Aviat Networks, Inc.: Form 10-Q for the period ended Dec 27, 2024

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 to be forward-looking statements, including without limitation statements of, about, concerning or regarding: our ability to maintain effective internal control over financial reporting and management systems and remediate material weaknesses; our plans, strategies and objectives for future operations, including with respect to growing our business and sustaining profitability; our restructuring efforts; 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, Inc. (“Aviat,” the “Company,” “we,” “us,” and “our”). 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 Quarterly Report on Form 10-Q.

See “Item 1A. Risk Factors” in the Company’s fiscal 2024 Annual Report on Form 10-K filed with the SEC on October 4, 2024 for more information regarding factors that may cause its 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 (the “Exchange Act”), along with provisions of the Private Securities Litigation Reform Act of 1995, and we expressly disclaim any obligation, other than as required by law, to update any 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 2025 and 2024 Results

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Aviat’s results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited condensed consolidated financial statements and accompanying notes. In the discussion herein, the fiscal year ending June 27, 2025 is referred to as “fiscal 2025” or “2025” and the fiscal year ended June 28, 2024 is referred to as “fiscal 2024” or “2024.”

Overview

Aviat is a global supplier of microwave networking and access networking solutions, backed by an extensive suite of professional services and support. Aviat sells radios, routers, software and services integral to the functioning of data transport networks. Aviat has more than 3,000 customers and significant relationships with global service providers and private network operators. Aviat’s North America manufacturing base consists of a combination of contract manufacturing and assembly and testing operated in Austin, Texas by Aviat. Additionally, Aviat utilizes a contract manufacturer based in Asia for much of its international equipment demand. Aviat’s technology is underpinned by more than 500 patents. Aviat competes on the basis of total cost of ownership, microwave radio expertise and solutions for mission critical communications. Aviat has a global presence.

Acquisitions

4RF Limited

On July 2, 2024, the Company acquired 4RF Limited (“4RF”), a New Zealand company. Aviat purchased all of the issued and outstanding shares of 4RF in an all-cash transaction for $18.2 million, net of $1.2 million cash acquired. 4RF is a leading provider of industrial wireless access solutions, including narrowband point-to-point/multi-point radios and Private LTE and 5G routers. The acquisition of 4RF allows Aviat to expand its product offering for the global industrial wireless access markets including Private LTE/5G. See Note 11. Acquisitions of the Notes to the unaudited consolidated financial statements in this Quarterly Report on Form 10-Q (the “Notes”) for further information.

NEC’s Wireless Transport Business

On November 30, 2023, the Company completed the acquisition of NEC Corporation’s (“NEC”) wireless transport business (the “NEC Transaction”). Prior to the acquisition date, NEC was a leader in wireless backhaul networks with an extensive installed base of their Pasolink series products. The completion of the NEC Transaction increases the scale of Aviat, enhances the Company’s product portfolio with a greater capability to innovate, and creates a more diversified business. See Note 11. Acquisitions of the Notes for further information.

The fair value of the consideration transferred at the closing of the NEC Transaction was comprised of (i) cash of $32.2 million, and (ii) the issuance of 736,750 shares or $22.3 million of Company common stock. Aggregate consideration transferred at closing was approximately $54.5 million, which was subject to certain post-closing adjustments. In the second quarter of fiscal 2025, the Company transferred consideration of $5.8 million to settle a portion of the post-closing working capital adjustment. The Company estimates additional cash consideration of approximately $13.2 million will be transferred to NEC, primarily related to settlement of the remaining post-closing working capital adjustment.

Operations Review

The market for mobile backhaul continued to be the Company’s primary addressable market segment globally in the first six months of fiscal 2025. In North America, the Company supported 5G and long-term evolution (“LTE”) deployments of its mobile operator customers, public safety network deployments for state and local governments, and private network implementations for utilities and other customers. In international markets, the Company’s business continued to rely on a combination of customers increasing their capacity to handle subscriber growth and the ongoing build-out of some large LTE and 5G deployments. Aviat’s position continues to be to support its customers for 5G and LTE readiness and ensure that its technology roadmap is well aligned with evolving market requirements. Aviat’s strength in turnkey and after-sale support services is a differentiating factor that wins business for the Company and enables it to expand its business with existing customers. Additionally, Aviat operates an e-commerce platform that provides low-cost services, simple experience, and fast delivery to mobile operators and private network customers. However, as disclosed above and in the “Risk Factors” section in Item 1A of its Annual Report on Form 10-K filed with the SEC on October 4, 2024, a number of factors could prevent the Company from achieving its objectives, including ongoing pricing pressures attributable to competition and macroeconomic conditions in the geographic markets that it serves.

