公司與富國銀行（Wells Fargo Bank, National Association）於2023年5月9日簽署了一份有擔保信用額度協議（「信用額度」），該協議於2023年11月22日和2024年10月18日進行了修訂，富國銀行擔任行政代理人、短期貸款人和發行貸款人，富國證券公司、花旗集團全球市場有限公司以及雷吉昂斯資本市場擔任貸款人。該信用額度爲$40.0 百萬的循環信用額度（「循環貸」），以及$50.0 百萬的延遲提款定期貸款額度（「定期貸款」），到期日爲2028年5月8日。該$40.0 百萬的循環貸可以借用，並設有$10.0 百萬的信用證子額度和$10.0 百萬的短期貸款子額度。有關詳細信息，請參閱第16條附註：後續事件。
公司在基本報表日期時記錄損失或或有損失的情況下，將其作爲運營費用進行記錄，當滿足以下條件時：(i) 很可能資產已減值或在基本報表日期已經發生了負債； (ii) 損失金額可以合理估計。如果存在合理的可能性發生損失，則需要在基本報表的附註中披露不符合上述兩個條件的損失或或有損失。收益或或有收益在實現之前不予記錄。公司將所有爲解決監管、法律和稅務事項而產生的法律費用視爲發生即費用。
Revenue from product sales increased by 2.6% and revenue from services decreased by 0.2% for the first quarter of fiscal 2025 compared with the same quarter of fiscal 2024 primarily due to the factors discussed above and product sales contribution from the NEC Transaction.
Gross Margin
Three Months Ended
(In thousands, except percentages)
September 27, 2024
September 29, 2023
$ Change
% Change
Revenue
$
88,429
$
86,909
$
1,520
1.7
%
Cost of revenue
68,641
55,714
12,927
23.2
%
Gross margin
$
19,788
$
31,195
$
(11,407)
(36.6)
%
% of revenue
22.4
%
35.9
%
Product margin %
14.6
%
39.0
%
Service margin %
39.8
%
29.1
%
Gross margin for the first quarter of fiscal 2025 decreased by $11.4 million compared with the same quarter of fiscal 2024 primarily due to changes in regions and customers and the expected near-term dilution as a result of the NEC Transaction.
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Research and Development
Three Months Ended
(In thousands, except percentages)
September 27, 2024
September 29, 2023
$ Change
% Change
Research and development
$
10,408
$
6,424
$
3,984
62.0
%
% of revenue
11.8
%
7.4
%
Research and development expenses increased by $4.0 million for the first quarter of fiscal 2025 primarily due to increased product development activities.
Selling and Administrative
Three Months Ended
(In thousands, except percentages)
September 27, 2024
September 29, 2023
$ Change
% Change
Selling and administrative
$
24,948
$
19,237
$
5,711
29.7
%
% of revenue
28.2
%
22.1
%
Selling and administrative expenses increased by $5.7 million for the first quarter of fiscal 2025 compared with the first quarter of fiscal 2024 primarily due to merger and acquisition expenses and additional costs resulting from the NEC Transaction.
Restructuring
Three Months Ended
(In thousands, except percentages)
September 27, 2024
September 29, 2023
$ Change
% Change
Restructuring charges
$
—
$
644
$
(644)
(100.0)
%
In the first quarter of fiscal 2025, there were no restructuring charges incurred, compared to $0.6 million in the first quarter of fiscal 2024. The prior year period includes restructuring charges primarily associated with reductions in workforce to optimize skill sets and align cost structure across the Company.
Interest Expense, net
Three Months Ended
(In thousands, except percentages)
September 27, 2024
September 29, 2023
$ Change
% Change
Interest expense, net
$
1,115
$
99
$
1,016
1,026.3
%
Interest expense, net increased by $1.0 million for the first quarter of fiscal 2025 compared to the first quarter of fiscal 2024 primarily due to interest expense incurred on the Term Loan borrowings used to fund the NEC Transaction in the second quarter of fiscal 2024.
Other Expense, net
Three Months Ended
(In thousands, except percentages)
September 27, 2024
September 29, 2023
$ Change
% Change
Other expense, net
$
710
$
802
$
(92)
(11.5)
%
Other expense, net decreased by $(0.1) million for the first quarter of fiscal 2025, primarily as a result of foreign exchange rate movement.
