AVIAT NETWORKS, INC. 10-Q

Item 1. Financial Statements AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended (In thousands, except per share amounts) September 29, 2023 September 30, 2022 Revenues: Product sales $ 59,545 $ 55,101 Services 28,021 26,150 Total revenues 87,566 81,251 Cost of revenues: Product sales 36,313 35,253 Services 19,401 16,544 Total cost of revenues 55,714 51,797 Gross margin 31,852 29,454 Operating expenses: Research and development 6,424 6,087 Selling and administrative 19,237 17,504 Restructuring charges 644 1,950 Total operating expenses 26,305 25,541 Operating income 5,547 3,913 Other expense, net 901 2,782 Income before income taxes 4,646 1,131 Provision for income taxes 641 3,877 Net income (loss) $ 4,005 $ ( 2,746 ) Net income (loss) per share of common stock outstanding: Basic $ 0.35 $ ( 0.25 ) Diluted $ 0.34 $ ( 0.25 ) Weighted-average shares outstanding: Basic 11,574 11,200 Diluted 11,943 11,200 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended (In thousands) September 29, 2023 September 30, 2022 Net income (loss) $ 4,005 $ ( 2,746 ) Other comprehensive income (loss): Net change in cumulative translation adjustments 33 ( 1,113 ) Other comprehensive income (loss) 33 ( 1,113 ) Comprehensive income (loss) $ 4,038 $ ( 3,859 ) See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and par value amounts) September 29, 2023 June 30, 2023 ASSETS Current Assets: Cash and cash equivalents $ 35,465 $ 22,242 Accounts receivable, net of allowances of $ 726 and $ 719 94,497 101,653 Unbilled receivables 60,975 58,588 Inventories 30,659 33,057 Other current assets 22,814 22,164 Total current assets 244,410 237,704 Property, plant and equipment, net 9,035 9,452 Goodwill 5,112 5,112 Intangible assets, net 8,870 9,046 Deferred income taxes 86,452 86,650 Right of use assets 2,984 2,554 Other assets 13,436 13,978 Total assets $ 370,299 $ 364,496 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 61,767 $ 60,141 Accrued expenses 20,561 24,442 Short-term lease liabilities 723 610 Advance payments and unearned revenue 46,050 44,268 Restructuring liabilities 112 600 Total current liabilities 129,213 130,061 Unearned revenue 7,627 7,416 Long-term lease liabilities 2,436 2,140 Other long-term liabilities 317 314 Reserve for uncertain tax positions 4,064 3,975 Deferred income taxes 492 492 Total liabilities 144,149 144,398 Commitments and contingencies (Note 13) Stockholders’ equity: Preferred stock, $ 0.01 par value, 50.0 million shares authorized, none issued — — Common stock, $ 0.01 par value, 300.0 million shares authorized, 11.7 million shares issued and outstanding at September 29, 2023; 11.5 million shares issued and outstanding at June 30, 2023 117 115 Treasury stock ( 6,147 ) ( 6,147 ) Additional paid-in-capital 832,060 830,048 Accumulated deficit ( 583,909 ) ( 587,914 ) Accumulated other comprehensive loss ( 15,971 ) ( 16,004 ) Total stockholders’ equity 226,150 220,098 Total liabilities and stockholders’ equity $ 370,299 $ 364,496 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended (In thousands) September 29, 2023 September 30, 2022 Operating Activities Net income (loss) $ 4,005 $ ( 2,746 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation of property, plant and equipment 1,168 1,344 Amortization of intangible assets 176 124 Provision for uncollectible receivables 14 182 Share-based compensation 1,834 1,838 Deferred taxes 39 3,338 Charges for inventory write-downs 547 405 Noncash lease expense 177 206 Net loss on marketable securities — 1,734 Other non-cash operating activities, net 17 — Changes in operating assets and liabilities: Accounts receivable 7,043 4,279 Unbilled receivables ( 2,395 ) ( 5,570 ) Inventories 1,955 ( 2,727 ) Accounts payable 1,787 ( 346 ) Accrued expenses ( 3,947 ) ( 2,619 ) Advance payments and unearned revenue 1,998 ( 2,496 ) Income taxes 331 91 Other assets and liabilities ( 769 ) ( 3,351 ) Net cash provided by (used in) operating activities 13,980 ( 6,314 ) Investing Activities Payments for acquisition of property, plant and equipment ( 717 ) ( 474 ) Proceeds from sale of marketable securities — 7,907 Acquisition, net of cash acquired and purchases of intangible assets — ( 15,769 ) Net cash used in investing activities ( 717 ) ( 8,336 ) Financing Activities Proceeds from borrowings 25,200 15,000 Repayments of borrowings ( 25,200 ) ( 15,000 ) Payments for taxes related to net settlement of equity awards ( 105 ) ( 670 ) Proceeds from issuance of common stock under employee stock plans 285 360 Net cash provided by (used in) financing activities 180 ( 310 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 223 ) ( 347 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 13,220 ( 15,307 ) Cash, cash equivalents, and restricted cash, beginning of period 22,521 37,104 Cash, cash equivalents, and restricted cash, end of period $ 35,741 $ 21,797 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) Three Months Ended September 29, 2023 