AVIAT Networks, Inc. Form 10-Q Summary
Reporting period: Quarter ended September 26, 2014, the first quarter of fiscal 2015. The request metadata identifies “2013 Q3,” but the filing itself reports fiscal 2015 first-quarter results and compares them with the quarter ended September 27, 2013.
Business Context
Aviat designs, manufactures and supports wireless networking products and services, including digital microwave systems, network management software, third-party networking equipment and turnkey support services. Customers include communications providers, private network operators, governments, utilities, transportation companies and public safety agencies. The company operates globally in one reportable segment.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $82.4 million | $93.4 million | Down 11.8% |
| Product revenue | $55.9 million | $63.5 million | Down 12.0% |
| Services revenue | $26.5 million | $29.9 million | Down 11.4% |
| Gross profit | $21.8 million | $23.1 million | Down 5.6% |
| Gross margin | 26.5% | 24.7% | Up 1.8 percentage points |
| Operating loss | $(5.6) million | $(13.4) million | Improved $7.8 million |
| Net loss | $(5.7) million | $(13.6) million | Improved $7.9 million |
| Net loss per share | $(0.09) | $(0.22) | Improved $0.13 |
| Cash used in operations | $(4.7) million | $(4.6) million | Comparable use |
Operating expenses declined to $27.4 million from $36.5 million, including research and development expense of $6.6 million, selling and administrative expense of $19.2 million, and restructuring charges of $1.5 million. The operating margin was approximately negative 6.8%, compared with negative 14.3% in the prior-year quarter.
Cash and cash equivalents were $42.4 million at September 26, 2014, down from $48.8 million at June 27, 2014. Total assets were $257.8 million and stockholders’ equity was $96.3 million. Inventories increased to $43.3 million from $38.1 million, while receivables increased to $84.5 million from $77.2 million.
Debt consisted of $6.0 million outstanding under the Silicon Valley Bank credit facility. The facility provided $26.1 million of available credit after considering the borrowing base, existing borrowings and letters of credit. Although Aviat was in compliance with its financial covenants, the borrowing was classified as current because of uncertainty regarding future covenant compliance and subjective acceleration provisions.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $11.0 million, primarily because of lower sales in Africa and the Middle East, Latin America and Asia Pacific. North American revenue increased 14.5% to $38.6 million.
- Africa and Middle East revenue declined 33.5% to $24.6 million as customers managed capital spending more closely.
- Gross margin percentage improved because of stronger North American product and service margins, reduced supply-chain costs and favorable mix, partially offset by lower sales volume.
- Research and development expense decreased 32.0%, and selling and administrative expense decreased 13.5%, primarily due to lower personnel, share-based compensation and incentive costs.
- Restructuring charges declined to $1.5 million from $4.5 million. The current quarter included $1.3 million of facilities costs and $0.2 million of employee termination costs.
- Operating cash use remained elevated. Working-capital uses included $7.4 million of increased receivables and $6.7 million of increased inventories, partly offset by $8.2 million of customer advances and unearned income.
- Comprehensive loss was $6.9 million, including a $1.3 million foreign-currency translation loss.
Guidance, Outlook, Risks and Unusual Items
- Management’s strategy was to accelerate innovation, optimize the product portfolio, reduce costs, improve operating efficiency and build a sustainable profitable business model. The filing does not provide specific revenue or earnings guidance.
- Management expects approximately $5.1 million of capital expenditures during the remainder of fiscal 2015, primarily for product-development equipment and customer managed services.
- Management expected existing cash, available credit and customer collections to fund working capital and capital expenditures for the next 12 months, but noted that this depends on operating cash generation, covenant compliance and anticipated operational improvements.
- The fiscal 2014–2015 restructuring plan was expected to incur total costs of approximately $8.6 million, with approximately $1.2 million of additional costs estimated as of September 26, 2014. Most remaining restructuring activities were expected to be completed by the end of fiscal Q2 2015.
- Restructuring liabilities totaled $5.3 million, including $2.5 million classified as current.
- MTN Group accounted for more than 10% of revenue and accounts receivable. Loss of this customer relationship could materially affect results.
- The company faces competitive pricing and margin pressure, fluctuating customer spending, geographic and product-mix volatility, foreign-exchange risk, supply-chain constraints, political risk and dependence on customer collections.
- A Singapore subsidiary was evaluating historical compliance with export regulations. Potential fines or penalties could not be estimated.
- Aviat continued to report material weaknesses in internal control over financial reporting involving the control environment, risk assessment, monitoring, manual journal entries, account reconciliations and revenue recognition for percentage-of-completion contracts. Management concluded that disclosure controls and procedures were not effective.
- The company had $18.8 million of future minimum operating lease payments, $36.7 million of supplier purchase obligations and $48.0 million of outstanding commercial commitments not recorded on the balance sheet.
- The discontinued WiMAX business contributed $0.2 million of income, including a $0.1 million gain related to the prior divestiture. No WiMAX revenue was reported.
Important Facts for Investors to Verify
- Whether revenue weakness, particularly in Africa and Latin America, persists and whether North American growth can offset it.
- Whether gross-margin improvement is sustainable or primarily reflects temporary geographic and product mix.
- Progress and cash costs of the restructuring plans and achievement of expected cost reductions.
- Future operating cash flow, working-capital requirements and the company’s ability to maintain compliance with credit-facility covenants.
- The impact of the $6.0 million current debt classification and the availability of the $26.1 million credit facility.
- Remediation and auditor validation of the identified material weaknesses in internal controls.
- Customer concentration involving MTN Group and collection risk associated with large receivable balances.
- The outcome of the Singapore export-compliance review and any resulting fines or penalties.