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AVNW > SEC Filings for AVNW > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for AVIAT NETWORKS, INC.

Form 10-Q for AVIAT NETWORKS, INC.


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q, including "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements of, about, concerning or regarding: our plans, strategies and objectives for future operations; our research and development efforts and new product releases and services; trends in revenue; drivers of our business and the markets in which we operate; future economic conditions, performance or outlook and changes in our industry and the markets we serve; the outcome of contingencies; the value of our contract awards; beliefs or expectations; the sufficiency of our cash and our capital needs and expenditures; our intellectual property protection; our compliance with regulatory requirements and the associated expenses; expectations regarding litigation; our intention not to pay cash dividends; seasonality of our business; the impact of foreign exchange and inflation; taxes; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by the use of forward-looking terminology, such as "anticipates," "believes," "expects," "may," "should," "would," "will," "intends," "plans," "estimates," "strategy," "projects," "targets," "goals," "seeing," "delivering," "continues," "forecasts," "future," "predict," "might," "could," "potential," or the negative of these terms, and similar words or expressions.


These forward-looking statements are based on estimates reflecting the current beliefs of the senior management of Aviat Networks. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should therefore be considered in light of various important factors, including those set forth in this document. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include the following:
continued price erosion as a result of increased competition in the microwave transmission industry;

the impact of the customer, product and geographic mix of our product orders;

        the volume and timing of product orders and the timing of completion of
         our product deliveries and installations;


        our suppliers' inability to perform and deliver on time as a result of
         their financial condition, component shortages or other supply chain
         constraints, such as the natural disasters in Thailand in 2011;


        our ability to meet projected new product development dates or
         anticipated cost reductions of new products;

continued weakness in the global economy affecting customer spending;

customer acceptance of new products;

the ability of our subcontractors to timely perform;

retention of our key personnel;

our ability to manage and maintain key customer relationships;

        uncertain economic conditions in the telecommunications sector combined
         with operator and supplier consolidation;


        the timing of our receipt of payment for products or services from our
         customers;


        our failure to protect our intellectual property rights or defend
         against intellectual property infringement claims by others;

the effects of currency and interest rate risks;

the impact of political turmoil in countries where we have significant business; and

the timing and size of future restructuring plans and write-offs.

Other factors besides those listed here also could adversely affect us. See "Item 1A. Risk Factors" in our fiscal 2012 Annual Report on Form 10-K for more information regarding factors that may cause our results to differ materially from those expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.
You should not place undue reliance on these forward-looking statements, which reflect our management's opinions only as of the date of the filing of this Quarterly Report on Form 10-Q. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, along with provisions of the Private Securities Litigation Reform Act of 1995, and we undertake no obligation, other than as imposed by law, to update forward-looking statements to reflect further developments or information obtained after the date of filing of this Quarterly Report on Form 10-Q or, in the case of any document incorporated by reference, the date of that document.

Overview of Business; Operating Environment and Key Factors Impacting Fiscal 2012 and 2013 Results
The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes. In the discussion below, our fiscal year ending June 28, 2013 is referred to as "fiscal 2013" or "2013" and fiscal year ended June 29, 2012 as "fiscal 2012" or "2012". We generate revenue by designing, developing, manufacturing and supporting a range of wireless networking products, solutions and services for mobile and fixed communications service providers, private network operators, government agencies, transportation and utility companies, public safety agencies and broadcast system operators across the globe. Our products include point-to-point (PTP) digital microwave transmission systems designed for first/last mile access, middle mile/backhaul, and long distance trunking applications. We also provide network management software solutions to enable operators to deploy, monitor and manage our systems, third party equipment such as antennas, routers, and multiplexers, necessary to build and deploy a wireless transmission network, and a full suite of turnkey support services.
We work continuously to improve our established brands and to create new products that meet our customers' evolving needs and preferences. Our fundamental business goal is to generate superior returns for our stockholders over the long term.


We believe that increases in revenue, operating profits and earnings per share are the key measures of financial performance for our business.
Our strategic focus in the next fiscal year will be to continue to accelerate innovation and optimize our product portfolio, improve costs and operational efficiencies, grow our revenue and create a sustainable, profitable business model. To do this, we have examined our products, markets, facilities, development programs, and operational flows to ensure we are focused on what we do well and what will differentiate us in the future. We will continue working to streamline management processes to attain the efficiency levels required by the markets in which we do business.

