Aviat Networks, Inc. — Fiscal 2021 Form 10-K
Reporting period: The filing is an annual report for the 52-week fiscal year ended July 2, 2021. The supplied metadata references 2020 Q4, but the filing also provides fiscal 2021 fourth-quarter data for the quarter ended July 2, 2021 and fiscal 2020 comparisons.
Business context
Aviat designs, manufactures and sells microwave and millimeter-wave wireless networking products, software, professional services and support for communications service providers and private network operators. Key demand drivers include 5G and LTE deployments, rural broadband, network modernization, public safety, utilities and other mission-critical applications. The company operates as one reportable segment and uses outsourced manufacturing partners in the United States and Asia.
Fiscal 2021 revenue was concentrated in North America, which represented approximately 67% of total revenue, compared with 64% in fiscal 2020. The United States alone represented 66.1% of fiscal 2021 revenue.
Financial performance and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Revenue | $274.9 million | $238.6 million | 15.2% increase |
| Product revenue | $185.8 million | $153.8 million | 20.8% increase |
| Services revenue | $89.1 million | $84.8 million | 5.0% increase |
| Gross margin | $102.6 million; 37.3% | $84.7 million; 35.5% | Margin increased 180 basis points |
| Operating income | $22.2 million | $3.4 million | Substantial improvement |
| Net income | $110.1 million | $0.3 million | Primarily benefited from tax valuation allowance release |
| Diluted EPS | $9.42 | $0.02 | Includes tax-related benefit |
| Cash flow from operations | $17.3 million | $17.5 million | Slight decrease |
| Capital expenditures | $2.8 million | $4.6 million | Decrease |
Fiscal 2021 net income included a discrete $92.2 million release of valuation allowances on U.S. federal and state deferred tax assets. Excluding this unusual tax benefit, the filing does not provide a separately stated adjusted net income figure.
Fourth-quarter fiscal 2021 revenue was $71.7 million, gross margin was $25.9 million, operating income was $3.7 million and net income was $2.8 million. Fourth-quarter fiscal 2020 revenue was $62.7 million, gross margin was $21.9 million, operating income was $2.1 million and net income was $1.1 million.
Cash and cash equivalents were $47.9 million at July 2, 2021. The company also reported $22.7 million of available capacity under its $25.0 million Silicon Valley Bank revolving credit facility, after outstanding letters of credit. No borrowings were outstanding under that facility at year-end. Short-term debt declined from $9.0 million at July 3, 2020 to zero.
Total assets increased to $297.7 million from $179.8 million, primarily reflecting the deferred tax asset recognized after the valuation allowance release. Total liabilities were $114.3 million and equity was $183.3 million at July 2, 2021.
Material changes versus the prior comparable period
- Revenue increased 15.2%, led by North America, Africa and the Middle East, product sales, private-network business, rural broadband and higher mobile-operator demand.
- North America revenue increased 20.7% to $183.1 million; Africa and the Middle East increased 17.1% to $44.0 million.
- Europe and Russia revenue declined 20.9% to $8.8 million, primarily due to lower mobile-operator sales.
- Gross margin improved to 37.3% from 35.5%, helped by product mix, private-network business, Aviat Store sales, multiband products and software sales.
- Research and development expense increased 13.1% to $21.8 million to support new products, while selling and administrative expense decreased 2.9% to $56.3 million.
- Restructuring charges declined to $2.3 million from $4.0 million, although a new fiscal 2021 restructuring plan generated $2.4 million of charges.
- Inventory increased to $23.4 million from $14.0 million, partly to secure component parts amid shortages. Unbilled receivables increased to $37.5 million from $28.1 million.
- Backlog increased to approximately $225 million from $210 million. Management expected to substantially deliver the July 2, 2021 backlog during fiscal 2022, subject to cancellations, delivery changes and customer commitments.
- The company repurchased approximately $0.8 million of common stock during fiscal 2021, with $2.6 million remaining under the authorization. No cash dividends are planned.
Guidance, outlook, risks and unusual items
Management anticipated further revenue growth in fiscal 2022, citing a strong backlog, continued momentum across verticals, U.S. rural broadband opportunities and evidence of 5G investment by U.S. service-provider customers. Planned fiscal 2022 capital expenditures were $5.0 million to $6.0 million.
On August 25, 2021, the board approved an additional restructuring plan. The company expected approximately $0.8 million of severance charges in the first quarter of fiscal 2022 and approximately $0.6 million of annual net savings, primarily to support growth initiatives.
- COVID-19 continued to create risks involving supply-chain constraints, component availability, field-service execution, customer demand and economic activity. The fiscal 2021 impact on supply-chain lead times and order fulfillment was described as minimal, but future effects remained uncertain.
- Competition and customer consolidation continued to pressure pricing and margins, particularly in international markets.
- The company depends on contract manufacturers and certain sole or limited-source suppliers for key components, including specialized integrated circuits.
- The SVB credit facility contains minimum liquidity and profitability covenants, collateral requirements and restrictions on acquisitions, indebtedness, liens, investments and certain restricted payments.
- Outstanding commercial commitments totaled approximately $583.3 million, primarily performance surety bonds and standby letters of credit. The company stated that significant future payouts were not considered probable based on historical experience.
- Contractual cash obligations totaled $44.2 million, including purchase obligations, software commitments, leases and uncertain tax positions.
- An Indian regulatory enforcement matter remained unresolved; only an immaterial probable loss had been accrued, and the company could not estimate any excess loss range.
- The company retained significant tax attributes, including U.S. federal net operating loss carryforwards, but their utilization may be limited by ownership-change rules and other tax considerations.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Revenue recognition based on estimated costs to complete long-term service contracts was identified as the critical audit matter.
Investor verification points
- Separate the $92.2 million deferred-tax valuation allowance release from recurring operating profitability and cash generation.
- Verify fiscal 2022 revenue conversion from the $225 million backlog and the $70.4 million of remaining long-term field-service performance obligations.
- Monitor gross-margin sustainability amid pricing pressure, customer concentration and product-mix changes.
- Assess inventory growth, component availability, unbilled receivables and customer collections for working-capital risk.
- Review compliance with SVB credit-facility covenants and the availability of the $22.7 million borrowing capacity.
- Evaluate exposure to the $583.3 million of off-balance-sheet commercial commitments and performance guarantees.
- Track the additional fiscal 2022 restructuring charge and whether the projected $0.6 million annual savings are realized.
- Review the recoverability and expiration profile of tax attributes, uncertain tax positions and the remaining deferred-tax valuation allowance.