What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2023-02-01 · 82 added, 72 removed, 145 unchanged (52% of the section changed)

26 unchanged sentences

• the impact of COVID-19 on our business, operations and cash flows;

• disruptions relating to the ongoing conflict between Russia and Ukraine;

• continued price and margin erosion as a result of increased competition in the microwave transmission industry;

21 unchanged sentences

• our ability to implement our stock repurchase program or that it will enhance long-term stockholder value;

• the impact of adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions.

Other factors besides those listed here could also adversely affect us.

15 unchanged sentences

We have a global presence.

While supply chain lead-times remain extended and difficult to manage, the impact on our ability to fulfill orders for the current quarter 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.

While supply chain lead-times remain extended and difficult to manage and certain components remain on allocation, we have seen recent improvements in the supply chain environment.

The impact that supply chain constraints had on our ability to fulfill orders for the current quarter was minimal.

Depending on the progression of factors such as supply allocations, lead-time trends and our ability to perform field services, we could experience constraints and delays in fulfilling customer orders in future periods.

We continually monitor, assess and adapt to the situation to mitigate impacts on our business, supply chain and customer demand.

6 unchanged sentences

(“Redline”), a leading provider of mission-critical data infrastructure.

segment, leveraging Aviat's sales channel to address a large dollar Private LTE/5G addressable market and increasing Aviat’s reach in mission-critical industrial Private Networks.

Redline allows Aviat to expand its Private Networks Offering with Private LTE/5G, Unlicensed Wireless Access Solutions, by creating an integrated end-to-end offering for wireless access and transport in the Private Networks segment, leveraging Aviat's sales channel to address the large Private LTE/5G market and increasing Aviat’s reach in mission-critical industrial Private Networks.

Operations Review

The market for mobile backhaul continued to be our primary addressable market segment globally in the first six months of fiscal 2023.

The market for mobile backhaul continued to be our primary addressable market segment globally in the first nine months of fiscal 2023.

In North America, we supported 5G and long-term evolution (“LTE”) deployments of our mobile operator customers, public safety network deployments for state and local governments, and private network implementations for utilities and other customers.

6 unchanged sentences

(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 30, 2022 and December 31, 2021 and the related changes were as follows:

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Revenue by region for the three and nine months ended March 31, 2023 and April 1, 2022 and the related changes were as follows:

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

North America $ 46,064 $ 49,042 $ (2,978) (6.1) % $ 146,961 $ 151,025 $ (4,064) (2.7) %

5 unchanged sentences

$ 83,480 $ 74,516 $ 8,964 12.0 % $ 255,414 $ 225,538 $ 29,876 13.2 %

Our revenue in North America increased by $1.0 million, or 2.0%, during the second quarter of fiscal 2023 compared with the same period of fiscal 2022.

Revenue in North America decreased by $(1.1) million, or (1.1)%, during the six months ended fiscal 2023 compared with the same period of fiscal 2022.

The respective changes in North America revenue during the three and six months ended fiscal 2023 were primarily due to timing of private network projects.

Our revenue in Africa and the Middle East increased by $0.6 million or 4.4% during the second quarter of fiscal 2023 compared with the same period of fiscal 2022.

Revenue in Africa and the Middle East increased by $0.9 million, or 3.6%, during the six months of fiscal 2023 compared with the same period of fiscal 2022.

This increase in revenue during the three and six months ended fiscal 2023 was primarily due to increased sales to mobile and private network operators in the region.

Revenue in Europe increased by $2.4 million, or 83.4%, for the second quarter of fiscal 2023 compared with the same period of fiscal 2022.

Revenue in Europe increased by $4.2 million, or 75.3%, during the six months of fiscal 2023 compared with the same period of fiscal 2022.

This increase during the three and six month periods was due to increased sales to mobile operators.

Revenue in Latin America and Asia Pacific increased by $8.8 million, or 84.7%, during the second quarter of fiscal 2023 compared with the same period of fiscal 2022, and increased by $16.9 million, or 88.0%, during the first six months ended fiscal 2023 compared with the same period of fiscal 2022.

