Aviat Networks(AVNW) - 2021 Q4 - Annual Report

Part I Business Aviat Networks is a global microwave networking solutions provider serving communication service providers and private network operators, driven by demand for higher data capacity - The company's business is divided into two main customer categories: Communications Service Providers (CSPs) and private network operators[13] - Key market drivers include 5G deployments, rural broadband initiatives (middle mile), and the modernization of private networks for utilities, public safety, and financial institutions[19][20][21] - The company's strategy is built on three pillars: a portfolio of wireless transport products for increased capacity, software applications and tools for simplification and automation, and an e-commerce platform (Aviat Store) for lower costs and faster lead times[26][27] - Major product families include CTR 8000 (integrated microwave modem and cell site router), WTM 4000 (high-capacity microwave radio for SDN), and AviatCloud (platform for network automation)[30] - The company's backlog increased to approximately $225 million at July 2, 2021, from $210 million at July 3, 2020[38] - No single customer accounted for more than 10% of total revenue in fiscal 2021 or 2020, while MTN Group accounted for 11% in fiscal 2019[41] - As of July 2, 2021, the company held 434 U.S. patents and 462 international patents, with 14 U.S. and 19 international patent applications pending[52] Revenue by Geographic Region (FY2019-FY2021) | Region | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | North America | 67% | 64% | 54% | | International | 33% | 36% | 46% | Research and Development Expenditures | Fiscal Year | Amount (in millions) | % of Revenue | | :--- | :--- | :--- | | 2021 | $21.8 | 7.9% | | 2020 | $19.3 | 8.1% | | 2019 | $21.1 | 8.7% | Risk Factors The company faces significant business, operational, financial, and legal risks, including lengthy sales cycles, intense competition, and international trade tensions - Business & Operational Risks: The company's sales cycle can be lengthy (12-24 months), making operating results difficult to predict, while the COVID-19 pandemic continues to pose risks to operations, supply chains, and customer demand, and the company faces strong competition from larger rivals like Ericsson and Huawei, requiring continuous innovation to remain competitive[70][77][79] - Financial & Macroeconomic Risks: A significant portion of sales (34% in FY2021) are international, exposing the company to political and economic risks, and the ability to use net operating loss (NOL) carryforwards may be limited by Section 382 of the tax code, which prompted the company to adopt a Tax Benefit Preservation Plan[73][132][144] - Legal & Regulatory Risks: Continued U.S.-China trade tensions could adversely impact the supply chain, and the company is also subject to litigation risks regarding intellectual property and potential liability claims as its products are used in critical communications networks[74][150][159] - Restructuring Risks: The company has undertaken and may continue restructuring activities to reduce costs, which carry risks including not realizing anticipated benefits and harming employee relationships, with restructuring charges of $2.3 million in fiscal 2021, $4.0 million in 2020, and $0.7 million in 2019[85][86] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[173] Properties Aviat Networks leases approximately 164,000 square feet globally and owns 108,000 square feet, with its corporate headquarters in Austin, Texas - The company's corporate headquarters is located in Austin, Texas, in a leased space of approximately 18,000 square feet[174] - Globally, the company leases about 164,000 square feet and owns about 108,000 square feet of facilities[174] Legal Proceedings The company is involved in various legal claims, notably an ongoing enforcement action by the Indian Department of Revenue and a recently settled customer claim - An enforcement action by the Indian Department of Revenue is ongoing against the company's subsidiary, Aviat India, related to historical intercompany transactions, for which the company has accrued an immaterial amount[178][499] - A claim from a customer received in May 2016 regarding allegedly defective products was settled for an immaterial amount during the third quarter of fiscal 2021[177][495] Mine Safety Disclosures This item is not applicable to the company - Not applicable[180] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Aviat Networks' common stock trades on NASDAQ, with no cash dividends planned, and the company recently completed a two-for-one stock split and continued share repurchases - The company's common stock is listed on the NASDAQ Global Select Market under the symbol AVNW[183] - The company has not paid cash dividends and does not intend to in the foreseeable future[184] - A two-for-one stock split, in the form of a stock dividend, was effected on April 7, 2021[184] - As of July 2, 2021, $2.6 million remained available for repurchases under the company's stock repurchase program[188] Stock Repurchase Activity | Fiscal Year | Amount Repurchased (in millions) | | :--- | :--- | | 2021 | $0.8 | | 2020 | $1.8 | | 2019 | $2.3 | Selected Financial Data This section provides a five-year summary of key financial data, highlighting fiscal 2021 revenues of $274.9 million and net income of $110.1 million Selected Financial Data (2017-2021) | (In thousands, except per share amounts) | July 2, 2021 | July 3, 2020 | June 28, 2019 | June 29, 2018 | July 1, 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $274,911 | $238,642 | $243,858 | $242,506 | $241,874 | | Net income (loss) | $110,139 | $257 | $9,738 | $2,302 | $(621) | | Net income (loss) per share - diluted | $9.42 | $0.02 | $0.87 | $0.16 | $(0.08) | | Total assets | $297,653 | $179,801 | $169,193 | $156,061 | $152,576 | | Long-term liabilities | $17,949 | $17,150 | $15,466 | $12,077 | $12,218 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses fiscal 2021 financial results, noting a 15.2% revenue increase, improved gross margin, and significant net income driven by a deferred tax asset valuation allowance release Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, using derivative instruments to mitigate currency volatility - The company is exposed to foreign currency exchange rate risk and interest rate risk[283] - Derivative instruments are used to reduce volatility from foreign currency exchange rates, and as of July 2, 2021, the company had no foreign currency forward contracts outstanding[256] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements with an unqualified auditor's opinion, highlighting "Revenue Recognition – Estimated Costs to Complete" as a critical audit matter - The independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting[289][300] - The auditor identified "Revenue Recognition – Estimated Costs to Complete" for overtime revenue contracts as a Critical Audit Matter due to the significant management estimates and assumptions involved[293][294] - A two-for-one stock split was effected on April 7, 2021, with all share and per-share amounts in the financial statements retrospectively adjusted[325] - As of July 2, 2021, the company had remaining performance obligations of approximately $70.4 million related to long-term field service projects, with about 60% expected to be recognized as revenue in fiscal 2022[395] - In fiscal 2021, the company released a $92.2 million valuation allowance on its U.S. federal and state deferred tax assets due to expectations of continued profitability[476] Consolidated Statement of Operations Highlights (FY2021) | (In thousands) | Amount | | :--- | :--- | | Total Revenues | $274,911 | | Gross Margin | $102,615 | | Operating Income | $22,210 | | Net Income | $110,139 | Consolidated Balance Sheet Highlights (As of July 2, 2021) | (In thousands) | Amount | | :--- | :--- | | Total Current Assets | $170,239 | | Total Assets | $297,653 | | Total Current Liabilities | $96,369 | | Total Liabilities | $114,318 | | Total Equity | $183,335 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[509] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of July 2, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[510] - Management concluded that the company's internal control over financial reporting was effective as of July 2, 2021[513] - No material changes were made to the internal control over financial reporting during the quarter ended July 2, 2021[511] Other Information The Board of Directors approved a new restructuring plan on August 25, 2021, expected to incur $0.8 million in charges in Q1 fiscal 2022 - On August 25, 2021, the Board of Directors approved a new restructuring plan expected to incur charges of approximately $0.8 million in Q1 fiscal 2022[515][516] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for these items is incorporated by reference from the company's definitive Proxy Statement - Information for Part III (Items 10, 11, 12, 13, and 14) is incorporated by reference from the company's definitive Proxy Statement[518] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and all exhibits filed with the Form 10-K - This section contains the list of financial statements, financial statement schedules, and exhibits filed with the Form 10-K[523] - Schedule II — Valuation and Qualifying Accounts for the three fiscal years ended July 2, 2021 is included[523]