly consistent with fiscal 2013, and anticipated directional margin improvement in the second half as next-generation products gained traction.
- Management expected approximately $10.0 million of fiscal 2014 capital expenditures, principally for product-development equipment and information-technology infrastructure.
- The company expected to provide increased managed services in certain geographies, which could require upfront costs before related revenue is realized.
- Fiscal 2013 included a $4.1 million loss from discontinued WiMAX operations, including a $4.2 million write-down of deferred costs and remaining customer obligations.
- Inventory write-downs totaled $7.7 million, or 1.6% of revenue, compared with $3.4 million in fiscal 2012.
- The company warned that it had reserves for uncertain tax positions of $15.9 million and could face cash tax demands of up to $20.0 million from one or more foreign jurisdictions during fiscal 2014. Expected tax payments during the first two fiscal quarters were approximately $3.6 million, but the timing of remaining payments was not estimable.
- Principal risks include intense competition and price erosion, customer and telecommunications-industry consolidation, dependence on major customers, international and political exposure, customer credit and payment risk, supply-chain dependence, technology transitions, inventory obsolescence, foreign-exchange volatility, tax disputes, restructuring execution and the need to achieve sustained profitability.
- The independent auditor reported an unqualified opinion and concluded that internal control over financial reporting was effective as of June 28, 2013.
Important facts for investors to verify
- Whether the company renewed or replaced the Silicon Valley Bank facility before its February 2014 expiration and whether it continued to satisfy applicable covenants.
- The ultimate cash payments and resolution of the $28.7 million of unrecognized tax benefits, including the $15.9 million balance affecting the effective tax rate.
- Actual costs and savings achieved under the Fiscal 2013-2014 restructuring plan.
- Backlog conversion, cancellation or deferral trends, particularly the concentration attributable to MTN Group.
- Adoption, pricing and margin performance of the CTR 8000 and other next-generation products.
- Whether services growth can offset product-price erosion and support sustained operating profitability.
- Customer collections, international credit exposure, foreign-exchange effects and inventory write-down requirements.