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Item 7. Management’s Discussion and Analysis

2022-09-14 compared with 2021-08-25 · 95 added, 167 removed, 250 unchanged (51% of the section changed)

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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 July 1, 2022 is referred to as “fiscal 2022” or “2022”;

our fiscal year ended July 2, 2021 is referred to as “fiscal 2021” or “2021”;

In the discussion below, our fiscal year ended July 1, 2022 is referred to as “fiscal 2022” or “2022”;

our fiscal year ended July 2, 2021 is referred to as “fiscal 2021” or “2021”;

and our fiscal year ended June 28, 2019 is referred to as “fiscal 2019” or “2019.” Our fiscal year ends on the Friday nearest to June 30.

Fiscal 2021 presented included 52 weeks while fiscal 2020 included 53 weeks and fiscal 2019 included 52 weeks.

This one week difference between fiscal 2021 and fiscal 2020 impacts the comparison of both revenue and expenses.

We achieved revenue growth of 15.2% in fiscal 2021.

We anticipate further revenue growth in fiscal 2022.

We continue to have a strong backlog entering fiscal 2022 and we anticipate continuing our strong momentum across all verticals.

We have made inroads into the U.S.

rural broadband and wireless internet service provider areas and there is now further evidence of investment to support 5G deployments with our U.S.

service provider customers.

Our international sales grew in fiscal 2021.

In March 2020, the World Health Organization characterized the current respiratory illness caused by novel coronavirus disease, known as COVID-19, as a pandemic.

The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns.

Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic.

The COVID-19 pandemic has had and is likely to continue to have an impact on our operations, supply chains and distribution systems.

The COVID-19 pandemic has led to an increase in our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking or requiring.

The extent to which the COVID-19 pandemic impacts our business, prospects and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, including ongoing vaccination efforts, any new variant strains of the underlying virus and how quickly and to what extent normal economic and operating activities can resume.

Management is actively monitoring the impact of the COVID-19 pandemic on our financial condition, liquidity, operations, suppliers, industry, and workforce.

and our fiscal year ended July 3, 2020 is referred to as “fiscal 2020” or “2020.” Our fiscal year ends on the Friday nearest to June 30.

Fiscal 2022 and fiscal 2021 presented included 52 weeks while fiscal 2020 included 53 weeks.

This one week difference between fiscal 2022 and 2021 to fiscal 2020 impacts the comparison of both revenue and expenses.

Aviat sells radios, routers, software and services.

We have more than 3,000 customers and significant relationships with global service providers and private network operators.

Our manufacturing base in North America consists of a combination of contract manufacturing and assembly and test operated in Austin, Texas by Aviat.

Our technology is underpinned by more than 200 patents.

We compete on the basis of total cost of ownership, microwave radio expertise and solutions for mission critical communications.

We have a global presence.

The COVID-19 pandemic related disruptions to our business, operations, customers and suppliers lessened over the course of fiscal 2022.

While supply chain lead-times remain extended and difficult to manage, the impact on our ability to fulfill orders for the year ended July 1, 2022 was minimal.

Depending on the progression of pandemic-related factors such as supply constraints, potential for temporary manufacturing restrictions and our ability to perform field services during shelter in place orders, we could experience constraints and delays in fulfilling customer orders in future periods.

We are monitoring, assessing and adapting to the situation to mitigate impacts on our business, supply chain and customer demand.

We expect the potential for these challenges to continue until business and economic activities return to more normal levels.

Our first priority remains the health and safety of our employees and their families.

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Our manufacturing sites remain operational, and we are maintaining social distancing and have enhanced cleaning protocols and usage of personal protective equipment, where appropriate.

The impact to our supply chain lead times and ability to fulfill orders was minimal for the year ended July 2, 2021.

However, depending on pandemic-related factors such as constraints of supply of certain component parts, uncertain duration of temporary manufacturing restrictions and our ability to perform field services during shelter in place orders, we could experience constraints and delays in fulfilling customer orders in future periods.

We are monitoring, assessing and adapting to the situation and preparing for possible implications to our business, supply chain and customer demand.

We expect the potential for these challenges to continue until business and economic activities return to more normal levels.

The financial results for the year ended July 2, 2021 reflect some of the reduced activity experienced during the period in various locations around the world and are not necessarily indicative of the results for the next fiscal period or fiscal year.

