What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-06 compared with 2023-11-01 · 70 added, 55 removed, 102 unchanged (55% of the section changed)

22 unchanged sentences

These forward-looking statements are based on estimates reflecting the current beliefs of the senior management of Aviat Networks, Inc.

(“Aviat,” the “Company,” “we,” “us,” and “our”).

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.

18 unchanged sentences

NEC’s Wireless Transport Business

On May 9, 2023, the Company entered into the Purchase Agreement with NEC.

Pursuant to the Purchase Agreement, the Company will purchase certain assets and liabilities from NEC relating to NEC’s wireless backhaul business.

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.

On November 30, 2023 (the “Closing Date”), the Company completed the NEC Transaction, acquiring NEC’s wireless transport business.

Prior to the Closing Date, NEC was a leader in wireless backhaul networks with an extensive installed base of their Pasolink series products.

The completion of the NEC Transaction increases the scale of Aviat, enhances the Company’s product portfolio with a greater capability to innovate, and creates a more diversified business.

Acquisitions of the Notes to the unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further information.

The fair value of the consideration transferred at the closing of the NEC Transaction was comprised of (i) cash of $32.2 million, and (ii) the issuance of 736,750 shares or $22.3 million of Company common stock.

Aggregate consideration transferred at closing was approximately $54.5 million, which is subject to certain post-closing adjustments.

The Company estimates additional cash consideration of approximately $22.9 million will be transferred to NEC in the fourth quarter of fiscal 2024, primarily related to settlement of the post-closing working capital adjustment.

The Company funded the cash portion of the NEC Transaction with Term Loan borrowings under its Credit Facility.

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, for a purchase price of $ 20.4 million.

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.

Operations Review

The market for mobile backhaul continued to be the Company’s primary addressable market segment globally in the first three months of fiscal 2024.

The market for mobile backhaul continued to be the Company’s primary addressable market segment globally in the first six months of fiscal 2024.

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

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

Revenue by region for the three months ended September 29, 2023 and September 30, 2022 and the related changes were as follows:

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Revenue by region for the three and six months ended December 29, 2023 and December 30, 2022 and the related changes were as follows:

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

North America $ 51,326 $ 52,049 $ (723) (1.4) % $ 106,834 $ 100,897 $ 5,937 5.9 %

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Total revenue $ 95,036 $ 90,683 $ 4,353 4.8 % $ 182,602 $ 171,934 $ 10,668 6.2 %

Revenue in North America increased by $6.7 million during the first quarter of fiscal 2024 compared with the same period of fiscal 2023, primarily due to strong private network and tier 1 demand.

Revenue in Africa and the Middle East decreased by $(1.0) million during the first quarter of fiscal 2024 compared with the same period of fiscal 2023, primarily due to cyclical softness in the capital expenditure plans of large mobile operators in the region.

Revenue in Europe increased by $0.8 million for the first quarter of fiscal 2024 compared with the same period of fiscal 2023, primarily due to increased sales to mobile operators in the region.

Revenue in Latin America and Asia Pacific decreased by $0.1 million during the first quarter of fiscal 2024 compared with the same period of fiscal 2023, primarily due to timing of projects with mobile operators.

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Revenue in North America decreased by $0.7 million during the second quarter of fiscal 2024 compared with the same period of fiscal 2023, primarily due to timing of public safety projects.

Revenue in North America increased by $5.9 million during the first six months of fiscal 2024 compared with the same period of fiscal 2023, primarily due to strong private network and tier 1 demand.

Revenue in Africa and the Middle East increased by $0.4 million during the second quarter of fiscal 2024 compared with the same period of fiscal 2023.

Revenue in Africa and the Middle East decreased by $0.7 million during the first six months of fiscal 2024 compared with the same period of fiscal 2023.

The decrease during the first six months of fiscal 2024 was primarily due to cyclical softness in the capital expenditure plans of large mobile operators in the region and currency impacts from locally provided services.

Revenue in Europe increased by $0.2 million during the second quarter of fiscal 2024 compared with the same period of fiscal 2023.

Revenue in Europe increased by $1.0 million during the first six months of fiscal 2024 compared with the same period of fiscal 2023.

The increases for the second quarter and the first six months of fiscal 2024 were primarily due to increased sales to mobile operators in the region.

Revenue in Latin America and Asia Pacific increased by $4.4 million during the second quarter and the first six months of fiscal 2024 compared with the same periods of fiscal 2023.

The increase was primarily due to higher volumes of projects with mobile operators.

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

Product sales $ 66,392 $ 65,561 $ 831 1.3 % $ 125,937 $ 120,662 $ 5,275 4.4 %

1 unchanged sentence

Total revenue $ 95,036 $ 90,683 $ 4,353 4.8 % $ 182,602 $ 171,934 $ 10,668 6.2 %

Revenue from product sales and services increased by 8.1% and 7.2%, respectively for the first quarter of fiscal 2024 compared with the same quarter of fiscal 2023.

Revenue from product sales and services increased by 1.3% and 14.0%, respectively for the second quarter of fiscal 2024 compared with the same quarter of fiscal 2023.

