What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-05 compared with 2024-05-01 · 73 added, 87 removed, 94 unchanged (63% of the section changed)

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All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including without limitation statements of, about, concerning or regarding:

our ability to maintain effective internal control over financial reporting and management systems and remediate material weaknesses;

our plans, strategies and objectives for future operations, including with respect to growing our business and sustaining profitability;

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See “Item 1A.

Risk Factors” in the Company’s fiscal 2023 Annual Report on Form 10-K filed with the SEC on August 30, 2023 for more information regarding factors that may cause its results to differ materially from those expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

Risk Factors” in the Company’s fiscal 2024 Annual Report on Form 10-K filed with the SEC on October 4, 2024 for more information regarding factors that may cause its results to differ materially from those expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this Quarterly Report on Form 10-Q.

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Aviat has a global presence.

On July 2, 2024, the Company acquired 4RF Limited (“4RF”), a New Zealand company.

Aviat purchased all of the issued and outstanding shares of 4RF in an all-cash transaction for $18.2 million, net of $1.2 million cash acquired.

4RF is a leading provider of industrial wireless access solutions, including narrowband point-to-point/multi-point radios and Private LTE and 5G routers.

The acquisition of 4RF allows Aviat to expand its product offering for the global industrial wireless access markets including Private LTE/5G.

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

NEC’s Wireless Transport Business

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.

On November 30, 2023, the Company completed the acquisition of NEC Corporation’s (“NEC”) wireless transport business (the “NEC Transaction”).

Prior to the acquisition 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.

Acquisitions of the Notes 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 $22.4 million will be transferred to NEC in the first quarter of fiscal 2025, primarily related to settlement of the post-closing working capital adjustment.

The Company estimates additional cash consideration of approximately $19.6 million will be transferred to NEC in the second quarter of fiscal 2025, 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.

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.

Credit Facility and Debt of the Notes for further information.

Operations Review

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

The market for mobile backhaul continued to be the Company’s primary addressable market segment globally in the first three months of fiscal 2025.

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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Additionally, Aviat operates an e-commerce platform that provides low-cost services, simple experience, and fast delivery to mobile operators and private network customers.

However, as disclosed above and in the “Risk Factors” section in Item 1A of its Annual Report on Form 10-K filed with the SEC on August 30, 2023, a number of factors could prevent the Company from achieving its objectives, including ongoing pricing pressures attributable to competition and macroeconomic conditions in the geographic markets that it serves.

However, as disclosed above and in the “Risk Factors” section in Item 1A of its Annual Report on Form 10-K filed with the SEC on October 4, 2024, a number of factors could prevent the Company from achieving its objectives, including ongoing pricing pressures attributable to competition and macroeconomic conditions in the geographic markets that it serves.

Revisions to Prior Period Consolidated Financial Statements

Subsequent to the third quarter of fiscal 2024, the Company identified certain errors in the quarterly financial statements for fiscal 2024.

The Company evaluated the materiality of the errors and determined that the impacts were not material, individually or in the aggregate, to the Company’s previously issued consolidated financial statements for any of the prior reporting periods in which they occurred.

The Company has revised the prior period financial statements for fiscal 2024 to correct the errors.

The revisions ensure comparability across all periods presented herein.

Refer to Note 1.

The Company and Basis of Presentation and Note 15.

Revisions to Prior Period Consolidated Financial Statements of the Notes for further information.

The Company manages its sales activities primarily on a geographic basis in North America and three international geographic regions:

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

Revenue by region for the three and nine months ended March 29, 2024 and March 31, 2023 and the related changes were as follows:

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Revenue by region for the three months ended September 27, 2024 and September 29, 2023 and the related changes were as follows:

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

North America $ 42,225 $ 54,853 $ (12,628) (23.0) %

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Total revenue $ 88,429 $ 86,909 $ 1,520 1.7 %

Revenue in North America decreased by $1.7 million during the third quarter of fiscal 2024 compared with the same period of fiscal 2023, primarily due to the near completion of a large tier 1 project.

Revenue in North America increased by $4.3 million during the first nine months of fiscal 2024 compared with the same period of fiscal 2023, primarily due to private network and tier 1 demand.

Revenue in Africa and the Middle East decreased by $7.8 million during the third quarter of fiscal 2024 compared with the same period of fiscal 2023.

Revenue in Africa and the Middle East decreased by $8.5 million during the first nine months of fiscal 2024 compared with the same period of fiscal 2023.

The decreases for the third quarter and the first nine months of fiscal 2024 were 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 $2.7 million during the third quarter of fiscal 2024 compared with the same period of fiscal 2023.

Revenue in Europe increased by $3.7 million during the first nine months of fiscal 2024 compared with the same period of fiscal 2023.