Operations Review

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We manage our sales activities primarily on a geographic basis in North America and three international geographic regions:

(1) Africa and the Middle East, (2) Europe and Russia and (3) Latin America and Asia Pacific.

(1) Africa and the Middle East, (2) Europe and (3) Latin America and Asia Pacific.

Revenue by region for fiscal 2022, 2021 and 2020 and the related changes are shown in the table below:

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Africa and the Middle East 47,527 44,023 37,595 3,504 6,428 8.0 % 17.1 %

Europe and Russia 8,826 11,157 16,933 (2,331) (5,776) (20.9) % (34.1) %

Europe 12,973 8,826 11,157 4,147 (2,331) 47.0 % (20.9) %

Latin America and Asia Pacific 42,658 38,991 38,181 3,667 810 9.4 % 2.1 %

Total Revenue $ 302,959 $ 274,911 $ 238,642 $ 28,048 $ 36,269 10.2 % 15.2 %

We achieved revenue growth of 10.2% in fiscal 2022.

We have progressed in the U.S.

rural broadband and wireless internet service provider areas and there is evidence of investment to support 5G deployments with our U.S.

service provider customers.

Our revenue from North America increased by $16.7 million, or 9.1%, in fiscal 2022 compared with fiscal 2021.

The increase in North America revenue during fiscal 2021 was due to revenue growth with private network customers, as well as increased sales to mobile operators.

The increase in North America revenue during fiscal 2022 was due to revenue growth with private network customers and rural broadband customers.

Revenue from North America increased $31.4 million, or 20.7%, in fiscal 2021 compared with fiscal 2020.

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The increase in revenue was primarily due to increased sales to mobile operators in the region.

Revenue from Africa and the Middle East decreased $10.7 million, or 22.2%, in fiscal 2020 compared with fiscal 2019.

The decrease in revenue was primarily due to decreased sales to our mobile operator customers in the region.

Revenue from Europe and Russia decreased by $2.3 million, or 20.9%, in fiscal 2021 compared with fiscal 2020.

The decrease in revenue was due to lower sales to mobile operator customers.

Revenue in Europe and Russia decreased $5.8 million, or 34.1%, in fiscal 2020 compared with fiscal 2019.

Revenue from Africa and the Middle East increased $6.4 million, or 17.1%, in fiscal 2021 compared with fiscal 2020.

The increase in revenue was primarily due to increased sales to mobile operators in the region.

Revenue from Europe increased by $4.1 million, or 47.0%, in fiscal 2022 compared with fiscal 2021.

The increase in revenue was due to higher sales to private network customers.

Revenue in Europe decreased $2.3 million, or 20.9%, in fiscal 2021 compared with fiscal 2020.

The decrease was due to lower sales to mobile operator customers.

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The increase in revenue was primarily due to higher sales to mobile operator customers in Asia Pacific offset in part by decreased revenue in Latin America.

Revenue from Latin America and Asia-Pacific decreased $7.6 million, or 16.5%, in fiscal 2020 compared with fiscal 2019.

The decrease was primarily due to lower sales volume from certain mobile operator customers in Asia Pacific offset in part by increased revenue in Latin America.

Revenue from Latin America and Asia-Pacific increased $0.8 million, or 2.1%, in fiscal 2021 compared with fiscal 2020.

The increase in revenue was primarily due to higher sales to mobile operator customers in Asia Pacific offset in part by decreased revenue in Latin America.

Fiscal Year $ Change % Change

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Our revenue from product sales increased by $22.3 million, or 12.0%, in fiscal 2022 compared with fiscal 2021.

Product volume increased with customers in all regions.

Our services revenue increased by $5.7 million, or 6.4%, in fiscal 2022 compared with fiscal 2021 from increased sales in all regions, except for Asia Pacific.

Our revenue from product sales increased $32.0 million, or 20.8%, in fiscal 2021 compared with fiscal 2020.

Product volume increased with customers in North America and Middle East Africa, offset in part by small declines in the other international markets.

Our services revenue increased by $4.3 million, or 5.0%, in fiscal 2021 compared with fiscal 2020 from increased sales in North America.

Our revenue from product sales decreased $2.9 million, or 1.9%, in fiscal 2020 compared with fiscal 2019.

Product volume decreased with customers in international markets and was offset in part by increased product sales in North America.

Our services revenue decreased by $2.3 million, or 2.6%, in fiscal 2020 compared with fiscal 2019.

