Business Context and Reporting Period
Aviat Networks, Inc. designs, manufactures, and sells wireless networking products, software, and services for telecommunications, private networks, government, transportation, utilities, public safety, and broadcast customers. The filing reports the three and six months ended December 30, 2022, representing fiscal 2023 second quarter and first half. Comparisons are with the periods ended December 31, 2021.
Financial Performance and Liquidity
| Metric | Three Months Ended Dec. 30, 2022 | Prior Year | Six Months Ended Dec. 30, 2022 | Prior Year |
|---|---|---|---|---|
| Revenue | $90.7 million | $77.9 million | $171.9 million | $151.0 million |
| Gross margin | $32.2 million; 35.5% | $28.2 million; 36.2% | $61.7 million; 35.9% | $54.2 million; 35.9% |
| Operating income | $8.7 million | $9.2 million | $12.6 million | $16.0 million |
| Net income | $6.0 million | $5.9 million | $3.3 million | $10.6 million |
| Diluted earnings per share | $0.51 | $0.49 | $0.28 | $0.89 |
| Cash used in operating activities | Not separately provided | Not separately provided | $(8.4) million | $(2.2) million |
Second-quarter product revenue increased 22.6% to $65.6 million, while services revenue increased 3.0% to $25.1 million. Product margin improved to 38.1% from 36.4%, but service margin declined to 28.8% from 35.7%. Selling and administrative expense increased 20.6% to $16.6 million, and restructuring charges were $0.9 million versus a $1.0 million recovery in the prior-year quarter.
At December 30, 2022, cash and cash equivalents were $21.4 million, compared with $36.9 million at July 1, 2022. Total current assets were $223.5 million and total current liabilities were $124.5 million. Accounts receivable, unbilled receivables, and inventories increased to $91.4 million, $53.6 million, and $35.2 million, respectively.
The company had no borrowings outstanding under its $25.0 million revolving credit facility, with $22.0 million available after $3.0 million of letters of credit. It borrowed and repaid $24.0 million during the first six months. Management stated that cash, available credit, and expected customer collections should satisfy anticipated working-capital and capital-expenditure needs for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 16.5% in the quarter and 13.8% year to date, driven primarily by product sales, higher Private Network and mobile-operator activity, and the Redline acquisition.
- Regional growth was strongest in Latin America and Asia Pacific, up 84.7% in the quarter, and Europe, up 83.4%. North America increased 2.0% in the quarter but declined 1.1% year to date.
- Gross margin dollars increased, but quarterly gross margin percentage declined 70 basis points because of lower service margins.
- Operating income declined 5.8% in the quarter and 21.4% year to date, reflecting higher selling and administrative costs, restructuring charges, and acquisition-related expenses.
- Year-to-date net income declined to $3.3 million, partly reflecting $1.7 million of losses on sales of marketable securities and higher tax expense, including deferred tax effects related to Redline.
- Operating cash flow worsened to an $8.4 million use, primarily because of increases in receivables, inventories, prepaid deposits, and other operating assets.
- Aviat completed its $20.4 million all-cash acquisition of Redline Communications on July 5, 2022, for net cash consideration of $15.8 million after acquired cash. The acquisition added $4.95 million of goodwill and $7.29 million of finite-lived intangible assets.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management expects continued demand from 5G, LTE, mobile backhaul, private networks, and mission-critical industrial applications. Management also expects supply-chain lead times, inflationary pressures, logistical bottlenecks, and potential pandemic-related operating constraints to continue affecting the business.
A restructuring plan approved in the second quarter is expected to eliminate six roles and be implemented through the end of the first half of fiscal 2024. Total restructuring liabilities were $1.5 million at quarter-end and are expected to be paid over the following 12 months. The company also disclosed approximately $115.9 million of remaining performance obligations, with approximately 51% expected to be recognized as revenue within 12 months.
Key risks include customer and geographic concentration, order timing and mix, pricing and margin pressure, supply-chain constraints, acquisition integration, customer collections, financial covenant compliance, foreign exchange, interest rates, inflation, macroeconomic weakness, competition, cybersecurity and intellectual-property matters, regulatory and political developments, and retention of key personnel.
Outstanding commitments included $63.8 million of supplier and contract-manufacturer purchase obligations, approximately $3.8 million of software-license obligations, and $68.3 million of commercial commitments, primarily performance bonds and letters of credit. The company reported no material accrued legal contingency, but an Indian regulatory matter remains ongoing with an immaterial amount accrued.
Facts Investors Should Verify
- Whether Redline produces the anticipated revenue, margin, cost-savings, and private-network growth benefits and whether integration costs remain within expectations.
- Whether working-capital needs, particularly receivables and inventory, reverse sufficiently to restore positive operating cash flow.
- The sustainability of the 35.5% quarterly gross margin, including the decline in service margin and the effect of inflation and pricing actions.
- Liquidity after considering $21.4 million of cash, $22.0 million of undrawn credit availability, $68.3 million of commercial commitments, and $63.8 million of supplier obligations.
- Compliance with the revolving facility’s minimum adjusted quick-ratio and profitability covenants.
- The timing and effectiveness of restructuring actions and the related expected cost savings.
- The impact of customer concentration, foreign operations, currency movements, supply constraints, and potential litigation or regulatory outcomes.