Revenue from product sales and services increased by 4.4% and 10.5%, respectively for the first six months of fiscal 2024 compared with the same period of fiscal 2023.

The relatively proportionate increases were driven by the same overall factors of revenue growth discussed previously.

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

Revenue $ 95,036 $ 90,683 $ 4,353 4.8 % $ 182,602 $ 171,934 $ 10,668 6.2 %

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Service margin % 28.3 % 28.8 % 29.5 % 32.8 %

Gross margin for the first quarter of fiscal 2024 increased by $2.4 million compared with the same quarter of fiscal 2023, primarily due to a higher proportion of sales to North American customers where the Company’s margins are historically strongest.

Gross margin for the second quarter of fiscal 2024 increased by $4.6 million compared with the same quarter of fiscal 2023.

Gross margin for the first six months of fiscal 2024 increased by $7.0 million.

Gross margin dollars and as a percentage of revenue increased in the second quarter and for the first six months of fiscal 2024 compared with the prior year primarily due to higher software revenue, favorable project level mix, and moderating freight and material costs.

Research and Development

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

Research and development $ 8,394 $ 6,047 $ 2,347 38.8 % $ 14,818 $ 12,134 $ 2,684 22.1 %

% of revenue 8.8 % 6.7 % 8.1 % 7.1 %

Research and development expenses increased by $0.3 million in the first quarter of fiscal 2024 compared with the same period of fiscal 2023, primarily due to increased product development activities.

Research and development expenses increased by $2.3 million and $2.7 million for the second quarter and the first six months of fiscal 2024, respectively, compared with the corresponding periods of fiscal 2023.

The increase in research and development expenses was primarily due to increased product development activities and additional costs from the NEC Transaction.

Selling and Administrative

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

Selling and administrative $ 21,442 $ 16,567 $ 4,875 29.4 % $ 40,679 $ 34,071 $ 6,608 19.4 %

% of revenue 22.6 % 18.3 % 22.3 % 19.8 %

Selling and administrative expenses increased by $1.7 million in the first quarter of fiscal 2024 compared with the same period in fiscal 2023, primarily due to variable compensation and merger and acquisition related expenses.

Selling and administrative expenses increased by $4.9 million and $6.6 million for the second quarter and the first six months of fiscal 2024, respectively, compared with the corresponding periods of fiscal 2023.

The increase in selling and administrative expenses was primarily due to merger and acquisition expenses related to the NEC Transaction.

Restructuring

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

Restructuring charges $ 2,000 $ 928 $ 1,072 115.5 % $ 2,644 $ 2,878 $ (234) (8.1) %

In the first quarter of fiscal 2024, restructuring charges were $0.6 million, a decrease of $(1.3) million compared to the same period in fiscal 2023.

In the second quarter of fiscal 2024, restructuring charges were $2.0 million, an increase of $1.1 million compared to the same period in fiscal 2023.

The increase in restructuring charges was primarily due to restructuring activities associated with the NEC Transaction.

The prior year includes non-recurring restructuring charges primarily associated with the Redline acquisition completed in the first quarter of fiscal 2023.

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

Other Expense, net

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Other expense, net $ 901 $ 2,782 $ (1,881) (67.6) %

Other expense, net decreased by $(1.9) million in the first quarter of fiscal 2024, compared with the same period of fiscal 2023, primarily due to non-recurring losses of $1.7 million recognized on the sale of marketable securities included in the prior year.

Three Months Ended

(In thousands, except percentages) September 29, 2023 September 30, 2022 $ Change % Change

Other (Income) Expense, net

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

Other (income) expense, net $ (243) $ (460) $ 217 (47.2) % $ 658 $ 2,322 $ (1,664) (71.7) %

Other income, net decreased by $0.2 million for the second quarter of fiscal 2024, primarily due to interest expense incurred on the Term Loan borrowings used to fund the NEC Transaction.

Other expense, net decreased by $1.7 million for the first six months of fiscal 2024, primarily due to non-recurring losses of $1.7 million recognized on the sale of marketable securities included in the prior year.

Three Months Ended Six Months Ended

(In thousands, except percentages) December 29, 2023 December 30, 2022 $ Change % Change December 29, 2023 December 30, 2022 $ Change % Change

Income before income taxes $ 5,237 $ 9,138 $ (3,901) (42.7) % $ 9,883 $ 10,269 $ (386) (3.8) %

1 unchanged sentence

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

Tax expense for the first quarter of fiscal 2024 was primarily attributable to tax expense for the U.S.

Tax expense for the first six months of fiscal 2024 was primarily attributable to tax expense for the U.S.

entity and profitable foreign subsidiaries.

Tax expense for the first quarter of fiscal 2023 was primarily attributable to tax expense for the U.S.

entity and profitable foreign subsidiaries, including deferred tax expense associated with the acquisition of Redline in July 2022 and the subsequent multi-step restructuring, in which two Canadian Redline corporations converted to unlimited liability companies and then amalgamated by the end of September 2022.