Decreased sales in international markets were offset in part by increased sales in North America.

Fiscal Year $ Change % Change

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Gross margin for fiscal 2022 increased by $6.6 million, or 6.5%, compared with fiscal 2021.

Gross margin as a percentage of revenue for fiscal 2021 increased to 37.3%, compared with 35.5% in fiscal 2020, primarily due to higher volume of Private Network business, increased sales through Aviat Store which serves primarily the Rural Broadband, and wins with our multiband products and software sales.

Gross margin as a percentage of revenue for fiscal 2022 decreased to 36.1%, compared with 37.3% in fiscal 2021, primarily due to inflationary pressures during the year.

Gross margin for fiscal 2021 increased $17.9 million, or 21.2%, compared with fiscal 2020.

Gross margin as a percentage of revenue for fiscal 2020 increased to 35.5%, compared with 32.5% in fiscal 2019, primarily due to higher margin rates for product sales and implementation of cost savings initiatives.

The increased volume of product sales in North America, which generally has a higher gross margin compared to international, contributed most of the overall gross margin improvement in fiscal 2020.

Research and Development Expenses

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Our research and development (“R&D”) expenses increased by $0.8 million, or 3.6%, in fiscal 2022 compared with fiscal 2021.

The increase was due to additional investments to support new product offerings and redesigns to mitigate supply chain constraints.

Our R&D expenses increased $2.5 million, or 13.1%, in fiscal 2021 compared with fiscal 2020.

The increase was due to additional investments to support new product offerings.

Our R&D expenses decreased $1.8 million, or 8.7%, in fiscal 2020 compared with fiscal 2019.

The decrease was primarily due to consolidation of product development, lower variable compensation and costs reduction initiatives associated with COVID-19, offset in part by expenses associated with one extra week in our fiscal 2020 calendar.

Selling and Administrative Expenses

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% of revenue 19.0 % 20.5 % 24.3 %

Our selling and administrative expenses decreased by $1.7 million, or 2.9%, in fiscal 2021 compared with fiscal 2020.

The decrease was primarily due to lower travel expenses and restructuring savings offset in part by higher sales-related expenses.

Our selling and administrative expenses increased $1.9 million, or 3.4%, in fiscal 2020 compared with fiscal 2019.

The increase was primarily due to higher variable compensation and expenses associated with one extra week in our fiscal 2020 calendar, partially offset by cost reductions initiatives associated with COVID-19.

Our selling and administrative expenses increased by $1.3 million, or 2.4%, in fiscal 2022 compared with fiscal 2021.

The increase was primarily due to higher corporate expenses.

Our selling and administrative expenses decreased $1.7 million, or 2.9%, in fiscal 2021 compared with fiscal 2020.

The decrease was primarily due to lower travel expenses and restructuring savings offset in part by increases in sales-related expenses.

Restructuring Charges

During the third and fourth quarters of fiscal 2021, our Board of Directors approved restructuring plans (the “Fiscal 2021 Plan”) to continue to reduce our operating costs and improve profitability.

During the fourth quarter of Q4 2022, our Board of Directors approved a restructuring plan (the “Q4 2022 Plan”) to restructure specific groups to optimize skill sets and execute on strategic deliverables.

The Q4 2022 Plan was anticipated to be implemented through early fiscal year 2023, with a certain number of positions being consolidated.

We recorded $0.4 million restructuring charges for this plan in Fiscal Year 2022.

During the third quarter of fiscal 2021, our Board of Directors approved restructuring plans (the “Fiscal 2021 Plan”) to continue to reduce our operating costs and improve profitability.

We recorded restructuring charges of $2.4 million related to the Fiscal 2021 Plan in fiscal 2021.

Payments related to the accrued restructuring balances for this plan are expected to be fully paid in fiscal 2023.

During the fourth quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q4 2020 Plan”) in order to continue to reduce our operating costs and improve profitability to optimize our business model and increase efficiencies.

We recorded restructuring charges of $1.9 million related to the Q4 2020 Plan in fiscal 2020.

Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2022.

During the third quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q3 2020 Plan”) in order to reduce our operating costs and improve profitability to optimize our business model and increase efficiencies.

During the fourth quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q4 2020 Plan”) to continue to reduce our operating costs and improve profitability to optimize our business model and increase efficiencies.

