AVIAT NETWORKS, INC. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first three quarters ended March 30, 2012, compared with April 1, 2011. The filing metadata identifies “2011 Q3,” but the filing itself reports fiscal 2012 results. The interim financial statements are unaudited.
Business Context and Reporting Period
Aviat designs, develops, sells and services wireless networking products, including point-to-point microwave transmission systems, network management software, related equipment and turnkey support services. The company serves mobile and fixed communications providers, private networks, government agencies, utilities, transportation and public-safety customers.
Aviat completed the sale of its WiMAX business to EION Networks on September 2, 2011. WiMAX results are presented as discontinued operations; continuing operations therefore primarily reflect the core microwave business.
Key Financial Metrics
| Metric | Q3 FY2012 | Q3 FY2011 | First 3 Quarters FY2012 | First 3 Quarters FY2011 |
|---|---|---|---|---|
| Total revenue | $111.6 million | $115.5 million | $328.0 million | $331.2 million |
| Product revenue | $85.5 million | $89.5 million | $248.7 million | $259.8 million |
| Services revenue | $26.1 million | $26.0 million | $79.3 million | $71.4 million |
| Gross margin | $34.3 million | $31.6 million | $98.9 million | $95.3 million |
| Gross margin percentage | 30.7% | 27.4% | 30.2% | 28.8% |
| Operating loss | $(0.2) million | $(10.1) million | $(11.3) million | $(31.2) million |
| Loss from continuing operations | $(0.8) million | $(25.5) million | $(14.5) million | $(52.5) million |
| Net loss | $(3.2) million | $(36.9) million | $(22.8) million | $(70.7) million |
| Net loss per share | $(0.05) | $(0.63) | $(0.39) | $(1.21) |
| Cash flow from operations | Not separately provided | Not separately provided | $(0.8) million | $(45.4) million |
At March 30, 2012, cash and cash equivalents were $90.5 million, down from $98.2 million at July 1, 2011. Total current assets were $315.3 million and current liabilities were $169.7 million. Total debt was approximately $13.9 million, consisting of $6.0 million of short-term debt and $7.9 million outstanding under a new term loan. The company reported $19.0 million of available borrowing capacity under its $40.0 million Silicon Valley Bank facility, after borrowings and outstanding letters of credit.
Debt includes an $8.25 million two-year term loan drawn in January 2012 to fund redemption of the company’s redeemable preference shares. The facility matures in 2014, contains minimum liquidity and profitability covenants, and is secured by certain assets. Aviat stated that it was in compliance with the covenants at March 30, 2012.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 3.4% to $111.6 million; year-to-date revenue declined 1.0% to $328.0 million.
- International revenue declined 5.5% for the quarter and 4.2% year to date, primarily due to lower Europe and Russia sales and reduced business with a major Russian customer. North American revenue increased 4.8% year to date.
- Services revenue increased $7.9 million year to date, partly offsetting lower product revenue.
- Gross margin improved by 330 basis points in the quarter and 140 basis points year to date. Improvement reflected the absence of the prior-year $6.0 million manufacturing-overhead charge and significant prior-year inventory write-downs, although competitive pricing pressure continued.
- Research and development expense decreased 13.3% year to date, and selling and administrative expense decreased 6.5%, largely due to prior restructuring actions and lower compensation and facility costs.
- Operating loss improved by $9.9 million for the quarter and $19.9 million year to date. The year-to-date results include a $5.6 million goodwill impairment charge recorded in the second quarter.
- Discontinued-operations losses declined to $2.4 million for the quarter and $8.3 million year to date, compared with $11.4 million and $18.2 million, respectively, in the prior periods.
- Cash used in operations improved substantially from $45.4 million to $0.8 million year to date, primarily because of improved collections and lower working-capital requirements.
- Restructuring charges declined to $0.4 million for the quarter and $1.4 million year to date, compared with $4.4 million and $13.4 million, respectively. The company expects to wind down remaining Fiscal 2011 Plan activities in fiscal 2013.
Guidance, Outlook, Risks and Unusual Items
Management expects continued long-term growth in mobile-operator demand as network operators expand capacity. Aviat plans to introduce next-generation products in the following fiscal year and is focused on product innovation, portfolio optimization, cost reduction and operational efficiency. Management stated that existing cash, available credit and expected customer collections should be sufficient for working-capital needs over the next 12 months and the foreseeable future.
- One customer group, MTN Group, represented 18.1% of quarterly revenue and 15.0% of year-to-date revenue. Loss of the group’s business could materially affect results.
- Competitive pricing and continued price erosion may pressure margins.
- Key operating risks include global telecommunications weakness, customer spending, order timing and mix, supplier and subcontractor performance, product acceptance, foreign exchange, political turmoil and customer payment timing.
- A significant decline in market capitalization triggered the $5.6 million goodwill impairment charge. The filing states that long-lived assets were not impaired based on undiscounted cash-flow testing.
- Remaining restructuring liabilities totaled $1.6 million at March 30, 2012, with approximately $1.6 million of additional restructuring charges expected during the remainder of fiscal 2012.
- A derivative portfolio hedged foreign-currency exposure; a 10% adverse currency movement was estimated to affect derivative fair value by approximately $2.9 million, before offsets from underlying exposures.
- A derivative/shareholder litigation matter remained unresolved. The company stated that it could not determine whether a loss was probable or reasonably estimate a loss amount. A separate Brazil matter was settled for $0.2 million.
- Operating lease commitments totaled $27.9 million, net of $1.7 million in non-cancelable subleases, including $20.5 million through April 2020 for headquarters facilities.
- Approximately 69% of cash was held outside the United States, creating practical repatriation constraints related to withholding and other taxes.
Facts Investors Should Verify
- Confirm the correct period designation: the filing is for fiscal Q3 2012, ended March 30, 2012, despite the request metadata stating 2011 Q3.
- Assess whether improved gross margins are sustainable after excluding prior-year manufacturing and inventory charges and considering ongoing price pressure.
- Monitor dependence on MTN Group and continued weakness in Europe and Russia.
- Review liquidity-covenant compliance, debt maturities, borrowing availability and the effect of the $8.25 million term loan.
- Track cash generation, receivables collections, unbilled costs, customer advances and the concentration of cash held internationally.
- Evaluate the remaining restructuring costs, legal contingencies and potential effects of the goodwill impairment and discontinued WiMAX operations.