While the general trend of increasing demand for bandwidth to support mobile networks applies in all markets, we expect to see quarter-to-quarter fluctuations within markets and with individual customers based on customers' past purchasing patterns. As well, seasonality is a factor that impacts our business. Our fiscal third quarter revenue and orders have historically been lower than the revenue and orders in the immediately preceding second quarter because many of our customers utilize a significant portion of their capital budgets at the end of their fiscal year, which is our second fiscal quarter. The majority of our customers begin a new fiscal year on January 1, and capital expenditures tend to be lower in an organization's first quarter than in its fourth quarter. We anticipate that this seasonality will continue. The seasonality between the second quarter and third quarter may be affected by a variety of additional factors, including changes in the global economy and other factors. Please refer to the section entitled "Risk Factors" in Item 1A in our fiscal 2012 Annual Report on Form 10-K.

Operations Review
During the first quarter of fiscal 2013, we secured orders and continued to expand our footprint with our customers in the mobile operator market using our current technology and service capabilities. The market for mobile backhaul continues to be our primary addressable market segment and the demand for increasing the backhaul capacity in our customers' networks continues to grow in line with our expectations. In the quarter we saw increased demand in North America as we supported the LTE deployments of our key customers. Internationally our business continued to rely on a combination of customers increasing their capacity to handle subscriber growth, the ongoing build-out of some large 3G deployments, and the emergence of early stage LTE deployments. Our position continues to be to support our customers for LTE readiness and ensure that our technology roadmap is well aligned with evolving market requirements. We continue to find that our strength in turnkey and after-sale support services is a differentiating factor that wins business for us and enables us to expand our business with existing customers in all markets. Despite a difficult macro-economic environment, our new products and product roadmap seem to be resonating broadly across all of our geographic and application areas. However, as disclosed above and in the "Risk Factors" section of our 2012 Annual Report on Form 10-K, a number of factors could prevent us from achieving our objectives, including ongoing pricing pressures attributable to competition and macroeconomic conditions in the geographic markets that we service. During the first quarter of Fiscal 2013, we incurred restructuring expenses under the Fiscal 2011 Plan that will allow us to reduce our operational costs. We intend to complete remaining restructuring activities under the Fiscal 2011 Plan during fiscal 2013.
In the fourth quarter of fiscal 2012, we re-evaluated our reportable segments primarily due to changes in our management, product platform and business processes, and determined that we operate in one single reportable industry segment. Accordingly, financial information for the first quarter of fiscal 2012 has been recast to conform with the current reportable segment disclosure. Revenue
We manage our sales activities primarily on a geographic basis in North America and three international geographic regions: Africa and Middle East, Europe and Russia, and Latin America and Asia Pacific. Revenue by region for the first quarter of fiscal 2013 and 2012 and the related changes are shown in the table below:


                                                  Quarter Ended
(In millions, except percentages)  September 28, 2012      September 30, 2011       $ Change        % Change
North America                     $              38.7     $              37.1     $       1.6           4.3  %
Africa and Middle East                           49.0                    42.7             6.3          14.8  %
Europe and Russia                                12.4                    12.4               -             -  %
Latin America and Asia Pacific                   14.9                    19.2            (4.3 )       (22.4 )%
Total Revenue                     $             115.0     $             111.4     $       3.6           3.2  %

Our revenue in North America increased $1.6 million, or 4.3%, in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. We saw improved sales with North American wireless network operators which was attributable to the ongoing buildout of LTE capable networks in the region. At the same time, business with power utilities, state and local government private networks also remained strong in North America. We also saw growth in demand for our network services and support in the region and experienced an increase in service revenue during the period primarily with mobile operator customers. We also completed our first low latency projects for a private network operator. Our revenue in Africa and Middle East increased substantially over the same period in fiscal 2012. We experienced year over year increases with customers in both East and West Africa. Revenue was down year over year in Latin America and Asia Pacific primarily due to a decline in customer purchasing patterns, which we believe was temporary. Sales to our European customers were about the same as in the first quarter of fiscal 2012.
Our services revenue constituted a larger share of the total revenue in the first quarter of fiscal 2013 than in the year-ago period, consisting 27% of total revenue compared to 20% of total revenue in the first quarter of fiscal 2012. The services revenue increase was predominantly in North America as discussed above. Our product sales were down in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012 mostly due to reduced purchases of microwave radio equipment by customers in North America and Latin America and Asia.
During the first quarter of both fiscal 2013 and 2012, the MTN Group in Africa accounted for more than 10% of our total revenue. We have entered into separate and distinct contracts with MTN Group as well as separate arrangements with MTN Group subsidiaries. None of such contracts on an individual basis are material to our operations. The loss of all MTN Group business could adversely affect our results of operations, cash flows and financial position.