This increase during the three and six month periods was due to a key customer win in Asia Pacific and increased sales to mobile operators in Latin America.

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Our revenue in North America decreased by $(3.0) million, or (6.1)%, during the third quarter of fiscal 2023 compared with the same period of fiscal 2022.

Revenue in North America decreased by $(4.1) million, or (2.7)%, during the nine months ended fiscal 2023 compared with the same period of fiscal 2022.

The decrease in North America revenue during the three and nine months ended fiscal 2023 were primarily driven by lower tier one product volumes and lower private network volumes partially offset by higher service volume.

Our revenue in Africa and the Middle East increased by $6.1 million or 46.6% during the third quarter of fiscal 2023 compared with the same period of fiscal 2022.

Revenue in Africa and the Middle East increased by $7.0 million, or 18.7%, during the nine months of fiscal 2023 compared with the same period of fiscal 2022.

This increase in revenue during the three and nine months ended fiscal 2023 was primarily driven by increased product sales to mobile and private network operators in the region.

Revenue in Europe increased by $1.0 million, or 33.6%, for the third quarter of fiscal 2023 compared with the same period of fiscal 2022.

Revenue in Europe increased by $5.2 million, or 61.1%, during the nine months of fiscal 2023 compared with the same period of fiscal 2022.

This increase during the three and nine months ended fiscal 2023 was primarily driven by increased sales to mobile operators.

Revenue in Latin America and Asia Pacific increased by $4.9 million, or 51.4%, during the third quarter of fiscal 2023 compared with the same period of fiscal 2022, and increased by $21.8 million, or 75.9%, during the first nine months ended fiscal 2023 compared with the same period of fiscal 2022.

This increase during the three and nine months ended fiscal 2023 was primarily driven by a key customer win in Asia Pacific and increased product sales to mobile operators in Latin America.

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

Product sales $ 54,811 $ 52,047 $ 2,764 5.3 % $ 175,473 $ 156,361 $ 19,112 12.2 %

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$ 83,480 $ 74,516 $ 8,964 12.0 % $ 255,414 $ 225,538 $ 29,876 13.2 %

Our revenue from product sales increased by $12.1 million, or 22.6%, for the second quarter of fiscal 2023 compared with the same quarter of fiscal 2022.

Our services revenue increased by $0.7 million, or 3.0%, during the second quarter of fiscal 2023 compared with the same quarter of fiscal 2022.

Our revenue from product sales increased by $16.3 million, or 15.7%, for the six months ended fiscal 2023 compared with the same period of fiscal 2022.

Our services revenue increased by $4.6 million, or 9.8%, during the six months ended fiscal 2023 compared with the same period of fiscal 2022.

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Our revenue from product sales increased by $2.8 million, or 5.3%, for the third quarter of fiscal 2023 compared with the same quarter of fiscal 2022.

Our services revenue increased by $6.2 million, or 27.6%, during the third quarter of fiscal 2023 compared with the same quarter of fiscal 2022.

Our revenue from product sales increased by $19.1 million, or 12.2%, for the nine months ended fiscal 2023 compared with the same period of fiscal 2022.

Our services revenue increased by $10.8 million, or 15.6%, during the nine months ended fiscal 2023 compared with the same period of fiscal 2022.

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

Revenue $ 83,480 $ 74,516 $ 8,964 12.0 % $ 255,414 $ 225,538 $ 29,876 13.2 %

6 unchanged sentences

37.6 % 32.7 % 34.5 % 33.5 %

Gross margin for the second quarter of fiscal 2023 increased by $4.1 million, or 14.4% compared with the same quarter of fiscal 2022.

Gross margin for the first six months of fiscal 2023 increased by $7.4 million, or 13.7%.

Gross margin for the third quarter of fiscal 2023 increased by $2.3 million, or 8.3% compared with the same quarter of fiscal 2022.

Gross margin for the first nine months of fiscal 2023, increased by $9.7 million, or 11.9%.

The gross margin improvement was primarily due to higher volume of Private Network and mobile operator business as well as the contribution from the Redline acquisition.

Gross margin as a percentage of product revenue increased in the second quarter and in the first six months of fiscal 2023 compared with the prior year periods primarily due to pricing actions effectively offsetting cost inflation and the accretive contribution of the Redline acquisition.

