Aviat Networks, Inc. — Form 10-Q Summary
Business context and reporting period
Aviat Networks designs, develops, manufactures and supports wireless networking products, microwave transmission systems, network-management software, third-party equipment and related services. The filing covers the 13-week quarter and first two quarters of fiscal 2012 ended December 30, 2011, with comparisons to the periods ended December 31, 2010.
The WiMAX business was sold to EION Networks on September 2, 2011 and is presented as discontinued operations. The continuing business is focused on the core microwave networking business.
Financial results and liquidity
| Metric | Quarter ended Dec. 30, 2011 | Quarter ended Dec. 31, 2010 | First two quarters FY2012 | First two quarters FY2011 |
|---|---|---|---|---|
| Total revenue | $105.0 million | $115.3 million | $216.4 million | $215.7 million |
| Gross margin | $31.9 million; 30.4% | $37.4 million; 32.4% | $64.6 million; 29.9% | $63.7 million; 29.5% |
| Operating loss | $(8.6) million | $(3.0) million | $(11.1) million | $(21.1) million |
| Loss from continuing operations | $(10.0) million | $(10.0) million | $(13.7) million | $(27.0) million |
| Net loss | $(12.8) million | $(12.5) million | $(19.6) million | $(33.8) million |
| Basic and diluted net loss per share | $(0.22) | $(0.21) | $(0.33) | $(0.58) |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(7.5) million | $(40.5) million |
Product revenue was $74.1 million in the quarter and $163.2 million for the first two quarters; services revenue was $30.9 million and $53.2 million, respectively. North America revenue increased 9.7% in the quarter and 7.4% year to date, while International revenue declined 18.9% and 3.5%, respectively.
At December 30, 2011, cash and cash equivalents were $84.3 million, compared with $98.2 million at July 1, 2011. Current assets were $303.6 million and current liabilities were $161.6 million. Short-term debt was $6.0 million. The company had $26.4 million of available credit under its $40.0 million Silicon Valley Bank facility after borrowings and outstanding letters of credit.
Cash decreased by $13.9 million during the first two quarters, including $7.5 million used in operating activities, $4.6 million used in investing activities and $1.8 million of unfavorable foreign-exchange effects. Capital expenditures were $3.4 million.
Material changes versus the prior comparable period
- Second-quarter revenue declined $10.3 million, or 8.9%, primarily because of lower International revenue, particularly in Europe and Russia, including reduced business with a major Russian customer.
- Year-to-date revenue increased only $0.7 million, or 0.3%, as North American growth and stronger Latin American and Asia-Pacific sales largely offset International declines.
- Second-quarter gross margin decreased 2.0 percentage points to 30.4%, reflecting lower Russian revenue and competitive pricing pressure. Year-to-date gross margin improved modestly because the prior-year period included a $6.0 million manufacturing-overhead charge.
- The company recorded a $5.6 million goodwill impairment charge in the second quarter after a significant decline in market capitalization indicated impairment of the International reporting unit.
- Research and development expense declined 21.4% in the quarter and 14.8% year to date, primarily due to prior restructuring. Selling and administrative expense was essentially flat in the quarter but declined 6.7% year to date.
- Restructuring charges declined to $0.1 million in the quarter and $1.0 million year to date, compared with $3.4 million and $9.0 million, respectively, in the prior-year periods.
- The discontinued WiMAX operation generated a $2.8 million quarterly loss and a $5.9 million year-to-date loss, including a $2.0 million disposal loss in the year-to-date period.
Guidance, outlook, commentary, risks and unusual items
Management’s fiscal 2012 strategy is to accelerate product innovation, optimize the product portfolio, improve operating efficiency, grow revenue and establish a sustainable profitable business model. Management expects to complete the remaining Fiscal 2011 restructuring activities by the end of fiscal 2012 and incur approximately $2.0 million of additional restructuring charges during the remainder of the year.
Management stated that it expects to generate cash from operating activities in the second half of fiscal 2012 and believes existing cash, available credit and expected customer collections will be sufficient for working-capital needs over the next 12 months and the foreseeable future. The $8.25 million redeemable preference shares were redeemed on January 30, 2012 using a two-year, 5% term loan under the amended credit facility.
- A contract manufacturer in Thailand was affected by flooding. The company mitigated most delivery impacts but continued to monitor potential supply-chain effects.
- MTN’s affiliated group accounted for 8.6% of quarterly revenue and 13.3% of year-to-date revenue; loss of the group’s business could materially affect results.
- Key risks include pricing pressure, customer and geographic concentration, telecommunications-sector weakness, order timing, supplier and subcontractor performance, product-development execution, foreign-exchange exposure, political instability and customer payment timing.
- The company had $29.2 million of future minimum operating-lease commitments, net of non-cancelable subleases, as of December 30, 2011.
- Foreign-exchange forward contracts had total notional amounts of $47.3 million. Management estimated that a 10% adverse currency movement would affect their fair value by approximately $3.5 million, before considering offsets from underlying exposures.
- Pending legal matters include a derivative action against former officers and directors and litigation involving a Brazilian subsidiary. Management does not currently expect the disclosed proceedings to have a material adverse effect, although outcomes cannot be assured.
Important facts for investors to verify
- Whether the projected second-half operating cash generation occurs and whether liquidity remains adequate after the preference-share refinancing.
- The sustainability of North American growth and the company’s ability to offset weakness in Europe, Russia and other International markets.
- Whether competitive pricing pressure continues to compress gross margins.
- The completion, cost and cash impact of the remaining restructuring program.
- The effect of the Thailand supply-chain disruption and other supplier dependencies.
- The concentration and payment risk associated with MTN and other major customers.
- The assumptions supporting the $5.6 million goodwill impairment analysis and the risk of further impairment.
- The final proceeds and contingent payments from the WiMAX divestiture; the filing does not provide a clear estimate of amounts beyond the $0.4 million scheduled payment and potential payments of up to $2.8 million.