Aviat Networks, Inc. Form 10-Q Summary
Business context and reporting period
Aviat designs, manufactures and sells wireless networking products, software and related services for telecommunications, private networks, government, transportation, utilities, public safety and broadcast customers worldwide. The filing covers the three and nine months ended March 31, 2017, the third quarter and first nine months of fiscal 2017. Fiscal 2017 ends June 30, 2017. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended March 31, 2017 | Prior comparable period | Nine months ended March 31, 2017 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $58.7 million | $60.5 million | $185.4 million | $210.4 million |
| Gross margin | $17.7 million; 30.2% | $14.4 million; 23.8% | $56.2 million; 30.3% | $51.8 million; 24.6% |
| Operating income (loss) | $0.1 million | $(7.6) million | $(0.3) million | $(14.2) million |
| Net income (loss) attributable to Aviat | $(0.4) million | $(7.9) million | $0.7 million | $(14.8) million |
| Basic earnings (loss) per share | $(0.08) | $(1.50) | $0.12 | $(2.82) |
| Cash flow from operating activities | Not separately provided for the quarter | Not separately provided | $14.0 million | $7.1 million |
Third-quarter product revenue increased 7.9% to $39.1 million, while services revenue declined 19.1% to $19.6 million. First-nine-month product revenue declined 11.0% to $119.8 million and services revenue declined 13.4% to $65.7 million.
At March 31, 2017, cash and cash equivalents were $39.9 million, short-term investments were $0.2 million, and total current assets were $128.8 million. Total debt was $8.0 million, consisting primarily of borrowings under the SVB Credit Facility. Available credit under that facility was $4.8 million after borrowing-base limitations, borrowings and letters of credit. Total liabilities were $96.7 million and total equity was $54.8 million.
Material changes versus the prior comparable period
- Quarterly revenue decreased 2.9%; first-nine-month revenue decreased 11.9%.
- North America revenue increased 7.5% for the quarter and 3.1% year to date, while international revenue declined, particularly in Africa and the Middle East, Europe and Russia, and Latin America and Asia Pacific.
- Gross margin improved substantially, driven by lower supply-chain costs, improved product and service pricing margins, process improvements and a $0.4 million recovery of previously reserved inventory.
- Research and development expense declined 15.8% for the quarter and 13.1% year to date. Selling and administrative expense declined 17.7% and 14.0%, respectively, primarily from restructuring-related reductions in personnel costs.
- Restructuring charges declined to $0.1 million for the quarter and $0.3 million year to date. Restructuring liabilities totaled $1.9 million at March 31, 2017, including $1.7 million classified as current.
- Operating performance improved from a prior-year operating loss to approximately breakeven for the quarter and year to date. The first nine months also benefited from a $3.7 million Singapore tax refund.
- Cash increased $9.4 million from July 1, 2016, primarily because of $14.0 million of operating cash flow, partially offset by $3.2 million of capital expenditures and $1.0 million of net debt repayment.
Guidance, outlook, risks and unusual items
Management expects demand for mobile backhaul capacity to grow over the long term but anticipates quarterly fluctuations and continued seasonality, with fiscal third-quarter activity historically lower than the second quarter. Management expects to continue focusing on product innovation, cost reductions, operational efficiency, organic growth and potential strategic alternatives, including acquisitions, divestitures or asset sales. No specific revenue or earnings guidance is provided.
- Management expects approximately $1.0 million of additional capital expenditures during the remainder of fiscal 2017 and believes available cash, credit and customer collections will fund working capital and capital expenditures for at least the next 12 months.
- The SVB facility expires June 30, 2018. The company was in compliance with amended covenants at March 31, 2017, but noted uncertainty regarding future compliance, borrowing-base availability and possible lender acceleration rights.
- International results remain exposed to constrained U.S.-dollar availability, delayed customer payments, political and economic instability, currency movements and weakness in telecommunications-sector spending.
- Competition may cause continued price and margin erosion. Other risks include customer concentration, supply-chain constraints, product acceptance, key-person retention, intellectual-property claims, restructuring execution and preservation of tax loss carryforwards.
- Commercial commitments not recorded on the balance sheet included $33.8 million of surety bonds, standby letters of credit and similar arrangements. Outstanding supplier purchase obligations were $21.7 million and software-license commitments were approximately $1.4 million.
- The company recorded a $0.4 million payout related to a performance guarantee in the Middle East and intends to pursue recovery. A separate Austrian customer claim seeks $1.0 million; the potential loss cannot currently be estimated and no accrual was recorded.
- In April 2017, the company recovered a previously written-off Canadian tax deposit of $0.4 million, which will be recorded in the fourth quarter of fiscal 2017.
Important facts for investors to verify
- Whether improved gross margins and reduced operating expenses are sustainable despite lower international revenue and continued competitive pricing pressure.
- Future compliance with the SVB Credit Facility’s financial covenants, borrowing-base requirements and renewal terms.
- The timing and collectability of accounts receivable, particularly given customer concentration and international payment constraints.
- The remaining cash costs and completion timetable for restructuring programs and facility obligations.
- The outcome of the Singapore tax dispute and related potential refunds or liabilities, as well as the company’s ability to use its tax loss carryforwards.
- Potential exposure from performance guarantees, customer disputes, purchase commitments and other off-balance-sheet commercial commitments.
- The filing’s stated period is fiscal third quarter 2017, ended March 31, 2017, despite the request metadata referring to “2016 Q3.”