Tax expense for the first six months of fiscal 2023 was primarily attributable 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, in which two Canadian Redline corporations converted to unlimited liability companies and then amalgamated by the end of September 2022.

Liquidity, Capital Resources, and Financial Strategies

Sources of Cash

As of September 29, 2023, the Company’s total cash and cash equivalents were $35.5 million.

As of December 29, 2023, the Company’s total cash and cash equivalents were $45.9 million.

Approximately $20.0 million was held in the United States.

The remaining balance of $25.9 million was held by entities outside the United States.

Of the amount of cash and cash equivalents held by the Company’s foreign subsidiaries on September 29, 2023, $15.6 million was held in jurisdictions where its 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 the Company’s foreign subsidiaries on December 29, 2023, $25.4 million was held in jurisdictions where its undistributed earnings are indefinitely reinvested, and if repatriated, would be subject to foreign withholding taxes.

Operating Activities

Operating cash flows is presented as net income adjusted for certain non-cash items and changes in operating assets and liabilities.

Net cash provided by (used in) operating activities was $14.0 million for the first three months of fiscal 2024, compared with $(6.3) million in the prior year.

Net cash provided by (used in) operating activities was $6.9 million for the first six months of fiscal 2024, compared with $(8.4) million in the prior year.

The $15.3 million increase is primarily attributable to improvements in working capital and increased net income prior to non-cash adjustments compared to the prior year.

Investing Activities

Net cash used in investing activities was $0.7 million for the first three months of fiscal 2024, compared to $8.3 million in the prior year.

The $7.6 million decrease is primarily due to non-recurring activity included in the prior year associated with the Redline acquisition partially offset by proceeds received on the sale of marketable securities.

Net cash used in investing activities was $33.5 million for the first six months of fiscal 2024, compared to $7.3 million in the prior year.

The $26.2 million increase is primarily due to payments of the cash consideration associated with the NEC Transaction and increased capital expenditures, partially offset by non-recurring activity included in the prior year related to proceeds received on the sale of marketable securities.

Financing Activities

Financing cash flows consist primarily of borrowings and repayments under the Company’s Credit Facility and proceeds from the exercise of employee stock options.

Net cash provided by (used in) financing activities was $0.2 million for the first three months of fiscal 2024, compared with $(0.3) million in the prior year.

The $0.5 million change is primarily due to less payments for taxes related to the net settlement of equity awards, partially offset by lower proceeds on the exercise of employee stock options.

As of September 29, 2023, the Company’s principal sources of liquidity consisted of $35.5 million in cash and cash equivalents, $38.8 million of available credit under its Credit Facility, and future collections of receivables from customers.

Net cash provided by financing activities was $50.3 million for the first six months of fiscal 2024, compared with $0.1 million in the prior year.

The $50.2 million increase is primarily due to the $50.0 million of Term Loan borrowings primarily used to settle the cash portion of the consideration associated with the NEC Transaction.

As of December 29, 2023, the Company’s principal sources of liquidity consisted of $45.9 million in cash and cash equivalents, $37.7 million of available credit under its Credit Facility, and future collections of receivables from customers.

The Company regularly requires letters of credit from certain customers, and, from time to time, these letters of credit are discounted without recourse shortly after shipment occurs in order to meet immediate liquidity requirements and to reduce its credit and sovereign risk.

Historically, the Company’s primary sources of liquidity have been cash flows from operations and credit facilities.

Additionally, the Company has an effective shelf registration statement on Form S-3 allowing it to offer and sell, either individually or in combination, in one or more offerings, up to a total dollar amount of $200.0 million of any combination of the securities described in the shelf registration statement or a related prospectus supplement.

Additionally, the Company has an effective shelf registration statement on Form S-3 allowing it to offer and sell, either individually or in combination, in one or more offerings, up to a total dollar amount of approximately $200.0 million of any combination of the securities described in the shelf registration statement or a related prospectus supplement.

The Company believes that its existing cash and cash equivalents, the available borrowings under its Credit Facility, the availability under its effective shelf registration statement and future cash collections from customers will be sufficient to provide for its anticipated requirements and plans for cash for at least the next 12 months.

In addition, the Company believes these sources of liquidity will be sufficient to provide for its anticipated requirements and plans for cash beyond the next 12 months.

The Company borrowed and repaid $25.2 million against the Credit Facility during the first three months of fiscal 2024.

As of September 29, 2023, the Company had no borrowings outstanding and was in compliance with all financial covenants contained in the Credit Facility.

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 borrowed and repaid $33.2 million against the Revolver during the first six months of fiscal 2024.

In the second quarter of fiscal 2024, the Company borrowed $50.0 million against the Term Loan to primarily settle the cash portion of the consideration associated with the NEC Transaction.

As of December 29, 2023, the Company had $50.0 million outstanding under its Term Loan and no borrowings under its Revolver and was in compliance with all financial covenants contained in the Credit Facility.

As of December 29, 2023, the Company had commercial commitments outstanding of $57.3 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.

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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-Q

Item 2. Management’s Discussion and Analysis