Aviat Networks, Inc. Form 10-Q Summary
Business Context and Reporting Period
Aviat Networks designs, manufactures and sells wireless networking products, digital microwave systems, network management software and related services globally. This unaudited report covers the third quarter and first three quarters of fiscal 2015 ended April 3, 2015. The third quarter included 14 weeks, compared with 13 weeks in the comparable fiscal 2014 quarter.
The filing identifies the reporting period as fiscal 2015; the request metadata labels it “2014 Q3.”
Key Financial Metrics
| Metric | Quarter Ended April 3, 2015 | Comparable Quarter | First Three Quarters 2015 | Comparable Period |
|---|---|---|---|---|
| Total revenue | $74.8 million | $81.4 million | $248.1 million | $260.6 million |
| Gross margin | $17.6 million; 23.5% | $20.9 million; 25.7% | $63.9 million; 25.8% | $65.3 million; 25.1% |
| Operating loss | $10.1 million | $14.8 million | $18.9 million | $38.9 million |
| Net loss | $11.5 million | $14.8 million | $21.2 million | $38.3 million |
| Net loss per share | $0.18 | $0.24 | $0.34 | $0.62 |
| Cash flow from operations | Not separately provided | Not separately provided | $(9.5) million | $(32.1) million |
- Quarterly product revenue declined 6.2% to $47.0 million, while services revenue declined 11.2% to $27.8 million.
- Year-to-date product revenue declined 3.7% and services revenue declined 6.6%.
- Research and development expense decreased 23.8% for the quarter and 29.5% year to date, primarily from lower personnel and facility costs.
- Selling and administrative expense decreased 21.7% for the quarter and 13.4% year to date.
- Restructuring charges were $3.2 million for the quarter and $4.7 million year to date.
- Income tax expense was $1.5 million for the quarter and $2.4 million year to date, despite pretax losses, primarily reflecting profitable foreign subsidiaries and jurisdictions where tax benefits on losses were not recognized.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $35.0 million at April 3, 2015, down from $48.8 million at June 27, 2014.
- Total assets were $220.1 million and stockholders’ equity was $76.8 million, compared with $253.2 million and $102.6 million, respectively, at fiscal year-end.
- Outstanding short-term debt under the Silicon Valley Bank credit facility was $9.0 million, compared with $6.0 million at June 27, 2014.
- The credit facility has a $40.0 million committed amount, subject to borrowing-base limitations. Available credit was $15.1 million at April 3, 2015, after existing borrowings and letters of credit.
- The facility matures on September 26, 2016 and includes minimum adjusted quick-ratio and profitability covenants. The company was compliant as of April 3, 2015, but classified the borrowing as current because of uncertainty about future covenant compliance and subjective acceleration provisions.
- Year-to-date cash used in operating activities was $9.5 million; capital expenditures were $3.0 million and net financing cash inflow was $2.9 million.
- Management expects approximately $1.0 million of additional capital expenditures during the remainder of fiscal 2015 and believes available cash, credit capacity and customer collections will fund requirements for at least the next 12 months, subject to continued covenant compliance and operating performance.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 8.1% in the quarter and 4.8% year to date.
- Quarterly revenue decreased in North America, Europe and Russia, and Latin America and Asia Pacific; Africa and Middle East revenue increased modestly. Year-to-date North America increased 9.3%, while Africa and Middle East declined 18.3%.
- Quarterly gross margin percentage declined from 25.7% to 23.5%, primarily due to lower volume, weaker regional profitability and higher foreign-exchange losses. Year-to-date gross margin percentage improved modestly from 25.1% to 25.8%.
- Operating and net losses improved substantially year to date, largely because of lower operating expenses and reduced restructuring charges, although the company remained loss-making.
- Net foreign-exchange losses increased to $1.3 million for the quarter and $2.8 million year to date, compared with $0.2 million and $0.4 million, respectively.
- The company revised previously reported fiscal 2015 second-quarter revenue, cost of revenue, operating loss and net loss for an immaterial revenue-recognition misstatement. The adjustment reduced second-quarter revenue by $1.6 million and net loss by $0.7 million on a previously reported basis.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued quarter-to-quarter fluctuations and seasonal weakness in the third fiscal quarter, as customers often spend more capital near their fiscal year-end.
- The company initiated a Fiscal 2015-2016 restructuring plan during the quarter to reduce fixed overhead and operating expenses and preserve cash flow. Estimated total costs are $7.0 million, with $3.1 million incurred by April 3, 2015; remaining activities are expected to be substantially completed by the first half of fiscal 2016.
- Material risks include pricing and margin erosion, reduced telecommunications-sector spending, customer concentration, foreign-exchange exposure, supply-chain constraints, product acceptance, political and economic instability, and the ability to meet credit-facility covenants.
- MTN Group accounted for more than 10% of revenue and accounts receivable. Loss of this customer relationship could materially affect results, cash flows and financial condition.
- The company’s Singapore subsidiary is evaluating historical compliance with export regulations. Potential fines or penalties cannot currently be estimated.
- Management continued to report material weaknesses in internal control over financial reporting involving the control environment, risk assessment, monitoring, manual journal entries, account reconciliations and revenue recognition for percentage-of-completion contracts and product sales. Disclosure controls were therefore deemed ineffective as of April 3, 2015.
- Foreign-currency forward contracts had a total notional value of $15.3 million. A 10% adverse currency movement would affect their fair value by approximately $1.5 million, excluding offsets from underlying exposures.
- Outstanding commitments included $16.0 million of future operating lease payments, $32.4 million of purchase obligations and $35.5 million of commercial commitments not recorded on the balance sheet.
Important Facts for Investors to Verify
- Whether cash generation improves sufficiently to support operations, restructuring payments and capital expenditures.
- Future compliance with the SVB credit facility’s financial covenants and the availability of the remaining borrowing capacity.
- Progress and realized savings from the Fiscal 2015-2016 restructuring plan.
- Remediation and independent validation of the disclosed material weaknesses in financial reporting controls.
- Revenue concentration and collection exposure related to MTN Group and other major customers.
- The outcome of the Singapore export-compliance review and any resulting fines or penalties.
- The effect of continued foreign-exchange losses, regional spending weakness and competitive pricing pressure on gross margins.