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity (In thousands) Shares $ Amount $ Amount Balance as of June 30, 2023 11,518 $ 115 $ ( 6,147 ) $ 830,048 $ ( 587,914 ) $ ( 16,004 ) $ 220,098 Net income — — — — 4,005 — 4,005 Other comprehensive income — — — — — 33 33 Issuance of common stock under employee stock plans 204 2 — 283 — — 285 Shares withheld for taxes related to vesting of equity awards ( 3 ) — — ( 105 ) — — ( 105 ) Share-based compensation — — — 1,834 — — 1,834 Balance as of September 29, 2023 11,719 $ 117 $ ( 6,147 ) $ 832,060 $ ( 583,909 ) $ ( 15,971 ) $ 226,150 Three Months Ended September 30, 2022 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity (In thousands) Shares $ Amount $ Amount Balance as of July 1, 2022 11,161 $ 112 $ ( 6,147 ) $ 823,259 $ ( 599,442 ) $ ( 16,029 ) $ 201,753 Net loss — — — — ( 2,746 ) — ( 2,746 ) Other comprehensive loss — — — — — ( 1,113 ) ( 1,113 ) Issuance of common stock under employee stock plans 174 2 — 358 — — 360 Shares withheld for taxes related to vesting of equity awards ( 22 ) ( 1 ) — ( 669 ) — — ( 670 ) Share-based compensation — — — 1,838 — — 1,838 Balance as of September 30, 2022 11,313 $ 113 $ ( 6,147 ) $ 824,786 $ ( 602,188 ) $ ( 17,142 ) $ 199,422 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 AVIAT NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. The Company and Basis of Presentation The Company Aviat Networks, Inc. (“Aviat,” the “Company,” “we,” “us,” and “our”) designs, manufactures, and sells wireless networking and access networking solutions and services to mobile and fixed telephone service providers, private network operators, government agencies, transportation and utility companies, public safety agencies and broadcast system operators across the globe. Aviat’s products include broadband wireless access base stations and customer premises equipment for fixed and mobile, point-to-point digital microwave radio systems for access, backhaul, trunking and license-exempt applications, supporting new network deployments, network expansion, and capacity upgrades. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information, and Aviat has made estimates, assumptions and judgments affecting the amounts reported in its unaudited condensed consolidated financial statements and the accompanying notes, as discussed in greater detail below. Accordingly, the statements do not include all information and footnotes required by U.S. GAAP for annual consolidated financial statements. In the opinion of the Company’s management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for such periods. The results for the three months ended September 29, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year or future operating periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes thereto included in Aviat’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany transactions and accounts have been eliminated. Certain amounts in the financial statements have been reclassified for comparative purposes to conform to the current period financial statement presentation. Aviat’s fiscal year includes 52 or 53 weeks and ends on the Friday nearest to June 30. The three months ended September 29, 2023 and September 30, 2022 both consisted of 13 weeks. Fiscal year 2024 will be comprised of 52 weeks and will end on June 28 , 2024. Fiscal year 2023 was comprised of 52 weeks and ended on June 30, 2023. Use of Estimates The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires the Company to make estimates, assumptions and judgments affecting the amounts reported and related disclosures. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. The Company evaluates estimates and assumptions on an ongoing basis and may employ outside experts to assist in making these evaluations. Changes in such estimates, based on more accurate information, or different assumptions or conditions, may affect amounts reported in future periods. Such estimates affect significant items, including revenue recognition, provision for uncollectible receivables, inventory valuation, goodwill and identified intangible assets in business combinations, valuation allowances for deferred tax assets, uncertainties in income taxes, contingencies and recoverability of long-lived assets. Actual results may differ materially from estimates. Summary of Significant Accounting Policies There have been no material changes in the Company’s significant accounting policies as of and for the three months ended September 29, 2023, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. 