We recorded restructuring charges of $1.9 million related to the Q4 2020 Plan in fiscal 2020.

Payments related to the accrued restructuring liability balance for this plan were fully paid in fiscal 2022.

During the fourth quarter of fiscal 2019, our Board of Directors approved a restructuring plan (the “Fiscal 2020 Plan”) to primarily consolidate product development, right size our resources to support our International business and other support functions.

Payments related to the accrued restructuring liability balance for this plan were fully paid in fiscal 2021.

During the fourth quarter of fiscal 2018, our Board of Directors approved a restructuring plan (the “Fiscal 2018-2019 Plan”) to consolidate back-office support functions and align resources by geography to lower our expense structure.

We completed the restructuring activities under the Fiscal 2018-2019 Plan at the end of fiscal 2019.

During the third quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q3 2020 Plan”) to reduce our operating costs and improve profitability to optimize our business model and increase efficiencies.

We recorded restructuring charges of $0.6 million related to the Q3 2020 Plan in fiscal 2020.

Payments related to the accrued restructuring liability balance for this plan were fully paid in fiscal 2021.

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(In thousands, except percentages) 2022 2021 2020 2022/2021 2021/2020 2022/2021 2021/2020

Fiscal 2021 Plan $ 2,414 $ — $ — $ 2,414 $ — N/A N/A

Q4 2020 Plan 92 1,879 — (1,787) 1,879 (95.1) % N/A

Prior Years' Plan (235) 2,170 736 (2,405) 1,434 (110.8) % 194.8 %

Q4 2022 Plan $ 434 $ — $ — $ 434 $ — N/A N/A

Fiscal 2021 Plan 271 2,414 — (2,143) 2,414 (88.8) % N/A

Prior Years Plans (231) (143) 4,049 (88) (4,192) 61.5 % (103.5) %

Prior Year Plan:

Facilities and Other (236) — — (236) — N/A N/A

Restructuring charges $ 238 $ 2,271 $ 4,049 $ (2,033) $ (1,778) (89.5) % (43.9) %

Restructuring charges for fiscal 2021 included employee severance and benefits of $2.4 million the Fiscal 2021 Plan and a reduction in the previously estimated accrual of $0.2 million in Prior Years' Plan.

Restructuring charges for fiscal 2020 included employee severance and benefits costs of $1.9 million for the Q4 2020 Plan, $2.2 million for the Prior Years' Plan.

Restructuring charges for fiscal 2019 included $0.7 million of employee severance and benefits costs related to the Prior Years' Plan.

Interest Income, Interest Expense and Other Income (Expense), Net

Restructuring charges for fiscal 2022 included employee and severance and benefits of $0.4 million under the Q4 2022 Plan and $0.3 million under the Fiscal 2021 Plan and reductions of Prior Years Plans estimated accruals of $0.5 million.

Restructuring charges for fiscal 2021 included employee severance and benefits of $2.4 million, the Fiscal 2021 Plan and a reduction in the previously estimated accrual of $0.1 million in Prior Years Plans.

Restructuring charges for fiscal 2020 included employee severance and benefits costs of $1.9 million for the Q4 2020 Plan and $2.2 million for the Prior Years Plans.

Our successfully executed restructuring initiatives have enabled us to restructure specific groups to optimize skill sets and align structure to execute on strategic deliverables, in addition to aligning cost structure with core of the business.

Other Income (Expense), Net

Fiscal Year $ Change % Change

(In thousands, except percentages) 2022 2021 2020 2022/2021 2021/2020 2022/2021 2021/2020

Interest income $ 230 $ 385 $ 267 $ (155) $ 118 (40) % 44 %

Interest expense — (54) (102) 54 48 (100) % (47) %

Other income, net — — 17 — (17) N/A N/A

Interest income reflected interest earned on our cash equivalents which were comprised of money market funds and bank certificates of deposit.

Interest expense was primarily related to interest associated with borrowings under our Silicon Valley Bank (“SVB”) credit facility and discounts on customer letters of credit.

Other income, net 1,690 230 331 1,460 (101) 635 % (31) %

Our other income, net increased by $1.5 million, in fiscal 2022 compared with fiscal 2021, primarily due to gains in marketable securities partially offset by movement in foreign exchange.

