Aviat Networks, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2023. The requested “2022 Q4” period does not match this filing; the filing is an annual report covering fiscal 2023, with comparisons to fiscal 2022 and fiscal 2021. Aviat designs, manufactures and sells microwave and wireless access networking products, software and related professional services to communications service providers and private network operators globally.
Financial performance and key metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Revenue | $346.6 million | $303.0 million | 14.4% increase |
| Product sales | $239.3 million | $208.1 million | 15.0% increase |
| Services revenue | $107.3 million | $94.9 million | 13.1% increase |
| Gross profit | $124.2 million | $109.2 million | 13.7% increase |
| Gross margin | 35.8% | 36.1% | Down 0.3 percentage points |
| Operating income | $26.4 million | $28.7 million | 8.1% decrease |
| Net income | $11.5 million | $21.2 million | 45.5% decrease |
| Diluted EPS | $0.97 | $1.79 | Decrease |
| Operating cash flow | $(1.6) million | $2.8 million | Turned negative |
Revenue growth was driven by international share gains, the July 2022 acquisition of Redline Communications Group, higher mobile-operator and private-network sales, and a significant Asia-Pacific customer win. North American revenue increased 1.1%, while Africa and the Middle East increased 27.1%, Europe increased 44.7%, and Latin America and Asia Pacific increased 53.1%.
Gross margin was broadly stable, as the benefit of higher volumes and Redline was offset by a greater mix of lower-margin international revenue. Operating profitability declined because selling and administrative expense rose 21.1% to $69.8 million, reflecting Redline-related expenses, higher share-based compensation and merger and acquisition costs. Restructuring charges increased to $3.0 million from $0.2 million. Other expense was $3.3 million, compared with other income of $1.7 million in fiscal 2022, primarily due to marketable-securities losses, higher interest expense and foreign-exchange losses. The effective tax rate increased to 50.1% from 30.5%, partly due to Redline acquisition, restructuring and integration-related tax expense.
Liquidity, cash flow, debt and balance sheet
- Cash and cash equivalents were $22.2 million at June 30, 2023, down from $36.9 million at July 1, 2022. Total cash, cash equivalents and restricted cash were $22.5 million.
- Operating cash flow was negative $1.6 million, primarily reflecting increases in accounts receivable, unbilled receivables and inventory.
- Investing cash outflow was $11.9 million, including $15.8 million for the Redline acquisition and $5.3 million of capital expenditures, partly offset by $9.2 million of proceeds from marketable securities.
- The new Wells Fargo credit facility provides a $40.0 million revolving facility and a $50.0 million delayed-draw term loan, both maturing May 8, 2028. No borrowings were outstanding at fiscal year-end, and $40.0 million was available under the revolver.
- The term loan is intended to fund the $45.0 million cash component of the pending NEC transaction. The Company was in compliance with its credit-facility covenants at June 30, 2023.
- Total assets were $364.5 million and total liabilities were $144.4 million. Accounts receivable and unbilled receivables totaled $160.2 million, while advance payments and unearned revenue totaled $51.7 million.
- Backlog was approximately $289 million at June 30, 2023, compared with $245 million at July 1, 2022. Management expects to substantially deliver the backlog during fiscal 2024, but orders may be delayed or cancelled.
- The Company does not pay cash dividends and does not intend to do so in the foreseeable future. No shares were repurchased during fiscal 2023; $7.3 million remained available under the repurchase authorization.
Material changes versus the prior comparable period
- Revenue increased 14.4%, with international revenue rising from approximately 34% of total revenue in fiscal 2022 to approximately 42% in fiscal 2023.
- Redline Communications was acquired on July 5, 2022, for total consideration of approximately $20.4 million, including $15.8 million net of acquired cash. The acquisition added $5.1 million of goodwill and $9.0 million of net finite-lived intangible assets at year-end.
- Operating income and net income declined despite revenue growth because of higher selling and administrative expenses, restructuring costs, other expense and income taxes.
- Cash flow from operations declined from positive $2.8 million to negative $1.6 million, while accounts receivable rose to $101.7 million and unbilled receivables rose to $58.6 million.
- The Company replaced its prior Silicon Valley Bank credit facility with the new Wells Fargo-led secured credit facility. It borrowed and repaid $36.5 million under the new revolver during fiscal 2023 and borrowed and repaid $65.7 million under the former SVB facility.
- Restructuring charges primarily related to the Redline acquisition and workforce reductions outside the United States. The remaining restructuring liability was $0.6 million and was expected to be paid during the next 12 months.
Guidance, outlook, risks and unusual items
The filing does not provide specific numerical revenue, earnings or margin guidance. Management expects continued demand from 5G, mobile backhaul, rural broadband and private networks, but expects supply-chain, logistics and inflationary challenges to continue. Supply-chain conditions had recently improved, although certain components remained on allocation and future order-fulfillment delays remained possible.
- Pending NEC transaction: Aviat agreed to acquire certain NEC wireless backhaul assets and liabilities for approximately $70 million, consisting of $45 million in cash, subject to adjustments, and $25 million in Aviat common stock. Closing was expected in the fourth quarter of calendar 2023 and remained subject to regulatory and other conditions. The agreement could terminate if conditions were not satisfied by February 9, 2024.
- Execution and integration: The NEC transaction and Redline integration may require substantial management attention, increase expenses and create risks relating to customer retention, systems integration, personnel and realization of expected synergies.
- Working-capital risk: The increase in receivables and unbilled receivables contributed to negative operating cash flow. Customers may request longer payment terms or vendor financing, particularly in emerging markets.
- Customer and geographic concentration: The United States represented 57.3% of fiscal 2023 revenue, while international sales represented approximately 43%. A related group of entities represented approximately 14% of accounts receivable at year-end.
- Supply-chain exposure: Aviat outsources manufacturing and relies on sole or limited sources for certain specialized components, including some integrated circuits. Trade restrictions, geopolitical tensions and potential Taiwan-related disruptions could affect supply.
- Contract and accounting estimates: Service revenue recognized over time depends on estimated costs to complete. This was the filing’s critical audit matter. Changes in project costs or progress estimates could affect revenue and profit.
- Commitments and contingencies: Purchase and other contractual obligations totaled $40.8 million, and commercial commitments, including standby letters of credit and surety bonds, totaled $61.0 million. The Company reported no material legal proceedings, although an Indian regulatory matter remains open and has only an immaterial accrual.
- Tax matters: The Company reported $16.1 million of unrecognized tax benefits, $37.0 million of deferred-tax valuation allowance and significant federal and foreign tax-loss carryforwards. Some tax attributes begin to expire in fiscal 2024.
Most important facts for investors to verify
- Whether the NEC transaction closed on expected terms, including the $45 million cash payment, $25 million equity issuance, financing and regulatory approvals.
- Whether revenue growth converts into sustainable operating cash flow, particularly as receivables, unbilled receivables and inventory remain elevated.
- Whether international growth and Redline integration improve earnings without further margin pressure, restructuring charges or acquisition-related costs.
- The Company’s ability to remain within the new credit facility’s fixed-charge coverage and leverage covenants after funding the NEC transaction.
- Backlog conversion, customer cancellations or delivery delays, and the extent to which the $289 million backlog is realized in fiscal 2024.
- Exposure to supply constraints, inflation, foreign exchange, customer credit deterioration and geopolitical or trade disruptions.
- Changes in service-contract cost estimates, deferred tax asset realizability, tax audits and unrecognized tax benefits.