Aviat Networks, Inc. Form 10-Q Summary
Business context and reporting period
Aviat Networks designs, manufactures and sells wireless networking products, microwave transmission systems, network management software and related services to telecommunications, government, utility, transportation and other customers globally. The filing covers the quarter ended December 26, 2014, the second quarter of fiscal 2015, and the six months ended December 26, 2014. Comparisons are to the quarter and six months ended December 27, 2013.
Key financial metrics
| Metric | Quarter ended Dec. 26, 2014 | Quarter ended Dec. 27, 2013 | Six months ended Dec. 26, 2014 | Six months ended Dec. 27, 2013 |
|---|---|---|---|---|
| Total revenue | $92.5 million | $85.8 million | $174.9 million | $179.2 million |
| Gross margin | $25.2 million; 27.2% | $21.3 million; 24.8% | $47.0 million; 26.9% | $44.4 million; 24.8% |
| Operating loss | $(2.5) million | $(10.7) million | $(8.1) million | $(24.1) million |
| Net loss | $(3.3) million | $(9.9) million | $(9.0) million | $(23.5) million |
| Net loss per share | $(0.05) | $(0.16) | $(0.14) | $(0.38) |
| Cash flow from operations | Not separately provided | Not separately provided | $(9.1) million | $(17.6) million |
Product revenue was $58.0 million in the quarter and $113.9 million year to date; services revenue was $34.5 million and $61.0 million, respectively. Research and development expense declined 31.9% year over year to $6.4 million in the quarter and $13.0 million year to date. Selling and administrative expense declined 4.5% in the quarter and 9.0% year to date.
At December 26, 2014, cash and cash equivalents were $38.7 million, down from $48.8 million at June 27, 2014. Total current assets were $209.3 million and total current liabilities were $133.2 million. Debt consisted of $9.0 million outstanding under the Silicon Valley Bank credit facility, with $13.2 million of additional availability after borrowing-base and letter-of-credit limitations. Stockholders’ equity was $91.5 million.
Material changes versus the prior comparable period
- Quarterly revenue increased 7.8%, driven primarily by North America, which rose 30.8%, and Europe and Russia, which rose 17.0%.
- Six-month revenue declined 2.4%, reflecting lower sales in Africa and the Middle East, down 24.1%, and Latin America and Asia Pacific, down 18.9%.
- Gross margin improved to 27.2% for the quarter and 26.9% year to date, compared with 24.8% in both prior comparable periods.
- The operating loss narrowed substantially because of improved gross profit, lower research and development and selling and administrative costs, and reduced restructuring charges.
- Restructuring charges declined to zero for the quarter, including a $0.2 million facilities charge offset by a $0.2 million severance credit. Six-month restructuring charges were $1.5 million versus $4.8 million.
- Operating cash use improved to $9.1 million year to date from $17.6 million, but cash declined by $10.1 million after capital expenditures, foreign exchange effects and other financing activity.
- Foreign currency translation losses reduced accumulated other comprehensive income by $3.3 million year to date, and quarterly net foreign exchange loss increased to $0.9 million from $0.2 million.
Guidance, outlook, commentary, risks and unusual items
Management expects continued demand for mobile backhaul capacity over the long term but anticipates quarter-to-quarter fluctuations and seasonal weakness in the third fiscal quarter following customers’ year-end capital spending. Management expects to provide additional managed services, which may defer revenue recognition while creating upfront and ongoing costs. Capital expenditures of approximately $3.3 million were expected during the remainder of fiscal 2015.
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. This assessment is subject to continued operating cash generation, covenant compliance and achievement of expected operational improvements.
- The $9.0 million credit-facility borrowing was classified as current because of uncertainty regarding future covenant compliance and subjective lender acceleration provisions, although the company was in compliance at quarter end.
- The credit facility includes minimum adjusted quick-ratio and profitability covenants, collateral requirements and restrictions on additional indebtedness, liens, acquisitions and other actions.
- The company had $4.5 million of restructuring liabilities, including $2.3 million current, and $17.0 million of future operating lease payments.
- Outstanding purchase obligations were $31.6 million, and unrecorded commercial commitments were $49.3 million.
- The Singapore subsidiary is evaluating historical compliance with export regulations. Potential fines or penalties cannot currently be estimated.
- Management reported continuing material weaknesses in internal control over financial reporting involving COSO components, manual journal entries, account reconciliations and percentage-of-completion revenue recognition. Disclosure controls were therefore not effective as of December 26, 2014.
- The MTN Group accounted for more than 10% of revenue and accounts receivable, creating customer concentration risk.
- Foreign currency forward contracts had a total notional amount of $21.8 million; a 10% adverse currency movement was estimated to affect their fair value by approximately $2.2 million.
Important facts for investors to verify
- Progress in remediating the identified material weaknesses and whether future filings report effective internal and disclosure controls.
- Compliance with the SVB credit-facility covenants and the amount of borrowing-base availability as operating losses continue.
- Quarterly and year-to-date cash burn, collections of receivables and the effect of unbilled project costs on liquidity.
- Whether North American growth offsets continued weakness in Africa, the Middle East and Latin America.
- Completion and cash cost of the Fiscal 2014-2015 restructuring plan.
- Outcome of the Singapore export-compliance review and any resulting penalties or remediation costs.
- Exposure to MTN Group concentration, foreign exchange volatility, competitive price pressure and seasonal third-quarter weakness.