Aviat Networks, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended April 3, 2020, compared with March 29, 2019. Although the request metadata references “2019 Q3,” the filing is Aviat’s fiscal 2020 third-quarter report. The quarter included 14 weeks versus 13 weeks in the prior-year quarter; the nine-month period included 40 weeks versus 39 weeks.
Business Context
Aviat designs, manufactures and sells wireless networking products, turnkey solutions and related services for telecommunications providers, private network operators, government agencies, utilities, transportation, public safety and other customers globally. The company operates as one reportable segment. North American private-network, rural broadband, wireless internet service provider and mobile-operator projects were key growth areas, while international markets faced lower capital spending and increased competition, particularly from Chinese vendors.
Financial Performance and Liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Total revenue | $61.4 million | $54.0 million | $176.0 million | $179.6 million |
| Gross margin | $22.0 million | $16.3 million | $62.8 million | $56.7 million |
| Gross margin percentage | 35.8% | 30.1% | 35.7% | 31.5% |
| Operating income (loss) | $1.2 million | $(2.5) million | $1.3 million | $(1.1) million |
| Net income (loss) | $0.7 million | $4.3 million | $(0.9) million | $5.9 million |
| Diluted EPS | $0.13 | $0.78 | $(0.16) | $1.05 |
| Cash flow from operations | Not separately provided | Not separately provided | $14.6 million | $5.3 million |
Product sales were $40.9 million in the quarter and $111.7 million year to date; services revenue was $20.4 million and $64.3 million, respectively. Product margins were 39.7% for the quarter and 38.7% year to date, while service margins were 27.9% and 30.5%, respectively.
- Cash and cash equivalents were $39.2 million at April 3, 2020, compared with $31.9 million at June 28, 2019. Including restricted cash, total cash was $39.5 million.
- Operating cash flow was $14.6 million for the first nine months, compared with $5.3 million in the prior-year period. Capital expenditures were $3.9 million, and approximately $1.4 million of additional capital expenditures were expected during the remainder of fiscal 2020.
- Debt consisted primarily of $9.0 million outstanding under the Silicon Valley Bank credit facility. Available credit was $14.5 million as of April 3, 2020, and the company was in compliance with its financial covenants.
- Total assets were $179.8 million and total liabilities were $112.8 million. Current liabilities included $9.0 million of short-term debt, $21.5 million of current advance payments and unearned revenue, and $2.4 million of short-term lease liabilities.
- Customer contract liabilities totaled $29.7 million, with approximately 30% expected to be recognized as revenue during the remainder of fiscal 2020. Remaining performance obligations were approximately $71.8 million, of which approximately 60% was expected to be recognized over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 13.6%, primarily from North America, while nine-month revenue declined 2.0% because North American growth was more than offset by lower international revenue.
- North American revenue increased 30.3% in the quarter and 21.2% year to date. Africa and the Middle East declined 16.7% and 26.6%, Europe and Russia declined 42.8% and 24.8%, and Latin America and Asia Pacific increased 17.6% in the quarter but declined 28.8% year to date.
- Gross margin percentage improved substantially, reflecting a shift toward higher-margin markets and improved margins on certain projects. The improvement was partly offset by increased supply-chain costs.
- Operating income improved from a loss to income in both the quarter and nine-month period, despite higher selling and administrative expense and restructuring charges.
- Quarterly net income declined from $4.3 million to $0.7 million, and year-to-date results shifted from $5.9 million of net income to a $0.9 million loss. The prior-year results benefited from a $6.8 million quarterly tax benefit and a $1.6 million discrete tax benefit related to a Brazilian withholding-tax credit.
- Research and development expense decreased 8.9% in the quarter and 3.4% year to date. Selling and administrative expense increased 13.6% in the quarter and 7.1% year to date.
- Restructuring charges increased to $0.6 million in the quarter and $2.2 million year to date, compared with none and $0.8 million, respectively, in the prior-year periods.
- The company repurchased 26,484 shares for approximately $0.4 million during the quarter and suspended its repurchase program in February 2020. Approximately $3.4 million remained authorized.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2020 revenue to be higher in North America, subject to customer budgets, project timing and field-service execution, while maintaining a conservative outlook for international revenue.
- COVID-19 had a minimal effect on supply-chain lead times and order fulfillment during the reported quarter, but management warned of potential future manufacturing, logistics, field-service and customer-demand disruptions. The company’s manufacturing sites remained operational, with remote work, social distancing and enhanced safety protocols implemented.
- On April 21, 2020, the company entered into a $5.9 million Paycheck Protection Program loan and received the proceeds on April 22. After subsequent SBA guidance concerning public-company eligibility, the company repaid the principal and interest.
- On May 4, 2020, the company amended its SVB credit facility to extend its expiration date to June 28, 2021. The facility includes quarterly financial covenants and collateral requirements; a covenant breach could impair liquidity.
- The company approved additional restructuring actions to reduce costs and improve profitability. Restructuring liabilities totaled approximately $1.8 million at April 3, 2020, with approximately $1.5 million expected to be paid within 12 months.
- Off-balance-sheet commercial commitments totaled $57.7 million, including purchase obligations of $22.7 million and software-license obligations of approximately $2.1 million. Outstanding customer-related commercial commitments were not recorded as liabilities because significant payments were not considered probable.
- Material risk factors include COVID-19, international political and economic conditions, customer spending and payment timing, supply-chain constraints, competition and pricing pressure, foreign-exchange exposure, financial-covenant compliance, customer concentration, restructuring execution and litigation.
- Pending matters include an approximately $1.0 million Austrian customer claim for alleged product defects and ongoing Indian regulatory proceedings. The filing states that potential losses beyond amounts accrued cannot currently be estimated.
Most Important Facts for Investors to Verify
- Whether COVID-19 materially affected subsequent-quarter revenue, backlog conversion, field services, supply-chain performance and customer collections.
- Whether North American growth and improved gross margins offset continued international weakness and competitive pricing pressure.
- Compliance with SVB credit-facility covenants, borrowing-base availability and the facility amendment extending maturity to June 2021.
- Cash conversion, inventory growth, accounts receivable collections and the sustainability of positive operating cash flow.
- The timing and total cost of restructuring plans and whether expected cost savings are realized.
- Final treatment and forgiveness status of the repaid PPP loan, as well as any related tax or regulatory consequences.
- Developments in the Austrian product claim, Indian regulatory proceedings, tax audits and other contingencies.