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 27, 2024 September 29, 2023 Revenues: Product sales $ 61,116 $ 59,545 Services 27,313 27,364 Total revenues 88,429 86,909 Cost of revenues: Product sales 52,201 36,313 Services 16,440 19,401 Total cost of revenues 68,641 55,714 Gross margin 19,788 31,195 Operating expenses: Research and development 10,408 6,424 Selling and administrative 24,948 19,237 Restructuring charges — 644 Total operating expenses 35,356 26,305 Operating (loss) income ( 15,568 ) 4,890 Interest expense, net 1,115 99 Other expense, net 710 802 (Loss) income before income taxes ( 17,393 ) 3,989 (Benefit from) provision for income taxes ( 5,514 ) 432 Net (loss) income $ ( 11,879 ) $ 3,557 Net (loss) income per share of common stock outstanding: Basic $ ( 0.94 ) $ 0.31 Diluted $ ( 0.94 ) $ 0.30 Weighted-average shares outstanding: Basic 12,646 11,574 Diluted 12,646 11,943 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) Three Months Ended (In thousands) September 27, 2024 September 29, 2023 Net (loss) income $ ( 11,879 ) $ 3,557 Other comprehensive income: Net change in cumulative translation adjustments 2,153 33 Other comprehensive income 2,153 33 Comprehensive (loss) income $ ( 9,726 ) $ 3,590 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 27, 2024 June 28, 2024 ASSETS Current Assets: Cash and cash equivalents $ 51,034 $ 64,622 Accounts receivable, net of allowances of $ 2,190 and $ 1,854 169,002 158,013 Unbilled receivables 94,725 90,525 Inventories 79,559 62,267 Assets held for sale — 2,720 Other current assets 32,942 27,076 Total current assets 427,262 405,223 Property, plant and equipment, net 11,883 9,480 Goodwill 15,153 8,217 Intangible assets, net 28,754 13,644 Deferred income taxes 91,317 83,112 Right-of-use assets 3,665 3,710 Other assets 12,823 11,837 Total assets $ 590,857 $ 535,223 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 104,926 $ 92,854 Accrued expenses 39,137 42,148 Operating lease liabilities 1,125 1,006 Advance payments and unearned revenue 79,380 58,839 Other current liabilities 21,234 21,614 Current portion of long-term debt 2,395 2,396 Total current liabilities 248,197 218,857 Long-term debt 80,980 45,954 Unearned revenue 7,522 7,413 Long-term operating lease liabilities 2,782 2,823 Other long-term liabilities 407 394 Reserve for uncertain tax positions 3,445 3,485 Deferred income taxes 412 412 Total liabilities 343,745 279,338 Commitments and contingencies (Note 12) 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, 12.7 million and 12.6 million shares issued and outstanding as of September 27, 2024 and June 28, 2024, respectively. 127 126 Treasury stock 0.2 million and 0.2 million shares as of September 27, 2024 and June 28, 2024, respectively ( 6,479 ) ( 6,479 ) Additional paid-in-capital 861,023 860,071 Accumulated deficit ( 590,392 ) ( 578,513 ) Accumulated other comprehensive loss ( 17,167 ) ( 19,320 ) Total stockholders’ equity 247,112 255,885 Total liabilities and stockholders’ equity $ 590,857 $ 535,223 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 27, 2024 September 29, 2023 Operating Activities Net (loss) income $ ( 11,879 ) $ 3,557 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation of property, plant and equipment 1,317 1,168 Amortization of intangible assets 513 176 Provision for uncollectible receivables 350 14 Share-based compensation 1,664 1,834 Deferred taxes ( 6,826 ) ( 170 ) Inventory write-downs 501 547 Non-cash lease expense 325 177 Other non-cash operating activities, net ( 37 ) 17 Changes in operating assets and liabilities: Accounts receivable ( 15,498 ) 7,043 Unbilled receivables ( 2,821 ) ( 1,738 ) Inventories ( 13,197 ) 1,955 Accounts payable 8,594 1,787 Accrued expenses ( 6,807 ) ( 3,947 ) Advance payments and unearned revenue 20,015 1,998 Income taxes payable 1,773 331 Other assets and liabilities ( 5,152 ) ( 769 ) Net cash (used in) provided by operating activities ( 27,165 ) 13,980 Investing Activities Purchase of property, plant and equipment ( 5,421 ) ( 717 ) Proceeds from sale of asset held for sale 2,396 — Acquisition, net of cash acquired ( 18,150 ) — Net cash used in investing activities ( 21,175 ) ( 717 ) Financing Activities Proceeds from revolver 35,000 25,200 Repayments of revolver — ( 25,200 ) Payments for taxes related to net settlement of equity awards ( 711 ) ( 105 ) Proceeds from issuance of common stock under employee stock plans — 285 Net cash provided by financing activities 34,289 180 Effect of exchange rate changes on cash, cash equivalents, and restricted cash 1,293 ( 223 ) Net (decrease) increase in cash, cash equivalents, and restricted cash ( 12,758 ) 13,220 Cash, cash equivalents, and restricted cash, beginning of period 64,934 22,521 Cash, cash equivalents, and restricted cash, end of period $ 52,176 $ 35,741 