Revisions to Prior Period Consolidated Financial Statements

Subsequent to the third quarter of fiscal 2024, the Company identified certain errors in the quarterly financial statements for fiscal 2024. The Company evaluated the materiality of the errors and determined that the impacts were not material, individually or in the aggregate, to the Company’s previously issued consolidated financial statements for any of the prior reporting periods in which they occurred. The Company has revised the prior period financial statements for fiscal 2024 to correct the errors. The revisions ensure comparability across all periods presented herein. Refer to Note 1. The Company and Basis of Presentation and Note 15. Revisions to Prior Period Consolidated Financial Statements of the Notes for further information.

Revenue

The Company manages its sales activities primarily on a geographic basis in North America and three international geographic regions: (1) Africa and the Middle East, (2) Europe, and (3) Latin America and Asia Pacific. Revenue by region for the three and six months ended December 27, 2024 and December 29, 2023 and the related changes were as follows:

(In thousands, except percentages)

Revenue in North America increased by $7.3 million during the second quarter of fiscal 2025 compared with the same period of fiscal 2024 primarily due to increased volume for private network projects. Revenue in North America decreased by $5.3 million during the first six months of fiscal 2025 compared with the same period of fiscal 2024, primarily due to lower demand from Tier 1 mobile network operators and timing of certain private network projects, partially offset by contributions from the 4RF transaction.

Revenue in Africa and the Middle East decreased by $1.8 million during the second quarter of fiscal 2025 compared with the same period of fiscal 2024. Revenue in Africa and the Middle East decreased by $1.3 million during the first six months of fiscal 2025 compared with the same period of fiscal 2024. The decreases for the second quarter and the first six months of fiscal 2025 were primarily due to continued softness in the capital expenditure plans of large mobile operators in the region.

Revenue in Europe increased by $2.8 million during the second quarter of fiscal 2025 compared with the same period of fiscal 2024. Revenue in Europe increased by $3.1 million during the first six months of fiscal 2025 compared with the same period of fiscal 2024. The increases for the second quarter and the first six months of fiscal 2025 were primarily due to increased sales to mobile operators in the region driven by volumes from the NEC transaction.

Revenue in Latin America and Asia Pacific increased by $16.2 million during the second quarter of fiscal 2025 compared with the same period of fiscal 2024. Revenue in Latin America and Asia Pacific increased by $29.5 million during the first six months of fiscal 2025 compared with the same period of fiscal 2024. The increases were primarily due to contributions resulting from the NEC transaction and higher volumes of projects with mobile operators.

(In thousands, except percentages)

Revenue from product sales increased by 26.6% and revenue from services increased by 25.2% for the second quarter of fiscal 2025 compared with the same quarter of fiscal 2024. Revenue from product sales and services increased by 15.1% and 12.8%, respectively for the first six months of fiscal 2025 compared with the same period of fiscal 2024. The increases were primarily due to the factors discussed above and product sales contribution from the NEC Transaction.

Gross Margin

(In thousands, except percentages)

Gross margin for the second quarter of fiscal 2025 increased by $4.6 million compared with the same quarter of fiscal 2024 primarily due to sales volume and changes in regions and customers. Gross margin for the first six months of fiscal

2025 decreased by $6.8 million primarily due to changes in regions and customers and the expected near-term dilution as a result of the NEC Transaction driven from first quarter results.

Research and Development

(In thousands, except percentages)

Research and development expenses increased by $1.8 million and $5.8 million for the three and six months ended December 27, 2024, respectively, primarily due to development activity related to the NEC transaction.

Selling and Administrative

(In thousands, except percentages)

Selling and administrative expenses decreased by $1.3 million for the second quarter of fiscal 2025 compared with the second quarter of fiscal 2024 primarily due to lower spending and cost reduction activities. Selling and administrative expenses increased $4.4 million for the first six months of fiscal 2025 primarily due to merger and acquisition expenses and additional costs resulting from the NEC and 4RF transactions.

Restructuring

(In thousands, except percentages)

In the second quarter of fiscal 2025, there were $1.4 million of restructuring charges incurred, primarily associated with reductions in workforce in certain of the Company’s operations to optimize skill sets and align cost structure. The prior year period includes restructuring charges primarily associated with the NEC Transaction.

