AVIAT NETWORKS, INC. annual report, FY2022

Aviat Networks, Inc. — Fiscal 2022 Form 10-K Summary

Reporting period: Fiscal year ended July 1, 2022, comprising 52 weeks. The request metadata references “2021 Q4,” but the supplied filing is the fiscal 2022 annual report, filed September 14, 2022. Fiscal 2021 ended July 2, 2021 and also comprised 52 weeks.

Business context

Aviat designs, manufactures and sells microwave and millimeter-wave wireless networking products, routers, software and related professional services. Customers include communications service providers, mobile operators, broadband providers, governments, utilities, public safety agencies, transportation companies and other private network operators. The company operates as one reportable segment and manages sales geographically.

• Fiscal 2022 revenue was 66% North America and 34% international.
• Products include the CTR 8000, WTM 4000 and AviatCloud platforms, supporting 5G, rural broadband, mobile backhaul and mission-critical private networks.
• Manufacturing is outsourced primarily to contract manufacturers in North America and Asia.
• Employees increased to 712 at July 1, 2022 from 687 at July 2, 2021.
• Backlog was approximately $245 million at July 1, 2022, compared with $225 million at July 2, 2021. Management expected to substantially deliver the backlog during fiscal 2023, although orders may be delayed or cancelled.

Financial performance and key metrics

Metric	Fiscal 2022	Fiscal 2021	Change
Revenue	$303.0 million	$274.9 million	Up 10.2%
Product sales	$208.1 million	$185.8 million	Up 12.0%
Services revenue	$94.9 million	$89.1 million	Up 6.4%
Gross margin	$109.2 million	$102.6 million	Up 6.5%
Gross margin percentage	36.1%	37.3%	Down 1.2 percentage points
Operating income	$28.7 million	$22.2 million	Up 29.4%
Net income	$21.2 million	$110.1 million	Down 80.8%
Diluted earnings per share	$1.79	$9.42	Down 81.0%
Cash flow from operations	$2.8 million	$17.3 million	Down $14.5 million

Fiscal 2021 net income benefited from a $90.4 million net deferred-tax-asset change, including a $92.2 million valuation-allowance release. Fiscal 2022 included a $9.3 million income-tax expense, producing a 30.5% effective tax rate. Fiscal 2022 other income of $1.7 million primarily reflected gains in marketable securities, partially offset by foreign-exchange effects.

Research and development expense increased to $22.6 million, or 7.5% of revenue, from $21.8 million, or 7.9%. Selling and administrative expense increased 2.4% to $57.7 million but declined as a percentage of revenue to 19.0% from 20.5%. Restructuring charges declined to $0.2 million from $2.3 million.

Liquidity, capital resources and balance sheet

• Cash and cash equivalents plus marketable securities totaled $47.8 million at July 1, 2022, compared with $47.9 million of cash and cash equivalents at July 2, 2021.
• Cash, cash equivalents and restricted cash declined to $37.1 million from $48.2 million.
• Accounts receivable increased to $73.2 million from $48.1 million, and unbilled receivables increased to $45.9 million from $37.5 million, contributing to lower operating cash flow.
• The company had $21.7 million of available capacity under its $25.0 million Silicon Valley Bank revolving credit facility, after $3.3 million of outstanding letters of credit. No borrowings were outstanding at year-end.
• The facility matures June 28, 2024, is secured by certain assets and contains adjusted-quick-ratio and profitability covenants. The company reported compliance with its covenants at year-end.
• Fiscal 2022 investing cash outflow was $7.8 million, including $1.8 million of capital expenditures and $8.3 million of marketable-security purchases, partially offset by $2.3 million of proceeds from an asset sale.
• Fiscal 2022 financing cash outflow was $4.9 million, including $5.4 million of share repurchases.
• Management expected fiscal 2023 capital expenditures of $5.0 million to $6.0 million and believed available liquidity would cover working capital and capital expenditures for at least the next 12 months.

Material changes versus the prior comparable period

• Revenue grew 10.2%, led by North America, Europe and increased product volumes across regions.
• Gross margin percentage declined because of inflationary pressures, while product margin declined to 36.4% from 39.1%; service margin improved to 35.4% from 33.5%.
• Operating income improved despite higher research and development and selling and administrative expenses.
• Net income and earnings per share fell sharply because fiscal 2021 included the substantial deferred-tax-asset valuation-allowance release.
• Operating cash flow weakened materially as accounts receivable, unbilled receivables and inventories increased and customer advance payments declined.
• Fiscal 2022 restructuring charges were substantially lower, but the fourth-quarter 2022 plan contemplated approximately 11 position reductions to be implemented through early fiscal 2023. Restructuring liabilities totaled $1.4 million at year-end.
• A new $10.0 million stock-repurchase authorization was approved in November 2021. The company repurchased $5.4 million of shares during fiscal 2022, with $7.3 million remaining available at year-end.
• On July 5, 2022, after the balance-sheet date, Aviat completed its acquisition of Redline Communications for approximately $12.9 million in cash transaction value, with an implied enterprise value of approximately $15.0 million. Purchase accounting was not complete when the filing was prepared.

Guidance, outlook, risks and unusual items

The filing does not provide formal revenue or earnings guidance. Management cited continued opportunity from 5G deployments, rural broadband, private networks and network modernization, while emphasizing pricing pressure, customer consolidation and supply-chain constraints.

• COVID-19 disruptions lessened during fiscal 2022, but component shortages, extended lead times, freight constraints, supplier disruptions and potential manufacturing or field-service restrictions remained risks.
• Competition may continue to reduce average selling prices and margins, particularly in international markets.
• Motorola represented 13% of fiscal 2022 revenue, and MTN Group represented approximately 17% of year-end accounts receivable, creating customer and collection concentration.
• Approximately 87.7% of cash and marketable securities was held outside the United States, including $29.2 million in jurisdictions where earnings were indefinitely reinvested.
• Supplier commitments totaled $56.8 million, including $52.8 million related to contract-manufacturer purchase obligations. The company also had $65.4 million of off-balance-sheet commercial commitments, primarily surety bonds and standby letters of credit.
• The company reported an ongoing Indian regulatory enforcement matter with an immaterial accrued probable loss and no estimable excess range of loss.
• Net deferred tax assets were $94.8 million, supported by $37.5 million of valuation allowance. U.S. federal tax-loss carryforwards of $358.9 million begin to expire in fiscal 2023, subject to applicable limitations.
• Critical accounting judgments include revenue recognition based on estimated costs to complete, inventory valuation and deferred-tax-asset realizability.
• BDO USA, LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition involving estimated costs to complete was identified as the critical audit matter.

Investor verification checklist

• Verify that the filing period is fiscal 2022 rather than fiscal 2021 Q4.
• Assess whether revenue growth can continue despite lower gross margins, inflation and customer pricing pressure.
• Monitor operating cash conversion, receivables, unbilled receivables, inventory and customer advance payments.
• Review compliance with the SVB credit-facility covenants and the availability of the $21.7 million borrowing capacity.
• Evaluate Redline’s post-acquisition contribution, purchase accounting and integration costs.
• Assess customer concentration, particularly Motorola revenue and MTN Group receivables.
• Review supply-chain commitments, component availability and potential excess or obsolete inventory charges.
• Consider the tax benefit from deferred-tax assets and NOLs, including expiration dates, valuation allowances and Section 382 limitations.
• Review the Indian enforcement proceeding, commercial commitments and other contingent liabilities for developments beyond the amounts accrued.
• Confirm the impact of the $5.4 million fiscal 2022 repurchase program and the remaining $7.3 million authorization on capital allocation and liquidity.