Fiscal Year $ Change

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$ 30,435 $ 22,440 $ 3,709 $ 7,995 $ 18,731

(Benefit from) provision for income taxes (87,699) 3,452 (8,188) (91,151) 11,640

Provision for (benefit from) income taxes 9,275 (87,699) 3,452 96,974 (91,151)

As % of income before income taxes

30.5 % (390.8) % 93.1 %

Our (benefit from) provision for income taxes was $87.7 million of benefit for fiscal 2021, $3.5 million of expense for fiscal 2020 and $8.2 million of benefit for fiscal 2019.

Our provision for (benefit from) income taxes was $9.3 million of expense for fiscal 2022, $87.7 million of benefit for fiscal 2021 and $3.5 million of expense for fiscal 2020.

Our tax expense for fiscal 2022 was primarily due to tax expense related to U.S.

and profitable foreign subsidiaries.

Our tax benefit for fiscal 2021 was primarily due to the release of $92.2 million in valuation allowance on our U.S.

federal and state deferred tax assets, offset by tax expenses related to profitable foreign subsidiaries and an increase in our reserve for uncertain tax positions.

Our tax expense for fiscal 2020 was primarily due to tax expense related to profitable foreign subsidiaries and an increase in our reserve for uncertain tax positions.

Liquidity, Capital Resources and Financial Strategies

As of July 2, 2021, our cash and cash equivalents and short-term investments totaled $47.9 million.

As of July 1, 2022, our cash and cash equivalents and marketable securities totaled $47.8 million.

Approximately $5.9 million, or 12.3%, was held in the United States.

The remaining balance of $41.9 million, or 87.7%, was held by entities outside the United States.

This amount includes $14.0 million moved in advance of the Redline acquisition closure.

Of the amount of cash and cash equivalents held by our foreign subsidiaries at July 1, 2022, $29.2 million was held in jurisdictions where our undistributed earnings are indefinitely reinvested, and if repatriated, would be subject to foreign withholding taxes.

Operating Activities

Cash provided by operating activities is presented as net income adjusted for certain non-cash items and changes in assets and liabilities.

Net cash provided by operating activities was $17.3 million for fiscal 2021, $17.5 million for fiscal 2020 and $2.9 million for fiscal 2019.

Cash used in or provided by operating activities is presented as net income adjusted for certain non-cash items and changes in assets and liabilities.

Net cash provided by operating activities was $2.8 million for fiscal 2022, $17.3 million and $17.5 million, respectively, were provided by operating activities for fiscal 2021 and fiscal 2020.

For fiscal 2022 compared to fiscal 2021, cash provided by operating activities decreased by $14.5 million.

The net contribution of non-cash items to cash provided by operating activities decreased by $92.3 million and the net contribution of changes in operating assets and liabilities to cash provided by operating activities decreased by $17.7 million in fiscal 2021 as compared to fiscal 2020.

The $92.3 million decrease in the net contribution of non-cash items to cash provided by operating activities was primarily attributable to a $90.4 million net change in deferred tax assets.

Net changes in operating assets and liabilities resulted in a decrease of $17.7 million to cash used by operating activities for fiscal 2021 compared to fiscal 2020.

The net contribution of non-cash items to cash provided by operating activities increased by $97.4 million and the net contribution of changes in operating assets and liabilities to cash provided by operating activities decreased by $22.9 million in fiscal 2022 as compared to fiscal 2021.

The $97.4 million increase in the net contribution of non-cash items to cash provided by operating activities was primarily attributable to a $98.6 million net change in deferred tax assets.

Net changes in operating assets and liabilities resulted in a decrease of $22.9 million additional cash used by operating activities for fiscal 2022 compared to fiscal 2021.

Accounts receivable and unbilled costs fluctuate from period to period, depending on the amount and timing of sales and billing activities and cash collections.

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The change in inventories and in customer service inventories during fiscal 2022 were primarily driven by forecasted demand and to secure component parts in shortage.

The increase in customer advance payments and unearned revenue during fiscal 2021 was due to the timing of payment from customers and revenue recognition.

The decrease in customer advance payments and unearned revenue during fiscal 2022 was due to the timing of payment from customers and revenue recognition.

We used $1.6 million in cash during fiscal 2022 on expenses related to restructuring liabilities.

For fiscal 2021 compared to fiscal 2020, cash provided by operating activities increased by $0.2 million.

The net contribution of non-cash items to cash provided by operating activities increased by $9.3 million and the net changes in operating assets and liabilities to cash provided by operating activities increased by $10.3 million in fiscal 2020 as compared to fiscal 2019.