The Company’s successfully executed restructuring initiatives have enabled it to restructure specific groups to optimize skill sets and align its organizational structure to execute on strategic deliverables, in addition to aligning cost structure with the core of the business.

Interest Expense, net

(In thousands, except percentages)

Interest expense, net increased by $1.2 million and $2.2 million for the three and six months ended December 27, 2024, respectively, primarily due to interest expense incurred on incremental Term Loan borrowings compared to the prior year period.

Other Expense, net

(In thousands, except percentages)

29

Other expense, net increased by $0.9 million and $0.8 million for the three and six months ended December 27, 2024, respectively, primarily as a result of losses recognized on the extinguishment of debt and foreign exchange rate movement.

Income Taxes

(In thousands, except percentages)

The Company estimates its annual effective tax rate at the end of each quarterly period, and records the tax effect of certain discrete items in the interim period in which they occur, including changes in judgment about uncertain tax positions and deferred tax valuation allowances.

The tax benefit for the first six months of fiscal 2025 was primarily due to tax benefit resulting from year-to-date losses. The tax expense for the first six months of fiscal 2024 was primarily attributable to tax expense related to U.S. and profitable foreign subsidiaries.

Liquidity, Capital Resources, and Financial Strategies

Sources of Cash

As of December 27, 2024, the Company’s total cash and cash equivalents were $52.6 million. Approximately $21.6 million was held in the United States. The remaining balance of $31.0 million, or 59%, was held outside the United States.

Operating Activities

Operating cash flows is presented as net (loss) income adjusted for certain non-cash items and changes in operating assets and liabilities. Net cash (used in) provided by operating activities was $(6.4) million for the first six months of fiscal 2025, compared with $6.9 million in the prior year. The $(13.3) million decrease is primarily attributable to increases in working capital and decreased earnings compared to the prior year.

Investing Activities

Net cash used in investing activities was $23.5 million for the first six months of fiscal 2025, compared to $33.5 million in the prior year. The $10.1 million decrease is primarily due to higher acquisition payments in the prior year associated with the NEC Transaction.

Financing Activities

Financing cash flows consist primarily of borrowings and repayments under the Company’s Credit Facility and proceeds from the exercise of employee stock options. Net cash provided by financing activities was $18.6 million for the first six months of fiscal 2025, compared with $50.3 million in the prior year. The $(31.7) million decrease is primarily due to reduced Term Loan borrowings compared to the prior year as the prior year period included the $50.0 million of Term Loan borrowings primarily used to fund the NEC Transaction.

As of December 27, 2024, the Company’s principal sources of liquidity consisted of $52.6 million in cash and cash equivalents, $66.7 million of available credit under its Credit Facility, and future collections of receivables from customers. In the first quarter of fiscal 2025, the Company amended its Credit Facility which increased the borrowing capacity to $75.0 million for each of the Term Loan and Revolver facilities. The Company regularly requires letters of credit from certain customers, and, from time to time, these letters of credit are discounted without recourse shortly after shipment occurs in order to meet immediate liquidity requirements and to reduce its credit and sovereign risk. Historically, the Company’s primary sources of liquidity have been cash flows from operations and credit facilities.

The Company believes that its existing cash and cash equivalents, the available borrowings under its Credit Facility and future cash collections from customers will be sufficient to provide for its anticipated requirements and plans for cash for at least the next 12 months. In addition, the Company believes these sources of liquidity will be sufficient to provide for its anticipated requirements and plans for cash beyond the next 12 months.

The Company borrowed and repaid $35.0 million against the Revolver during the first six months of fiscal 2025. As of December 27, 2024, the Company had $75.0 million outstanding under its Term Loan and no borrowings outstanding under its Revolver and was in compliance with all financial covenants contained in the Credit Facility.

Critical Accounting Estimates

For information about the Company’s critical accounting estimates, see the “Critical Accounting Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its fiscal 2024 Annual Report on Form 10-K.

In the normal course of doing business, the Company is exposed to risks associated with foreign currency exchange rates and changes in interest rates. The Company employs established policies and procedures governing the use of financial instruments to manage its exposure to such risks. Information about the Company’s market risk is presented in Part II, Item 7A in its fiscal 2024 Annual Report on Form 10-K. There have been no material changes to the Company’s market risk during the first six months of fiscal 2025.

Exchange Rate Risk

The Company conducts business globally in numerous currencies and is therefore exposed to foreign currency risks. From time to time, the Company uses derivative instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The Company does not hold or issue derivatives for trading purposes or make speculative investments in foreign currencies.

