Aviat Networks, Inc. — Fiscal 2019 First-Quarter 10-Q Summary
Business context and reporting period
Aviat Networks designs, manufactures and supports wireless networking products, microwave radio systems, network management software and related professional services for telecommunications, private networks, government, transportation, utility, public safety and broadcast customers worldwide. The filing covers the 13 weeks ended September 28, 2018, compared primarily with the 13 weeks ended September 29, 2017.
The company operates in one reportable segment. Fiscal 2019 is scheduled to end June 28, 2019. The company adopted ASC 606 revenue recognition on June 30, 2018 using the modified retrospective method; prior-period amounts were not restated and are therefore not directly comparable.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $60.5 million | $56.2 million | 7.7% increase |
| Product revenue | $39.1 million | $35.1 million | 11.6% increase |
| Services revenue | $21.4 million | $21.1 million | 1.3% increase |
| Gross margin | $17.9 million | $17.3 million | 3.6% increase |
| Gross margin percentage | 29.6% | 30.8% | Down 1.2 points |
| Operating loss | $(1.5) million | $(1.2) million | Higher loss |
| Net loss attributable to Aviat | $(0.8) million | $(0.7) million | Higher loss |
| Diluted loss per share | $(0.14) | $(0.12) | Higher loss per share |
| Cash flow from operations | $(6.8) million | $4.9 million | $11.7 million unfavorable |
Product margin was 31.5%, compared with 32.5% in the prior-year quarter, while service margin was 26.2%, compared with 27.9%. The decline in consolidated margin was primarily attributed to a lower concentration of North American revenue and lower margins on certain installation projects.
At September 28, 2018, cash and cash equivalents were $28.4 million, or $28.7 million including restricted cash. Total assets were $159.2 million and total equity was $62.3 million. Accounts receivable and unbilled receivables were $50.9 million and $28.7 million, respectively. Inventories declined to $8.7 million from $21.3 million at June 29, 2018.
Debt consisted of $9.0 million outstanding under the Silicon Valley Bank revolving credit facility. The facility had $10.4 million of available credit, expires June 29, 2019, and includes financial covenants. Aviat stated that it was in compliance with the covenants at September 28, 2018. Management believes available cash, credit capacity and expected collections will fund anticipated working capital and capital expenditures for at least the next 12 months, but noted that future availability depends on covenant compliance and eligible receivables.
Material changes versus the prior comparable period
- Revenue increased $4.3 million, driven primarily by product sales and higher volume in Latin America and Asia Pacific.
- North American revenue decreased 10.4% because of the timing of customer project milestones; Europe and Russia revenue decreased 16.5% because of lower private-network sales.
- Latin America and Asia Pacific revenue increased 104.6%, primarily from higher sales to several mobile operator customers. Africa and Middle East revenue increased 5.1%.
- Gross margin dollars increased, but gross margin percentage declined from 30.8% to 29.6%.
- Restructuring charges increased to $0.8 million from nominal charges in the prior-year quarter. The company expects to substantially complete the current restructuring plan by the end of fiscal 2019.
- Operating cash flow shifted from a $4.9 million inflow to a $6.8 million outflow, primarily because of increases in accounts receivable and unbilled receivables and other working-capital movements.
- Interest and other expense were not material. Foreign-exchange losses recorded in costs of revenues were $0.2 million in the current quarter.
Guidance, outlook, risks and unusual items
Management anticipated a return to top-line growth in fiscal 2019, supported by an expanded solutions portfolio, broader addressable markets, customer expansion and expected demand associated with LTE and emerging 5G deployments. Management also expects increased managed-services opportunities and continued cost and process streamlining. No formal numerical revenue or earnings guidance was provided in the filing.
ASC 606 increased reported first-quarter revenue to $60.5 million; the company disclosed that revenue would have been approximately $49.9 million under the prior ASC 605 guidance. Adoption produced a $5.6 million net reduction to opening accumulated deficit, primarily related to bill-and-hold arrangements, professional-services revenue, variable consideration, allocation of deliverables and capitalization of commissions.
The company recorded a $1.6 million discrete tax benefit related to the release of a valuation allowance on a Brazil withholding-tax refund asset. It continues to maintain a full valuation allowance against U.S. deferred tax assets because future realization is not considered more likely than not.
Key risks include intense price and margin competition, customer and geographic concentration, project timing, collection and credit risk, foreign-exchange volatility, political and economic conditions in developing markets, supply-chain and subcontractor performance, customer acceptance of new products, financial covenant compliance, restructuring execution and the ability to sustain cash generation.
Future obligations included $5.8 million of minimum operating-lease payments, $18.2 million of supplier and contract-manufacturer purchase obligations, $0.7 million of software-license commitments and $55.9 million of outstanding commercial commitments not recorded on the balance sheet. The company also disclosed a $1.0 million Austrian customer claim for alleged product defects; the reasonably possible loss cannot currently be estimated, and no accrual was recorded.
The board’s $7.5 million stock-repurchase authorization remained in place. Aviat repurchased 23,579 shares for approximately $0.4 million during the quarter, leaving approximately $7.1 million available.
Important facts for investors to verify
- Assess comparable revenue and profitability using the ASC 606 adoption disclosures, because prior-period results were not retrospectively restated.
- Monitor accounts receivable, unbilled receivables and operating cash flow, which drove a significant quarterly cash outflow.
- Verify renewal or replacement plans for the $30.0 million credit facility before its June 29, 2019 expiration and monitor covenant compliance.
- Evaluate whether revenue growth in Asia Pacific and Latin America offsets weakness in North America and Europe.
- Track gross-margin recovery, particularly product mix and installation-project profitability.
- Review restructuring costs, expected fiscal 2019 completion and cash payments extending into fiscal 2020.
- Consider customer concentration: MTN Group and Globe represented 13% and 11% of quarterly revenue, respectively, and MTN represented 24% of accounts receivable.
- Review the Brazil tax refund, open tax audits, the Austrian product claim and $55.9 million of off-balance-sheet commercial commitments.