Aviat Networks, Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: Three and six months ended January 1, 2021, compared with December 27, 2019. The quarter comprised 13 weeks. Aviat designs, manufactures, and sells wireless networking products and related services globally.
Financial performance and liquidity
| Metric | Three months ended Jan. 1, 2021 | Prior comparable period | Six months ended Jan. 1, 2021 | Prior comparable period |
|---|---|---|---|---|
| Total revenue | $70.5 million | $56.0 million | $136.8 million | $114.6 million |
| Gross margin | $26.9 million; 38.2% | $18.3 million; 32.7% | $51.2 million; 37.4% | $40.9 million; 35.7% |
| Operating income (loss) | $7.9 million; approximately 11.2% margin | $(1.5) million | $14.4 million; approximately 10.6% margin | $0.02 million |
| Net income (loss) | $6.6 million; $1.16 diluted EPS | $(1.7) million; $(0.31) diluted EPS | $12.6 million; $2.23 diluted EPS | $(1.6) million; $(0.30) diluted EPS |
| Cash flow from operations | Not separately provided | Not separately provided | $10.2 million | $10.8 million |
- Product revenue increased 36.7% in the quarter and 28.8% for the six-month period; service revenue increased 9.1% and 4.1%, respectively.
- North America was the largest region, generating $49.2 million of quarterly revenue and $94.7 million for six months. Europe and Russia declined 37.5% in the quarter and 35.2% for six months.
- Selling and administrative expense declined 5.8% in the quarter and 9.1% for six months, primarily reflecting lower travel and restructuring savings. No restructuring charges were recorded in either fiscal 2021 period.
- Cash and cash equivalents were $43.0 million at January 1, 2021, compared with $41.6 million at July 3, 2020. Total current assets were $156.4 million versus current liabilities of $91.8 million.
- Operating cash flow was partly offset by working-capital investment, including increases in accounts receivable, unbilled receivables, and inventories. Capital expenditures were $1.4 million for the six months; approximately $3.5 million of additional fiscal 2021 capital expenditures were expected.
- The company repaid its $9.0 million SVB Credit Facility balance in July 2020. At January 1, 2021, $23.5 million was available under the $25.0 million facility, which matures June 28, 2021. The company was compliant with its financial covenants and reported no borrowings under the facility.
Material changes and unusual items
- Revenue increased 26.0% in the second quarter and 19.4% for the first six months, driven primarily by North American private-network projects, increased mobile-operator sales in Africa and the Middle East, and higher Latin America and Asia Pacific sales.
- Gross margin expanded by 550 basis points in the quarter and 170 basis points for six months, primarily from higher volume and improved product and service profitability, particularly in North America.
- The company recognized a $0.4 million tax expense related to settlement of a Slovenian tax audit and a minimal tax benefit from release of a Saudi Arabian uncertain-tax-position reserve. A $1.2 million Brazilian withholding-tax refund was received in the first quarter.
- A United Kingdom facility with a carrying value of $2.2 million was classified as held for sale. No impairment charge was recorded.
- Restructuring liabilities declined to $1.4 million and were expected to be paid during fiscal 2021.
- The stock repurchase program remained suspended; $3.4 million remained available, and no open-market repurchases occurred during the first six months.
Outlook, risks, and contingencies
- Management anticipated fiscal 2021 revenue growth, citing a healthy backlog, momentum in U.S. rural broadband and wireless internet service provider markets, and potential 5G-related investment. International revenue expectations remained conservative because of capital-spending declines and competitive intensity.
- Management stated that COVID-19 had a minimal impact on supply-chain lead times and order fulfillment during the reported periods, but warned that future manufacturing restrictions, field-service limitations, supply constraints, customer-demand changes, and economic disruption could materially affect results.
- Remaining performance obligations were approximately $77.0 million at January 1, 2021; approximately 60% was expected to be recognized as revenue within 12 months.
- Advance payments and unearned revenue totaled $34.0 million, with approximately half expected to be recognized during the remainder of fiscal 2021.
- Key risks include pricing and margin pressure, customer and geographic concentration, supplier and component constraints, dependence on collections and credit-facility renewal, financial-covenant compliance, foreign exchange, telecommunications-sector conditions, restructuring execution, tax-asset realization, litigation, and political or regulatory developments.
- Commercial commitments, including surety bonds and standby letters of credit, totaled $59.7 million and were not recorded on the balance sheet. Supplier purchase obligations totaled $25.8 million and software-license commitments approximately $1.2 million.
- The company had ongoing tax audits and legal and regulatory matters, including Indian foreign-exchange enforcement proceedings, but had accrued only immaterial estimated probable losses and could not estimate any excess loss range.
Investor verification priorities
- Verify whether the expected fiscal 2021 revenue growth and backlog conversion materialize, particularly in North America and 5G-related projects.
- Monitor gross-margin sustainability and the effect of product, service, regional, and customer mix.
- Confirm renewal or replacement of the SVB Credit Facility before its June 28, 2021 maturity and continued compliance with its covenants.
- Track working-capital conversion, especially accounts receivable, unbilled receivables, inventories, and customer collections.
- Assess the impact of COVID-19, supply-chain disruptions, competitive pricing, and reduced international capital spending.
- Review the $59.7 million of commercial commitments, outstanding letters of credit, purchase obligations, tax audits, and unresolved legal or regulatory matters.