From time to time, the Company enters into foreign exchange forward contracts to mitigate the change in fair value of specific non-functional currency assets and liabilities on the balance sheet. All balance sheet hedges are marked to market through earnings every period. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. The Company did not have any foreign exchange forward contracts outstanding as of December 27, 2024.

Certain of the Company’s international business are transacted in non-U.S. dollar (“USD”) currencies. From time to time, the Company utilizes foreign currency hedging instruments to minimize the currency risk of non-USD transactions. The impact of translating the assets and liabilities of foreign operations to USD is included as a component of stockholders’ equity. As of December 27, 2024 and June 28, 2024, the cumulative translation adjustment decreased stockholders’ equity by $20.6 million and $19.3 million, respectively.

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relates primarily to its cash equivalents and borrowings under its Credit Facility. Refer to Note 6. Credit Facility and Debt of the Notes for further information.

Exposure on Cash Equivalents

The Company had $52.6 million in total cash and cash equivalents as of December 27, 2024. Cash equivalents totaled $7.0 million as of December 27, 2024 and were comprised of money market funds and bank certificates of deposit. Cash equivalents have been recorded at fair value. Fair value is measured using inputs that fall into a three-level hierarchy that prioritizes the inputs used to measure fair value based on observability of such inputs. For more information on the fair value measurements of cash equivalents, refer to Note 5. Fair Value Measurements of Assets and Liabilities of the Notes for further information.

The Company’s cash equivalents earn interest at fixed rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. A 10% change in interest rates on the Company’s cash equivalents is not expected to have a material impact on its financial position, results of operations, or cash flows.

Exposure on Borrowings

As of December 27, 2024, the Company had $75.0 million outstanding under its Term Loan and no borrowings outstanding under its Revolver.

The Company’s borrowings under the current Credit Facility bear interest at either: (a) Adjusted Term SOFR plus the applicable margin; or (b) the Base Rate plus the applicable margin. The pricing levels for interest rate margins are determined based on the Consolidated Total Leverage Ratio as determined and adjusted quarterly. As of December 27, 2024, the applicable margin on Adjusted Term SOFR and Base Rate borrowings was 2.75% and 1.75%, respectively. The effective rate of interest on the outstanding Term Loan borrowings as of December 27, 2024 was 7.2%.

A 10% change in interest rates is estimated to have a $0.5 million impact on annual interest expense on the Company’s outstanding long-term debt as of December 27, 2024.

Evaluation of Disclosure Controls and Procedures

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2024, the Company’s management concluded that our disclosure controls and procedures were not effective as of June 28, 2024 due to certain material weaknesses in internal control over financial reporting. Refer to Part II, Item 9A. Controls and Procedures in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2024 for further information.

During the first six months of fiscal 2025, the Company implemented actions designed to improve our internal control over financial reporting and remediate these material weaknesses, including (i) providing training to the applicable control performers related to the importance of timely execution of control activities for which they are responsible; (ii) beginning the redesign of controls over the determination of the appropriate period for revenue recognition, controls over arrangements where revenue is recognized over time and controls related to the review and approval of journal entries, and (iii) implementing a formal monitoring program to perform the necessary evaluations to ascertain whether the components of internal control are present and functioning, including implementing corrective actions as necessary.

These steps are subject to ongoing senior management review, as well as oversight by the audit committee of our Board of Directors. While significant progress has been made to remediate the material weaknesses, the material weaknesses will not be considered remediated until the associated controls operate effectively for a sufficient period of time and management concludes, through testing, that the controls are operating effectively. We will continue to monitor the design and effectiveness of these and other processes, procedures and controls and make further changes management deems appropriate.

The Company’s management, with the participation of our President and CEO, and Chief Financial Officer (“CFO”), completed an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of December 27, 2024. The Company’s CEO and CFO have concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were not effective as of December 27, 2024, due to the material weaknesses described above not being fully remediated as of the date of the evaluation.

Changes in Internal Controls over Financial Reporting

Except as noted above, there were no changes to our internal controls over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) that occurred during the quarter ended December 27, 2024 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company’s management, including its CEO and CFO, does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Investors should carefully review and consider the information regarding certain factors which could materially affect our business, operating results, cash flows, and financial condition set forth under Item 1A, Risk Factors, in our fiscal 2024 Annual Report on Form 10-K filed with the SEC on October 4, 2024.

There have been no material changes from the risk factors described in our Annual Report, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.