8 Accounting Standards Not Yet Adopted The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). The Company determined at this time that all ASUs issued but not yet adopted are either not applicable or are expected to have a minimal impact on its financial position and results of operations. Note 2. Net Income (Loss) Per Share of Common Stock The following table presents the computation of basic and diluted net income per share: Three Months Ended (In thousands, except per share amounts) September 29, 2023 September 30, 2022 Numerator: Net income (loss) $ 4,005 $ ( 2,746 ) Denominator: Weighted-average shares outstanding, basic 11,574 11,200 Effect of potentially dilutive equivalent shares 369 — Weighted-average shares outstanding, diluted 11,943 11,200 Net income (loss) per share of common stock outstanding: Basic $ 0.35 $ ( 0.25 ) Diluted $ 0.34 $ ( 0.25 ) The following table summarizes the weighted-average equity awards that were excluded from the diluted net income (loss) per share calculations since they were anti-dilutive: Three Months Ended (In thousands) September 29, 2023 September 30, 2022 Stock options 259 154 Restricted stock units and performance stock units 58 48 Total shares of common stock excluded 317 202 Note 3. Revenue Recognition Contract Balances, Performance Obligations, and Backlog (In thousands) September 29, 2023 June 30, 2023 Contract assets Accounts receivable, net $ 94,497 $ 101,653 Contract assets $ 60,975 $ 58,588 Capitalized commissions $ 3,070 $ 3,492 Contract liabilities Advance payments and unearned revenue $ 46,050 $ 44,268 Unearned revenue, long-term $ 7,627 $ 7,416 Significant changes in contract balances may arise as a result of recognition over time for services, transfer of control for equipment, and periodic payments (both in arrears and in advance). 9 From time to time, the Company may experience unforeseen events that could result in a change to the scope or price associated with an arrangement. When such events occur, the transaction price and measurement of progress for the performance obligation are updated and this change is recognized as a cumulative catch-up to revenue. Because of the nature and type of contracts, the timeframe to completion and satisfaction of current and future performance obligations can shift; however, this will have no impact on the Company’s future obligation to bill and collect. As of September 29, 2023, the Company reported $ 53.7 million in advance payments and unearned revenue and long-term unearned revenue, of which approximately 40 % is expected to be recognized as revenue in the remainder of fiscal 2024 and the remainder thereafter. Approximately $ 7.4 million of revenue was recognized during the three months ended September 29, 2023, which was included in advance payments and unearned revenue at June 30, 2023. Remaining Performance Obligations The aggregate amount of transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $ 152.4 million at September 29, 2023. Of this amount, approximately 50 % is expected to be recognized as revenue during the next 12 months, with the remaining amount to be recognized thereafter. Note 4. Leases Three Months Ended September 29, 2023 September 30, 2022 (In thousands) Operating lease costs $ 221 $ 312 Short-term lease costs 414 551 Variable lease costs 12 35 Total lease costs $ 647 $ 898 The weighted average lease term and discount rate for the three months ended September 29, 2023 were as follows: Weighted average remaining lease term 5.7 years Weighted average discount rate 5.5 % As of September 29, 2023, future minimum lease payments under all non-cancelable operating leases with an initial term in excess of one year were as follows (in thousands): Remainder of fiscal 2024 $ 724 2025 757 2026 632 2027 312 2028 319 Thereafter 1,235 Total lease payments 3,979 Less: interest ( 820 ) Present value of lease liabilities $ 3,159 Note 5. Balance Sheet Components Cash, Cash equivalents, and Restricted cash The following provides a summary of cash, cash equivalents, and restricted cash reported within the unaudited condensed consolidated balance sheets that reconciles to the corresponding amount in the unaudited condensed consolidated statement of cash flows: 10 (In thousands) September 29, 2023 June 30, 2023 Cash and cash equivalents $ 35,465 $ 22,242 Restricted cash included in other assets 276 279 Total cash, cash equivalents, and restricted cash in the Statement of Cash Flows $ 35,741 $ 22,521 Inventories (In thousands) September 29, 2023 June 30, 2023 Finished products $ 17,104 $ 18,502 Raw materials and supplies 11,771 12,794 Customer service inventories $ 1,784 $ 1,761 Total inventories $ 30,659 $ 33,057 Consigned inventories included within raw materials and supplies $ 9,937 $ 11,224 The Company records charges to adjust inventories due to excess and obsolete inventory resulting from lower sales forecasts, product transitioning or discontinuance. The charges incurred during the three months ended September 29, 2023 and September 30, 2022 were included in cost of product sales as follows: Three Months Ended (In thousands) September 29, 2023 September 30, 2022 Excess and obsolete inventory $ 294 $ 170 Customer service inventory write-downs 253 235 Total inventory charges $ 547 $ 405 Other Current Assets (In thousands) September 29, 2023 June 30, 2023 Contract manufacturing assets $ 5,782 $ 6,487 Prepaid and other current assets 17,032 15,677 Total other current assets $ 22,814 $ 