Aviat Networks, Inc. — Fiscal 2023 Third-Quarter Form 10-Q
Reporting period: Quarterly period ended March 31, 2023; comparative quarter ended April 1, 2022. The fiscal year ends June 30, 2023. The filing was dated May 3, 2023. The source metadata labels the period “2022 Q3,” but the filing reports fiscal third quarter 2023.
Business context
Aviat designs, manufactures and sells wireless networking products, solutions and services for mobile and fixed telephone providers, private network operators, government agencies, utilities, transportation, public safety and broadcast customers. The company operates in one reportable segment and serves more than 3,000 customers globally.
On July 5, 2022, Aviat acquired Redline Communications for $20.4 million in cash, including $15.8 million of net cash consideration. The acquisition expanded Aviat’s private LTE/5G and unlicensed wireless access offerings.
Financial performance and liquidity
| Metric | Three months ended March 31, 2023 | Three months ended April 1, 2022 | Nine months ended March 31, 2023 | Nine months ended April 1, 2022 |
|---|---|---|---|---|
| Total revenue | $83.5 million | $74.5 million | $255.4 million | $225.5 million |
| Gross margin | $29.8 million | $27.5 million | $91.5 million | $81.8 million |
| Gross margin percentage | 35.7% | 37.0% | 35.8% | 36.3% |
| Operating income | $7.5 million | $7.5 million | $20.1 million | $23.5 million |
| Net income | $4.9 million | $6.0 million | $8.2 million | $16.6 million |
| Diluted earnings per share | $0.41 | $0.51 | $0.69 | $1.40 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $9.0 million | $10.8 million |
Third-quarter product revenue increased 5.3% to $54.8 million, while services revenue increased 27.6% to $28.7 million. For the first nine months, product revenue rose 12.2% to $175.5 million and services revenue rose 15.6% to $79.9 million.
As of March 31, 2023, cash and cash equivalents were $22.5 million, down from $36.9 million at July 1, 2022. Total cash, cash equivalents and restricted cash were $22.7 million. Accounts receivable were $88.5 million, unbilled receivables were $63.3 million and inventories were $39.1 million.
Short-term debt was $6.2 million, compared with none at July 1, 2022. The company had $15.8 million of availability under its $25.0 million SVB revolving credit facility, which matures June 28, 2024. During the first nine months, Aviat borrowed $50.2 million and repaid $44.0 million.
Operating cash flow remained negative because of working-capital investment, including increases in accounts receivable, unbilled receivables and inventories. Investing cash outflows were $11.7 million, including $15.8 million for the Redline acquisition and $5.1 million of capital expenditures, partially offset by $9.2 million of marketable-security proceeds. Financing activities provided $6.2 million.
Material changes versus the prior comparable periods
- Third-quarter revenue increased 12.0%; nine-month revenue increased 13.2%.
- Third-quarter operating income was essentially unchanged despite higher revenue, while nine-month operating income declined 14.5%.
- Third-quarter net income declined 18.9%; nine-month net income declined 50.7%. Higher taxes, other expense, operating expenses and acquisition-related costs contributed to the decline.
- Gross margin percentage declined 130 basis points in the quarter and 50 basis points for the nine-month period, primarily because of regional and customer mix. Product margins declined, while service margins improved.
- Research and development expense increased 23.9% in the quarter, primarily from Redline’s research and development program. Selling and administrative expense increased 6.6% in the quarter and 20.8% for the nine-month period, driven by Redline, variable compensation and merger-and-acquisition costs.
- Nine-month restructuring charges were $2.9 million, compared with a $0.4 million recovery in the prior-year period. The company had $0.9 million of restructuring liabilities at March 31, 2023.
- North American revenue declined 6.1% in the quarter, while Africa and the Middle East, Europe, and Latin America and Asia Pacific increased 46.6%, 33.6% and 51.4%, respectively.
- The company did not repurchase shares during the first nine months of fiscal 2023; $8.0 million remained available under the $10.0 million repurchase authorization.
Guidance, outlook, risks and unusual items
The filing does not provide specific numerical revenue, earnings or margin guidance. Management stated that supply-chain lead times remained extended and certain components remained allocated, although the effect on the reported quarter was minimal. Inflationary pressures related to supply-chain and logistics constraints continued.
Management expects cash, available credit and future customer collections to be sufficient for anticipated working-capital and capital-expenditure requirements for at least the next 12 months. However, operating cash flow was negative for the first nine months, and liquidity depends in part on customer collections and borrowing-base availability.
Following the March 2023 failure of Silicon Valley Bank, the credit facility transferred to SVB Bridge Bank. Aviat reported full access to its deposits and credit facility by March 14, 2023. The company temporarily opened a Wells Fargo account, which violated an affirmative covenant restricting domestic accounts to SVB; the lender waived the noncompliance. The company stated that it remained compliant with all other credit agreement requirements.
Outstanding off-balance-sheet commercial commitments were $62.8 million, consisting of $3.0 million of letters of credit and $59.8 million of bonds. The company also had $47.6 million of supplier or contract-manufacturer purchase obligations and approximately $3.9 million of software-license obligations.
Key risks include competition and price erosion, supply-chain constraints, customer and geographic concentration, timing of customer payments, acquisition integration, financial covenant compliance, adverse financial-sector developments, foreign exchange and interest-rate exposure, macroeconomic weakness, geopolitical events, litigation, tax audits and the ability to realize restructuring savings.
Remaining performance obligations were approximately $111.8 million at March 31, 2023; approximately 50% was expected to be recognized as revenue within the next 12 months. Advance payments and unearned revenue totaled $48.0 million, with approximately 20% expected to be recognized during the remainder of fiscal 2023.
Important facts for investors to verify
- Reconcile the filing’s fiscal-period labeling with the “2022 Q3” request metadata; the reported period is fiscal third quarter 2023.
- Monitor negative operating cash flow, working-capital requirements and the increase in short-term borrowing.
- Review the SVB credit facility’s covenants, waiver, borrowing-base availability and June 2024 maturity.
- Assess whether Redline generates the expected revenue, margin and cost synergies and whether acquisition-related expenses moderate.
- Evaluate the sustainability of gross margins given product-margin pressure, customer mix and inflationary costs.
- Consider the $62.8 million of commercial commitments and $47.6 million of supplier purchase obligations relative to cash and available credit.
- Review customer concentration: Motorola Solutions and MTN each represented approximately 12% of third-quarter revenue; MTN represented 16% of accounts receivable.
- Track restructuring execution, including the six-role Q2 2023 plan, the Redline-related workforce reduction and the $0.9 million accrued liability.