Aviat Networks, Inc. — Fiscal 2022 First-Quarter 10-Q Summary
Business Context and Reporting Period
Aviat Networks designs, manufactures, and sells wireless networking products, solutions, and services for mobile and fixed telephone providers, private networks, government, transportation, utilities, public safety, and broadcast customers. The filing covers the 13 weeks ended October 1, 2021, compared with the 13 weeks ended October 2, 2020. Fiscal 2022 ends July 1, 2022.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $73.2 million | $66.3 million | Up 10.4% |
| Product revenue | $50.8 million | $44.5 million | Up 14.4% |
| Services revenue | $22.3 million | $21.8 million | Up 2.2% |
| Gross margin | $26.1 million; 35.7% | $24.2 million; 36.6% | Margin down 0.9 points |
| Operating income | $6.8 million; 9.3% | $6.6 million; 9.9% | Up 3.8% |
| Net income | $4.7 million | $5.9 million | Down 21.1% |
| Diluted EPS | $0.39 | $0.54 | Down $0.15 |
| Cash flow from operations | $0.7 million | $4.2 million | Down $3.6 million |
Product margin was 37.2%, unchanged year over year, while service margin declined to 32.1% from 35.3%. The lower consolidated gross margin reflected inflationary pressures and supply-chain and logistics costs, partly offset by price increases and surcharges. Research and development expense increased 21.9% to $5.9 million, while selling and administrative expense declined 1.1% to $12.7 million. Restructuring charges were $0.7 million versus none in the prior-year quarter.
The income-tax provision increased to $2.2 million from $0.7 million. The effective tax rate was approximately 31.6% in the current quarter versus approximately 10.1% in the prior-year quarter, contributing to the decline in net income despite higher operating income.
At October 1, 2021, cash and cash equivalents were $47.3 million, compared with $47.9 million at July 2, 2021. Total assets were $308.9 million and total liabilities were $121.0 million. The company had no borrowings outstanding under its $25.0 million SVB revolving credit facility and had $22.5 million of available credit after outstanding letters of credit. The facility matures June 28, 2024, and the company was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased $6.9 million, led by North America, which grew 12.0% to $50.9 million, primarily from private-network projects and rural broadband sales.
- International revenue increased in Africa and the Middle East by 1.2%, Europe and Russia by 19.5%, and Latin America and Asia Pacific by 10.8%.
- Gross margin percentage decreased from 36.6% to 35.7%, primarily because of supply-chain, logistics, and inflationary costs.
- Operating income increased modestly despite higher research and development spending and new restructuring charges.
- Net income declined because the higher tax provision more than offset the increase in operating income.
- Operating cash flow fell to $0.7 million, principally because accounts receivable increased and working capital consumed cash.
- The company repurchased 22,543 shares for $0.7 million during the quarter; $1.9 million remained available under the repurchase authorization.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management anticipated revenue growth in fiscal 2022 and cited backlog, momentum across vertical markets, U.S. rural broadband and wireless internet opportunities, 5G investment, and international growth. The filing does not provide a quantitative revenue or earnings guidance range.
Management expects supply-chain and logistical challenges, inflationary pressures, and related margin impacts to continue until economic activity normalizes. Key risks include COVID-19 effects, component shortages and supplier performance, competitive pricing and margin erosion, customer concentration and payment timing, financial-covenant compliance, foreign-exchange exposure, global economic conditions, tariffs and trade restrictions, political and regulatory developments, and execution of restructuring and product-development initiatives.
The Fiscal 2021 restructuring plan is expected to reduce the workforce by approximately 30 employees through the second quarter of fiscal 2022. Restructuring liabilities totaled $3.0 million at October 1, 2021 and were expected to be paid within the next 12 months.
Contractual and contingent exposures included $43.8 million of supplier and contract-manufacturer purchase obligations, approximately $4.0 million of software-license obligations, and $64.0 million of commercial commitments, including performance guarantees and standby letters of credit, that were not recorded on the balance sheet. The company reported no material accrued legal-loss contingencies, although litigation and an Indian regulatory matter remain subject to uncertainty. A United Kingdom facility with a carrying value of $2.2 million was classified as held for sale, with sale expected by the end of the second fiscal quarter.
Remaining performance obligations were approximately $82.0 million, with approximately 70% expected to be recognized as revenue over the next 12 months. Advance payments and unearned revenue totaled $44.0 million, of which approximately 45% was expected to be recognized during the remainder of fiscal 2022.
Important Facts for Investors to Verify
- Whether revenue growth and backlog convert into sustained quarterly growth, particularly in North America, rural broadband, private networks, and 5G-related markets.
- Whether supply-chain, logistics, inflation, and service-delivery pressures further reduce gross and service margins.
- Whether working-capital needs, especially accounts receivable and unbilled receivables, improve sufficiently to restore operating cash flow.
- The effective tax rate and the sustainability of deferred-tax assets and net operating loss attributes.
- Compliance with the SVB credit-facility covenants and continued availability of the $22.5 million credit capacity.
- Execution, cash costs, and savings from the restructuring plan and the timing of the planned United Kingdom facility sale.
- Potential exposure from $64.0 million of commercial commitments, $43.8 million of purchase obligations, customer concentration, and unresolved legal or regulatory matters.
- The effect of continued stock repurchases on liquidity and share count.