Service margin as a percentage of service revenue in the second quarter and in first six months of fiscal 2023 declined compared to the same periods in fiscal 2022 due to changes in the stand-alone prices for products and services and the resulting impact on the allocation of the overall transaction price to services.

Gross margin as a percentage of product revenue decreased in the third quarter and in the first nine months of fiscal 2023 compared with the prior year periods primarily due to regional and customer mix partially offset by the accretive contribution of the Redline acquisition.

Service margin as a percentage of service revenue in the third quarter and in the first nine months of fiscal 2023, increased compared to the same periods in fiscal 2022 due to changes in the stand-alone prices for products and services and the resulting impact on the allocation of the overall transaction price to services.

Research and Development Expenses

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

Research and development $ 6,518 $ 5,259 $ 1,259 23.9 % $ 18,652 $ 17,338 $ 1,314 7.6 %

7.8 % 7.1 % 7.3 % 7.7 %

Our research and development expenses in the second quarter and first six months of fiscal 2023 were relatively flat compared with the same periods of fiscal 2022.

Much of our research and development costs are incurred in EUR or NZD currencies.

The strength of the USD yielded savings compared to the prior year, which were substantially offset by the addition of the Redline research and development costs.

Our research and development expenses in the third quarter and first nine months of fiscal 2023 increased compared with the same periods of fiscal 2022.

The increase was primarily attributable to Redline’s research and development program partially offset by the strength of the US Dollar yielded savings compared to the prior year.

Selling and Administrative Expenses

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

Selling and administrative $ 15,842 $ 14,867 $ 975 6.6 % $ 49,913 $ 41,304 $ 8,609 20.8 %

19.0 % 20.0 % 19.5 % 18.3 %

The $2.8 million selling and administrative expense increase in the second quarter of fiscal 2023 was driven by the addition of Redline and variable compensation expenses.

The $7.6 million selling and administrative expense increase for the first six months of fiscal 2023 was also driven by Redline and variable compensation, as well as merger and acquisition related expenses.

The $1.0 million selling and administrative expense increase in the third quarter of fiscal 2023 was driven by the Redline acquisition and variable compensation expenses.

The $8.6 million selling and administrative expense increase for the first nine months of fiscal 2023 was also driven by the Redline acquisition and variable compensation, as well as merger and acquisition related expenses.

Restructuring Charges

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Restructuring charges (recovery) $ 928 $ (960) $ 1,888 * $ 2,878 $ (301) $ 3,179 *

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

Restructuring (recovery) charges $ (23) $ (72) $ 49 * $ 2,855 $ (373) $ 3,228 *

• Percentage not meaningful

In the second quarter of fiscal 2023, we recorded restructuring charges of $0.9 million primarily related to the Q2 2023 Plan.

For the six months ended fiscal 2023 we recorded restructuring charges related to the Q1 2023 Plan and Q2 2023 Plan.

In the third quarter of fiscal 2023, we completed the Q4 2022 Plan.

For the nine months ended fiscal 2023 we recorded restructuring charges related to the Q1 2023 Plan and Q2 2023 Plan partially offset by the completion of the Q4 2022 Plan.

Other Expense/Income, net

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

Other (income)/expense, net $ 428 $ 175 $ 253 * $ 2,750 $ 387 $ 2,363 *

• Percentage not meaningful

Our other (income)/expense, net decreased by $(0.7) million and $2.1 million, in the three and six months ended fiscal 2023, respectively, compared with the same periods of fiscal 2022 primarily due to the movement in foreign exchange rates.

Three Months Ended Six Months Ended

(In thousands, except percentages) December 30, 2022 December 31, 2021 $ Change % Change December 30, 2022 December 31, 2021 $ Change % Change

Our other (income)/expense, net increased by $0.3 million and $2.4 million, in the three and nine months ended fiscal 2023, respectively, compared with the same periods of fiscal 2022 primarily due to loss on sale of Marketable securities and the movement in foreign exchange rates.

