Aviat Networks, Inc. Form 10-Q Summary
Business context and reporting period
Aviat Networks designs, manufactures and sells wireless networking products, solutions and services for telecommunications operators, governments, utilities, transportation, public safety and other customers worldwide. The filing covers the 13 weeks and first nine months ended March 30, 2018, within fiscal 2018, which ends June 29, 2018. The provided request metadata identifies “2017 Q3,” but the filing itself is for fiscal 2018 third quarter.
Financial performance and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Revenue | $62.1 million | $58.7 million | $180.0 million | $185.4 million |
| Gross margin | $18.1 million; 29.2% | $17.7 million; 30.2% | $57.3 million; 31.8% | $56.2 million; 30.3% |
| Operating income (loss) | $(1.4) million | $0.1 million | $0.3 million | $(0.3) million |
| Net income (loss attributable to Aviat) | $(2.6) million | $(0.4) million | $1.8 million | $0.7 million |
| Diluted EPS | $(0.49) | $(0.08) | $0.32 | $0.12 |
| Cash flow from operations | Not separately provided | Not separately provided | $7.3 million | $13.4 million |
Product revenue was $40.7 million in the quarter and $113.5 million year to date; services revenue was $21.4 million and $66.5 million, respectively. Research and development expense increased 11.5% in the quarter to $4.8 million, while selling and administrative expense increased 11.0% to $14.7 million.
At March 30, 2018, cash and cash equivalents were $37.3 million, restricted cash was $1.3 million, and short-term investments were $0.3 million. Total cash, cash equivalents and restricted cash were $38.9 million, up from $36.6 million at June 30, 2017. The $1.3 million of restricted cash became unrestricted in April 2018.
Debt consisted primarily of $9.0 million outstanding under the Silicon Valley Bank credit facility. The facility had $6.9 million of available credit, expires June 30, 2018, and includes financial covenants. The company was in compliance with those covenants at quarter end. Management expected available cash, credit availability and customer collections to fund requirements for at least the next 12 months, but renewal of the credit facility was not assured.
Material changes versus the prior comparable period
- Third-quarter revenue increased 5.8%, driven by higher product and services revenue. However, nine-month revenue declined 2.9%, primarily because of weaker international product sales.
- North America revenue increased 8.8% in the quarter and 2.7% year to date. Africa and the Middle East increased 1.7% in the quarter but declined 9.7% year to date. Latin America and Asia Pacific increased 11.2% in the quarter but declined 13.8% year to date.
- Quarterly gross margin dollars increased 2.3%, but gross margin percentage fell to 29.2% from 30.2% because of lower product margins. Year-to-date gross margin percentage improved to 31.8% from 30.3%.
- Quarterly operating results shifted from $0.1 million of operating income to a $1.4 million operating loss, primarily reflecting higher research and development and selling and administrative costs.
- Quarterly net loss attributable to Aviat increased to $2.6 million from $0.4 million. Year-to-date attributable earnings improved to $1.8 million from $0.7 million, helped substantially by tax benefits.
- Operating cash flow declined to $7.3 million year to date from $13.4 million. Capital expenditures increased to $5.0 million from $3.2 million.
Guidance, outlook, risks and unusual items
The filing does not provide specific revenue, earnings or margin guidance. Management expects quarter-to-quarter fluctuations and continued seasonality, with third-quarter revenue historically lower than second-quarter revenue because customers commonly spend capital budgets near calendar year-end. Management’s strategy emphasizes product innovation, portfolio optimization, cost reductions, operational efficiency, managed services and potential strategic alternatives.
- The nine-month tax benefit of $2.2 million included a $1.3 million Singapore tax refund and a $3.3 million release of a valuation allowance related to refundable alternative minimum tax credits. These items materially affected reported earnings and are not representative of recurring operating performance.
- The company adopted certain inventory and income-tax accounting updates without material impact. It planned to adopt the new revenue standard in fiscal 2019 using the modified retrospective method. Management expected changes in the timing of installation and certain product revenue recognition, but the final accumulated-deficit impact remained incomplete.
- Restructuring liabilities totaled approximately $0.5 million at quarter end, with payments expected through fiscal 2020. The company recorded a $0.3 million reduction in estimated restructuring payments during fiscal 2018.
- Outstanding commercial commitments not recorded on the balance sheet totaled $54.7 million, including purchase obligations of $20.0 million. Operating lease commitments totaled $6.8 million.
- A customer in Austria asserted a $1.0 million product-defect claim. The company disputed the claim, had recorded no accrual, and stated that a reasonably possible loss could not be estimated.
- MTN Group represented 17% of quarterly revenue, 14% of nine-month revenue and 18% of accounts receivable at quarter end, creating customer-concentration exposure.
- Key risks include competitive pricing and margin pressure, customer and geographic concentration, collection timing, credit-facility renewal and covenant compliance, foreign exchange exposure, supply-chain constraints, political and economic conditions in developing markets, customer acceptance of products, intellectual-property claims and litigation.
- On May 13, 2018, the board authorized repurchases of up to $7.5 million of common stock beginning May 17, 2018. The program was discretionary and could be suspended or discontinued.
Important facts for investors to verify
- Whether the SVB Credit Facility was renewed after its June 30, 2018 expiration and on what terms.
- The sustainability of operating profitability excluding the Singapore tax refund and AMT-related tax benefit.
- The final fiscal 2019 impact of adopting the new revenue-recognition standard.
- Progress in restoring nine-month international product revenue and maintaining product margins.
- The status and potential exposure from the Austrian customer claim and other contingencies.
- Actual use of the $7.5 million stock-repurchase authorization and its effect on liquidity and share count.
- Whether commercial commitments, customer concentration and foreign-exchange exposure have increased or changed materially since March 30, 2018.