The $9.3 million increase in the net contribution of non-cash items to cash provided by operating activities was primarily attributable to a $8.6 million net change in deferred tax assets.

The net contribution of non-cash items to cash provided by operating activities decreased by $92.3 million and the net changes in operating assets and liabilities to cash provided by operating activities decreased by $17.7 million in fiscal 2021 as compared to fiscal 2020.

The $92.3 million decrease in the net contribution of non-cash items to cash provided by operating activities was primarily attributable to a $90.4 million net change in deferred tax assets offset by proceeds from sale of asset held for sale.

Investing Activities

Net cash used in investing activities was $2.8 million for fiscal year 2021, $4.6 million for fiscal 2020 and $5.2 million for fiscal 2019, which consisted of capital expenditures.

Net cash used in investing activities was $7.8 million for fiscal year 2022, $2.8 million for fiscal 2021 and $4.6 million for fiscal 2020, which consisted of purchases of marketable securities and capital expenditures net of cash received from sale of a real estate asset.

For fiscal 2023, we expect to spend between $5.0 million to $6.0 million for capital expenditures, primarily on equipment for development and manufacturing of new products and IT infrastructure.

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Financing cash flows consist primarily of proceeds and repayments of short-term debt, repurchase of stock and proceeds from the sale of shares of common stock through employee equity plans.

Net cash used in financing activities was $8.0 million for fiscal year 2021, which was attributable to $9.0 million for the repayment of borrowings, $0.8 million for repurchase of common stock, $0.2 million payments for taxes related to net settlement of equity awards, offset by $1.9 million proceeds from the issuance of common stock from employee stock plans.

Net cash used in financing activities was $4.9 million for fiscal year 2022, which was attributable to $5.4 million for repurchase of common stock relating to treasury shares, $0.5 million payments for taxes related to net settlement of equity awards, offset by $1.0 million proceeds from the issuance of common stock from employee stock plans.

Net cash used by financing activities was $8.0 million for fiscal 2021 and $2.5 million for fiscal 2020.

As of July 2, 2021, our principal sources of liquidity consisted of the $47.9 million in cash and cash equivalents, $22.7 million of available credit under our $25.0 million credit facility with Silicon Valley Bank (“SVB Credit Facility”) which matures on June 28, 2024, and future collections of receivables from customers.

We regularly require 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 our credit and sovereign risk.

As of July 1, 2022, our principal sources of liquidity consisted of the $47.8 million in cash and cash equivalents and marketable securities, $21.7 million of available credit under our $25.0 million credit facility with Silicon Valley Bank (“SVB Credit Facility”) which matures on June 28, 2024, and future collections of receivables from customers.

We regularly require letters of credit from certain customers and, from time to time, these letters of credit are discounted without recourse shortly after shipment occurs 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 and credit facilities.

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The borrowing base is subject to certain eligibility criteria.

Availability under the accounts

receivable formula-based revolving credit facility can also be utilized to issue letters of credit with a $12.0 million sub-limit.

Availability under the accounts receivable formula-based revolving credit facility can also be utilized to issue letters of credit with a $12.0 million sub-limit.

We may prepay loans under the SVB Credit Facility in whole or in part at any time without premium or penalty.

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As of July 1, 2022, we were in compliance with the quarterly financial covenants, as amended, contained in the SVB Credit Facility.

Due to the current economic uncertainty stemming from the impact of the COVID-19 pandemic, on April 21, 2020, we entered into a Paycheck Protection Program Note (the “Note”) with Silicon Valley Bank as the lender (“Lender”) in an aggregate principal amount of $5.9 million pursuant to the Paycheck Protection Program under the CARES Act (the “PPP Loan”).

On April 22, 2020, we received proceeds of $5.9 million from the PPP Loan.

At the time when we applied for the PPP Loan, we had qualified to receive the funds pursuant to the then-published qualification requirements.

On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance regarding qualification requirements for public companies.

Based on our assessment of the new guidance, on May 5, 2020, we repaid the principal and interest on the PPP Loan.

We also obtained an uncommitted short-term line of credit of $0.4 million from a bank in New Zealand to support the operations of our subsidiary located there in fiscal 2015.

This line of credit provides for $0.3 million in short-term advances at various interest rates, all of which was available as of July 2, 2021.