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 31, 2023 April 1, 2022 $ Change % Change March 31, 2023 April 1, 2022 $ Change % Change

Income before income taxes $ 7,068 $ 7,307 $ (239) (3.3) % $ 17,337 $ 23,117 $ (5,780) (25.0) %

1 unchanged sentence

We estimate our annual effective tax rate at the end of each quarterly period, and we record 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 expense for the second quarter of fiscal 2023 was primarily due to the tax expense related to U.S.

The tax expense for the third quarter of fiscal 2023 was primarily due to the tax expense related to U.S.

and profitable foreign subsidiaries.

The tax expense for the first six months of fiscal 2023 was primarily due to the tax expense related to U.S.

and profitable foreign subsidiaries, including deferred tax expense associated with our acquisition of Redline in July 2022 and subsequent restructuring impact.

The tax expense for the first nine months of fiscal 2023 was primarily due to the tax expense related to U.S.

and profitable foreign subsidiaries, including tax expense associated with our acquisition of Redline in July 2022 and subsequent restructuring impact.

Liquidity, Capital Resources, and Financial Strategies

Sources of Cash

As of December 30, 2022, our total cash and cash equivalents were $21.4 million.

As of March 31, 2023, our total cash and cash equivalents were $22.5 million.

Approximately $4.6 million, or 20.5%, was held in the United States.

The remaining balance of $17.9 million, or 79.5%, was held by entities outside the United States.

Of the amount of cash and cash equivalents held by our foreign subsidiaries on December 30, 2022, $13.3 million was held in jurisdictions where our undistributed earnings are indefinitely reinvested, and if repatriated, would be subject to foreign withholding taxes.

Of the amount of cash and cash equivalents held by our foreign subsidiaries on March 31, 2023, $16.6 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 or used in operating activities is presented as net income adjusted for non-cash items and changes in operating assets and liabilities.

Net cash used in operating activities was $8.4 million for the first six months of fiscal 2023, compared to $2.2 million cash used in operations for the first six months of fiscal 2022;

Net cash used in operating activities was $9.0 million for the first nine months of fiscal 2023, compared to $10.8 million cash used in operations for the first nine months of fiscal 2022;

this difference was primarily related to a net change in Other Assets and Liabilities, Accrued Expenses, Inventories, Advance Payments and Unearned Revenue, partially offset by the net change in Accounts Receivable.

Net cash provided by noncash items was $15.5 million for the first six months of 2023.

The net changes in operating assets and liabilities resulted in a net use of cash of $27.1 million for the first six months of fiscal 2023, compared to net use of cash of $21.1 million for the same period in fiscal 2022.

Changes in operating assets and liabilities resulted in a net use of cash for the first six months of fiscal 2023 primarily related to Accounts Receivable that fluctuate from period to period, depending on the amount and timing of sales, billing activities and cash collections;

and an increase in certain levels of inventories and prepaid deposits to mitigate supply chain constraints.

The use of cash from assets and liabilities was partially offset by the timing of payments from Accounts Payable and by customer Advance Payments and Unearned Revenue.

Net cash provided by noncash items was $19.4 million for the first nine months of 2023.

The net changes in operating assets and liabilities resulted in a net use of cash of $36.6 million for the first nine months of fiscal 2023, compared to net use of cash of $40.0 million for the same period in fiscal 2022.

Changes in operating assets and liabilities resulted in a net use of cash for the first nine months of fiscal 2023 primarily related to Accounts Receivable that fluctuate from period to period, depending on the amount and timing of sales, billing activities and cash collections;

and an increase in Accounts Payable, by the timing of payments.

The use of cash from assets and liabilities was partially offset by customer Unbilled Receivables and Advance Payments and Unearned Revenue;

Accrued Expenses, Inventories and Other Assets and Liabilities.

Investing Activities

Net cash used in investing activities was $7.3 million and $0.8 million for the first six months of fiscal 2023 and 2022, respectively, which consisted of the Redline acquisition and capital expenditures offset by proceeds from the sale of marketable securities.

Net cash used in investing activities was $11.7 million and $1.2 million for the first nine months of fiscal 2023 and 2022, respectively, which consisted of the Redline acquisition and capital expenditures offset by proceeds from the sale of marketable securities.

