Aviat Networks, Inc. Form 10-Q Summary
Reporting period: Third quarter and first three quarters of fiscal 2013 ended March 29, 2013, compared with the periods ended March 30, 2012. The supplied metadata identifies “2012 Q3,” but the filing itself is the fiscal 2013 third-quarter Form 10-Q, filed May 7, 2013.
Business Context
Aviat designs, manufactures and sells wireless networking products, microwave transmission systems, network management software, and related services to telecommunications operators, private networks, government agencies, utilities, transportation companies and other customers worldwide. The company reports one operating segment and conducts business across North America, Africa and the Middle East, Europe and Russia, and Latin America and Asia Pacific.
Key Financial Metrics
| Metric | Q3 FY2013 | Q3 FY2012 | First 3 Quarters FY2013 | First 3 Quarters FY2012 |
|---|---|---|---|---|
| Total revenue | $118.3 million | $111.6 million | $362.3 million | $328.0 million |
| Gross margin | $34.1 million; 28.8% | $34.3 million; 30.7% | $106.5 million; 29.4% | $98.9 million; 30.2% |
| Operating income (loss) | $(1.0) million | $(0.5) million | $4.6 million | $(11.9) million |
| Loss from continuing operations | $(1.6) million | $(0.8) million | $(7.4) million | $(14.5) million |
| Net loss | $(1.7) million | $(3.2) million | $(9.2) million | $(22.8) million |
| Net loss per share | $(0.03) | $(0.05) | $(0.15) | $(0.39) |
| Operating cash flow | Not separately provided | Not separately provided | $5.5 million | $(0.8) million |
- Quarterly revenue increased 6.0%; year-to-date revenue increased 10.5%.
- Services revenue rose 28.0% for the quarter and 25.3% year to date, while product revenue declined 0.7% quarterly but increased 5.7% year to date.
- Quarterly gross margin percentage declined 190 basis points, and year-to-date gross margin percentage declined 80 basis points, primarily because of pricing pressure, product mix, and a $1.1 million deferred-cost write-down associated with a customer’s liquidity concerns.
- Research and development expense increased 11.2% in the quarter and 8.6% year to date. Selling and administrative expense declined 2.8% and 5.2%, respectively.
- Cash and cash equivalents were $92.9 million at March 29, 2013, compared with $96.0 million at June 29, 2012.
- Total debt was $9.8 million, all classified as short-term at quarter-end, compared with $12.9 million of combined short- and long-term debt at June 29, 2012. The company had $24.4 million of available credit under its $40.0 million SVB facility.
- Total assets were $304.1 million and total liabilities were $150.1 million at March 29, 2013.
Material Changes Versus Prior Comparable Period
- North America revenue increased 24.2% in the quarter and 7.4% year to date, supported by LTE network deployments.
- Africa and Middle East revenue increased 11.2% in the quarter and 49.6% year to date, primarily from mobile-operator capacity investments.
- Europe and Russia revenue declined 20.3% in the quarter and 22.3% year to date; Latin America and Asia Pacific declined 21.5% and 25.0%, respectively.
- Operating results improved year to date, with a $4.6 million operating profit versus an $11.9 million operating loss in the prior-year period. The improvement reflected higher revenue, lower selling and administrative expense, and no prior-year goodwill impairment charge.
- Net loss improved partly because the discontinued WiMAX business generated a $0.1 million quarterly loss and a $1.8 million year-to-date loss, versus losses of $2.4 million and $8.3 million in the comparable periods.
- Income-tax expense increased substantially to $12.0 million year to date, primarily because the company increased its reserve for uncertain tax positions by $11.1 million following information obtained during foreign tax examinations.
- Inventory declined to $40.5 million from $56.8 million at fiscal year-end, while receivables declined to $80.0 million from $90.7 million.
Cash Flow, Liquidity and Debt
- Year-to-date operating cash flow was $5.5 million, driven by collections, lower inventory, noncash charges, and the increase in uncertain-tax reserves. Investing cash use was $6.0 million, including $5.9 million of capital expenditures. Financing cash use was $3.0 million, primarily debt repayment.
- Management expects approximately $3.0 million of additional capital expenditures during the remainder of fiscal 2013, primarily for product development equipment and information-technology infrastructure.
- Approximately $66.8 million, or 71.9% of cash, was held outside the United States. Of foreign-held cash, $53.7 million was in jurisdictions where earnings were considered indefinitely reinvested and could be subject to U.S. tax if repatriated.
- The SVB facility expires February 28, 2014, and includes minimum liquidity and profitability covenants. Aviat was in compliance at March 29, 2013. Certain receivables, inventory and equipment secure the facility.
Outlook, Commentary and Risks
- Management’s strategy is to accelerate innovation, optimize the product portfolio, reduce costs, improve operating efficiency, grow revenue and establish a sustainable profitable business model.
- Demand for mobile backhaul capacity and LTE-related deployments remained supportive, but management expects quarter-to-quarter fluctuations and continued seasonality. Fiscal third-quarter revenue is historically lower than second-quarter revenue because customers often spend capital budgets near their fiscal year-end.
- Management stated that existing cash, available credit and expected customer collections should fund working capital and capital expenditures for the next 12 months and the foreseeable future, while noting that future cash generation and operational improvements are not assured.
- Potential foreign tax assessments could total up to $16.0 million and could require payment as early as the fourth quarter of fiscal 2013; the timing and amount were not determinable at quarter-end.
- Remaining restructuring activities under the Fiscal 2011 Plan were expected to be completed during fiscal 2013. The restructuring liability was $1.5 million, including $1.0 million classified as current.
- Key risks include competitive price erosion, customer and geographic concentration, order timing and mix, global economic weakness, supplier and subcontractor performance, product-development execution, customer acceptance of new products, foreign-exchange exposure, political instability, tax disputes, and dependence on major customers. MTN Group and Verizon Wireless each represented more than 10% of revenue in the reported periods.
- The company had $61.6 million of supplier purchase obligations, $5.0 million of major capital and service commitments, and $52.6 million of off-balance-sheet commercial commitments, principally guarantees and standby letters of credit.
- Management concluded that disclosure controls and procedures were effective as of March 29, 2013, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the company can convert improved year-to-date revenue and operating performance into sustained quarterly profitability despite declining gross margins.
- The ultimate amount and timing of foreign tax assessments related to the $16.0 million uncertain-tax reserve.
- Renewal, refinancing or repayment plans for the SVB credit facility before its February 2014 expiration and the January 2014 term-loan maturity.
- Customer concentration and the effect of any reduction in business from MTN Group or Verizon Wireless.
- Execution of the remaining restructuring program and the expected cash payments.
- Progress in weaker regions, particularly Europe and Russia and Latin America and Asia Pacific, and the durability of LTE-related demand in North America and Africa.