Aviat Networks, Inc. — Fiscal 2019 Third-Quarter 10-Q Summary
Reporting period: The filing covers the 13 weeks ended March 29, 2019, and the nine months ended March 29, 2019. The filing is a quarterly report for fiscal 2019, although the requested metadata identifies it as “2018 Q3.” Results are unaudited. Aviat designs, manufactures, and supports wireless networking products, solutions, and services for telecommunications, government, utility, transportation, public safety, and other customers worldwide.
Key Financial Metrics
| Metric | Three Months Ended March 29, 2019 | Prior-Year Quarter | Nine Months Ended March 29, 2019 | Prior-Year Nine Months |
|---|---|---|---|---|
| Total revenue | $54.0 million | $62.1 million | $179.6 million | $180.0 million |
| Gross margin | $16.3 million; 30.1% | $18.1 million; 29.2% | $56.7 million; 31.5% | $57.3 million; 31.8% |
| Operating income (loss) | $(2.5) million | $(1.4) million | $(1.1) million | $0.3 million |
| Net income attributable to Aviat | $4.3 million | $(2.6) million | $5.9 million | $1.8 million |
| Diluted earnings per share | $0.78 | $(0.49) | $1.05 | $0.32 |
| Cash flow from operations | Not separately provided | Not separately provided | $5.3 million | $7.3 million |
- Quarterly revenue declined 13.0%, primarily from lower product and service volume. Nine-month revenue was essentially flat, down 0.2%.
- Quarterly product revenue decreased 14.9% and services revenue decreased 9.3%. For the nine-month period, product revenue increased 2.0%, while services revenue declined 3.9%.
- Quarterly gross margin percentage improved because of better product profitability and lower supply-chain costs, but nine-month gross margin percentage declined because of lower service margins.
- Research and development expense increased 12.5% in the quarter and 6.2% for the nine-month period due to increased product-development activity. Selling and administrative expense declined 9.1% and 2.7%, respectively, primarily because of lower variable compensation.
- Net income was substantially affected by a $6.8 million quarterly income-tax benefit, including a $7.1 million release of valuation allowance on certain U.S. deferred tax assets. The company reported a pretax loss for the quarter.
Geographic and Operating Changes
- Third-quarter revenue declined 10.0% in North America, 37.1% in Africa and the Middle East, and 8.6% in Europe and Russia. Latin America and Asia Pacific increased 21.8%.
- Nine-month revenue declined in North America, Africa and the Middle East, and Europe and Russia, but increased 49.0% in Latin America and Asia Pacific, primarily from higher Asia Pacific mobile-operator sales.
- Management cited customer project timing, fewer mobile-operator orders, completion of a large Middle East project in the prior year, competitive pricing pressure, and macroeconomic and currency-related factors as important influences.
- MTN Group represented 13% of quarterly revenue and 12% of nine-month revenue. Globe Telecom represented 12% of quarterly revenue. These customers also represented significant portions of accounts receivable.
Cash, Debt, Liquidity, and Capital Resources
- Cash, cash equivalents, and restricted cash were $36.3 million at March 29, 2019, compared with $37.8 million at June 29, 2018. Cash and cash equivalents on the balance sheet were $36.1 million.
- Operating cash flow for the first nine months was $5.3 million, compared with $7.3 million in the prior-year period. Capital expenditures were $4.1 million, and approximately $1.0 million of additional fiscal 2019 capital expenditures was expected.
- Debt under the Silicon Valley Bank credit facility was $9.0 million, with $9.8 million of availability at March 29, 2019. The facility was scheduled to expire June 29, 2019, and the outstanding borrowing was repaid in April 2019.
- The company was in compliance with its amended credit-facility covenants at March 29, 2019. Liquidity remained dependent on cash balances, operating collections, credit availability, and compliance with borrowing-base and financial-covenant requirements.
- The company repurchased 122,546 shares for approximately $1.9 million during the first nine months. Approximately $5.6 million remained available under the $7.5 million repurchase authorization.
Accounting, Outlook, Risks, and Unusual Items
- Aviat adopted ASC 606 revenue recognition on June 30, 2018 using the modified retrospective method. The adoption produced a $5.6 million net reduction to opening accumulated deficit, and prior periods were not retrospectively restated. Reported year-over-year revenue and earnings comparisons are therefore not fully comparable.
- Under ASC 606, reported nine-month revenue was $179.6 million versus $167.0 million on an ASC 605 basis; reported nine-month net income was $5.9 million versus $0.9 million on an ASC 605 basis. Investors should distinguish accounting adoption effects from underlying operating performance.
- Advance payments and unearned revenue totaled $26.6 million, of which approximately 25% was expected to be recognized as revenue in the following three months. Backlog and remaining performance obligations may be delayed or canceled.
- Restructuring charges were $0.8 million for the first nine months, with $1.8 million of restructuring liabilities outstanding at March 29, 2019. Management expected to substantially complete the current restructuring plan by fiscal year-end, with related payments expected to be completed by the end of fiscal 2020.
- Management expects continued demand for wireless backhaul capacity, LTE deployments, managed services, and future 5G-related opportunities, but also highlighted strong price competition, customer-concentration risk, international market volatility, supply-chain constraints, and uncertainty in customer spending and project timing.
- Outstanding off-balance-sheet commercial commitments were $59.0 million, including guarantees, standby letters of credit, and similar arrangements. Purchase obligations were $18.5 million, software-license commitments were approximately $1.4 million, and future operating lease payments totaled $6.5 million.
- The company disclosed an approximately $1.0 million Austrian customer claim alleging defective products. No loss was accrued because the outcome and reasonably possible loss could not be estimated.
- Foreign-currency forward contracts had a total notional value of $3.5 million. International operations, currency movements, political conditions, and customer credit and collection risks remain material exposures.
Investor Verification Checklist
- Verify the renewal, replacement, or other disposition of the $30.0 million SVB credit facility after its June 29, 2019 expiration.
- Assess whether the large quarterly tax benefit, including the deferred-tax valuation-allowance release, is recurring and whether the related deferred tax assets will ultimately be realized.
- Reconcile reported results under ASC 606 with comparable results under ASC 605 when evaluating revenue growth, margins, and earnings trends.
- Monitor customer concentration, especially MTN Group and Globe Telecom, and collection exposure reflected in accounts receivable.
- Evaluate cash conversion, unbilled receivables of $28.5 million, contract liabilities of $26.6 million, and the timing of backlog conversion.
- Review the $59.0 million of commercial commitments, restructuring payments, customer claim, guarantees, and other contingencies for potential cash requirements.