22,164 Property, Plant and Equipment, net (In thousands) September 29, 2023 June 30, 2023 Land $ 210 $ 210 Buildings and leasehold improvements 5,889 5,889 Software 16,998 16,989 Machinery and equipment 47,088 47,150 Total property, plant and equipment, gross 70,185 70,238 Less: Accumulated depreciation ( 61,150 ) ( 60,786 ) Total property, plant and equipment, net $ 9,035 $ 9,452 11 Included in the total property, plant and equipment, gross were $ 0.6 million and $ 0.4 million of assets in progress which have not been placed in service as of September 29, 2023 and June 30, 2023, respectively. Depreciation expense related to property, plant and equipment, was as follows: Three Months Ended (In thousands) September 29, 2023 September 30, 2022 Depreciation $ 1,168 $ 1,344 Accrued Expenses (In thousands) September 29, 2023 June 30, 2023 Compensation and benefits $ 7,256 $ 10,368 Taxes 5,109 4,553 Warranties 2,100 2,100 Commissions 1,339 1,453 Professional fees 944 2,104 Other 3,813 3,864 Total accrued expenses $ 20,561 $ 24,442 The Company accrues for the estimated cost to repair or replace products under warranty. Changes in the warranty liability were as follows: Three Months Ended (In thousands) September 29, 2023 September 30, 2022 Balance as of the beginning of the period $ 2,100 $ 2,913 Warranty provision recorded during the period 375 175 Assumed in acquisition — 55 Consumption during the period ( 375 ) ( 388 ) Balance as of the end of the period $ 2,100 $ 2,755 Advance Payments and Unearned Revenue (In thousands) September 29, 2023 June 30, 2023 Advance payments $ 2,049 $ 1,607 Unearned revenue 44,001 42,661 Total advance payments and unearned revenue $ 46,050 $ 44,268 Excluded from the balances above are $ 7.6 million and $ 7.4 million in long-term unearned revenue as of September 29, 2023 and June 30, 2023, respectively. Note 6. Fair Value Measurements of Assets and Liabilities Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market in the absence of a principal market) for the asset or liability in an orderly transaction between market participants as of the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs in measuring fair value and established a three-level fair value hierarchy that prioritizes the observable inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows: 12 • Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities; • Level 2 — Observable market-based inputs or observable inputs that are corroborated by market data; and • Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The estimated fair values and valuation input levels of assets and liabilities that are measured at fair value on a recurring basis as of September 29, 2023 and June 30, 2023 were as follows: September 29, 2023 June 30, 2023 Valuation Inputs (In thousands) Fair Value Fair Value Assets: Cash and cash equivalents: Money market funds $ 8,259 $ 571 Level 1 Bank certificates of deposit $ 3,533 $ 3,793 Level 2 Items are classified within Level 1 if quoted prices are available in active markets. The Company’s Level 1 items are primarily money market funds. As of September 29, 2023 and June 30, 2023, these money market funds were valued at $ 1.00 net asset value per share. Items are classified within Level 2 if the observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources are available with reasonable levels of price transparency. The Company’s bank certificates of deposit are classified within Level 2. The carrying value of bank certificates of deposit approximates their fair value. As of September 29, 2023 and June 30, 2023, there were no recurring assets or liabilities valued using significant unobservable inputs. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2, and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the first three months of fiscal 2024 and 2023, there were no transfers of assets or liabilities measured at fair value between levels of the fair value hierarchy. Note 7. Credit Facility and Debt In May 2023, the Company entered into a Secured Credit Facility Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender and Wells Fargo Securities LLC, Citigroup Global Markets Inc., and Regions Capital Markets as lenders. The Credit Facility provides for a $ 40.0 million revolving credit facility (the “Revolver”) and a $ 50.0 million Delayed Draw Term Loan Facility (the “Term Loan”) with a maturity date of May 8, 2028. The $ 40.0 million Revolver can be borrowed with a $ 10.0 million sublimit for letters of credit, and a $ 10.0 million swingline loan sublimit. The Term Loan has a funding date on or prior to the closing date of the NEC Transaction (as defined below) with the proceeds intended to be used to settle the cash portion of the consideration and any related expenses. See Note 12. Acquisitions for further information. Deferred financing costs of $ 0.8 million were paid in association with entering into the Credit Facility. As of September 29, 2023, the available credit under the Revolver was $ 38.8 million, reflecting the available limit of $ 40.0 million less outstanding letters of credit of $ 1.2 million. The available credit under the Term Loan was $ 50.0 million. The Company borrowed $ 25.2 million and repaid $ 25.2 million against the Revolver during the three months ended September 29, 2023. There was no borrowing outstanding for either the Revolver or Term Loan as of September 29, 2023. Outstanding borrowings under the Credit Facility bear interest at either: (a) Adjusted Term Secured Overnight Financing Rate (“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 September 29, 2023, the applicable margin on Adjusted Term SOFR and Base Rate borrowings was 2.75 % and 1.75 %, respectively. 