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) Three Months Ended September 27, 2024 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 28, 2024 12,622 $ 126 $ ( 6,479 ) $ 860,071 $ ( 578,513 ) $ ( 19,320 ) $ 255,885 Net loss — — — — ( 11,879 ) — ( 11,879 ) Other comprehensive income — — — — — 2,153 2,153 Issuance of common stock under employee stock plans 80 1 — ( 1 ) — — — Shares withheld for taxes related to vesting of equity awards ( 26 ) — — ( 711 ) — — ( 711 ) Share-based compensation — — — 1,664 — — 1,664 Balance as of September 27, 2024 12,676 $ 127 $ ( 6,479 ) $ 861,023 $ ( 590,392 ) $ ( 17,167 ) $ 247,112 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 $ ( 589,273 ) $ ( 16,004 ) $ 218,739 Net income — — — — 3,557 — 3,557 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 $ ( 585,716 ) $ ( 15,971 ) $ 224,343 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 statement of its financial position, results of operations and cash flows for such periods. The results for the three months ended September 27, 2024 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 28, 2024. 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 27, 2024 and September 29, 2023 both consisted of 13 weeks. Fiscal year 2025 contains 52 weeks and will end on June 27, 2025. Fiscal year 2024 contained 52 weeks and ended on June 28, 2024. 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. 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. In accordance with ASC 250, Accounting Changes and Error Corrections and Staff Accounting Bulletins (“SAB”) No. 99, Materiality and No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, 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 8 statements. As a result, the Company has revised the prior period financial statements and related disclosures to correct the errors for comparability across all periods presented herein. Refer to Note 15. Revisions to Prior Period Consolidated Financial Statements of the Notes to this Form 10-Q, and Note 1. The Company and Summary of Significant Accounting Policies and Part II, Item 9B. Other Information of the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2024 for further information. 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 27, 2024, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2024. Accounting Standards Not Yet Adopted In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances the transparency and usefulness of income tax information through improvements to disclosures primarily related to the rate reconciliation and income taxes paid information. ASU 2023-09 is effective for the Company’s annual reporting beginning in fiscal 2026. The Company is currently evaluating the impact of this ASU on its consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly presented to the chief operating decision maker. The disclosures required under ASU 2023-07 are also required for public entities with a single reportable segment. ASU 2023-07 is effective for the Company’s annual reporting beginning in fiscal 2025 and for interim periods beginning in fiscal 2026. The Company is currently evaluating the impact of the ASU on its consolidated financial statements. The Company considers the applicability and impact of all ASUs issued by the FASB. The Company determined at this time that all other 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 (Loss) Income Per Share of Common Stock The following table presents the computation of basic and diluted net (loss) income per share: Three Months Ended (In thousands, except per share amounts) September 27, 2024 September 29, 2023 Numerator: Net (loss) income $ ( 11,879 ) $ 3,557 Denominator: Weighted-average shares outstanding, basic 12,646 11,574 Effect of potentially dilutive equivalent shares — 369 Weighted-average shares outstanding, diluted 12,646 11,943 Net (loss) income per share of common stock outstanding: Basic $ ( 0.94 ) $ 0.31 Diluted $ ( 0.94 ) $ 0.30 9 The following table summarizes the weighted-average equity awards that were excluded from the diluted net (loss) income per share calculations since they were anti-dilutive: Three Months Ended (In thousands) September 27, 2024 September 29, 2023 Stock options 396 259 Restricted stock units and performance stock units 154 58 Total shares of common stock excluded 550 317 Note 3. Revenue Recognition Contract Balances, Performance Obligations, and Backlog (In thousands) September 27, 2024 June 28, 2024 Contract assets Accounts receivable, net $ 169,002 $ 158,013 Unbilled receivables 94,725 90,525 Capitalized commissions 3,531 3,269 Contract liabilities Advance payments and unearned revenue $ 79,380 $ 58,839 Unearned revenue, long-term 7,522 7,413 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). 