Aviat Networks, Inc. Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended April 1, 2022, Aviat’s fiscal third quarter and first nine months of fiscal 2022. The comparable periods ended April 2, 2021. The request metadata identifies “2021 Q3,” but the filing is for fiscal 2022 Q3. Aviat designs, manufactures, and sells wireless networking products, solutions, and services globally.
Financial Results and Position
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Revenue | $74.5 million | $66.4 million | $225.5 million | $203.2 million |
| Gross profit | $27.5 million | $25.6 million | $81.8 million | $76.7 million |
| Gross margin | 37.0% | 38.5% | 36.3% | 37.8% |
| Operating income | $7.5 million | $4.0 million | $23.5 million | $18.5 million |
| Operating margin | 10.0% | 6.1% | 10.4% | 9.1% |
| Net income | $6.0 million | $94.7 million | $16.6 million | $107.3 million |
| Diluted earnings per share | $0.51 | $8.00 | $1.40 | $9.31 |
Product revenue increased 15.0% in the quarter and 14.6% for the nine-month period; services revenue increased 6.2% and 3.5%, respectively. North America and Africa and the Middle East were the primary growth regions. Gross profit increased, but gross margin declined because of inflation, expedite fees, and supply-chain and logistics costs. Service margins were relatively stable, while product margins declined.
Net income in the prior-year periods benefited from an $88.6 million nine-month income-tax benefit, primarily from releasing valuation allowances on U.S. deferred tax assets. Fiscal 2022 includes tax expense of $6.5 million for the nine-month period, making year-over-year net income comparisons less indicative of operating performance.
Net cash used in operating activities was $10.8 million in the first nine months of fiscal 2022, compared with $14.2 million provided in the prior-year period. Working capital absorbed cash, particularly through increases in accounts receivable, unbilled receivables, inventories, and customer service inventories. Cash and cash equivalents were $31.3 million at April 1, 2022, compared with $47.9 million at July 2, 2021.
At April 1, 2022, total assets were $319.7 million and total liabilities were $122.4 million. Accounts receivable and unbilled receivables totaled $121.9 million, while inventories and customer service inventories totaled $30.5 million. Shareholders’ equity was $197.3 million.
Debt, Liquidity, and Capital Allocation
- No borrowings were outstanding under the $25.0 million SVB accounts-receivable revolving credit facility; $21.7 million was available after $3.3 million of outstanding letters of credit. The facility matures June 28, 2024, and the company was in compliance with its financial covenants.
- A separate New Zealand line of credit had up to $0.3 million of short-term advances available, with no amounts outstanding.
- Financing activities used $4.0 million during the first nine months, including $4.6 million for share repurchases.
- The company repurchased 149,389 shares for $4.6 million during the first nine months and had $8.0 million remaining under its $10.0 million repurchase authorization at April 1, 2022.
- Management stated that cash, available credit, and expected customer collections should be sufficient for working capital and capital expenditures for at least the next 12 months.
- Approximately $19.1 million, or 60.9% of cash and cash equivalents, was held outside the United States; $16.8 million was in jurisdictions where earnings were indefinitely reinvested.
Material Changes and Unusual Items
- Revenue grew 12.2% in the quarter and 11.0% for the nine-month period, driven primarily by private-network projects, rural broadband activity, mobile-operator sales, and continuing 5G and LTE deployments.
- Operating income increased despite lower gross margin, supported by higher revenue, lower selling and administrative expenses, and restructuring recoveries.
- Restructuring recoveries were $0.1 million in the quarter and $0.4 million for the nine-month period, reducing the restructuring liability to $1.0 million.
- The company completed the sale of its United Kingdom facility for $2.3 million of proceeds and recognized an approximately $0.1 million gain.
- Inventory increased as management built supply to mitigate component shortages and other supply-chain constraints. Purchase obligations with suppliers and contract manufacturers totaled $40.1 million.
- Subsequent to quarter-end, Aviat announced an agreement to acquire Redline Communications Group for approximately CAD$16.2 million, or approximately US$12.9 million, in cash, funded from cash on hand. Closing was expected within four months, subject to customary conditions and regulatory approvals.
Outlook, Risks, and Contingencies
Management anticipated fiscal 2022 revenue growth, citing backlog, continued momentum across verticals, U.S. rural broadband and wireless internet service provider opportunities, 5G investment, and international growth. The filing does not provide a specific quantitative revenue or earnings forecast.
Management expects inflationary pressures, supply-chain bottlenecks, logistics costs, and component shortages to continue until economic and business activity normalizes. Price increases and surcharges partially offset higher costs, but competitive pricing pressure continues to affect margins.
- Key risks include COVID-19 effects, supplier and component constraints, inflation, customer payment timing, customer and geographic mix, competition and price erosion, global economic weakness, foreign-exchange volatility, and the ability to satisfy credit-facility covenants.
- Commercial commitments not recorded on the balance sheet totaled $65.1 million, primarily involving surety bonds, standby letters of credit, and other performance-related arrangements. Management did not expect significant payments under these guarantees based on available information.
- Unfulfilled or partially unfulfilled performance obligations totaled approximately $82.8 million, with approximately 70% expected to be recognized as revenue over the following 12 months.
- The company had open tax audits in several jurisdictions and an ongoing Indian regulatory enforcement matter. Only an immaterial amount was accrued for the Indian matter, and the filing states that any loss beyond the accrued amount cannot currently be estimated.
- Legal claims and litigation arise in the ordinary course of business; no material accruals were recorded, and management did not currently believe the matters would materially affect financial position.
Investor Verification Priorities
- Confirm the reporting-period distinction: this filing is fiscal 2022 Q3, not fiscal 2021 Q3.
- Assess whether operating cash conversion improves as receivables, unbilled receivables, and inventories normalize.
- Monitor supply-chain, inflation, and expedite costs and their effect on product gross margin.
- Evaluate the tax-rate normalization after the unusually large deferred-tax benefit in the prior-year period.
- Review the funding, closing conditions, and integration implications of the Redline acquisition.
- Verify customer concentration, particularly Motorola Solutions and MTN Group, and the 20% concentration of accounts receivable with MTN Group.
- Track the $65.1 million of commercial commitments, $40.1 million of supplier purchase obligations, letters of credit, and compliance with credit-facility covenants.
- Review the sustainability of the stock-repurchase program given negative operating cash flow during the nine-month period.