The line of credit also provides for the issuance of standby letters of credit and company credit cards, of which $0.1 million was outstanding as of July 2, 2021.

This facility may be terminated upon notice, is reviewed annually for renewal or modification, and is supported by a corporate guarantee.

During fiscal 2022, we terminated our uncommitted short-term line of credit from a bank in New Zealand.

Restructuring Payments

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We expect to fund these future payments with available cash and cash provided by operations.

Contractual Obligations

The following table summarizes our contractual obligations and commitments as of July 2, 2021:

Obligations Due by Fiscal Year

(In thousands) Total < 1 year 1 - 3 years 3 - 5 years > 5 years Other

Purchase obligations (1)(4)

31,411 17,201 13,515 695 — —

Other purchase obligations (3)(4)

2,456 1,529 927 — — —

Operating lease commitments (5)

5,172 973 1,315 1,174 1,710 —

Reserve for uncertain tax positions (2)

5,164 — — — — 5,164

Total contractual cash obligations $ 44,203 $ 19,703 $ 15,757 $ 1,869 $ 1,710 $ 5,164

___________________________

(1) From time to time in the normal course of business we may enter into purchasing agreements with our suppliers that require us to accept delivery of, and remit full payment for, finished products that we have ordered, finished products that we requested be held as safety stock, and work in process started on our behalf in the event we cancel or terminate the purchasing agreement.

Because these agreements do not specify fixed or minimum quantities, do not specify minimum or variable price provisions, and do not specify the approximate timing of the transaction, and we have no present intention to cancel or terminate any of these agreements, we currently do not believe that we have any future liability under these agreements.

(2) Liabilities for uncertain tax positions of $5.2 million were included in long-term liabilities in the consolidated balance sheets.

At this time, we are unable to make a reasonably reliable estimate of the timing of payments related to this amount due to uncertainties in the timing of tax audit outcomes.

(3) Contractual obligation related to software as a service and software maintenance support.

(4) These items are not recorded on our consolidated balance sheets.

(5) Includes operating leases with terms less than 1 year that are not recorded on our consolidated balance sheets.

Commercial Commitments

We have entered into commercial commitments in the normal course of business including surety bonds, standby letters of credit and other arrangements with financial institutions and insurers primarily relating to the guarantee of future performance on certain tenders and contracts to provide products and services to customers.

As of July 2, 2021, we had commercial commitments on outstanding surety bonds and standby letters of credit as follows:

Expiration of Commitments by Fiscal Year

(In thousands) Total 2022 2023 2024 After 2024

Standby letters of credit used for:

Bids $ 787 $ 787 $ — $ — $ —

Payment guarantees 3,238 2,190 — — 1,048

Performance 34,697 33,584 1,113 — —

38,825 36,629 1,113 35 1,048

Surety bonds used for:

Performance 530,497 524,726 5,771 — —

Payment guarantees 3,642 3,542 100 — —

Tax bonds 10,315 6,771 — 3,544 —

544,454 535,039 5,871 3,544 —

Total commercial commitments $ 583,279 $ 571,668 $ 6,984 $ 3,579 $ 1,048

Historically, we have not paid out any significant amount of our performance guarantees.

As such, the outstanding commercial commitments have not been recorded in our consolidated balance sheets.

Off-Balance Sheet Arrangements

In accordance with the definition under SEC rules (Item 303(a)(4)(ii) of Regulation S-K), any of the following qualify as off-balance sheet arrangements:

• any obligation under certain guarantee contracts;

• a retained or contingent interest in assets transferred to an unconsolidated entity or similar entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;

• any obligation, including a contingent obligation, under certain derivative instruments;

• any obligation, including a contingent obligation, arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

Currently we are not participating in transactions that generate relationships with unconsolidated entities or financial partnerships, including variable interest entities, and we do not have any material retained or contingent interest in assets as defined above.

As of July 2, 2021, we did not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity.

In addition, we are not currently a party to any related party transactions that materially affect our results of operations, cash flows or financial condition.

Financial Risk Management

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Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities.

As of July 2, 2021, we had no foreign currency forward contracts outstanding.

