Aviat Networks, Inc. — Fiscal 2021 First-Quarter Form 10-Q Summary
Business context and reporting period
Aviat designs, manufactures, and sells wireless networking products, solutions, and services for telecommunications providers, private networks, government agencies, utilities, transportation, public safety, and other customers worldwide. The filing covers the 13-week quarter ended October 2, 2020, compared with the 13-week quarter ended September 27, 2019. Fiscal 2021 is expected to end July 2, 2021.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $66.3 million | $58.6 million | Up 13.1% |
| Product revenue | $44.5 million | $36.6 million | Up 21.5% |
| Services revenue | $21.8 million | $22.0 million | Down 0.9% |
| Gross profit | $24.2 million | $22.6 million | Up 7.5% |
| Gross margin | 36.6% | 38.5% | Down 1.9 percentage points |
| Operating income | $6.6 million | $1.5 million | Up $5.0 million |
| Net income | $5.9 million | $0.1 million | Up $5.9 million |
| Diluted EPS | $1.07 | $0.01 | Improved |
| Cash flow from operations | $4.2 million | $5.6 million | Down $1.4 million |
Product gross margin declined to 37.2% from 43.1%, primarily due to product and regional mix. Service gross margin improved to 35.3% from 30.8%. Research and development expense declined 7.1% to $4.8 million, while selling and administrative expense declined 12.3% to $12.8 million. The prior-year quarter included $1.2 million of restructuring charges; no restructuring charges were recorded in the current quarter.
Cash and cash equivalents were $36.2 million at October 2, 2020, down from $41.6 million at July 3, 2020. Total assets were $176.8 million and total equity was $75.9 million. The company repaid $9.0 million of short-term debt during the quarter and had no outstanding balance under the SVB Credit Facility at quarter-end. Available credit was $23.5 million, after $1.5 million of outstanding letters of credit. The facility matures June 28, 2021, and the company was in compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher product sales, North American private-network projects, mobile operator sales, and stronger Latin America and Asia Pacific sales.
- North America revenue increased 14.4% to $45.5 million; Latin America and Asia Pacific increased 64.2% to $8.0 million.
- Europe and Russia revenue decreased 33.6% to $2.3 million, principally due to lower mobile-operator sales. Africa and Middle East revenue was substantially unchanged.
- Operating profitability improved substantially because of higher revenue, cost-savings initiatives, lower selling and administrative and research and development expenses, and the absence of prior-year restructuring charges.
- Operating cash flow declined despite higher net income, primarily because working-capital changes consumed cash, including increases in unbilled receivables and accrued expenses.
- Cash decreased by $5.4 million, primarily reflecting the $9.0 million debt repayment, partly offset by operating cash flow and employee equity-plan proceeds.
- Restructuring liabilities declined from $2.7 million to $1.8 million. The remaining balance is expected to be paid during fiscal 2021.
Guidance, outlook, commentary, risks, and unusual items
Management anticipates modest revenue growth in fiscal 2021. The company cited a healthy North American backlog, continued momentum in private networks, rural broadband, wireless internet service providers, and potential investment supporting 5G deployments. Internationally, management remains more conservative because of lower capital spending and increased competition.
Remaining performance obligations were approximately $75.4 million at October 2, 2020; approximately 60% is expected to be recognized as revenue within the next 12 months. Advance payments and unearned revenue totaled $33.4 million, of which approximately 68% is expected to be recognized during the remainder of fiscal 2021.
COVID-19 had a minimal effect on supply-chain lead times and order fulfillment during the quarter, but management warned that future manufacturing restrictions, field-service limitations, customer-demand changes, and broader economic disruptions could cause delays or increased costs. Other material risks include competitive pricing and margin pressure, customer and geographic mix, supplier constraints, financial-covenant compliance, collection timing, foreign exchange, tariffs and trade restrictions, political instability, litigation, intellectual-property claims, and the ability to renew the SVB Credit Facility.
The company expects approximately $4.0 million of capital expenditures during the remainder of fiscal 2021, primarily for development and manufacturing equipment and information-technology infrastructure. Commercial commitments not recorded on the balance sheet totaled $58.7 million, including $23.5 million of supplier or contract-manufacturing purchase obligations and $1.4 million of software-license obligations. Management does not currently expect material payments under performance guarantees.
A $1.2 million Brazilian tax refund was received during the quarter. The company continues to maintain a partial valuation allowance against U.S. deferred tax assets, and realization of those assets is not assured. The Amended and Restated Tax Benefit Preservation Plan was subject to shareholder approval at the November 11, 2020 annual meeting. The stock repurchase program remained suspended, with $3.4 million available under the authorization.
Investor verification items
- Verify whether anticipated modest fiscal 2021 revenue growth is supported by backlog conversion and sustained North American demand.
- Monitor product gross-margin recovery, given the decline to 37.2% and continued competitive and mix pressures.
- Assess operating cash conversion and working-capital movements, particularly unbilled receivables, accounts receivable, and accrued expenses.
- Confirm renewal or replacement of the $25.0 million SVB Credit Facility before its June 28, 2021 maturity and continued covenant compliance.
- Track COVID-19 effects on suppliers, manufacturing, field services, customer spending, and international operations.
- Review the $58.7 million of commercial commitments, outstanding letters of credit, purchase obligations, and contingent legal and tax exposures.
- Evaluate the recoverability of U.S. deferred tax assets and the effect of future changes in tax valuation allowances on earnings.