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 27, 2024, the Company reported $ 86.9 million in advance payments and unearned revenue and long-term unearned revenue, of which approximately 80 % is expected to be recognized as revenue in the next twelve months and the remainder thereafter. Approximately $ 16.6 million of revenue was recognized during the three months ended September 27, 2024, which was included in advance payments and unearned revenue at June 28, 2024. Remaining Performance Obligations The aggregate amount of transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $ 144.8 million at September 27, 2024 relating to our long-term field service projects. 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. 10 Note 4. 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: (In thousands) September 27, 2024 June 28, 2024 Cash and cash equivalents $ 51,034 $ 64,622 Restricted cash included in long-term other assets 1,142 312 Total cash, cash equivalents, and restricted cash $ 52,176 $ 64,934 Inventories (In thousands) September 27, 2024 June 28, 2024 Finished products $ 55,788 $ 44,890 Raw materials and supplies 21,712 15,433 Customer service inventories 2,059 1,944 Total inventories $ 79,559 $ 62,267 Consigned inventories included within raw materials and supplies $ 12,105 $ 11,456 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 27, 2024 and September 29, 2023 were included in cost of product sales as follows: Three Months Ended (In thousands) September 27, 2024 September 29, 2023 Excess and obsolete inventory $ 310 $ 294 Customer service inventory write-downs 191 253 Total charges $ 501 $ 547 Other Current Assets (In thousands) September 27, 2024 June 28, 2024 Prepaid and other current assets $ 15,076 $ 13,559 Taxes 11,256 8,623 Contract manufacturing assets 6,610 4,894 Total other current assets $ 32,942 $ 27,076 11 Property, Plant and Equipment, net (In thousands) September 27, 2024 June 28, 2024 Buildings and leasehold improvements $ 1,302 $ 1,302 Software and equipment 73,456 69,898 Total property, plant and equipment, gross 74,758 71,200 Less: accumulated depreciation ( 62,875 ) ( 61,720 ) Total property, plant and equipment, net $ 11,883 $ 9,480 Included in the total property, plant and equipment, gross were $ 4.2 million and $ 4.1 million of assets in progress which have not been placed in service as of September 27, 2024 and June 28, 2024, respectively. Depreciation expense related to property, plant and equipment, was as follows: Three Months Ended (In thousands) September 27, 2024 September 29, 2023 Depreciation $ 1,317 $ 1,168 Accrued Expenses (In thousands) September 27, 2024 June 28, 2024 Taxes $ 11,718 $ 8,827 Compensation and benefits 8,240 9,689 Project costs 7,007 14,305 Other 5,816 3,507 Warranties 3,510 2,996 Commissions 1,533 1,538 Professional fees 1,313 1,286 Total accrued expenses $ 39,137 $ 42,148 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 27, 2024 September 29, 2023 Balance as of the beginning of the period $ 2,996 $ 2,100 Warranty provision recorded during the period 544 375 Assumed in acquisition 406 — Consumption during the period ( 436 ) ( 375 ) Balance as of the end of the period $ 3,510 $ 2,100 Advance Payments and Unearned Revenue (In thousands) September 27, 2024 June 28, 2024 Advance payments $ 18,989 $ 8,517 Unearned revenue 60,391 50,322 Total advance payments and unearned revenue $ 79,380 $ 58,839 12 Excluded from the balances above are $ 7.5 million and $ 7.4 million in long-term unearned revenue as of September 27, 2024 and June 28, 2024, respectively. Note 5. 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: • 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 27, 2024 and June 28, 2024 were as follows: (In thousands) September 27, 2024 June 28, 2024 Valuation Inputs Assets: Cash and cash equivalents: Money market funds $ 2,858 $ 6,602 Level 1 Bank certificates of deposit $ 3,574 $ 3,706 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 and marketable securities. As of September 27, 2024 and June 28, 2024, the 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. The Company did not have any recurring assets or liabilities that were valued using significant unobservable inputs. Note 6. Credit Facility and Debt The Company entered into a Secured Credit Facility Agreement (the “Credit Facility”), dated May 9, 2023, amended as of November 22, 2023 and October 18, 2024, 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 sub-limit for letters of credit, and a $ 10.0 million swingline loan sub-limit. Refer to Note 16. Subsequent Events for further information. In November 2023, 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 defined below). See Note 11. Acquisitions for further information. As of September 27, 2024, the available credit under the Revolver was $ 0.7 million, reflecting the available limit of $ 5.0 million less outstanding letters of credit of $ 4.3 million. The Company borrowed $ 35.0 million against the Revolver during the three months ended September 27, 2024. As of September 27, 2024, the Company had $ 48.8 million outstanding under its Term Loan and $ 35.0 million outstanding under its Revolver. 13 The following summarizes the Company’s outstanding long-term debt as of September 27, 2024: (In thousands) Revolver $ 35,000 Term loan 48,750 Less: unamortized deferred financing costs ( 375 ) Total debt 83,375 Less: current portion of long-term debt ( 2,395 ) Total long-term debt $ 80,980 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 27, 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 outstanding Term Loan and Revolver borrowings as of September 27, 2024 was 7.4 % and 7.6 %, respectively. 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 27, 2024, the Company was in compliance with all financial covenants contained in the Credit Facility. As of September 27, 2024, scheduled maturities of outstanding long-term debt are as follows: (In thousands) Remainder of 2025 $ 2,500 2026 3,750 2027 6,250 2028 71,250 Total $ 83,750 Note 7. Restructuring The following table summarizes restructuring related activities during the three months ended September 27, 2024: (In thousands) Employee Severance and Benefits Facilities and Other Total Balance as of June, 28, 2024 $ 1,718 $ — $ 1,718 Cash payments ( 80 ) — ( 80 ) Balance as of September, 27, 2024 $ 1,638 $ — $ 1,638 As of September 27, 2024, the accrued restructuring balance of $ 1.6 million was included in other current liabilities on the unaudited condensed consolidated balance sheets. Included in the above were positions identified for termination that have not been executed from a restructuring perspective. Prior Years’ Plans During fiscal 2024, the Company’s Board of Directors approved restructuring plans, primarily associated with the NEC Transaction (as defined below) and reductions in workforce in certain of the Company’s operations to optimize skill sets and align cost structure. The fiscal 2024 plans are expected to be completed through the end of fiscal 2025. 14 Note 8. 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 27, 2024, $ 6.9 million remains available and Aviat may choose to suspend or discontinue the repurchase program at any time. Repurchased shares are recorded as treasury stock. During the first quarter of fiscal 2025, the Company did not repurchase any shares of its common stock. Stock Incentive Programs As of September 27, 2024, 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. 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 27, 2024, the Company granted 9,140 restricted stock units. The Company recognizes compensation cost for share-based payment awards on a straight-line basis over the requisite service period. For awards with a performance condition vesting feature, share-based compensation costs are recognized when achievement of the performance conditions is considered probable. Forfeitures are recognized as they occur. 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 27, 2024 September 29, 2023 By Expense Category: Cost of revenues $ 104 $ 183 Research and development 143 146 Selling and administrative 1,417 1,505 Total share-based compensation expense $ 1,664 $ 1,834 By Type of Award: Options $ 327 $ 346 Restricted stock and performance share awards and units 1,337 1,488 Total share-based compensation expense $ 1,664 $ 1,834 As of September 27, 2024, there was approximately $ 1.8 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 1.7 years. As of September 27, 2024, there was $ 5.9 million of total unrecognized compensation expense related to non-vested stock awards which is expected to be recognized over a weighted-average period of 1.5 years. Note 9. 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”). 15 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 27, 2024 and September 29, 2023 was as follows: Three Months Ended (In thousands) September 27, 2024 September 29, 2023 North America $ 42,225 $ 54,853 Africa and the Middle East 10,450 9,954 Europe 5,600 5,252 Latin America and Asia Pacific 30,154 16,850 Total revenue $ 88,429 $ 86,909 Note 10. Income Taxes The Company’s effective tax rate varies from the U.S. federal statutory rate of 21% primarily due to U.S. global intangible low-taxed income inclusion (GILTI), state taxes, stock-based compensation and foreign operations that are subject to income taxes at different statutory rates. During interim periods, tax expense or benefit are accrued for jurisdictions that are anticipated to be profitable for fiscal 2025. The determination of income taxes for the three months ended September 27, 2024 and September 29, 2023 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. The tax benefit for the three months ended September 27, 2024 was primarily due to tax benefit resulting from year-to-date losses. The tax expense for the three months ended September 29, 2023 was primarily due to tax expense related to U.S. and profitable foreign subsidiaries. The Company 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 27, 2024 and September 29, 2023. 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. 16 Note 11. Acquisitions 4RF Limited 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. The Company is in the process of determining the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed. The preliminary estimated fair value of the assets acquired and liabilities assumed consisted of working capital of $ 5.6 million, other assets and liabilities of $ 1.6 million, intangible assets of $ 8.5 million, and goodwill of $ 2.5 million. The goodwill from this acquisition is non-deductible for tax purposes. NEC’s Wireless Transport Business On May 9, 2023, the Company entered into a Master Sale of Business Agreement (as amended on November 30, 2023, the “Purchase Agreement”) with NEC Corporation (“NEC”), to acquire NEC’s wireless transport business (the “NEC Transaction”). The Company completed the NEC Transaction on November 30, 2023 (the “Closing Date”). 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. The results of operations of the NEC Transaction have been included in the consolidated financial statements since the Closing Date. 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 common stock of the Company. The fair value of the shares issued was determined based on the closing market price of the Company’s common stock on the Closing Date. Aggregate consideration transferred at closing was approximately $ 54.5 million, which is subject to certain post-closing adjustments. As of September 27, 2024, the Company recorded accruals of approximately $ 19.6 million in estimated additional cash consideration, which is included in other current liabilities on the unaudited condensed consolidated balance sheets. The additional consideration is primarily related to the settlement of the post-closing working capital adjustment, and is expected to be transferred to NEC in the second quarter of fiscal 2025. The Company funded the cash portion of the consideration with Term Loan borrowings under its Credit Facility. See Note 6. Credit Facility and Debt for further information. The NEC Transaction was accounted for as a business combination using the acquisition method of accounting. The Company is in the process of obtaining final independent third-party valuations of certain intangible and tangible assets acquired. The fair values of the acquired intangible assets are based on estimates and assumptions that are considered reasonable by the Company. As of the acquisition date, the Company has recorded the assets acquired and the liabilities assumed at their respective estimated fair values. The recognized goodwill is attributable to the workforce of the acquired business and expected synergies. The goodwill from this acquisition is expected to be fully deductible for tax purposes. 17 A summary of the preliminary purchase price allocation is as follows: (In thousands) Accounts receivable, net $ 42,487 Inventories 29,279 Property, plant and equipment, net 539 Identifiable finite-lived intangible assets: Customer relationships 9,200 Technology 3,200 Other assets 243 Accounts payable ( 13,182 ) Advance payments and unearned revenue ( 3,192 ) Other liabilities ( 2,501 ) Goodwill 8,015 Net assets acquired $ 74,088 The preliminary purchase price allocation has been updated for certain measurement period adjustments based on revised estimates of fair value, which primarily resulted in a $ 6.8 million decrease in accounts receivables, a $ 4.9 million decrease in inventories, a $ 6.8 million increase in identifiable finite-lived intangible assets acquired and a $ 4.9 million increase to goodwill. The preliminary purchase price allocation is subject to adjustment based on the Company obtaining final independent third-party valuations, determining fair value and final allocations of purchase price to the identifiable assets acquired and liabilities assumed, and determining the final consideration, including adjustments related to settlement of the final post-closing working capital adjustment. Revenue and operating income associated with the NEC Transaction included in the consolidated statements of operations for the three months ended September 27, 2024 were $ 25.0 million and $ 1.0 million, respectively. Note 12. 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 (i) finished products that it has ordered, (ii) finished products that it requested be held as safety stock, and (iii) 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 27, 2024, the Company had outstanding purchase obligations with its suppliers or contract manufacturers of $ 72.0 million. In addition, the Company had purchase obligations of approximately $ 5.3 million associated with software as a service and software maintenance support. 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 27, 2024, 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 27, 2024, the Company had commercial commitments outstanding of $ 19.7 million, that were not recorded on the unaudited condensed consolidated balance sheets. The Company does not believe, based on historical experience and information currently 18 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 27, 2024 Letters of credit $ 4,292 Bonds 15,383 $ 19,675 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 27, 2024, 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 27, 2024, 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 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 directors of Aviat India appeared before the Ministry of Finance Enforcement Directorate. In March 2024, the Company appeared before the Joint Director of Enforcement to review the transactions at issue. No subsequent 19 hearing date has been scheduled as of September 27, 2024. 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 13. Goodwill and Intangible Assets The following presents details of goodwill and intangible assets: (In thousands) September 27, 2024 June 28, 2024 Goodwill $ 15,153 $ 8,217 The $ 6.9 million increase for the three months ended September 27, 2024 is associated with the preliminary purchase price allocations for the 4RF acquisition and the NEC Transaction. Refer to Note 11. Acquisitions for further information. 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. (In thousands except useful life) Useful life in Years September 27, 2024 June 28, 2024 Intangible assets: Technology 7 $ 6,835 $ 1,800 Patents 10 690 690 Customer relationships 14 — 15 22,123 11,530 Trade names 16 1,330 1,330 Total gross intangible assets $ 30,978 $ 15,350 Accumulated amortization ( 2,224 ) ( 1,706 ) Total net intangible assets $ 28,754 $ 13,644 Amortization of finite-lived intangibles for the three months ended September 27, 2024 was $ 0.5 million and is included in selling and administrative expenses. There were no impairment charges recorded for the three months ended September 27, 2024. 20 As of September 27, 2024, the estimated future amortization expense of finite-lived intangible assets is as follows (in thousands): Remainder of 2025 $ 2,449 2026 2,640 2027 2,640 2028 2,640 2029 2,640 Thereafter 15,745 Total $ 28,754 Note 14. Related Party Transactions NEC Corporation On November 30, 2023 (the “Closing Date”), the Company completed the NEC Transaction. See Note 11. Acquisitions for further information. A portion of the total consideration in the NEC Transaction included the issuance of 736,750 shares in Company common stock to NEC. The Company and NEC entered into a Registration Rights and Lock-Up Agreement, restricting NEC’s ability to transfer shares (the “Lock-Up”), except for certain limited exceptions as provided in the Registration Rights and Lock-Up Agreement, until one day after the one-year anniversary of the Closing Date (the “Initial Lock-Up Expiration Date”). Starting one day after the Initial Lock-Up Expiration Date, one-twelfth of the issued shares shall be released from the Lock-Up each month, such that all issued shares shall be released from Lock-Up by the two-year anniversary of the Closing Date. Pursuant to the Purchase Agreement, NEC will have the right to nominate a director to the Company’s Board of Directors from the Closing Date and for a period of two years thereafter. As of September 27, 2024, NEC held approximately 5.8 % of the Company’s outstanding common stock. In connection with the closing of the NEC Transaction and as of the Closing Date, the Company and NEC entered into agreements covering the performance of certain post-closing services and licensing arrangements. The agreements include arrangements covering manufacturing services and product supply, transition services, distribution services, research and development services, and licensing of trademark and intellectual property (“IP”). The Manufacturing and Supply Agreement includes arrangements for NEC to manufacture and supply Pasolink products on behalf of and to the Company and its customers. The transition services agreements include arrangements for the Company and NEC to provide and receive certain transition services, primarily associated with administrative functions. The distribution services agreements includes arrangements where NEC will provide distribution services on behalf of and to the Company and its customers in certain international markets and territories. The Research and Development Cooperating Agreement for Existing Products includes arrangements for NEC to provide the Company certain services relating to development work to maintain existing products of the NEC business. The licensing agreements include arrangements where the Company will grant NEC a non-exclusive license to certain Pasolink trademarks in Japan, and NEC will grant the Company a non-exclusive, worldwide (excluding Japan) license to certain NEC IP, including mobile backhaul-related patents. The licensing agreements are royalty-free and perpetual. A summary of the related party activity between the Company and NEC during the three months ended September 27, 2024 is as follows: (In thousands) Transition services received $ 745 Research and development services received 3,013 Purchase of inventories 8,293 21 As of September 27, 2024, the Company’s outstanding related party balances with NEC included in the unaudited condensed consolidated balance sheets are as follows: (In thousands) Accounts receivable, net $ 4,822 Accounts payable 11,878 Other current liabilities 19,596 Note 15. Revisions to Prior Period Consolidated Financial Statements As described in Note 1. The Company and Basis of Presentation, subsequent to the third quarter of fiscal 2024, the Company identified certain errors in the quarterly financial statements for fiscal 2024 related to estimated total contract costs and progress to completion for an over-time arrangement. The Company identified additional errors impacting the quarterly financial statements for fiscal 2024 related to the recognition of revenue prior to performance obligations being met and related to journal entries recorded in error. In accordance with ASC 250, Accounting Changes and Error Corrections and Staff Accounting Bulletins (“SAB”) No. 99, Materiality and No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, 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. The Company has revised the prior period financial statements and related disclosures for the first quarter of fiscal 2024 to correct the errors. A summary of the corrections to the impacted financial statement line items in the Company’s previously issued Consolidated Statements of Operations, Comprehensive Income, Equity and Cash Flows for the three months ended September 29, 2023 is provided below. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended September 29, 2023 (In thousands, except per share amounts) As Previously Reported Adjustments As Revised Revenues: Services $ 28,021 $ ( 657 ) $ 27,364 Total revenues 87,566 ( 657 ) 86,909 Gross margin 31,852 ( 657 ) 31,195 Operating income 5,547 ( 657 ) 4,890 Income before income taxes 4,646 ( 657 ) 3,989 Provision for income taxes 641 ( 209 ) 432 Net income $ 4,005 $ ( 448 ) $ 3,557 Net income per share of common stock outstanding: Basic $ 0.35 $ ( 0.04 ) $ 0.31 Diluted $ 0.34 $ ( 0.04 ) $ 0.30 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Three Months Ended September 29, 2023 (In thousands) As Previously Reported Adjustments As Revised Net income $ 4,005 $ ( 448 ) $ 3,557 Comprehensive income $ 4,038 $ ( 448 ) $ 3,590 22 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended September 29, 2023 (In thousands) As Previously Reported Adjustments As Revised Operating Activities Net income $ 4,005 $ ( 448 ) $ 3,557 Deferred taxes 39 ( 209 ) ( 170 ) Unbilled receivables ( 2,395 ) 657 ( 1,738 ) Net cash provided by operating activities 13,980 — 13,980 CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited) Three Months Ended September 29, 2023 Accumulated Deficit Total Equity (In thousands) As Previously Reported Balance as of June 30, 2023 $ ( 587,914 ) $ 220,098 Net income 4,005 4,005 Balance as of September 29, 2023 $ ( 583,909 ) $ 226,150 Adjustments Balance as of June 30, 2023 $ ( 1,359 ) $ ( 1,359 ) Net income ( 448 ) ( 448 ) Balance as of September 29, 2023 $ ( 1,807 ) $ ( 1,807 ) As Revised Balance as of June 30, 2023 $ ( 589,273 ) $ 218,739 Net income 3,557 3,557 Balance as of September 29, 2023 $ ( 585,716 ) $ 224,343 Note 16. Subsequent Events Credit Facility Amendment On October 18, 2024, the Company entered into a Second Amendment to Credit Agreement (the “Credit Facility Amendment”), 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 Amendment amends and modifies that certain Credit Facility dated May 9, 2023. The Credit Facility Amendment provided for changes and modifications to the Credit Facility, which include, among other things, (i) changes to certain payment term mechanics, (ii) a commitment to make term loans in the aggregate principal amount of $ 75.0 million for the purpose of refinancing the Term Loan currently outstanding under the Credit Facility, and (iii) an increase in the Revolver to $ 75.0 million in the aggregate. Refer to Note 6. Credit Facility and Debt for further information. 23