The increases for the third quarter and the first nine 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 $34.9 million during the third quarter of fiscal 2024 compared with the same period of fiscal 2023.

Revenue in Latin America and Asia Pacific increased by $39.3 million during the first nine months of fiscal 2024 compared with the same periods of fiscal 2023.

The increases were primarily due to contributions resulting from the NEC Transaction and higher volumes of projects with mobile operators.

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Revenue in North America decreased by $12.6 million during the first quarter of fiscal 2025 compared with the same period of fiscal 2024 primarily due to lower demand from Tier 1 mobile network operators and timing of certain private network projects.

Revenue in Africa and the Middle East increased by $0.5 million during the first quarter of fiscal 2025 compared with the same period of fiscal 2024 primarily due to spending from mobile network operators in the region.

Revenue in Europe increased by $0.3 million during the first quarter of fiscal 2025 compared with the same period of fiscal 2024 primarily due to increased sales to mobile operators in the region.

Revenue in Latin America and Asia Pacific increased by $13.3 million during the first quarter of fiscal 2025 compared with the same period of fiscal 2024 primarily due to contributions resulting from the NEC Transaction.

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

Product sales $ 61,116 $ 59,545 $ 1,571 2.6 %

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Total revenue $ 88,429 $ 86,909 $ 1,520 1.7 %

Revenue from product sales and services increased by 29.3% and 42.2%, respectively for the third quarter of fiscal 2024 compared with the same quarter of fiscal 2023.

Revenue from product sales and services increased by 12.2% and 21.9%, respectively for the first nine months of fiscal 2024 compared with the same period of fiscal 2023.

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

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Revenue from product sales increased by 2.6% and revenue from services decreased by 0.2% for the first quarter of fiscal 2025 compared with the same quarter of fiscal 2024 primarily due to the factors discussed above and product sales contribution from the NEC Transaction.

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

Revenue $ 88,429 $ 86,909 $ 1,520 1.7 %

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Service margin % 39.8 % 29.1 %

Gross margin for the third quarter of fiscal 2024 increased by $6.7 million compared with the same quarter of fiscal 2023.

Gross margin for the first nine months of fiscal 2024 increased by $13.7 million.

Gross margin dollars as a percentage of revenue decreased in the third quarter and for the first nine months of fiscal 2024 compared with the prior year primarily due to expected near term dilution as a result of the NEC Transaction.

Gross margin for the first quarter of fiscal 2025 decreased by $11.4 million compared with the same quarter of fiscal 2024 primarily due to changes in regions and customers and the expected near-term dilution as a result of the NEC Transaction.

Research and Development

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

Research and development $ 10,408 $ 6,424 $ 3,984 62.0 %

% of revenue 11.8 % 7.4 %

Research and development expenses increased by $4.1 million and $6.8 million for the third quarter and the first nine 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 resulting from the NEC Transaction.

Research and development expenses increased by $4.0 million for the first quarter of fiscal 2025 primarily due to increased product development activities.

Selling and Administrative

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

Selling and administrative $ 24,948 $ 19,237 $ 5,711 29.7 %

% of revenue 28.2 % 22.1 %

Selling and administrative expenses increased by $5.5 million and $12.1 million for the third quarter and the first nine 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 and additional costs resulting from the NEC Transaction.

Selling and administrative expenses increased by $5.7 million for the first quarter of fiscal 2025 compared with the first quarter of fiscal 2024 primarily due to merger and acquisition expenses and additional costs resulting from the NEC Transaction.

Restructuring

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Restructuring (recovery) charges

$ (417) $ (23) $ (394) 1,713.0 % $ 2,227 $ 2,855 $ (628) (22.0) %

In the third quarter of fiscal 2024, restructuring recoveries were $(0.4) million, an increase of $0.4 million compared to the same period in fiscal 2023.

For the first nine months of fiscal 2024, restructuring charges were $2.2 million, primarily related 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.

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

Restructuring charges $ — $ 644 $ (644) (100.0) %

In the first quarter of fiscal 2025, there were no restructuring charges incurred, compared to $0.6 million in the first quarter of fiscal 2024.

The prior year period includes restructuring charges primarily associated with reductions in workforce to optimize skill sets and align cost structure across the Company.

Interest Expense, net

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

Interest expense, net $ 1,115 $ 99 $ 1,016 1,026.3 %

Interest expense, net increased by $0.8 million and $1.2 million for the third quarter and the first nine months of fiscal 2024, respectively, compared with the corresponding periods of fiscal 2023.

The increase in interest expense, net was primarily due to interest expense incurred on the Term Loan borrowings used to fund the NEC Transaction in the second quarter of fiscal 2024.

