Aviat Networks, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the 13-week quarter ended September 30, 2011, the first quarter of fiscal 2012. Aviat designs, sells and supports wireless networking products, microwave transmission systems, network management software, equipment and related services for telecommunications, government, utility, public safety and other customers worldwide. The comparable prior-year quarter ended October 1, 2010.
The WiMAX business was sold to EION Networks on September 2, 2011 and is presented as discontinued operations. Prior-period amounts were reclassified accordingly. Management is focusing on its core microwave business, product innovation, cost reduction and operating efficiency.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total revenue | $111.4 million | $100.4 million | Up 11.0% |
| Product revenue | $89.1 million | $80.5 million | Up $8.6 million |
| Services revenue | $22.3 million | $19.9 million | Up $2.4 million |
| Gross margin | $32.7 million; 29.4% | $26.3 million; 26.2% | Up $6.4 million; 320 basis points |
| Operating loss | $(2.5) million | $(18.1) million | Improved $15.6 million |
| Loss from continuing operations | $(3.7) million | $(17.0) million | Improved $13.3 million |
| Net loss | $(6.8) million | $(21.3) million | Improved $14.5 million |
| Basic and diluted net loss per share | $(0.12) | $(0.36) | Improved $0.24 |
| Operating cash flow | $(6.6) million | $(37.5) million | Improved $30.9 million |
Gross margin benefited significantly from the absence of a $6.0 million one-time manufacturing-overhead charge recorded in the prior-year quarter. Excluding that charge, management stated that the current-quarter gross margin was lower year over year because of competitive pricing pressure.
- Research and development expense declined to $9.0 million from $9.7 million.
- Selling and administrative expense declined to $24.6 million from $28.4 million, primarily because of lower agent commissions and restructuring-related reductions in compensation expense.
- Restructuring charges declined to $0.9 million from $5.6 million.
- Income tax expense was $1.0 million, compared with a $5.5 million tax benefit in the prior-year quarter.
- Discontinued operations generated a $3.1 million loss, including a $2.0 million loss on the WiMAX disposal, compared with a $4.3 million loss in the prior-year quarter.
Revenue, segments and geographic trends
| Segment or region | Q1 FY2012 revenue | Year-over-year change |
|---|---|---|
| North America | $37.1 million | Up 5.1% |
| International | $74.3 million | Up 14.1% |
| Africa and Middle East | $42.7 million | Up 40.0% |
| Europe and Russia | $12.4 million | Down 29.9% |
| Latin America and Asia Pacific | $19.2 million | Up 13.6% |
North America and International both remained loss-making, but segment operating losses improved to $1.9 million and $0.6 million, respectively, from $9.5 million and $8.6 million. One International customer, MTN Group in Africa, represented 17.6% of total revenue; no customer represented at least 10% of prior-year revenue.
Cash flow, debt and liquidity
- Cash and cash equivalents were $87.6 million at September 30, 2011, down from $98.2 million at July 1, 2011. Approximately 69% was held outside the United States and could face additional taxation if repatriated.
- Cash used in operating activities was $6.6 million, reflecting the net loss, lower accounts payable and accrued liabilities, lower customer advances and restructuring payments, partly offset by collections of receivables.
- Capital expenditures were $2.8 million, resulting in $3.0 million of net cash used in investing activities.
- Short-term debt was $6.0 million. Under the $40.0 million Silicon Valley Bank facility, available credit was $24.8 million after borrowings and outstanding letters of credit of $9.2 million.
- The facility was amended on November 2, 2011 to extend its expiration to February 28, 2014 and add an up-to-$8.25 million, two-year term loan. Aviat intended to use the term loan to redeem its $8.25 million redeemable preference shares on January 30, 2012.
- Aviat was in compliance with its minimum liquidity and profitability covenants at September 30, 2011.
- Restructuring liabilities totaled $3.7 million, including $3.2 million classified as current. Management expected approximately $4.5 million of additional restructuring charges during the remainder of fiscal 2012.
Material changes, outlook and unusual items
- Management expected continued use of cash in the second quarter of fiscal 2012 as it completed restructuring and wound down WiMAX, with cash generation expected to be neutral to slightly positive in the second half of fiscal 2012.
- Management believed existing cash, available credit and customer collections would be sufficient for working-capital requirements over the next 12 months and the foreseeable future. This is a management assessment, not formal earnings guidance.
- The WiMAX divestiture supports a strategic shift toward the core microwave business. EION owes $0.4 million six months after closing and may owe up to $2.8 million of additional contingent consideration; the company could not estimate the additional amount or its probability and will recognize it only when received. EION may also receive up to $2.0 million from collections of certain WiMAX receivables.
- A contract manufacturer in Thailand was affected by severe flooding. At filing, supply had not been adversely affected, but prolonged disruption could cause component shortages, shipment delays, delayed or lost revenue and customer-relationship damage in the second and potentially third quarters of fiscal 2012.
- Key continuing risks include microwave-industry price erosion, customer and geographic concentration, global economic weakness, customer acceptance of new products, supply-chain and subcontractor performance, foreign exchange exposure, political instability and timing of customer payments.
- The company was party to a derivative shareholder litigation matter with an $8.9 million settlement covered by insurance. The court entered a Judgment and Order of Dismissal with Prejudice on October 11, 2011. A related derivative action remained pending, and the company intended to defend it vigorously.
Most important facts for investors to verify
- Whether revenue growth and the improved operating results were sustainable after excluding the prior-year $6.0 million manufacturing charge and reduced restructuring costs.
- Whether competitive pricing pressure continues to reduce gross margin.
- The effect of Thailand manufacturing disruption on shipments, revenue and customer relationships.
- Cash generation, especially during the WiMAX wind-down and remaining restructuring activities.
- Completion and financing of the January 30, 2012 redemption of the $8.25 million preference shares, including compliance with credit-facility covenants.
- Exposure to MTN Group concentration and collection, foreign-exchange and repatriation risks.
- The amount and timing of any contingent WiMAX sale consideration and the outcome of remaining litigation.