13 The Credit Facility requires the Company and its subsidiaries to maintain a fixed charge coverage ratio to be greater than 1.25 to 1.00 as of the last day of any fiscal quarter of the Company. The Credit Facility also requires that the Company maintain a maximum leverage ratio of 3.00 times EBITDA, with a step-down to 2.75 times EBITDA after four full quarters, and 2.50 times EBITDA after eight full quarters. The Credit Facility contains customary affirmative and negative covenants, including, among others, covenants limiting the ability of the Company and its subsidiaries to dispose of assets, permit a change in control, merge or consolidate, make acquisitions, incur indebtedness, grant liens, make investments, make certain restricted payments, and enter into transactions with affiliates, in each case subject to customary exceptions. As of September 29, 2023, the Company was in compliance with all financial covenants contained in the Credit Facility. Note 8. Restructuring Employee Severance and Benefits (In thousands) Fiscal 2024 Plans Prior Years’ Plans Total Accrual balance, June 30, 2023 $ — $ 600 $ 600 Charges, net 333 348 681 Cash payments ( 221 ) ( 948 ) ( 1,169 ) Accrual balance, September 29, 2023 112 — 112 As of September 29, 2023, the accrual balance of $ 0.1 million was classified as current and included in restructuring liabilities on the unaudited condensed consolidated balance sheets. Fiscal 2024 Plans During fiscal 2024, the Company’s Board of Directors approved restructuring plans, primarily associated with reductions in workforce to optimize skill sets and align cost structure. The fiscal 2024 plans are expected to be completed through the first half of fiscal 2024. Prior Years’ Plans Activities under the prior years’ plans primarily included reductions in workforce across the Company, associated with the acquisition of Redline (as defined below) and certain of the Company’s operations outside the United States. Payments related to the accrued restructuring balance for these plans are complete. Note 9. Stockholders’ Equity Stock Repurchase Program In November 2021 the Company’s Board of Directors approved a stock repurchase program to purchase up to $ 10.0 million of the Company’s common stock. As of September 29, 2023, $ 7.3 million remains available and Aviat may choose to suspend or discontinue the repurchase program at any time. During the first quarter of fiscal 2024, the Company did not repurchase any shares of common stock. Stock Incentive Programs As of September 29, 2023, the Company had one stock incentive plan for its employees and non-employee directors, the 2018 Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of share-based awards in the form of stock options, stock appreciation rights, restricted stock awards and units, and performance share awards and units. Under the 2018 Plan, option exercise prices are equal to the fair market value of Aviat common stock on the date the options are granted using the closing stock price. After vesting, options generally may be exercised within seven years after the date of grant. Restricted stock units are not transferable until vested and the restrictions lapse upon the achievement of continued employment or service over a specified time period. Restricted stock units issued to employees generally vest three years from the date of grant ( three-year cliff or annually over three years ). Restricted stock units issued annually to non-executive board members generally vest on the day before the annual stockholders’ meeting. 14 Vesting of performance share awards and units is subject to the achievement of predetermined financial performance and share price criteria, and continued employment through the end of the applicable period. During the three months ended September 29, 2023, the Company granted 63,889 restricted stock units, 63,889 performance share awards and 145,250 stock options. Total compensation expense for share-based awards included in the unaudited condensed consolidated statements of operations was as follows: Three Months Ended (In thousands) September 29, 2023 September 30, 2022 By Expense Category: Cost of revenues $ 183 $ 172 Research and development 146 135 Selling and administrative 1,505 1,531 Total share-based compensation expense $ 1,834 $ 1,838 By Type