Aviat Networks, Inc. Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended December 30, 2016, the second quarter of fiscal 2017. Comparisons are with the three and six months ended January 1, 2016. Aviat designs, manufactures and sells wireless networking products, solutions and services globally.
Financial Performance and Position
| Metric | Three months ended Dec. 30, 2016 | Three months ended Jan. 1, 2016 | Six months ended Dec. 30, 2016 | Six months ended Jan. 1, 2016 |
|---|---|---|---|---|
| Total revenue | $68.5 million | $70.4 million | $126.7 million | $150.0 million |
| Gross margin | $21.1 million | $16.4 million | $38.5 million | $37.4 million |
| Gross margin percentage | 30.8% | 23.3% | 30.4% | 25.0% |
| Operating income (loss) | $2.5 million | $(5.0) million | $(0.4) million | $(6.6) million |
| Net income (loss) attributable to Aviat | $1.7 million | $(5.7) million | $1.0 million | $(6.9) million |
| Diluted earnings (loss) per share | $0.31 | $(1.09) | $0.20 | $(1.32) |
| Cash flow from operating activities | Not separately provided | Not separately provided | $8.8 million | $6.4 million |
Product sales were $46.0 million in the quarter and $80.7 million year to date; services revenue was $22.6 million and $46.1 million, respectively. Research and development expense declined to $4.5 million for the quarter and $9.4 million year to date. Selling and administrative expense declined to $14.1 million and $29.2 million, respectively. Restructuring charges were $0.1 million for the quarter and $0.2 million year to date.
At December 30, 2016, cash and cash equivalents were $35.0 million, short-term investments were $0.2 million, and total assets were $156.9 million. Current liabilities were $90.9 million and total liabilities were $102.5 million. Equity was $54.4 million.
Debt under the Silicon Valley Bank credit facility was $8.0 million, compared with $9.0 million at July 1, 2016. The facility has a $30.0 million commitment, but availability was $5.1 million after the borrowing-base calculation and $6.9 million of outstanding letters of credit. The weighted-average borrowing rate during the first six months was 4.03%.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased 2.7%; six-month revenue decreased 15.5%, primarily because of lower product and service activity in Africa, the Middle East and Europe.
- North America revenue increased 23.6% in the quarter, driven principally by private network projects, while Africa and the Middle East declined 29.2% and Europe and Russia declined 50.0%.
- Quarterly gross margin increased $4.7 million, and the margin rate improved to 30.8% from 23.3%. Management attributed the improvement to lower supply-chain costs, process improvements and better service margins.
- The company moved from a quarterly operating loss of $5.0 million to operating income of $2.5 million. The six-month operating loss narrowed to $0.4 million from $6.6 million.
- Operating cash flow increased to $8.8 million from $6.4 million. Cash increased $4.5 million during the first six months, after $2.9 million of capital expenditures and $1.0 million of net debt repayments.
- Six-month results benefited from a $3.7 million refund related to a prior Singapore tax assessment. The prior-year six-month period included $0.4 million of discontinued-operation income from the former WiMAX business; no such income was recorded in fiscal 2017.
Outlook, Commentary, Risks and Unusual Items
Management’s fiscal 2017 priorities are to accelerate innovation, optimize the product portfolio, improve costs and operational efficiency, grow revenue and establish a sustainable profitable business model. No specific quantitative revenue or earnings guidance is provided in the filing.
Management expects historical seasonality to continue, with third-quarter revenue and orders typically lower than second-quarter levels because customers often spend capital budgets near calendar year-end. International operations remain exposed to constrained U.S.-dollar availability, weak commodity-linked economies, delayed customer payments and political and economic conditions.
The company expects approximately $1.0 million of capital expenditures during the remainder of fiscal 2017 and believes existing cash, available credit and customer collections will meet working-capital and capital-expenditure needs for at least the next 12 months. This assessment depends on continued operating cash generation, covenant compliance, adequate borrowing-base availability and renewal of the credit facility, which expires June 30, 2018.
- The company remains subject to strong price competition and potential margin erosion in the microwave transmission industry.
- MTN Group represented 12% of quarterly revenue, 11% of six-month revenue and 13% of accounts receivable at period-end. Motorola represented 12% of accounts receivable at period-end.
- Outstanding commercial commitments not recorded on the balance sheet totaled $40.4 million, including $22.6 million of supplier and contract-manufacturer purchase obligations and approximately $1.7 million of software-license commitments.
- The company recorded a $0.4 million payout on a Middle East performance guarantee and intends to pursue recovery. It also recorded a $0.3 million charge related to a customer demand to repurchase inventory in Africa.
- A customer in Austria has asserted a $1.0 million product-defect claim; the filing states that a reasonably possible loss cannot currently be estimated.
- Restructuring liabilities totaled $2.6 million at period-end, including $2.4 million classified as current. The fiscal 2016-2017 restructuring plan primarily involves workforce reductions and is expected to be substantially completed by the third quarter of fiscal 2017.
- The company established a tax-benefit preservation rights plan and related charter restrictions to protect net operating loss carryforwards from a potential ownership change.
- Foreign-currency forward contracts had a total notional amount of $6.0 million. A 10% adverse currency movement would have affected their fair value by approximately $0.6 million.
Investor Verification Points
- Verify whether improved gross margins and reduced operating expenses are sustainable after restructuring benefits and other favorable cost changes.
- Assess the recovery of international revenue, particularly in Africa, the Middle East and Europe, and monitor customer concentration and collection risk.
- Review compliance with the SVB facility’s financial covenants, future borrowing-base availability, subjective acceleration provisions and renewal prospects.
- Reconcile operating cash flow, including the nonrecurring Singapore tax refund, with underlying recurring cash generation.
- Evaluate potential exposure from the Austrian claim, African inventory dispute, performance-guarantee payout and other unrecorded commercial commitments.
- Confirm the timing and cash cost of remaining restructuring obligations and planned capital expenditures.
- Review the effect of seasonality, foreign exchange, political conditions and continued telecommunications-sector pricing pressure on future results.