Business Context and Reporting Period
Company: Aviat Networks, Inc. (formerly Harris Stratex Networks, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and three quarters ended April 2, 2010 (Fiscal 2010)
Business Overview: The company designs, manufactures, and sells wireless networking products, solutions, and services, including microwave radio and WiMAX systems, to service providers, government agencies, and industrial enterprises globally. In January 2010, the company changed its name to Aviat Networks, Inc. to reflect its brand identity following the termination of a trademark licensing agreement with Harris Corporation.
Key Financial Metrics
| Metric (in millions) | Q3 2010 | Q3 2009 | YTD 3Q 2010 | YTD 3Q 2009 |
|---|---|---|---|---|
| Total Revenue | $120.0 | $158.0 | $362.6 | $544.7 |
| Gross Margin | $18.2 (15.2%) | $16.5 (10.4%) | $98.2 (27.1%) | $126.7 (23.3%) |
| Operating Loss | $(29.0) | $(35.2) | $(41.6) | $(322.3) |
| Net Loss | $(25.7) | $(39.4) | $(41.4) | $(351.6) |
| Diluted EPS | $(0.43) | $(0.67) | $(0.70) | $(5.99) |
| Cash & Equivalents | $140.5 | N/A | $140.5 | N/A |
| Operating Cash Flow (YTD) | N/A | N/A | $21.8 | $45.3 |
| Short-Term Debt | $10.0 | N/A | $10.0 | N/A |
| Available Credit | $51.4 | N/A | $51.4 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 24.1% in Q3 2010 and 33.4% YTD compared to the prior year. The decline was driven by reduced customer demand due to the global economic recession, credit crises affecting customer financing, and increased competition. International revenue fell 30.1% in Q3, with significant drops in Africa (-40.7%) and Europe/Middle East/Russia (-30.6%).
- Improved Net Loss: Net loss improved significantly to $25.7 million in Q3 2010 from $39.4 million in Q3 2009. The YTD net loss was $41.4 million compared to $351.6 million in the prior year. The prior year's loss was heavily impacted by $279.0 million in goodwill impairment and $22.0 million in trade name impairment charges, which did not recur in 2010.
- Gross Margin Expansion: Gross margin percentage improved to 15.2% in Q3 2010 from 10.4% in Q3 2009. This improvement occurred despite $16.9 million in product transition charges (including inventory provisions and facility impairments) recorded in the current quarter.
- Segment Performance: The North America segment reported an operating loss of $22.6 million (improved from $28.8 million), while the International segment reported an operating loss of $6.4 million (flat from prior year).
Outlook, Risks, and Unusual Items
- Product Transition Charges: The company recorded $16.9 million in charges during Q3 2010 to converge multiple microwave products onto a single platform. This included $7.9 million for legacy inventory provisions, $5.5 million for facility/equipment impairment, and $3.5 million for inventory purchase commitments. Management expects to incur an additional $2.8 million in restructuring charges to complete outsourcing of manufacturing.
- Tax Benefit: A one-time income tax benefit of $4.4 million was recognized in Q3 2010 due to a U.S. loss carryback under the Worker, Homeownership, and Business Assistance Act of 2009.
- Liquidity: As of April 2, 2010, the company held $140.5 million in cash and cash equivalents with $51.4 million available under a $70 million credit facility. Management believes these resources are sufficient for the next 12 months.
- Key Risks:
- Continued global economic downturn affecting customer spending and access to capital.
- Price erosion due to competition in the microwave transmission industry.
- Customer concentration: The MTN group in Africa accounted for 27% of Q3 revenue.
- Legal proceedings: A federal securities class action lawsuit remains pending regarding prior financial statement restatements.
Investor Verification Checklist
- Revenue Concentration: Verify the stability of the MTN group relationship, which represents a significant portion of international revenue.
- Product Transition Costs: Confirm the timeline and total cost associated with the convergence to a single product platform and the outsourcing of manufacturing.
- Inventory Levels: Review the $70.8 million inventory balance and the adequacy of the $52.8 million reserve given the shift away from legacy products.
- Credit Facility Covenants: Monitor compliance with the minimum liquidity coverage ratio (1.75 to 1) and maximum leverage ratio (3.00 to 1) covenants.
- Legal Exposure: Assess the potential financial impact of the ongoing securities class action litigation.