AVIAT NETWORKS, INC. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, ended September 28, 2012; comparable quarter ended September 30, 2011. The quarter included 13 weeks. Aviat designs, manufactures and services wireless networking solutions for telecommunications operators, enterprises, government agencies, utilities and other customers globally.
Financial Performance and Position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $115.0 million | $111.4 million | +3.2% |
| Product revenue | $83.8 million | $89.1 million | Down $5.3 million |
| Services revenue | $31.2 million | $22.3 million | +39.9% |
| Gross margin | $33.7 million; 29.3% | $32.7 million; 29.4% | Essentially stable |
| Operating income (loss) | $1.3 million | $(2.5) million | Improved $3.8 million |
| Loss from continuing operations | $(0.8) million | $(3.7) million | Improved $2.9 million |
| Net loss | $(2.2) million | $(6.8) million | Improved $4.6 million |
| Basic and diluted net loss per share | $(0.04) | $(0.12) | Improved |
| Net cash used in operating activities | $(9.2) million | $(6.2) million | Use increased $3.0 million |
Gross margin percentage was 29.3%, operating margin was approximately 1.1%, and net margin was approximately negative 1.9%. Selling and administrative expense declined 7.7% to $22.7 million, while research and development expense increased 3.3% to $9.3 million. Restructuring charges declined to $0.3 million from $0.9 million.
At September 28, 2012, cash and cash equivalents were $85.1 million, down from $96.0 million at June 29, 2012. Total current assets were $302.1 million versus $304.6 million, and total stockholders’ equity was $157.6 million. Receivables increased to $109.3 million from $90.7 million, primarily reflecting late-quarter shipments. Inventories declined to $52.9 million from $56.8 million.
Total debt was approximately $11.8 million, consisting of $6.0 million of advance borrowings and $5.8 million outstanding under a term loan. The company had $21.5 million of available credit under its $40.0 million Silicon Valley Bank facility, after borrowings and letters of credit. The company was in compliance with its liquidity and profitability covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, driven by services growth and higher sales in North America and Africa and the Middle East; product sales declined.
- Services represented 27% of revenue versus 20% in the prior-year quarter, with improved service execution and fixed-cost absorption.
- North America revenue increased 4.3%, and Africa and Middle East revenue increased 14.8%; Latin America and Asia Pacific revenue declined 22.4%; Europe and Russia revenue was unchanged.
- Operating results improved due primarily to lower selling and administrative expense, reduced restructuring charges and higher gross profit.
- Net loss from discontinued WiMAX operations decreased to $1.4 million from $3.1 million. The prior-year period included a $2.0 million loss on disposition; the current-period loss primarily reflected a write-down of deferred cost of sales not transferred to the buyer.
- Operating cash flow worsened despite the lower net loss, primarily because receivables increased by $19.7 million and accrued expenses declined. Capital expenditures were $1.3 million, and $1.0 million of debt principal was repaid.
- Income tax expense increased to $1.5 million from $1.0 million, primarily because of a $1.4 million increase in an unrecognized tax benefit liability related to an ongoing Nigerian tax audit.
Outlook, Risks and Unusual Items
Management expects continued demand for mobile backhaul capacity, LTE-related deployments and network support services. Management’s stated priorities are to accelerate innovation, optimize the product portfolio, improve cost and operational efficiency, grow revenue and establish a sustainable profitable business model. The company expects seasonal variability, including historically lower third-quarter revenue and orders following customers’ year-end capital spending.
Management expects to spend approximately $10.0 million on capital expenditures during the remainder of fiscal 2013, primarily for new-product development equipment and information-technology infrastructure. It expects to incur approximately $1.1 million of additional restructuring charges in fiscal 2013 and complete the remaining Fiscal 2011 Plan activities during the year.
Management believes existing cash, available credit and expected customer collections will satisfy working-capital and capital-expenditure needs for the next 12 months and the foreseeable future. However, cash is concentrated outside the United States: $68.2 million, or 80.1% of total cash, was held by non-U.S. entities, with practical repatriation limitations arising from withholding and other taxes.
- Key risks include competitive pricing pressure, customer and geographic concentration, order timing, global economic weakness, telecommunications-sector consolidation, supply-chain constraints, product-development execution, customer payment timing, foreign-exchange exposure and political conditions in international markets.
- MTN Group accounted for more than 10% of revenue in both periods and more than 10% of accounts receivable at September 28, 2012. Loss of this business could materially affect results.
- Foreign-exchange forward contracts had total notional value of $38.7 million. A 10% adverse currency movement was estimated to affect fair value by approximately $2.4 million, before offsets from underlying exposures.
- The company had $52.3 million of supplier and contract-manufacturer purchase obligations, $5.4 million of contractual capital and service obligations, and $53.1 million of off-balance-sheet commercial commitments, primarily guarantees and letters of credit.
- The company faces ongoing Nigerian and Singapore tax reviews. The Nigerian review had produced a tentative assessment, and the ultimate outcome was not clear from the filing.
- A derivative lawsuit was dismissed on September 27, 2012, with limited leave to amend. The plaintiff did not amend by October 18, 2012, but requested a stay and demanded that the board investigate certain claims.
Facts Investors Should Verify
- Whether the significant increase in receivables converted to cash after quarter-end and whether operating cash flow improves.
- Whether services growth and new products support sustained gross-margin improvement despite pricing pressure.
- Compliance with the SVB facility’s minimum liquidity and profitability covenants and the facility’s February 2014 expiration.
- The outcome and potential additional exposure from the Nigerian tax audit and other open tax years.
- The amount and timing of remaining restructuring charges and cash payments.
- Revenue concentration and collection exposure related to MTN Group and international customers.
- Whether management’s projected $10.0 million capital spending and stated liquidity expectations remain achievable.