Aviat Networks, Inc. — Form 10-Q Summary
Business context and reporting period
Aviat designs, manufactures and sells wireless networking products, digital microwave systems, network management software and related services globally. This filing covers the second quarter and first two quarters of fiscal 2016, ended January 1, 2016, with comparable periods ended December 26, 2014. The filing is dated February 10, 2016.
Key financial metrics
| Metric | Quarter ended Jan. 1, 2016 | Quarter ended Dec. 26, 2014 | Two quarters ended Jan. 1, 2016 | Two quarters ended Dec. 26, 2014 |
|---|---|---|---|---|
| Revenue | $70.4 million | $90.9 million | $150.0 million | $173.3 million |
| Gross margin | $16.4 million; 23.3% | $24.0 million; 26.4% | $37.4 million; 24.9% | $46.0 million; 26.5% |
| Operating loss | $5.0 million | $3.7 million | $6.6 million | $9.1 million |
| Net loss attributable to Aviat | $5.7 million | $4.5 million | $6.9 million | $10.0 million |
| Loss per diluted share | $0.09 | $0.07 | $0.11 | $0.16 |
| Cash flow from operations | Not separately provided | Not separately provided | $6.4 million | $(9.1) million |
Quarterly product revenue declined 20.7% to $44.7 million, while services revenue declined 25.5% to $25.7 million. Year-to-date product revenue declined 12.4% and services revenue declined 15.4%.
At January 1, 2016, cash and cash equivalents were $39.5 million, total assets were $209.3 million, total liabilities were $132.3 million and total equity was $77.0 million. Debt under the Silicon Valley Bank credit facility was $9.0 million. Available credit was $11.3 million after borrowings and outstanding letters of credit.
Material changes versus the prior comparable period
- Total quarterly revenue decreased 22.6%; year-to-date revenue decreased 13.4%.
- North America revenue declined 27.8% for the quarter and 19.0% year to date, primarily because wireless operators were reaching the end of LTE build cycles and government and utility sales decreased.
- Africa and Middle East revenue increased 9.7% for the quarter and 10.4% year to date, driven by higher sales to larger African customers.
- Europe and Russia revenue declined 52.1% for the quarter and 39.2% year to date, reflecting project wind-downs, lower customer spending and currency devaluation.
- Latin America and Asia Pacific revenue declined 31.3% for the quarter and 18.9% year to date.
- Gross margin percentage fell to 23.3% from 26.4% in the quarter. Service margin declined to 19.5% from 26.4%; product margin declined to 25.5% from 26.4%.
- Research and development expense declined 18.8% for the quarter and 17.7% year to date. Selling and administrative expense declined 23.6% for the quarter and 17.6% year to date, reflecting restructuring-related personnel reductions and lower professional fees.
- Operating cash flow improved from an outflow of $9.1 million to inflow of $6.4 million year to date, primarily because of working-capital changes and lower losses.
Guidance, outlook, risks and unusual items
Management did not provide specific numerical revenue or earnings guidance. It expects continued demand for mobile backhaul over the long term but anticipates quarter-to-quarter volatility, customer and geographic mix changes, and seasonal weakness in the third fiscal quarter following customers’ year-end capital spending.
- The company’s strategic priorities are product innovation, portfolio optimization, cost reduction, operational efficiency and development of a sustainable profitable business model.
- A restructuring program is intended to reduce fixed overhead and operating expenses. Remaining restructuring liabilities were $3.0 million, including $2.5 million current, and management expects to complete the fiscal 2015–2016 plan by the end of fiscal 2016.
- Management expects approximately $2.2 million of capital expenditures during the remainder of fiscal 2016 and believes current cash, available credit and collections will fund requirements for at least the next 12 months.
- The credit facility expires September 26, 2016. Renewal is expected but is not assured. The facility includes profitability and liquidity covenants, collateral requirements and restrictions on certain corporate actions.
- The company remained in compliance with its credit-facility covenants as of January 1, 2016, but future compliance and credit availability are not assured.
- Nasdaq notified the company that its stock failed to maintain the $1.00 minimum closing bid price for 30 consecutive business days. The company had until July 5, 2016 to regain compliance, subject to possible hearing or market-transfer alternatives.
- Management concluded that material weaknesses in internal control over financial reporting continued, including deficiencies in risk assessment and monitoring, account reconciliations, revenue recognition, revenue cut-off, project accruals and inventory existence. Disclosure controls were also deemed ineffective.
- Material business risks include pricing and margin pressure, customer concentration, telecommunications-sector weakness, supplier and subcontractor performance, foreign exchange exposure, political instability, intellectual-property claims and dependence on restructuring results.
- Outstanding commitments included $16.2 million of future operating lease payments, $27.0 million of supplier or contract-manufacturer purchase obligations, $0.7 million under a major service agreement and $19.9 million of commercial commitments not recorded on the balance sheet.
- MTN Group, Motorola and Airtel represented significant customer or receivable concentrations. Loss of a major customer could materially affect results and liquidity.
Important facts for investors to verify
- Whether revenue and gross-margin trends stabilize after the LTE-cycle slowdown and seasonal third-quarter effects.
- Whether the company remediates the identified material weaknesses and avoids additional financial reporting errors.
- Whether Aviat renews or replaces the credit facility before its September 2016 expiration and continues meeting its covenants.
- Whether the company regains Nasdaq’s minimum bid-price requirement before the applicable deadline.
- Whether operating cash flow remains positive without relying on favorable working-capital timing, discounted customer letters of credit or additional financing.
- The collectability and concentration of accounts receivable, particularly from major customers and international markets.
- The ultimate cost and cash timing of restructuring, lease obligations, purchase commitments and other commercial commitments.