of Award: Options $ 346 $ 510 Restricted and performance stock awards and units 1,488 1,328 Total share-based compensation expense $ 1,834 $ 1,838 As of September 29, 2023, there was approximately $ 3.6 million of total unrecognized compensation expense related to non-vested stock options granted which is expected to be recognized over a weighted-average period of 2.3 years. As of September 29, 2023, there was $ 10.7 million of total unrecognized compensation expense related to non-vested stock awards which is expected to be recognized over a weighted-average period of 1.7 years. Note 10. Segment and Geographic Information Aviat operates in one reportable business segment: the design, manufacturing, and sale of wireless networking products, solutions, and services. The Company’s financial performance is regularly reviewed by its chief operating decision maker who is its Chief Executive Officer (“CEO”). The Company reports revenue by region and country based on the location where its customers accept delivery of products and services. Revenue by region for the three months ended September 29, 2023 and September 30, 2022 was as follows: Three Months Ended (In thousands) September 29, 2023 September 30, 2022 North America $ 55,508 $ 48,848 Africa and the Middle East 9,953 10,984 Europe 5,252 4,500 Latin America and Asia Pacific 16,853 16,919 Total revenue $ 87,566 $ 81,251 Note 11. Income Taxes The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% primarily due to global intangible low-taxed income inclusion (GILTI) in the U.S., state taxes, foreign operations that are subject to income taxes at different statutory rates, and certain jurisdictions where the tax benefit on current losses cannot be recognized. During interim periods, tax expenses are accrued for jurisdictions that are anticipated to be profitable for fiscal 2024. 15 The determination of income taxes for the three months ended September 29, 2023 and September 30, 2022 was based on the Company’s estimated annual effective tax rate adjusted for losses in certain jurisdictions for which no tax benefit can be recognized. Tax expense for the three months ended September 29, 2023 was primarily due to tax expense related to U.S. and profitable foreign subsidiaries. Tax expense for the three months ended September 30, 2022 was primarily due to tax expense related to U.S. and profitable foreign subsidiaries, including deferred tax expense associated with the acquisition of Redline in July 2022 and the subsequent multi-step restructuring plan in which two Canadian Redline corporations converted to unlimited liability companies and then amalgamated by the end of September 2022. Aviat has a number of years with open tax audits which vary from jurisdiction to jurisdiction. The major tax jurisdictions that are open and subject to potential audits include the U.S., Singapore, Ghana, Kenya, Nigeria, Saudi Arabia and Tanzania. The earliest years for these jurisdictions are as follows: U.S. - 2003; Singapore - 2015; Ghana – 2016; Kenya – 2018; Nigeria – 2006; Saudi Arabia – 2019 and Tanzania - 2017. Interest and penalties related to unrecognized tax benefits are accounted for as part of the provision for federal, foreign, and state income taxes. Such interest expense was not material for the three months ended September 29, 2023 and September 30, 2022. On March 11, 2021, the US enacted the American Rescue Plan Act of 2021 (“ARPA”) which expands Section 162(m) to cover the next five most highly compensated employees for the taxable year, in addition to the “covered employees” effective for taxable years beginning after December 31, 2026. The Company will continue to examine the elements of the ARPA and the impact it may have on future business. On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”) which includes a new corporate alternative minimum tax of 15% on adjusted financial statement income of corporations with profits greater than $1 billion, effective for taxable years beginning after December 31, 2022, and a 1% excise tax on stock repurchases by public corporations after December 31, 2022. The Company will continue to evaluate the applicability and effect of the IRA as more guidance is issued. Note 12. Acquisitions NEC’s Wireless Transport Business On May 9, 2023, the Company entered into a Master Sale of Business Agreement (the “Purchase Agreement”), with NEC Corporation (“NEC”). Pursuant to the Purchase Agreement, the Company will purchase certain assets and liabilities from NEC relating to NEC’s wireless backhaul business (the “NEC Transaction”). Initial consideration due at the closing of the NEC Transaction will be comprised of (i) an amount in cash equal to $ 45.0 million, subject to certain post-closing adjustments, and (ii) the issuance of $ 25.0 million in Company common stock. Aggregate consideration will be approximately $ 70.0 million. The Company has obtained permanent financing to fund the cash portion of the NEC Transaction. See Note 7. Credit Facility and Debt