Aviat Networks, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Aviat designs, manufactures and supports wireless networking products, digital microwave systems, network-management software and related services for telecommunications, government, utility, transportation and other customers globally. This report covers the quarter and first two quarters of fiscal 2014 ended December 27, 2013, compared with the comparable periods ended December 28, 2012. The financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Quarter Ended Dec. 27, 2013 | Quarter Ended Dec. 28, 2012 | First Two Quarters 2014 | First Two Quarters 2013 |
|---|---|---|---|---|
| Total revenue | $85.8 million | $129.0 million | $179.2 million | $244.0 million |
| Gross margin | $21.3 million; 24.8% | $38.7 million; 30.0% | $44.4 million; 24.8% | $72.4 million; 29.7% |
| Operating income (loss) | $(10.7) million | $4.9 million | $(24.1) million | $5.6 million |
| Net loss | $(9.9) million | $(5.3) million | $(23.5) million | $(7.5) million |
| Net loss per share | $(0.16) | $(0.09) | $(0.38) | $(0.13) |
| Cash flow from operations | Not separately provided | Not separately provided | $(17.6) million | $3.5 million |
- Quarterly revenue declined 33.5%; product sales fell 44.9% to $51.9 million, while services revenue declined 2.6% to $33.9 million.
- First-half revenue declined 26.6%; product sales fell 35.2% and services revenue fell 3.3%.
- Quarterly net loss margin was approximately 11.5%, compared with approximately 4.1% in the prior-year quarter. First-half net loss margin was approximately 13.1%, compared with approximately 3.1%.
- Research and development expense was $9.4 million for the quarter and $19.1 million for the first half. Selling and administrative expense was $22.2 million and $44.4 million, respectively.
- Restructuring charges were $0.3 million in the quarter and $4.8 million in the first half, including a $3.9 million facilities charge and $0.9 million of employee termination costs.
- Cash and cash equivalents were $64.7 million at December 27, 2013, down from $90.0 million at June 28, 2013. Total assets were $279.4 million and stockholders’ equity was $128.9 million.
- Debt consisted primarily of $6.0 million outstanding under the Silicon Valley Bank facility. Available credit was $36.8 million after borrowings and $7.2 million of outstanding letters of credit.
- Capital expenditures were $5.4 million in the first half. The company expects approximately $4.4 million of additional capital expenditures during the remainder of fiscal 2014.
Material Changes Versus the Prior Comparable Period
- The largest revenue decline occurred in Africa and the Middle East, where quarterly revenue fell 59.3% to $26.0 million and first-half revenue fell 44.2% to $63.0 million. Management attributed this primarily to reduced customer capital spending and the timing of a managed-services and warehousing arrangement.
- North America revenue declined 18.4% for the quarter and 15.7% for the first half, reflecting completion of portions of customers’ LTE build-outs and timing of government, utility and private-network purchases.
- Europe and Russia revenue increased 8.7% in the quarter but declined 13.9% for the first half. Latin America and Asia Pacific increased 10.3% in the quarter and 2.4% for the first half.
- Gross margin declined 520 basis points in the quarter and 490 basis points for the first half, primarily because of lower volumes, unfavorable product and regional mix, pricing pressure and reduced supply-chain cost absorption.
- The company reported a $23.5 million first-half net loss versus a $7.5 million loss in the prior-year period, and operating cash flow deteriorated from $3.5 million provided to $17.6 million used.
- The company paid $13.2 million during the quarter in connection with a revised Singapore tax assessment and recognized a $0.9 million discrete tax benefit. It also recorded a $2.2 million adjustment to correct immaterial historical tax-related errors.
- Discontinued WiMAX operations contributed $0.3 million of income in the quarter and $0.4 million in the first half, compared with losses in the prior-year periods.
Guidance, Outlook, Risks and Unusual Items
- No specific revenue or earnings guidance is provided. Management expects continued quarter-to-quarter volatility and seasonal weakness in the fiscal third quarter because customers typically spend less at the beginning of their fiscal years.
- Management expects continued demand for mobile-backhaul capacity and intends to focus on product innovation, portfolio optimization, operational efficiency and cost reduction. Managed-services arrangements may defer revenue recognition and require upfront costs.
- During the third quarter of fiscal 2014, the company initiated a new restructuring plan and expects approximately $5.0 million to $6.0 million of related costs. The existing fiscal 2013–2014 plan had approximately $2.4 million of additional estimated costs remaining at December 27, 2013.
- At December 27, 2013, the company was not in compliance with financial covenants under its credit agreement, and the $6.0 million borrowing was classified as current because of a subjective acceleration clause. Amendment No. 3, entered into February 10, 2014, restored covenant compliance.
- Management believes available cash, credit availability and expected customer collections will fund working capital and capital expenditures for the next 12 months, but cautions that future cash generation and covenant compliance are not assured.
- Key risks include pricing and margin erosion, dependence on customer spending and the MTN Group, global telecommunications weakness, customer payment timing, foreign-exchange exposure, supply-chain constraints, political instability, execution of restructuring activities and retention of key personnel.
- The company had $23.1 million of future minimum operating-lease payments, $31.9 million of supplier purchase obligations, $3.0 million of other contractual obligations and $48.2 million of outstanding commercial commitments at December 27, 2013.
- The Singapore subsidiary was evaluating historical export-regulation compliance; potential fines or penalties could not be estimated. The company also remained subject to tax examinations, including in Singapore and Nigeria.
Important Facts for Investors to Verify
- Whether the February 10, 2014 credit-facility amendment fully mitigated covenant, acceleration and liquidity risks.
- The timing and amount of revenue recognition under the major African managed-services and warehousing agreement.
- Whether revenue and gross-margin trends stabilize after the sharp declines in Africa, North America and product sales.
- The actual cost, timing and cash savings from both restructuring plans.
- The outcome of the Singapore tax appeal, Nigeria tax examination and Singapore export-compliance review.
- Customer concentration and payment exposure, particularly to MTN Group and other major international customers.
- Whether operating cash flow improves from the first-half use of $17.6 million and whether the company can fund its stated capital and restructuring requirements without additional financing.