AVIAT NETWORKS, INC. annual report, FY2014

Aviat Networks, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended June 27, 2014. The source includes fourth-quarter fiscal 2014 results, although the request metadata references “2013 Q4.” Aviat is a global provider of microwave and millimeter-wave wireless networking products, software, and professional services. The company operated in one reportable segment and employed approximately 960 people at year-end.

Financial Performance and Position

Metric	Fiscal 2014	Fiscal 2013	Change
Revenue	$346.0 million	$471.3 million	Down 26.6%
Gross margin	$85.1 million; 24.6%	$140.1 million; 29.7%	Down 510 basis points
Operating income (loss)	$(50.7) million	$1.7 million	Decline of $52.4 million
Loss from continuing operations	$(52.1) million	$(10.9) million	Loss increased
Net loss	$(51.2) million	$(15.0) million	Loss increased $36.2 million
Basic and diluted net loss per share	$(0.83)	$(0.25)	More severe loss
Cash flow from operations	$(29.3) million	$8.4 million	Decline of $37.7 million
Capital expenditures	$9.4 million	$10.4 million	Down $1.0 million
Cash and cash equivalents	$48.8 million	$90.0 million	Down $41.2 million

Product revenue declined to $222.6 million from $336.7 million; service revenue declined to $123.4 million from $134.6 million.
Product margin fell to 22.4% from 28.8%, primarily because of competitive pricing pressure and lower volume. Service margin declined to 28.5% from 31.9%.
Research and development expense was $35.5 million, or 10.3% of revenue, compared with $39.4 million, or 8.4%, in fiscal 2013.
Selling and administrative expense decreased to $88.8 million from $95.5 million, but increased to 25.7% of revenue from 20.3%.
Inventory and customer-service inventory write-downs totaled $7.2 million, or 2.1% of revenue.
Total assets were $253.2 million and total stockholders’ equity was $102.6 million at year-end.

Liquidity, Debt, and Commitments

Cash declined primarily because of $29.3 million used in operating activities, $9.4 million of capital expenditures, and $2.8 million of debt repayments.
The Silicon Valley Bank credit facility provided a maximum commitment of $40.0 million. At year-end, outstanding borrowings were $6.0 million, available credit was $19.7 million, and letters of credit outstanding were $5.7 million.
The $6.0 million borrowing was classified as current because of uncertainty regarding covenant compliance and subjective acceleration provisions, although the company stated that it was in compliance with its financial covenants at year-end.
Contractual cash obligations totaled $75.6 million, including $48.3 million of purchase obligations, $20.2 million of operating lease commitments, and $6.0 million of borrowings.
Unrecorded commercial commitments, primarily performance guarantees, surety bonds, and standby letters of credit, totaled $45.8 million.

Material Changes Versus the Prior Comparable Period

Revenue fell 26.6%, driven primarily by reduced purchases by the company’s largest African customer, completion of a large European project, and lower North American operator spending following LTE network build-outs.
Africa and Middle East revenue decreased 40.2% to $108.9 million; North America revenue decreased 21.3% to $142.0 million.
MTN Group represented 17% of fiscal 2014 revenue, down from 25% in fiscal 2013. MTN also represented approximately 17% of year-end accounts receivable.
Gross margin declined substantially as lower volume spread fixed costs over fewer sales and pricing pressure intensified.
Restructuring charges increased to $11.1 million from $3.1 million. The company recorded $6.4 million of employee termination costs and $4.7 million of facilities-related charges.
Backlog increased to $209.3 million from $158.5 million, but orders may be rescheduled or canceled and therefore are not a reliable measure of future revenue.
The company’s workforce decreased to approximately 960 employees from approximately 1,000.
Discontinued WiMAX operations generated $0.9 million of income in fiscal 2014, compared with a $4.1 million loss in fiscal 2013, primarily from recovery of previously written-down receivables.

Fourth-Quarter Fiscal 2014

Metric	Q4 Fiscal 2014	Q4 Fiscal 2013
Revenue	$85.4 million	$109.0 million
Gross margin	$19.8 million	$33.6 million
Operating income (loss)	$(11.8) million	$(2.9) million
Net loss	$(12.9) million	$(5.8) million
Basic and diluted net loss per share	$(0.21)	$(0.10)

Fourth-quarter fiscal 2014 included $2.1 million of restructuring charges and $1.2 million of excess and obsolete inventory markdowns.

Outlook, Management Commentary, and Risks

Management’s fiscal 2015 priorities were to accelerate product innovation, optimize the product portfolio, improve costs and operational efficiency, grow revenue, and establish a sustainable profitable business model.
The company expected to complete most remaining restructuring activities by the end of the second quarter of fiscal 2015 and estimated approximately $6.3 million of fiscal 2015 capital expenditures.
Management stated that cash, available credit, and expected customer collections should fund working capital and capital expenditures for the next 12 months, but acknowledged uncertainty regarding operating cash flow, covenant compliance, and operational improvements.
Seasonality is expected to continue, with customer capital spending generally stronger in the second fiscal quarter and weaker in the third fiscal quarter.
Key risks include continuing price and margin erosion, customer concentration, telecommunications-sector consolidation, international political and economic instability, currency exposure, customer payment risk, supply-chain dependence, and long sales cycles.
The company depends on contract manufacturers and certain sole or limited-source suppliers, including a single source for certain microwave integrated circuits.
Management identified material weaknesses in internal control over financial reporting involving the control environment, risk assessment, monitoring, manual journal entries, account reconciliations, and revenue recognition for percentage-of-completion contracts. Management and KPMG concluded that internal control over financial reporting and disclosure controls were not effective as of June 27, 2014.
KPMG issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the effectiveness of internal control over financial reporting. Remediation efforts were underway and expected to continue through fiscal 2015.
The company prepaid $13.2 million related to a Singapore tax assessment and continued to contest its tax positions. Management stated that unrecognized tax benefits could change by up to $14.0 million within the following 12 months.
A Singapore subsidiary was evaluating historical compliance with export regulations; potential fines or penalties could not be estimated.
The company has not paid cash dividends and does not expect to do so in the foreseeable future.

Investor Verification Priorities

Verify whether restructuring activities deliver the projected cost savings and whether additional restructuring charges are incurred.
Monitor cash burn, operating cash flow, customer collections, borrowing-base availability, and compliance with SVB credit-facility covenants.
Assess whether backlog converts into revenue, particularly given customer cancellation and delivery-schedule risks.
Track MTN Group spending and customer concentration, including exposure to African telecommunications operators.
Review gross-margin recovery, pricing trends, product mix, and inventory write-downs as newer products replace legacy platforms.
Confirm remediation and independent testing of the material weaknesses in revenue recognition, account reconciliations, journal-entry controls, and the broader control environment.
Follow the Singapore tax assessment and export-compliance review for possible cash payments, penalties, or additional tax expense.
Evaluate the company’s ability to achieve profitability after years of GAAP losses and continued competitive pressure.