for further information. The Purchase Agreement contains certain customary termination rights, including, among others, (i) the right of the Company or NEC to terminate if all the conditions to closing have not been either waived or satisfied on or before February 9, 2024 and (ii) there is a final non-appealable order of a government entity prohibiting the consummation of the NEC Transaction. The NEC Transaction remains subject to, among other things, regulatory approvals and satisfaction of other customary closing conditions. NEC is a leader in wireless backhaul networks with an extensive installed base of their Pasolink series products. The Company expects to complete the NEC Transaction in the fourth quarter of calendar year 2023. Redline Communications Group Inc. In the first quarter of fiscal 2023, the Company acquired all of the issued and outstanding shares of Redline Communications Group Inc. (“Redline”), for a purchase price of $ 20.4 million. Redline is a leading provider of mission-critical data infrastructure. See Note 12. Acquisitions to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 for the final purchase price allocation, valuation methodology, and other information related to the completion of the Redline acquisition. 16 Note 13. Commitments and Contingencies Purchase Orders and Other Commitments From time to time in the normal course of business, the Company may enter into purchasing agreements with its suppliers that require the Company to accept delivery of, and remit full payment for, finished products that it has ordered, finished products that it requested be held as safety stock, and work in process started on its behalf, in the event it cancels or terminates 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 the Company has no present intention to cancel or terminate any of these agreements, the Company currently does not believe that it has any future liability under these agreements. As of September 29, 2023, the Company had outstanding purchase obligations with its suppliers or contract manufacturers of $ 34.1 million. In addition, the Company had contractual obligations of approximately $ 5.7 million associated with software licenses. Financial Guarantees and Commercial Commitments Guarantees issued by banks, insurance companies, or other financial institutions are contingent commitments issued to guarantee performance under borrowing arrangements, such as bank overdraft facilities, tax and customs obligations, and similar transactions, or to ensure performance under customer or vendor contracts. The terms of the guarantees are generally equal to the remaining term of the related debt or other obligations and are generally limited to two years or less. As of September 29, 2023, the Company had no guarantees applicable to its debt arrangements. The Company has entered into commercial commitments in the normal course of business including surety bonds, standby letters of credit agreements, and other arrangements with financial institutions primarily relating to the guarantee of future performance on certain contracts to provide products and services to customers. As of September 29, 2023, the Company had commercial commitments outstanding of $ 60.5 million, that were not recorded on the unaudited condensed consolidated balance sheets. The Company does not believe, based on historical experience and information currently available, that it is probable that any significant amounts will be required to be paid on these performance guarantees in the future. The following table presents details of the Company’s commercial commitments: (In thousands) September 29, 2023 Letters of credit $ 2,588 Bonds 57,921 $ 60,509 Indemnifications Under the terms of substantially all of the Company’s license agreements, it has agreed to defend and pay any final judgment against its customers arising from claims against such customers that the Company’s products infringe the intellectual property rights of a third party. As of September 29, 2023, the Company has not received any notice that any customer is subject to an infringement claim arising from the use of its products; the Company has not received any request to defend any customers from infringement claims arising from the use of its products; and the Company has not paid any final judgment on behalf of any customer related to an infringement claim arising from the use of its products. Because the outcome of infringement disputes is related to the specific facts of each case and given the lack of previous or current indemnification claims, the Company cannot estimate the maximum amount of potential future payments, if any, related to its indemnification provisions. As of September 29, 2023, the Company had not recorded any liabilities related to these indemnifications. Legal Proceedings The Company is subject from time to time to disputes with customers concerning its products and services. From time to time, the Company may be involved in various other legal claims