Gross Margin

                                                    Quarter Ended
(In millions, except percentages)    September 28, 2012      September 30, 2011       $ Change      % Change
Revenue                             $           115.0       $           111.4       $      3.6          3.2 %
Cost of revenue                                  81.3                    78.7              2.6          3.3 %
Gross margin                        $            33.7       $            32.7       $      1.0          3.1 %
% of revenue                                     29.3 %                  29.4 %

Gross margin for the first quarter of fiscal 2013 increased $1.0 million, or 3.1%, compared with the same quarter of fiscal 2012. Gross margin as a percentage of revenue remained approximately the same compared with the first quarter of fiscal 2012. The increase in gross margin was due largely to higher sales volume and product mix in North America and in Africa and Middle East compared to the same period in previous year. We saw a higher portion of our revenue from services in the first quarter fiscal 2013 compared to the same period in the prior year. The increased service revenue volume also has higher gross margin rate compared to the prior year period resulting from improved efficiency on execution of services and spreading our fixed costs over a larger economic scale. We anticipate improvements in gross margin as a percentage of revenue over time as we bring more new products to market and the new products represent a larger share of our revenues. Research and Development Expenses


                                                  Quarter Ended
(In millions, except percentages)   September 28, 2012      September 30, 2011       $ Change      % Change
Research and development expenses $              9.3       $            9.0        $      0.3          3.3 %
% of revenue                                     8.1 %                  8.1 %

Our research and development ("R&D") expenses increased $0.3 million, or 3.3%, in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. As a percentage of revenue, R&D expenses remained 8.1% for the first quarter of both fiscal 2013 and 2012. The increase in R&D expenses of $0.3 million, consisting mostly of personnel expenses, was primarily due to investment in our new product development projects. We continue to invest in new product features, new functionality and lower cost platforms that we believe will enable our product lines to retain their technology leads in a cost effective manner.

Selling and Administrative Expenses

                                                   Quarter Ended
(In millions, except percentages)    September 28, 2012     September 30, 2011      $ Change      % Change
Selling and administrative expenses $           22.7       $           24.6       $     (1.9 )       (7.7 )%
% of revenue                                    19.7 %                 22.1 %

Our selling and administrative expenses declined $1.9 million, or 7.7%, in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. The decrease was due primarily to a $1.3 million reduction in professional services, a $0.6 million reduction in compensation expenses and a decrease of $0.9 million in expenses for information technology projects, partially offset by an increase of $0.6 million in bad debt expenses.
Restructuring Charges
During the first quarter of fiscal 2011, we initiated the Fiscal 2011 Plan to reduce our operational costs. The Fiscal 2011 Plan was intended to bring our cost structure in line with the changing business environment of the worldwide microwave radio and telecommunication markets, primarily in North America, Europe and Asia. Activities under the Fiscal 2011 Plan included the reductions in force to reduce our operating expenses and downsizing or closures of our Morrisville, North Carolina, Santa Clara, California, Montreal, Canada and certain international field offices.
Our restructuring charges by plan for the first quarter of fiscal 2013 and 2012 are summarized in the table below:

                                                 Quarter Ended
                                     September 28,
(In millions, except percentages)        2012            September 30, 2011       $ Change       % Change
Restructuring                      $           0.3     $                0.9     $      (0.6 )     (66.7 )%

Restructuring charges declined $0.6 million in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. The changes were due to the absence of a $0.5 million facilities charge in the first quarter of fiscal 2012 primarily related to the sublease and relocation of our Morrisville, North Carolina office during the period.
Our restructuring expenses consisted primarily of severance and related benefit charges, and to a lesser extent, facilities costs related to obligations under non-cancelable leases for facilities that we ceased to use. We intend to complete remaining restructuring activities under the Fiscal 2011 Plan in fiscal 2013.
Other Income (Expense), Interest Income and Interest Expense

                                           Quarter Ended
(In millions)                September 28, 2012     September 30, 2011
Other income (expense), net $            (0.6 )    $           -
Interest income                           0.3                0.2
Interest expense                         (0.3 )             (0.4 )


Other expense for the first quarter of fiscal 2013 consisted primarily of transactional tax assessments related to certain international entities. Interest expense was primarily related to interest associated with borrowings, term loan and letters of credit under our credit facilities and preference dividends on our $8.25 million redeemable preference shares. The $8.25 million preference shares were redeemed at their carrying value on January 30, 2012, funded by a two-year term loan of $8.25 million under our credit facility at a fixed interest rate of 5% per annum.

