AVIAT NETWORKS, INC. 10-Q

Item 3. Quantitative and Qualitative Disclosures about Market Risk In the normal course of doing business, the Company is exposed to risks associated with foreign currency exchange rates and changes in interest rates. The Company employs established policies and procedures governing the use of financial instruments to manage its exposure to such risks. Information about the Company’s market risk is presented in Part II, Item 7A in its fiscal 2023 Annual Report on Form 10-K. There have been no material changes to the Company’s market risk during the first nine months of fiscal 2024. Exchange Rate Risk The Company conducts business globally in numerous currencies and is therefore exposed to foreign currency risks. From time to time, the Company uses derivative instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The Company does not hold or issue derivatives for trading purposes or make speculative investments in foreign currencies. The Company enters into foreign exchange forward contracts to mitigate the change in fair value of specific non-functional currency assets and liabilities on the balance sheet. All balance sheet hedges are marked to market through earnings every period. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. The Company did not have any foreign exchange forward contracts outstanding as of March 29, 2024. Certain of the Company’s international business are transacted in non-U.S. dollar (“USD”) currencies. From time to time, the Company utilizes foreign currency hedging instruments to minimize the currency risk of non-USD transactions. The impact of translating the assets and liabilities of foreign operations to USD is included as a component of stockholders’ equity. As of March 29, 2024 and June 30, 2023, the cumulative translation adjustment decreased stockholders’ equity by $15.8 million and $16.0 million, respectively. Interest Rate Risk The Company’s exposure to market risk for changes in interest rates relates primarily to its cash equivalents and borrowings under its Credit Facility. 29 Exposure on Cash Equivalents The Company had $58.2 million in total cash and cash equivalents as of March 29, 2024. Cash equivalents totaled $11.1 million as of March 29, 2024 and were comprised of money market funds and bank certificates of deposit. Cash equivalents have been recorded at fair value. Fair value is measured using inputs that fall into a three-level hierarchy that prioritizes the inputs used to measure fair value based on observability of such inputs. For more information on the fair value measurements of cash equivalents, please refer to Note 6. Fair Value Measurements of Assets and Liabilities of the Notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q. The Company’s cash equivalents earn interest at fixed rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. The weighted-average days to maturity for cash equivalents held as of March 29, 2024 was 43 days, and these investments had an average yield of approximately 3.3% per annum. A 10% change in interest rates on the Company’s cash equivalents is not expected to have a material impact on its financial position, results of operations, or cash flows. Exposure on Borrowings As of March 29, 2024, the Company had $49.4 million outstanding under its Term Loan and no borrowings under its Revolver. The Company’s borrowings under the current Credit Facility bear interest at either: (a) Adjusted Term SOFR plus the applicable margin; or (b) the Base Rate plus the applicable margin. The pricing levels for interest rate margins are determined based on the Consolidated Total Leverage Ratio as determined and adjusted quarterly. As of March 29, 2024, the applicable margin on Adjusted Term SOFR and Base Rate borrowings was 2.50% and 1.50%, respectively. The effective rate of interest on the Company’s outstanding Term Loan borrowings as of March 29, 2024 was 7.9%. A 10% change in interest rates is estimated to have a $0.4 million impact on annual interest expense on the Company’s outstanding long-term debt as of March 29, 2024.