and litigation that arise in the normal course of its operations. The Company is aggressively defending all current litigation matters. Although there can be no assurances and the outcome of these matters is currently not determinable, the Company currently believes that none of these claims or proceedings are likely to have a material adverse effect on its financial position. There are many uncertainties associated with any litigation and these actions or other third-party claims against the Company may cause it to incur costly litigation and/or 17 substantial settlement charges. As a result, the Company’s business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company’s estimates, if any. The Company records accruals for its outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would result in a loss contingency to become both probable and reasonably estimable. The Company has not recorded any significant accrual for loss contingencies associated with such legal claims or litigation discussed above. Contingent Liabilities The Company records a loss contingency as a charge to operations when (i) it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements; and (ii) the amount of the loss can be reasonably estimated. Disclosure in the notes to the financial statements is required for loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred. Gain contingencies are not recorded until realized. The Company expenses all legal costs incurred to resolve regulatory, legal and tax matters as incurred. In March 2016, an enforcement action by the Indian Department of Revenue, Ministry of Finance was brought against Aviat’s subsidiary Aviat Networks (India) Private Limited (“Aviat India”) relating to the non-realization of intercompany receivables and non-payment of intercompany payables, which originated from 1999 to 2012, within the time frames dictated by the Indian regulations under the Foreign Exchange Management Act. In November 2017, the Indian Department of Revenue, Ministry of Finance also initiated a similar action against Telsima Communications Private Limited (“Telsima India”), a subsidiary of the Company, relating to the non-realization of intercompany receivables and non-payment of intercompany payables which originated from the period prior to our acquisition of Telsima India in February 2009. In September 2019, the Company’s directors of Aviat India appeared before the Ministry of Finance Enforcement Directorate. No settlement offers were discussed at the meeting and the matter is still ongoing with no subsequent hearing date currently scheduled as of September 29, 2023. The Company has accrued an immaterial amount representing the estimated probable loss for which it would settle the matter. The Company currently cannot form an estimate of the range of loss in excess of its amounts already accrued. If the outcome of this matter is greater than the current immaterial amount accrued, the Company intends to dispute it vigorously. Periodically, the Company reviews the status of each significant matter to assess the potential financial exposure. If a potential loss is considered probable and the amount can be reasonably estimated, the estimated loss is reflected in our results of operations. Significant judgment is required to determine the probability that a liability has been incurred or an asset impaired and whether such loss is reasonably estimable. Further, estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts that have been included in the consolidated financial statements. As additional information becomes available, the Company will reassess the potential liability related to its pending claims and litigation and may revise estimates accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on the Company’s results of operations and financial position. Note 14. Goodwill and Intangible Assets The following presents details of goodwill and intangible assets (in thousands except useful life): September 29, 2023 June 30, 2023 Goodwill $ 5,112 $ 5,112 The Company performs its annual goodwill impairment test on the first day of its fourth fiscal quarter. No indicators of impairment were identified during the current period that required the Company to perform an interim assessment or recoverability test. 18 Useful life in Years September 29, 2023 June 30, 2023 Intangible assets: Patents 10 $ 690 $ 690 Customer relationships 14 7,730 7,730 Trade names 16 1,330 1,330 Total gross intangible assets $ 9,750 $ 9,750 Accumulated amortization ( 880 ) ( 704 ) Total net intangible assets $ 8,870 $ 9,046 Amortization of finite-lived intangibles is included in selling and administrative expenses. There were no impairment charges recorded for the three months ended September 29, 2023 and September 30, 2022. As of September 29, 2023, the estimated future amortization expense of finite-lived intangible assets is as follows (in thousands): Remainder of 2024 $ 528 2025 704 2026 704 2027 704 2028 704 Thereafter 5,526 Total $ 8,870 19