Income Taxes

                                                             Quarter Ended
(In millions, except percentages)             September 28, 2012       September 30, 2011       $ Change
Income (loss) from continuing operations
before income taxes                          $            0.7        $          (2.7 )        $       3.4
Provision for income taxes                   $            1.5        $           1.0          $       0.5
% of income (loss) from continuing
operations before income taxes                          214.3 %                (37.0 )%

The determination of our provision for income taxes for first quarters of fiscal 2013 and fiscal 2012 was based on our estimated annual effective tax rate adjusted for losses in separate jurisdictions for which no tax benefit can be recognized. That determination also reflected tax expense and benefit generated in certain foreign jurisdictions. The tax expense for the first quarter 2013 was primarily attributable to an increase in unrecognized tax benefit liability of $1.4 million as the result of additional information identified during a recent audit in Nigeria. The tax expense for the first quarter of fiscal 2012 was primarily attributable to profitable foreign entities for which we have accrued income taxes. We accrued tax expenses for foreign jurisdictions that are anticipated to be profitable for fiscal 2013.
Our effective tax rate varies from the U.S. federal statutory rate of 35% due to results of foreign operations that are subject to income taxes at different statutory rates and certain jurisdictions where we cannot recognize tax benefits on current losses.

Loss from Discontinued Operations

                                                             Quarter Ended
(In millions)                                  September 28, 2012     September 30, 2011      $ Change
Loss from discontinued operations, net of tax $           (1.4 )     $           (3.1 )     $      1.7

Our discontinued operations consist of the WiMAX business, which was sold to EION on September 2, 2011. We completed the business transition with EION in fiscal 2012. The loss from discontinued operations decreased $1.7 million in the first quarter of fiscal 2013 compared with the same quarter of fiscal 2012. The loss incurred in the first quarter of fiscal 2013 was primarily due to write-down of certain WiMAX deferred cost of sales that were not transferred to EION. The loss in the first quarter of fiscal 2012 included a $2.0 million loss on disposition of the WiMAX business.

Liquidity, Capital Resources and Financial Strategies Sources of Cash
As of September 28, 2012, our total cash and cash equivalents were $85.1 million. Approximately $16.9 million, or 19.9% of our total cash and cash equivalents, was held by entities domiciled in the United States. The remaining balance of $68.2 million or 80.1% was held by entities outside the United States, primarily in Singapore and Nigeria. A portion of the non-U.S. cash and cash equivalents is utilized for working capital and other operating purposes. We are not aware of any local regulatory requirements in these countries that significantly restrict the ability of our operations to repatriate the excess cash generated by our foreign operations. However, there are practical limitations on repatriation of cash to the U.S. from these countries because of the resulting withholding and other taxes.
As of September 28, 2012, our principal sources of liquidity consisted of the $85.1 million in cash and cash equivalents, $21.5 million of available credit under our current $40.0 million credit facility with SVB, and future collections of receivables from customers. We regularly require letters of credit from some customers that request extended payment terms up to one year or more. These letters of credit are generally discounted without recourse shortly after shipment occurs in order to meet immediate liquidity requirements and to reduce our credit and sovereign risk. Historically our primary


sources of liquidity have been cash flows from operations, credit facilities and cash proceeds from sale of our equity securities. During the first quarter of fiscal 2013, our total cash and cash equivalents decreased by $10.9 million primarily due to $9.2 million cash used in operating activities, $1.3 million of cash used for capital expenditures, and $1.0 million repayment on our long-term debt.
Cash used in operating activities was $9.2 million in the first quarter of fiscal 2013 primarily due to an increase in receivables of $19.7 million and a net decrease in accounts payable and accrued expenses of $1.4 million, partially offset by a decrease in inventory of $3.2 million, a decrease in unbilled costs of $4.9 million and our net loss adjusted for non-cash items. Our accounts receivable increased significantly during the first quarter of fiscal 2013 primarily due to larger volume of shipments late in the quarter. The timing of billing and collections from customers associated with these shipments resulted in higher cash collections in the following month after the end of the quarter. The decrease in accounts payable and accrued expenses was primarily due to timing of disbursements. We also used $0.9 million in cash during the first quarter of fiscal 2013 related to restructuring liabilities. The decrease in our inventory was due to larger volume of inventory shipments late in the quarter. The decrease in unbilled costs was due to the completion of customer projects during the quarter.
During the remainder of fiscal year 2013, we expect to spend approximately $10.0 million for capital expenditures primarily on equipment for development of new products and improvement of our information technology infrastructure. We currently believe that our existing cash and cash equivalents, the available line of credit under the SVB facility and future cash collections from customers will be sufficient to provide for our anticipated requirements for working capital and capital expenditures for the next 12 months and the foreseeable future. There can be no assurance, however, that our business will generate cash flow, or that anticipated operational improvements will be achieved. If we are unable to maintain cash balances or generate sufficient cash flow from operations to service our obligations, we may be required to sell assets, reduce capital expenditures, or obtain financing. If we need to obtain additional financing, we cannot be assured that it will be available on favorable terms, or at all. Our ability to make scheduled principal payments or pay interest on or refinance any future indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the microwave communications market and to general economic, . . .

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