Business Context and Reporting Period
Company: Aviat Networks, Inc. (formerly Harris Stratex Networks, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and two quarters ended January 1, 2010 (Fiscal 2010 Q2)
Business Overview: The company designs, manufactures, and sells wireless networking products, solutions, and services, including microwave radio and WiMAX systems, to service providers, government agencies, and private network operators globally. The company changed its name in January 2010 following the termination of a trademark licensing agreement with Harris Corporation.
Key Financial Metrics
| Metric (in millions) | Q2 2010 | Q2 2009 | YTD 2010 (2 Qtrs) | YTD 2009 (2 Qtrs) |
|---|---|---|---|---|
| Total Revenue | $122.6 | $190.9 | $242.6 | $386.7 |
| Gross Margin | $42.3 (34.5%) | $51.1 (26.8%) | $80.0 (33.0%) | $110.2 (28.5%) |
| Operating Loss | $(6.2) | $(294.8) | $(12.6) | $(287.1) |
| Net Loss | $(7.9) | $(318.7) | $(15.7) | $(312.2) |
| Net Loss Per Share (Basic/Diluted) | $(0.13) | $(5.43) | $(0.27) | $(5.33) |
| Cash and Cash Equivalents | $126.4 | $136.8 (Jul 3, 2009) | $126.4 | $97.7 (Jan 2, 2009) |
| Short-Term Debt | $10.0 | $10.0 | $10.0 | $10.0 |
| Available Credit Facility | $50.8 | N/A | $50.8 | N/A |
| Operating Cash Flow (YTD) | $3.9 | $16.4 | $3.9 | $16.4 |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 35.8% in Q2 2010 compared to Q2 2009, driven by significant declines in Africa (-64.0%) and Europe/Middle East/Russia (-39.1%) due to the global economic recession, credit crisis, and customer consolidation. Latin America and Asia Pacific saw a slight increase of 5.1%.
- Profitability Improvement: The Net Loss improved significantly from $318.7 million in Q2 2009 to $7.9 million in Q2 2010. The prior year's loss was heavily impacted by non-cash impairment charges of $279.0 million for goodwill and $22.0 million for the "Stratex" trade name, which did not recur in the current period.
- Gross Margin Expansion: Gross margin percentage improved to 34.5% in Q2 2010 from 26.8% in Q2 2009, attributed to better pricing structures, lower logistics expenses, and improved supplier pricing.
- Segment Performance: The International segment reported an operating income of $3.4 million in Q2 2010, a stark contrast to the $261.9 million operating loss in Q2 2009 (driven by impairments). The North America segment reported an operating loss of $9.6 million, an improvement from the $32.9 million loss in the prior year.
Guidance, Outlook, and Risks
- Margin Outlook: Management expects gross margin percentage to decline to approximately 30% to 31% in future quarters from the 34.5% level realized in Q2 2010.
- Restructuring: The company is executing a restructuring plan (Fiscal 2009 Plan) to reduce workforce and restructure manufacturing. Total restructuring charges for the two quarters ended Jan 1, 2010, were $2.6 million. The company expects to incur an additional $8.5 million in restructuring charges, primarily related to manufacturing operations in San Antonio and international locations.
- Rebranding Costs: The company incurred $1.5 million in rebranding and transitional costs in Q2 2010 related to the name change and termination of the Harris license agreement.
- Liquidity: As of January 1, 2010, the company had $126.4 million in cash and $50.8 million in available credit under a $70 million facility. The company is in compliance with all financial covenants.
- Risks: Key risks include the global economic downturn affecting customer spending, continued price erosion due to competition, customer consolidation (particularly in Africa), and the ability to access capital markets in developing countries. There is also ongoing securities class action litigation related to prior financial statement restatements.
Investor Verification Checklist
- Revenue Concentration: Verify the impact of customer consolidation in Africa, noting that no single customer exceeded 10% of revenue in Q2 2010, whereas MTN and METCO were significant contributors in the prior year.
- Restructuring Execution: Monitor the execution of the remaining $8.5 million in expected restructuring charges and the associated cash outflows.
- Margin Sustainability: Assess whether the 34.5% gross margin is sustainable or if the projected decline to 30-31% materializes in subsequent quarters.
- Litigation Status: Review updates on the federal securities class action lawsuit filed in September 2008 regarding prior financial restatements.
- Outsourcing Impact: Evaluate the financial impact of increased outsourcing activity on manufacturing costs and restructuring liabilities.