Financing Activities

Financing cash flows consist primarily of borrowings 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 provided by financing activities was $0.1 million for the first six months of fiscal 2023, primarily from cash proceeds from the issuance of common stock under employee stock plans of $0.7 million partially offset by payments for taxes related to settlement of equity awards of $0.7 million.

Net cash used in financing activities was $2.4 million for the first six months of fiscal 2022, primarily due to the repurchase of common stock of $(2.6) million partially offset by cash proceeds from the issuance of common stock under employee stock plans of $0.6.

As of December 30, 2022, our principal sources of liquidity consisted of $21.4 million in cash and cash equivalents;

Net cash provided by financing activities was $6.2 million for the first nine months of fiscal 2023, primarily from cash proceeds from Short-term Debt and the issuance of common stock under employee stock plans of $1.1 million partially offset by payments for taxes related to settlement of equity awards of $1.1 million.

Net cash used in financing activities was $4.0 million for the first nine months of fiscal 2022, primarily due to the repurchase of common stock of $(4.6) million partially offset by cash proceeds from the issuance of common stock under employee stock plans of $0.9.

As of March 31, 2023, our principal sources of liquidity consisted of $22.5 million in cash and cash equivalents;

$15.8 million of available credit under our $25.0 million SVB Credit Facility, which matures on June 28, 2024, and future collections of receivables from customers.

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The SVB Credit Facility provides for a $25.0 million accounts receivable formula-based revolving credit facility that can be borrowed by the U.S.

company, with a $25.0 million sub-limit that can be borrowed by our U.S.

company, with a

$25.0 million sub-limit that can be borrowed by our U.S.

and Singapore entities.

Loans may be advanced under the SVB Credit Facility based on a borrowing base equal to a specified percentage of the value of eligible accounts of all

borrowers under the SVB Credit Facility.

Loans may be advanced under the SVB Credit Facility based on a borrowing base equal to a specified percentage of the value of eligible accounts of all borrowers under the SVB Credit Facility.

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.

As of December 30, 2022, available credit under the SVB Credit Facility was $22.0 million, reflecting the available limit of $25.0 million less outstanding letters of credit of $3.0 million.

We borrowed and repaid $24.0 million against the SVB Credit Facility during the six months ended December 30, 2022 and there was no borrowing outstanding as of December 30, 2022.

As of December 30, 2022, we were in compliance with the quarterly financial covenants, as amended, contained in the SVB Credit Facility and there was no amount outstanding under the SVB Credit Facility.

On March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, and the FDIC was appointed as receiver and Silicon Valley Bank was subsequently transferred into a new entity, SVB Bridge Bank.

Full access to our SVB Bridge Bank deposits and credit facility were restored by March 14, 2023.

As of March 31, 2023, available credit under the SVB Credit Facility was $15.8 million , reflecting the available limit of $25.0 million less outstanding letters of credit of $3.0 million.

We borrowed $50.2 million and repaid $44.0 million against the SVB Credit Facility during the nine months ended March 31, 2023.

As of March 31, 2023 there was $6.2 million of borrowing outstanding.

As of March 31, 2023, we were not in compliance with the affirmative covenant in Section 6.8 of the SVB Credit Facility, as amended, which restricts Aviat from having domestic operating or depository accounts with banks other than SVB.

We opened a non-SVB deposit account with Wells Fargo Bank, N.A.

in the immediate aftermath of the SVB closure by regulatory authorities on March 10, 2023 so that we could continue receiving customer remittances.

We subsequently requested and received a waiver from the lender for this noncompliance.

We were in compliance with all other aspects of the credit agreement.

As of March 31, 2023, we had commercial commitments of $62.8 million outstanding that were not recorded on our unaudited condensed consolidated balance sheets.

Restructuring Payments

We had liabilities for restructuring activities totaling $1.5 million as of December 30, 2022, which were classified as current liabilities and expected to be paid out in cash over the next 12 months.

We had liabilities for restructuring activities totaling $0.9 million as of March 31, 2023, which were classified as current liabilities and expected to be paid out in cash over the next 12 months.

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

3 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis