Aviat Networks(AVNW) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Aviat Networks, Inc's unaudited condensed consolidated financial statements for the quarter ended September 29, 2023 Condensed Consolidated Statements of Operations (Unaudited) The company's financial performance improved significantly for the three months ended September 29, 2023, shifting from a net loss to a substantial net income Metric (in thousands) | Metric (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | | Total Revenues | $87,566 | $81,251 | | Gross Margin | $31,852 | $29,454 | | Operating Income | $5,547 | $3,913 | | Net Income (Loss) | $4,005 | $(2,746) | | Basic EPS | $0.35 | $(0.25) | | Diluted EPS | $0.34 | $(0.25) | Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Comprehensive income turned positive for the three months ended September 29, 2023, driven by net income and favorable translation adjustments Metric (in thousands) | Metric (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | | Net Income (Loss) | $4,005 | $(2,746) | | Net change in cumulative translation adjustments | $33 | $(1,113) | | Comprehensive Income (Loss) | $4,038 | $(3,859) | Condensed Consolidated Balance Sheets (Unaudited) The company's financial position as of September 29, 2023, showed increased total assets and stockholders' equity compared to June 30, 2023 Metric (in thousands) | Metric (in thousands) | Sep 29, 2023 | Jun 30, 2023 | | :-------------------- | :----------- | :----------- | | Total Current Assets | $244,410 | $237,704 | | Total Assets | $370,299 | $364,496 | | Total Current Liabilities | $129,213 | $130,061 | | Total Liabilities | $144,149 | $144,398 | | Total Stockholders' Equity | $226,150 | $220,098 | - Cash and cash equivalents increased to $35,465k as of September 29, 2023, from $22,242k at June 30, 2023[12] Condensed Consolidated Statements of Cash Flows (Unaudited) The company generated positive operating cash flow for the three months ended September 29, 2023, a significant reversal from the cash used in the prior year Metric (in thousands) | Metric (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | | Net cash provided by (used in) operating activities | $13,980 | $(6,314) | | Net cash used in investing activities | $(717) | $(8,336) | | Net cash provided by (used in) financing activities | $180 | $(310) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $13,220 | $(15,307) | Condensed Consolidated Statements of Equity (Unaudited) Stockholders' equity grew during the three months ended September 29, 2023, primarily due to net income and share-based compensation Metric (in thousands) | Metric (in thousands) | Balance as of Sep 29, 2023 | Balance as of Jun 30, 2023 | | :-------------------- | :------------------------- | :------------------------- | | Total Equity | $226,150 | $220,098 | | Net income | $4,005 | - | | Share-based compensation | $1,834 | - | Metric (in thousands) | Metric (in thousands) | Balance as of Sep 30, 2022 | Balance as of Jul 1, 2022 | | :-------------------- | :------------------------- | :------------------------ | | Total Equity | $199,422 | $201,753 | | Net loss | $(2,746) | - | | Share-based compensation | $1,838 | - | Notes to Condensed Consolidated Financial Statements (Unaudited) These notes detail the company's accounting policies and provide breakdowns of key financial statement components and other essential disclosures Note 1. The Company and Basis of Presentation - Aviat Networks, Inc designs, manufactures, and sells wireless and access networking solutions and services to a global customer base[19] - The unaudited financial statements are prepared per U.S GAAP and SEC rules, incorporating management's estimates and judgments[20] Note 2. Net Income (Loss) Per Share of Common Stock Metric (in thousands, except per share amounts) | Metric (in thousands, except per share amounts) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :---------------------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) | $4,005 | $(2,746) | | Weighted-average shares outstanding, basic | 11,574 | 11,200 | | Weighted-average shares outstanding, diluted | 11,943 | 11,200 | | Basic EPS | $0.35 | $(0.25) | | Diluted EPS | $0.34 | $(0.25) | - 317 thousand weighted-average equity awards were excluded from diluted EPS calculations for the three months ended September 29, 2023, as they were anti-dilutive[26] Note 3. Revenue Recognition Contract Balances (in thousands) | Contract Balances (in thousands) | Sep 29, 2023 | Jun 30, 2023 | | :------------------------------- | :----------- | :----------- | | Contract assets | $60,975 | $58,588 | | Capitalized commissions | $3,070 | $3,492 | | Advance payments and unearned revenue | $46,050 | $44,268 | | Unearned revenue, long-term | $7,627 | $7,416 | - As of September 29, 2023, the transaction price allocated to unsatisfied performance obligations was approximately $152.4 million[31] - Approximately $7.4 million of revenue was recognized during the quarter from advance payments and unearned revenue at June 30, 2023[30] Note 4. Leases Lease Costs (in thousands) | Lease Costs (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | | Operating lease costs | $221 | $312 | | Short-term lease costs | $414 | $551 | | Variable lease costs | $12 | $35 | | Total lease costs | $647 | $898 | Future Minimum Lease Payments (in thousands) | Future Minimum Lease Payments (in thousands) | Amount | | :------------------------------------------- | :----- | | Remainder of fiscal 2024 | $724 | | 2025 | $757 | | 2026 | $632 | | 2027 | $312 | | 2028 | $319 | | Thereafter | $1,235 | | Total lease payments | $3,979 | | Less: interest | $(820) | | Present value of lease liabilities | $3,159 | - As of September 29, 2023, the weighted average remaining lease term was 5.7 years and the weighted average discount rate was 5.5%[32] Note 5. Balance Sheet Components Cash, Cash equivalents, and Restricted cash (in thousands) | Cash, Cash equivalents, and Restricted cash (in thousands) | Sep 29, 2023 | Jun 30, 2023 | | :------------------------------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $35,465 | $22,242 | | Restricted cash included in other assets | $276 | $279 | | Total cash, cash equivalents, and restricted cash | $35,741 | $22,521 | Inventories (in thousands) | Inventories (in thousands) | Sep 29, 2023 | Jun 30, 2023 | | :------------------------- | :----------- | :----------- | | Finished products | $17,104 | $18,502 | | Raw materials and supplies | $11,771 | $12,794 | | Customer service inventories | $1,784 | $1,761 | | Total inventories | $30,659 | $33,057 | Inventory Charges (in thousands) | Inventory Charges (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :------------------------------- | :------------------------------ | :------------------------------ | | Excess and obsolete inventory | $294 | $170 | | Customer service inventory write-downs | $253 | $235 | | Total inventory charges | $547 | $405 | Property, Plant and Equipment, net (in thousands) | Property, Plant and Equipment, net (in thousands) | Sep 29, 2023 | Jun 30, 2023 | | :------------------------------------------------ | :----------- | :----------- | | Total property, plant and equipment, gross | $70,185 | $70,238 | | Less: Accumulated depreciation | $(61,150) | $(60,786) | | Total property, plant and equipment, net | $9,035 | $9,452 | Accrued Expenses (in thousands) | Accrued Expenses (in thousands) | Sep 29, 2023 | Jun 30, 2023 | | :------------------------------ | :----------- | :----------- | | Compensation and benefits | $7,256 | $10,368 | | Taxes | $5,109 | $4,553 | | Warranties | $2,100 | $2,100 | | Commissions | $1,339 | $1,453 | | Professional fees | $944 | $2,104 | | Other | $3,813 | $3,864 | | Total accrued expenses | $20,561 | $24,442 | Warranty Liability (in thousands) | Warranty Liability (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Balance as of beginning of period | $2,100 | $2,913 | | Warranty provision recorded | $375 | $175 | | Consumption during the period | $(375) | $(388) | | Balance as of end of period | $2,100 | $2,755 | Note 6. Fair Value Measurements of Assets and Liabilities Assets (in thousands) | Assets (in thousands) | Sep 29, 2023 Fair Value | Jun 30, 2023 Fair Value | Valuation Inputs | | :-------------------- | :---------------------- | :---------------------- | :--------------- | | Money market funds | $8,259 | $571 | Level 1 | | Bank certificates of deposit | $3,533 | $3,793 | Level 2 | - The company classifies fair value measurements into a three-level hierarchy based on the observability of inputs[47][48][49] Note 7. Credit Facility and Debt - In May 2023, the company entered into a Secured Credit Facility Agreement providing a $40.0 million revolving credit facility and a $50.0 million term loan facility[50] - As of September 29, 2023, available credit was $38.8 million under the Revolver and $50.0 million under the Term Loan, with no outstanding borrowings[51] - The company was in compliance with all financial covenants as of September 29, 2023, including fixed charge coverage and leverage ratios[52][53] Note 8. Restructuring Restructuring (in thousands) | Restructuring (in thousands) | Fiscal 2024 Plans | Prior Years' Plans (Employee Severance and Benefits) | Total | | :--------------------------- | :---------------- | :--------------------------------------------------- | :---- | | Accrual balance, June 30, 2023 | $0 | $600 | $600 | | Charges, net | $333 | $348 | $681 | | Cash payments | $(221) | $(948) | $(1,169) | | Accrual balance, September 29, 2023 | $112 | $0 | $112 | - Fiscal 2024 restructuring plans primarily involve workforce reductions and are expected to be completed through the first half of fiscal 2024[55] Note 9. Stockholders' Equity Share-based Compensation Expense (in thousands) | Share-based Compensation Expense (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :---------------------------------------------- | :------------------------------ | :------------------------------ | | Total share-based compensation expense | $1,834 | $1,838 | | By Type of Award: | | | | Options | $346 | $510 | | Restricted and performance stock awards and units | $1,488 | $1,328 | - The company has $7.3 million remaining available under its stock repurchase program as of September 29, 2023[57] - During the quarter, the company granted 63,889 restricted stock units, 63,889 performance share awards, and 145,250 stock options[60] Note 10. Segment and Geographic Information Revenue by Region (in thousands) | Revenue by Region (in thousands) | Three Months Ended Sep 29, 2023 | Three Months Ended Sep 30, 2022 | | :------------------------------- | :------------------------------ | :------------------------------ | | North America | $55,508 | $48,848 | | Africa and the Middle East | $9,953 | $10,984 | | Europe | $5,252 | $4,500 | | Latin America and Asia Pacific | $16,853 | $16,919 | | Total revenue | $87,566 | $81,251 | - Aviat operates in one reportable business segment: the design, manufacturing, and sale of wireless networking products, solutions, and services[62] Note 11. Income Taxes - The company's effective tax rate differs from the U.S federal statutory rate due to GILTI, state taxes, and varied foreign tax rates[64] - Tax expense for Q1 FY24 was primarily from U.S and profitable foreign subsidiaries, unlike Q1 FY23 which included deferred tax expense from the Redline acquisition[65] - Major tax jurisdictions with open audits include the U.S, Singapore, Ghana, Kenya, Nigeria, Saudi Arabia, and Tanzania[66] Note 12. Acquisitions - Aviat Networks agreed to acquire NEC's wireless backhaul business for approximately $70.0 million, with the transaction expected to close in Q4 2023[68][69] - In Q1 FY23, the company acquired Redline Communications Group Inc for $20.4 million[70] Note 13. Commitments and Contingencies - As of September 29, 2023, the company had outstanding purchase obligations of $34.1 million and software license obligations of $5.7 million[72] - Commercial commitments outstanding totaled $60.5 million as of September 29, 2023, primarily consisting of bonds and letters of credit[74][75] - The company believes no current legal claims are likely to have a material adverse effect on its financial position[77][78] - An ongoing enforcement action by the Indian Department of Revenue has an immaterial amount accrued for estimated probable loss[80] Note 14. Goodwill and Intangible Assets Asset (in thousands) | Asset (in thousands) | Sep 29, 2023 | Jun 30, 2023 | | :------------------- | :----------- | :----------- | | Goodwill | $5,112 | $5,112 | | Total net intangible assets | $8,870 | $9,046 | Estimated Future Amortization Expense (in thousands) | Estimated Future Amortization Expense (in thousands) | | :--------------------------------------------------- | | Remainder of 2024 | $528 | | 2025 | $704 | | 2026 | $704 | | 2027 | $704 | | 2028 | $704 | | Thereafter | $5,526 | | Total | $8,870 | - No indicators of goodwill impairment were identified during the current period[82][84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on the company's financial condition and operational results for the three months ended September 29, 2023 Overview of Business; Operating Environment and Key Factors Impacting Fiscal 2024 and 2023 Results - This section contains forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially[88] - Investors should refer to 'Item 1A Risk Factors' in the fiscal 2023 Annual Report on Form 10-K for more information[89] Overview - Aviat is a global supplier of microwave and access networking solutions, serving over 3,000 customers with a portfolio supported by over 500 patents[92] - The company competes based on total cost of ownership and microwave radio expertise, with manufacturing in Texas and Asia[92] Acquisitions - Aviat Networks is acquiring NEC's wireless backhaul business for approximately $70.0 million, with closing expected in Q4 calendar year 2023[94][95] - In Q1 FY23, the company acquired Redline Communications Group Inc for $20.4 million, enhancing its mission-critical data infrastructure offerings[96] Operations Review - Mobile backhaul for 5G and LTE deployments remains the primary addressable market for mobile operators and private networks[97] - Aviat differentiates itself through turnkey support services and an e-commerce platform for fast delivery[97] Revenue Revenue by Region (in thousands, except percentages) | Revenue by Region (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :--------------------------------------------------- | :----------- | :----------- | :------- | :------- | | North America | $55,508 | $48,848 | $6,660 | 13.6 % | | Africa and the Middle East | $9,953 | $10,984 | $(1,031) | (9.4)% | | Europe | $5,252 | $4,500 | $752 | 16.7 % | | Latin America and Asia Pacific | $16,853 | $16,919 | $(66) | (0.4)% | | Total revenue | $87,566 | $81,251 | $6,315 | 7.8 % | Revenue by Type (in thousands, except percentages) | Revenue by Type (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :------------------------------------------------- | :----------- | :----------- | :------- | :------- | | Product sales | $59,545 | $55,101 | $4,444 | 8.1 % | | Services | $28,021 | $26,150 | $1,871 | 7.2 % | | Total revenue | $87,566 | $81,251 | $6,315 | 7.8 % | - North America revenue increased by $6.7 million (13.6%) due to strong private network and tier 1 demand[99] Gross Margin Gross Margin (in thousands, except percentages) | Gross Margin (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :---------------------------------------------- | :----------- | :----------- | :------- | :------- | | Revenue | $87,566 | $81,251 | $6,315 | 7.8 % | | Cost of revenue | $55,714 | $51,797 | $3,917 | 7.6 % | | Gross margin | $31,852 | $29,454 | $2,398 | 8.1 % | | % of revenue | 36.4 % | 36.3 % | | | | Product margin % | 39.0 % | 36.0 % | | | | Service margin % | 30.8 % | 36.7 % | | | - Gross margin increased by $2.4 million (8.1%) primarily due to a higher proportion of sales to North American customers[102] Research and Development R&D Expenses (in thousands, except percentages) | R&D Expenses (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :---------------------------------------------- | :----------- | :----------- | :------- | :------- | | Research and development | $6,424 | $6,087 | $337 | 5.5 % | | % of revenue | 7.3 % | 7.5 % | | | - Research and development expenses increased by $0.3 million (5.5%) due to increased product development activities[103] Selling and Administrative S&A Expenses (in thousands, except percentages) | S&A Expenses (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :---------------------------------------------- | :----------- | :----------- | :------- | :------- | | Selling and administrative | $19,237 | $17,504 | $1,733 | 9.9 % | | % of revenue | 22.0 % | 21.5 % | | | - Selling and administrative expenses increased by $1.7 million (9.9%) primarily due to variable compensation and M&A related expenses[104] Restructuring Restructuring Charges (in thousands, except percentages) | Restructuring Charges (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :------------------------------------------------------- | :----------- | :----------- | :------- | :------- | | Restructuring charges | $644 | $1,950 | $(1,306) | (67.0)% | - Restructuring charges decreased by $1.3 million (67.0%) as the prior year included non-recurring charges related to the Redline acquisition[106] Other Expense, net Other Expense, net (in thousands, except percentages) | Other Expense, net (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :---------------------------------------------------- | :----------- | :----------- | :------- | :------- | | Other expense, net | $901 | $2,782 | $(1,881) | (67.6)% | - Other expense, net decreased by $1.9 million (67.6%) primarily due to non-recurring losses on the sale of marketable securities in the prior year[107] Income Taxes Income Taxes (in thousands, except percentages) | Income Taxes (in thousands, except percentages) | Sep 29, 2023 | Sep 30, 2022 | $ Change | % Change | | :---------------------------------------------- | :----------- | :----------- | :------- | :------- | | Income before income taxes | $4,646 | $1,131 | $3,515 | 310.8 % | | Provision for income taxes | $641 | $3,877 | $(3,236) | (83.5)% | - Tax expense for Q1 FY24 was mainly from U.S and profitable foreign subsidiaries, while Q1 FY23 included significant deferred tax expense[109] Liquidity, Capital Resources, and Financial Strategies - As of September 29, 2023, total cash and cash equivalents were $35.5 million[110] - Net cash provided by operating activities was $14.0 million for Q1 FY24, a $20.3 million increase from the prior year[111] - The company believes existing cash and available credit will be sufficient to meet requirements for at least the next 12 months[114][115] Critical Accounting Estimates - For information on critical accounting estimates, refer to the 'Critical Accounting Estimates' section in the company's fiscal 2023 Annual Report[117] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to foreign currency exchange and interest rate risks and its strategies for managing them Exchange Rate Risk - The company uses derivative instruments to reduce volatility from foreign currency exchange rate changes but had no such contracts outstanding[119][120] - The cumulative translation adjustment decreased stockholders' equity by $16.0 million as of September 29, 2023[121] Interest Rate Risk - The company's exposure to interest rate risk relates to its cash equivalents and borrowings under its Credit Facility[122] - Cash equivalents of $11.8 million as of September 29, 2023, earn interest at an average yield of approximately 4.3% per annum[123][124] - Borrowings under the Credit Facility bear interest at variable rates based on Adjusted Term SOFR or the Base Rate plus an applicable margin[125] Item 4. Controls and Procedures Management evaluates the effectiveness of the company's disclosure controls and procedures and internal controls over financial reporting Evaluation of Disclosure Controls and Procedures - As of September 29, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures are effective[126] Changes in Internal Controls over Financial Reporting - There were no material changes to the company's internal controls over financial reporting during the quarter ended September 29, 2023[127] Inherent Limitations on Effectiveness of Controls - Management acknowledges that control systems provide reasonable, not absolute, assurance and may not prevent or detect all errors and fraud[128] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 13 of the financial statements for details on legal proceedings and contingent liabilities - For a discussion of legal proceedings and contingent liabilities, refer to 'Note 13 Commitments and Contingencies'[130] Item 1A. Risk Factors This section directs investors to the company's fiscal 2023 Annual Report for a comprehensive review of risk factors - Investors should carefully review the risk factors detailed in Item 1A of the fiscal 2023 Annual Report on Form 10-K[131] - No material changes to the previously disclosed risk factors were identified during the first three months of fiscal 2024[131] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that no shares were repurchased under the company's stock repurchase program during the first quarter of fiscal 2024 - A stock repurchase program has $7.3 million remaining available for repurchases[132] - No shares of common stock were repurchased under the program during the first quarter of fiscal 2024[132] Item 3. Defaults upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable[132] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable[132] Item 5. Other Information This section states that there is no other information to report under this item - No other information is reported under this item[132] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents and executive officer certifications - Exhibits include corporate governance documents, CEO and CFO certifications, and XBRL interactive data files[134] SIGNATURES - The report was duly signed on behalf of Aviat Networks, Inc by David M Gray, Senior Vice President and Chief Financial Officer, on November 1, 2023[136]