Aviat Networks, Inc. Form 10-Q Summary
Business context and reporting period
Aviat designs, manufactures and sells wireless networking products, software and services for telecommunications providers, private networks, government, transportation, utilities, public safety and broadcast customers. The filing covers the 13-week quarter ended September 30, 2022, the first quarter of fiscal 2023, compared with the 13-week quarter ended October 1, 2021.
The company operates as one reportable segment and serves more than 3,000 customers globally. The quarter included the July 5, 2022 acquisition of Redline Communications, a provider of mission-critical data infrastructure and private LTE/5G solutions.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $81.3 million | $73.2 million | Up 11.1% |
| Product revenue | $55.1 million | $50.8 million | Up 8.4% |
| Services revenue | $26.2 million | $22.3 million | Up 17.2% |
| Gross profit | $29.5 million | $26.1 million | Up 12.9% |
| Gross margin | 36.3% | 35.7% | Up 0.6 percentage points |
| Operating income | $3.9 million | $6.8 million | Down $2.9 million |
| Operating margin | 4.8% | 9.3% | Down 4.5 percentage points |
| Net income (loss) | $(2.7) million | $4.7 million | Declined $7.4 million |
| Diluted earnings (loss) per share | $(0.25) | $0.39 | Declined $0.64 |
| Cash flow from operations | $(6.3) million | $0.7 million | Declined $7.0 million |
Regional revenue increased in Europe by 66.5% and in Latin America and Asia Pacific by 91.9%; Africa and the Middle East increased 2.6%. North America declined 4.1%, primarily due to the timing of private-network projects.
Selling and administrative expense increased 37.8% to $17.5 million, primarily due to variable compensation and Redline integration costs. Research and development expense increased 3.0% to $6.1 million. Restructuring charges rose to $2.0 million from $0.7 million. Other expense was $2.8 million, primarily reflecting losses on marketable securities and foreign-exchange movements. The $3.9 million tax provision exceeded pre-tax income of $1.1 million, partly because of tax effects associated with the Redline acquisition and related restructuring.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $21.6 million at September 30, 2022, compared with $36.9 million at July 1, 2022. Including restricted cash, total cash, cash equivalents and restricted cash were $21.8 million.
- Marketable securities declined to $1.3 million from $10.9 million, primarily due to sales during the quarter. The company recognized a $1.2 million loss associated with those sales.
- Inventories increased to $32.9 million from $25.4 million as the company built inventory to mitigate supply-chain constraints.
- The company had no borrowings outstanding under its $25.0 million accounts-receivable-based SVB revolving credit facility at quarter-end. Available credit was $22.0 million after $3.0 million of outstanding letters of credit. The company borrowed and repaid $15.0 million during the quarter.
- The credit facility matures June 28, 2024, includes financial covenants and is secured by certain assets. Aviat stated that it was in compliance with the covenants at quarter-end.
- Management stated that cash, available credit and expected customer collections should be sufficient for anticipated working capital and capital expenditures for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue grew $8.1 million, led by international mobile-operator activity, stronger services revenue and the Redline contribution.
- Gross margin improved modestly despite expedite fees, inflation and supply-chain costs. Product margin declined to 36.0% from 37.2%, while service margin improved to 36.7% from 32.1%.
- Operating profitability deteriorated because higher selling and administrative costs, restructuring charges and other expense more than offset the revenue and gross-profit increases.
- Operating cash flow turned negative, driven by working-capital needs, including higher inventory and unbilled receivables.
- Aviat completed the all-cash Redline acquisition for total consideration of $20.4 million, including $4.6 million of cash acquired, resulting in $15.8 million of net cash used in investing activities. The preliminary allocation included $7.3 million of acquired intangible assets and $5.0 million of goodwill.
- The company recorded $2.0 million of restructuring charges under a plan expected to reduce the workforce by approximately 20 employees through the end of the third quarter of fiscal 2023. The restructuring liability was $1.5 million at quarter-end.
- Share-based compensation increased to $1.8 million from $0.9 million. No open-market share repurchases occurred during the quarter, and $8.0 million remained available under the repurchase authorization.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management expects continued demand related to 5G, LTE, private networks, public safety and capacity expansion, and expects Redline to expand Aviat’s private-network offering. Management also expects supply-chain constraints, inflationary pressures, logistics costs and fulfillment challenges to continue until economic and operating conditions normalize.
- Key risks include competition and price or margin erosion, supply shortages and extended lead times, customer and project timing, acquisition integration, financial covenant compliance, collections, foreign currency, interest rates, geopolitical and economic conditions, tariffs and trade restrictions, and retention of key personnel.
- COVID-19-related effects had lessened but could still disrupt operations, suppliers, manufacturing, field services, customer demand and cash flows.
- Outstanding purchase obligations were $62.7 million, and software-license commitments were approximately $3.7 million.
- Commercial commitments not recorded on the balance sheet totaled approximately $64.3 million, comprising $3.0 million of letters of credit and $61.3 million of bonds. Management did not believe significant payments under performance guarantees were probable.
- The company disclosed ongoing Indian regulatory enforcement matters relating to historical intercompany receivables and payables. An immaterial probable loss had been accrued, but the company could not estimate any additional potential loss.
- Foreign operations generated a $1.1 million cumulative translation loss in other comprehensive income during the quarter.
Important facts for investors to verify
- Whether Redline produces the expected revenue, margin and cost synergies and whether integration costs remain elevated.
- Whether inventory, unbilled receivables and other working-capital investments convert into cash and whether operating cash flow improves.
- Whether supply-chain constraints, inflation and expedite fees continue to pressure product margins.
- Whether the company maintains compliance with the SVB credit-facility covenants while cash balances remain reduced.
- The timing and cash cost of the approximately 20-employee Redline-related restructuring and other restructuring programs.
- The effect of tax expenses, foreign exchange movements and marketable-security losses on reported earnings.
- The potential exposure from $64.3 million of commercial commitments, $62.7 million of supplier purchase obligations and unresolved legal or regulatory matters.