Interest expense, net increased by $1.0 million for the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024 primarily due to interest expense incurred on the Term Loan borrowings used to fund the NEC Transaction in the second quarter of fiscal 2024.

Other Expense, net

Three Months Ended Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

Other expense, net $ 710 $ 802 $ (92) (11.5) %

Other expense, net decreased by $(0.2) million for the third quarter of fiscal 2024, primarily as a result of foreign exchange rate movement.

Other expense, net decreased by $2.3 million for the first nine 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 Nine Months Ended

(In thousands, except percentages) March 29, 2024 March 31, 2023 $ Change % Change March 29, 2024 March 31, 2023 $ Change % Change

Income before income taxes $ 4,037 $ 7,068 $ (3,031) (42.9) % $ 13,920 $ 17,337 $ (3,417) (19.7) %

Provision for income taxes $ 619 $ 2,179 $ (1,560) (71.6) % $ 3,607 $ 9,148 $ (5,541) (60.6) %

Other expense, net decreased by $(0.1) million for the first quarter of fiscal 2025, primarily as a result of foreign exchange rate movement.

Three Months Ended

(In thousands, except percentages) September 27, 2024 September 29, 2023 $ Change % Change

(Loss) income before income taxes $ (17,393) $ 3,989 $ (21,382) (536.0) %

(Benefit from) provision for income taxes $ (5,514) $ 432 $ (5,946) (1,376.4) %

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 nine months of fiscal 2024 was primarily attributable to tax expense for the U.S.

entity and profitable foreign subsidiaries.

Tax expense for the first nine 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.

The tax benefit for the first three months of fiscal 2025 was primarily due to tax benefit resulting from year-to-date losses.

The tax expense for the first three months of fiscal 2024 was primarily attributable to tax expense related to U.S.

and profitable foreign subsidiaries.

Liquidity, Capital Resources, and Financial Strategies

Sources of Cash

As of March 29, 2024, the Company’s total cash and cash equivalents were $58.2 million.

As of September 27, 2024, the Company’s total cash and cash equivalents were $51.0 million.

Approximately $12.5 million was held in the United States.

The remaining balance of $37.6 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 March 29, 2024, $37.2 million was held in jurisdictions where its undistributed earnings are indefinitely reinvested, and if repatriated, would be subject to foreign withholding taxes.

The remaining balance of $38.6 million, or 76%, was held outside the United States.

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 $22.2 million for the first nine months of fiscal 2024, compared with $(9.0) million in the prior year.

The $31.2 million increase is primarily attributable to improvements in working capital and increased net income prior to non-cash adjustments compared to the prior year.

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

Net cash (used in) provided by operating activities was $(27.2) million for the first three months of fiscal 2025, compared with $14.0 million in the prior year.

The $(41.1) million decrease is primarily attributable to increases in working capital and decreased earnings compared to the prior year.

Investing Activities

Net cash used in investing activities was $35.0 million for the first nine months of fiscal 2024, compared to $11.7 million in the prior year.

The $23.3 million increase is primarily due to payments of the cash consideration associated with the NEC Transaction, partially offset by non-recurring activity included in the prior year related to proceeds received on the sale of marketable securities.

Net cash used in investing activities was $21.2 million for the first three months of fiscal 2025, compared to $0.7 million in the prior year.

The $20.5 million increase is primarily due to payments associated with the acquisition of 4RF.

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 financing activities was $49.3 million for the first nine months of fiscal 2024, compared with $6.2 million in the prior year.

The $43.1 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 March 29, 2024, the Company’s principal sources of liquidity consisted of $59.2 million in cash and cash equivalents and marketable securities, $35.2 million of available credit under its Credit Facility, and future collections of receivables from customers.

Net cash provided by financing activities was $34.3 million for the first three months of fiscal 2025, compared with $0.2 million in the prior year.

The $34.1 million increase is primarily due to the $35.0 million of borrowings on the Company’s Revolver.

As of September 27, 2024, the Company’s principal sources of liquidity consisted of $51.0 million in cash and cash equivalents, $0.7 million of available credit under its Credit Facility, and future collections of receivables from customers.

On October 18, 2024, the Company amended its Credit Facility which increased the borrowing capacity to $75.0 million for each of the Term Loan and Revolver facilities.

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 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.

The Company believes that its existing cash and cash equivalents, the available borrowings under its Credit Facility 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 $33.2 million against the Revolver during the first nine 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 March 29, 2024, the Company had $49.4 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 March 29, 2024, the Company had commercial commitments outstanding of $16.6 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 Company borrowed $35.0 million against the Revolver during the first three months of fiscal 2025.

As of September 27, 2024, the Company had $48.8 million outstanding under its Term Loan and $35.0 million outstanding under its Revolver and was in compliance with all financial covenants contained in the Credit Facility.

Critical Accounting Estimates

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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