Net foreign exchange gain (loss) recorded in our consolidated statements of operations during fiscal 2021, 2020 and 2019 was as follows:

As of July 1, 2022, we had multiple forward contracts in one foreign currency outstanding as follows:

Notional Contract Amount Notional Contract Amount

Currency (Local Currency) (USD)

(In thousands)

Amount included in costs of revenues $ 1,015 $ 419 $ (664)

Total foreign exchange gain (loss), net $ 1,015 $ 419 $ (664)

A 10% adverse change in currency exchange rates for our foreign currency derivatives held as of July 2, 2021 would have an no impact as we held no foreign currency derivatives as of July 2, 2021.

Euro 1,500 $ 1,681

Net foreign exchange (loss) gain recorded in our consolidated statements of operations during fiscal 2022, 2021 and 2020 were $(1.1) million, $(1.0) million, and $0.4 million, respectively.

A 10% adverse change in currency exchange rates for our foreign currency derivatives held as of July 1, 2022 would have no impact as we held no foreign currency derivatives as of July 1, 2022.

Certain of our international business are transacted in non-U.S.

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Exposure on Cash Equivalents and Short-term Investments

We had $47.9 million in total cash and cash equivalents and short-term investments as of July 2, 2021.

We had $47.8 million in total cash and cash equivalents and marketable securities as of July 1, 2022.

Cash equivalents and short-term investments totaled $9.0 million as of July 1, 2022 and were comprised of money market funds and certificates of deposit.

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The portfolio is also diversified by maturity to ensure that funds are readily available as needed to meet our liquidity needs.

This policy reduces the potential need to sell securities in order to meet liquidity needs and therefore the potential effect of changing market rates on the value of securities sold.

This policy reduces the potential need to sell securities to meet liquidity needs and therefore the potential effect of changing market rates on the value of securities sold.

The primary objective of our short-term investment activities is to preserve principal while maximizing yields, without significantly increasing risk.

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Our significant accounting policies are more fully described in “Note 1.

The Company and Summary of Significant Accounting Policies” in the notes to consolidated financial statements.

In preparing our financial statements and

accounting for the underlying transactions and balances, we apply those accounting policies.

The Company and Summary of Significant

Accounting Policies” in the notes to consolidated financial statements.

In preparing our financial statements and accounting for the underlying transactions and balances, we apply those accounting policies.

We consider the estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain.

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These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known to us.

We perform ongoing profitability analysis of our service contracts accounted for under this method in order to determine whether the latest estimates of revenues, costs, and profits require updating.

We perform ongoing profitability analysis of our service contracts accounted for under this method to determine whether the latest estimates of revenues, costs, and profits require updating.

In rare circumstances if these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately.

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Several factors may influence the sale and use of our inventories, including decisions to exit a product line, technological change, new product development and competing product offerings.

These factors could

result in a change in the amount of obsolete inventory quantities on hand.

These factors could result in a change in the amount of obsolete inventory quantities on hand.

Additionally, our estimates of future product demand may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be overstated or understated.

In the future, if we determine that our inventory is overvalued, we would be required to recognize such costs in cost of product sales and services in our consolidated statements of operations at the time of such determination.

In the case of goods which have been written down below cost at the close of a fiscal quarter, such reduced amount is considered the new lower cost basis for subsequent accounting purposes, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

In the case of goods which have been written down below cost at the close of a fiscal quarter, such

reduced amount is considered the new lower cost basis for subsequent accounting purposes, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

We did not make any material changes in the valuation methodology during the past three fiscal years.

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Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase or decrease in the period in which the assessment is changed.

Realization of deferred tax assets is dependent upon future earnings in applicable tax jurisdictions.

At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets on a more likely than not basis.

During fiscal 2021, we recorded a valuation allowance release of $92.2 million as a discrete item based on management’s reassessment of the amount of its U.S.

federal and state deferred tax assets that are more likely than not to be realized, primarily as a result of increases in U.S.

profitability in the current period and expectations of continued profitability in future periods.

In performing our analysis, we used the most updated plans and estimates that we currently use to manage the underlying business and calculated the utilization of our deferred tax assets.

We continue to maintain a valuation allowance of $1.4 million on certain U.S.

federal and state deferred tax assets that we believe is not more likely than not to be realized in future periods.

The accounting estimates related to the liability for uncertain tax position require us to make judgments regarding the sustainability of each uncertain tax position based on its technical merits.

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Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome of these matters will be same as these estimates.

These estimates are updated

quarterly based on factors such as change in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues.

These estimates are updated quarterly based on factors such as change in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues.

Impact of Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis