AVIAT NETWORKS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q, including “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. 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; our restructuring efforts; our research and development efforts and new product releases and services; trends in revenue; drivers of our business and the markets in which we operate; future economic conditions, performance or outlook, and changes in our industry and the markets we serve; the outcome of contingencies; the value of our contract awards; beliefs or expectations; the sufficiency of our cash and our capital needs and expenditures; our intellectual property protection; our compliance with regulatory requirements and the associated expenses; expectations regarding litigation; our intention not to pay cash dividends; seasonality of our business; the impact of foreign exchange and inflation; taxes; the impact of tariffs, the adoption of trade restrictions affecting our products or suppliers, a United States withdrawal from or significant renegotiation of trade agreements, the occurrence of trade wars, the closing of border crossings, and other changes in trade regulations or relationships; and assumptions underlying any of the foregoing. Forward-looking statements may be identified by the use of forward-looking terminology, such as “anticipates,” “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,” “estimates,” “strategy,” “projects,” “targets,” “goals,” “seeing,” “delivering,” “continues,” “forecasts,” “future,” “predict,” “might,” “could,” “potential,” or the negative of these terms, and similar words or expressions. 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. Forward-looking statements should therefore be considered in light of various important factors, including those set forth in this Quarterly Report on Form 10-Q. See “Item 1A. 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. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), along with provisions of the Private Securities Litigation Reform Act of 1995, and we expressly disclaim any obligation, other than as required by law, to update any forward-looking statements to reflect further developments or information obtained after the date of filing of this Quarterly Report on Form 10-Q or, in the case of any document incorporated by reference, the date of that document. Overview of Business; Operating Environment and Key Factors Impacting Fiscal 2025 and 2024 Results The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Aviat’s results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited condensed consolidated financial statements and accompanying notes. In the discussion herein, the fiscal year ending June 27, 2025 is referred to as “fiscal 2025” or “2025” and the fiscal year ended June 28, 2024 is referred to as “fiscal 2024” or “2024.” Overview Aviat is a global supplier of microwave networking and access networking solutions, backed by an extensive suite of professional services and support. Aviat sells radios, routers, software and services integral to the functioning of data transport networks. Aviat has more than 3,000 customers and significant relationships with global service providers and private network operators. Aviat’s North America manufacturing base consists of a combination of contract manufacturing and assembly and testing operated in Austin, Texas by Aviat. Additionally, Aviat utilizes a contract manufacturer based in Asia for much of its international equipment demand. Aviat’s technology is underpinned by more than 500 patents. Aviat 27 competes on the basis of total cost of ownership, microwave radio expertise and solutions for mission critical communications. Aviat has a global presence. 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. See Note 11. 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 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. See Note 11. 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 was subject to certain post-closing adjustments. In the second quarter of fiscal 2025, the Company transferred consideration of $5.8 million to settle a portion of the post-closing working capital adjustment. The Company estimates additional cash consideration of approximately $13.2 million will be transferred to NEC, primarily related to settlement of the remaining post-closing working capital adjustment. 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 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. In international markets, the Company’s business continued to rely on a combination of customers increasing their capacity to handle subscriber growth and the ongoing build-out of some large LTE and 5G deployments. Aviat’s position continues to be to support its customers for 5G and LTE readiness and ensure that its technology roadmap is well aligned with evolving market requirements. Aviat’s strength in turnkey and after-sale support services is a differentiating factor that wins business for the Company and enables it to expand its business with existing customers. Additionally, Aviat operates an e-commerce platform that provides low-cost services, simple experience, and fast delivery to mobile operators and private network customers. In early 2025, new U.S. tariffs on foreign imports were proposed and introduced. Aviat plans to mitigate these tariffs by optimizing its sourcing and operations to minimize any cost impact. Aviat may also implement pricing actions to offset the impact of these tariffs. 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. Revenue 28 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 28, 2025 and March 29, 2024 and the related changes were as follows: Three Months Ended Nine Months Ended (In thousands, except percentages) March 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change North America $ 49,402 $ 44,400 $ 5,002 11.3 % $ 149,589 $ 149,868 $ (279) (0.2) % Africa and the Middle East 15,086 11,401 3,685 32.3 % 38,210 35,848 2,362 6.6 % Europe 9,429 6,549 2,880 44.0 % 23,376 17,378 5,998 34.5 % Latin America and Asia Pacific 38,723 48,472 (9,749) (20.1) % 108,091 88,329 19,762 22.4 % Total revenue $ 112,640 $ 110,822 $ 1,818 1.6 % $ 319,266 $ 291,423 $ 27,843 9.6 % Revenue in North America increased by $5.0 million during the third quarter of fiscal 2025 compared with the same period of fiscal 2024 primarily due to higher private network project revenues. Revenue in North America decreased by $0.3 million during the first nine months 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, partially offset by contributions from the 4RF transaction. Revenue in Africa and the Middle East increased by $3.7 million during the third quarter of fiscal 2025 compared with the same period of fiscal 2024. Revenue in Africa and the Middle East increased by $2.4 million during the first nine months of fiscal 2025 compared with the same period of fiscal 2024. The increases for the third quarter and the first nine months of fiscal 2025 were primarily due to increased volumes from private networks in the Middle East. Revenue in Europe increased by $2.9 million during the third quarter of fiscal 2025 compared with the same period of fiscal 2024. Revenue in Europe increased by $6.0 million during the first nine months of fiscal 2025 compared with the same period of fiscal 2024. The increases for the third quarter and the first nine months of fiscal 2025 were primarily due to increased sales to mobile operators in the region driven by volumes from the NEC Transaction. Revenue in Latin America and Asia Pacific decreased by $9.7 million during the third quarter of fiscal 2025 compared with the same period of fiscal 2024 primarily due to timing of capital expenditure plans of mobile operators in the Asia Pacific region. Revenue in Latin America and Asia Pacific increased by $19.8 million during the first nine months of fiscal 2025 compared with the same period of fiscal 2024 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 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Product sales $ 76,824 $ 70,844 $ 5,980 8.4 % $ 220,252 $ 195,410 $ 24,842 12.7 % Services 35,816 39,978 (4,162) (10.4) % 99,014 96,013 3,001 3.1 % Total revenue $ 112,640 $ 110,822 $ 1,818 1.6 % $ 319,266 $ 291,423 $ 27,843 9.6 % Revenue from product sales increased by 8.4% and revenue from services decreased by 10.4% for the third quarter of fiscal 2025 compared with the same quarter of fiscal 2024. Revenue from product sales and services increased by 12.7% and 3.1%, respectively for the first nine months of fiscal 2025 compared with the same period of fiscal 2024. The changes were primarily due to the factors discussed above and product sales contribution from the NEC Transaction. Gross Margin Three Months Ended Nine Months Ended (In thousands, except percentages) March 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Revenue $ 112,640 $ 110,822 $ 1,818 1.6 % $ 319,266 $ 291,423 $ 27,843 9.6 % Cost of revenue 73,344 74,751 (1,407) (1.9) % 219,296 187,830 31,466 16.8 % Gross margin $ 39,296 $ 36,071 $ 3,225 8.9 % $ 99,970 $ 103,593 $ (3,623) (3.5) % % of revenue 34.9 % 32.5 % 31.3 % 35.5 % Product margin % 33.1 % 32.6 % 28.0 % 38.1 % Service margin % 38.6 % 32.5 % 38.6 % 30.4 % 29 Gross margin for the third quarter of fiscal 2025 increased by $3.2 million compared with the same quarter of fiscal 2024 primarily due to sales volume and changes in regions and customers and product mix. Gross margin for the first nine months of fiscal 2025 decreased by $3.6 million 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 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Research and development $ 7,704 $ 10,623 $ (2,919) (27.5) % $ 28,334 $ 25,441 $ 2,893 11.4 % % of revenue 6.8 % 9.6 % 8.9 % 8.7 % Research and development expenses decreased by $2.9 million compared with the same quarter of fiscal 2024 primarily due to cost management. Research and development expenses increased by $2.9 million for the first nine months of fiscal 2025 primarily due to development activity related to the NEC Transaction. Selling and Administrative Three Months Ended Nine Months Ended (In thousands, except percentages) March 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Selling and administrative $ 22,121 $ 20,198 $ 1,923 9.5 % $ 68,348 $ 61,979 $ 6,369 10.3 % % of revenue 19.6 % 18.2 % 21.4 % 21.3 % Selling and administrative expenses increased by $1.9 million for the third quarter of fiscal 2025 and $6.4 million for the first nine months of fiscal 2025 primarily due to merger and acquisition expenses and additional costs resulting from the NEC and 4RF transactions. Restructuring Three Months Ended Nine Months Ended (In thousands, except percentages) March 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Restructuring charges $ 177 $ (417) $ 594 (142.4) % $ 1,592 $ 2,227 $ (635) (28.5) % For the first nine months of fiscal 2025, there were $1.6 million of restructuring charges incurred, primarily associated with reductions in workforce in certain of the Company’s operations to optimize skill sets and align cost structure. The prior year comparison period includes restructuring charges primarily associated with the NEC Transaction. 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. Interest Expense, net Three Months Ended Nine Months Ended (In thousands, except percentages) March 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Interest expense, net $ 1,557 $ 928 $ 629 67.8 % $ 4,252 $ 1,421 $ 2,831 199.2 % Interest expense, net increased by $0.6 million and $2.8 million for the three and nine months ended March 28, 2025, respectively, primarily due to interest expense incurred on incremental Term Loan borrowings compared to the prior year period. Other Expense, net 30 Three Months Ended Nine Months Ended (In thousands, except percentages) March 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Other expense, net $ 3,068 $ 63 $ 3,005 4,769.8 % $ 4,047 $ 228 $ 3,819 1,675.0 % Other expense, net increased by $3.0 million and $3.8 million for the three and nine months ended March 28, 2025, respectively, primarily as a result of foreign exchange rate movement and losses recognized on the extinguishment of debt. Income Taxes Three Months Ended Nine Months Ended (In thousands, except percentages) March 28, 2025 March 29, 2024 $ Change % Change March 28, 2025 March 29, 2024 $ Change % Change Income (loss) before income taxes $ 4,669 $ 4,676 $ (7) (0.1) % $ (6,603) $ 12,297 $ (18,900) (153.7) % Provision for (benefit from) income taxes $ 1,141 $ 806 $ 335 41.6 % $ (2,747) $ 3,086 $ (5,833) (189.0) % 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. The tax benefit for the first nine months of fiscal 2025 was primarily due to tax benefit resulting from year-to-date losses. The tax expense for the first nine 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 28, 2025, the Company’s total cash and cash equivalents were $49.4 million. Approximately $12.7 million was held in the United States. The remaining balance of $36.8 million, or 74%, was held outside the United States. Operating Activities 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 $(4.8) million for the first nine months of fiscal 2025, compared with $22.2 million in the prior year. The $(27.0) 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 $26.3 million for the first nine months of fiscal 2025, compared to $35.0 million in the prior year. The $8.7 million decrease is primarily due to higher acquisition payments in the prior year associated with the NEC Transaction. 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 $17.6 million for the first nine months of fiscal 2025, compared with $49.3 million in the prior year. The $(31.7) million decrease is primarily due to reduced Term Loan borrowings compared to the prior year as the prior year period included the $50.0 million of Term Loan borrowings primarily used to fund the NEC Transaction. As of March 28, 2025, the Company’s principal sources of liquidity consisted of $49.4 million in cash and cash equivalents, $66.3 million of available credit under its Credit Facility, and future collections of receivables from customers. In the second quarter of fiscal 2025, 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 31 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. 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 $55.0 million against the Revolver during the first nine months of fiscal 2025. As of March 28, 2025, the Company had $74.1 million outstanding under its Term Loan and no borrowings outstanding under its Revolver and was in compliance with all financial covenants contained in the Credit Facility. Critical Accounting Estimates For information about the Company’s critical accounting estimates, see the “Critical Accounting Estimates” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its fiscal 2024 Annual Report on Form 10-K.