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Income Taxes
Three Months Ended
(In thousands, except percentages)
September 27, 2024
September 29, 2023
$ Change
% Change
(Loss) income before income taxes
$
(17,393)
$
3,989
$
(21,382)
(536.0)
%
(Benefit from) provision for income taxes
$
(5,514)
$
432
$
(5,946)
(1,376.4)
%
The Company estimates its annual effective tax rate at the end of each quarterly period, and records the tax effect of certain discrete items in the interim period in which they occur, including changes in judgment about uncertain tax positions and deferred tax valuation allowances.
The tax benefit for the first three months of fiscal 2025 was primarily due to tax benefit resulting from year-to-date losses. The tax expense for the first three months of fiscal 2024 was primarily attributable to tax expense related to U.S. and profitable foreign subsidiaries.
Liquidity, Capital Resources, and Financial Strategies
Sources of Cash
As of September 27, 2024, the Company’s total cash and cash equivalents were $51.0 million. Approximately $12.5 million was held in the United States. The remaining balance of $38.6 million, or 76%, 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 $(27.2) million for the first three months of fiscal 2025, compared with $14.0 million in the prior year. The $(41.1) million decrease is primarily attributable to increases in working capital and decreased earnings compared to the prior year.
Investing Activities
Net cash used in investing activities was $21.2 million for the first three months of fiscal 2025, compared to $0.7 million in the prior year. The $20.5 million increase is primarily due to payments associated with the acquisition of 4RF.
Financing Activities
Financing cash flows consist primarily of borrowings and repayments under the Company’s Credit Facility and proceeds from the exercise of employee stock options. Net cash provided by financing activities was $34.3 million for the first three months of fiscal 2025, compared with $0.2 million in the prior year. The $34.1 million increase is primarily due to the $35.0 million of borrowings on the Company’s Revolver.
As of September 27, 2024, the Company’s principal sources of liquidity consisted of $51.0 million in cash and cash equivalents, $0.7 million of available credit under its Credit Facility, and future collections of receivables from customers. On October 18, 2024, the Company amended its Credit Facility which increased the borrowing capacity to $75.0 million for each of the Term Loan and Revolver facilities. The Company regularly requires letters of credit from certain customers, and, from time to time, these letters of credit are discounted without recourse shortly after shipment occurs in order to meet immediate liquidity requirements and to reduce its credit and sovereign risk. Historically, the Company’s primary sources of liquidity have been cash flows from operations and credit facilities.
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 $35.0 million against the Revolver during the first three months of fiscal 2025. As of September 27, 2024, the Company had $48.8 million outstanding under its Term Loan and $35.0 million outstanding under its Revolver and was in compliance with all financial covenants contained in the Credit Facility.
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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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of doing business, the Company is exposed to risks associated with foreign currency exchange rates and changes in interest rates. The Company employs established policies and procedures governing the use of financial instruments to manage its exposure to such risks. Information about the Company’s market risk is presented in Part II, Item 7A in its fiscal 2024 Annual Report on Form 10-K. There have been no material changes to the Company’s market risk during the first three months of fiscal 2025.
Exchange Rate Risk
The Company conducts business globally in numerous currencies and is therefore exposed to foreign currency risks. From time to time, the Company uses derivative instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The Company does not hold or issue derivatives for trading purposes or make speculative investments in foreign currencies.
From time to time, the Company enters into foreign exchange forward contracts to mitigate the change in fair value of specific non-functional currency assets and liabilities on the balance sheet. All balance sheet hedges are marked to market through earnings every period. Changes in the fair value of these derivatives are largely offset by re-measurement of the underlying assets and liabilities. The Company did not have any foreign exchange forward contracts outstanding as of September 27, 2024.
Certain of the Company’s international business are transacted in non-U.S. dollar (“USD”) currencies. From time to time, the Company utilizes foreign currency hedging instruments to minimize the currency risk of non-USD transactions. The impact of translating the assets and liabilities of foreign operations to USD is included as a component of stockholders’ equity. As of September 27, 2024 and June 28, 2024, the cumulative translation adjustment decreased stockholders’ equity by $17.2 million and $19.3 million, respectively.
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to its cash equivalents and borrowings under its Credit Facility. Refer to Note 6. Credit Facility and Debt of the Notes for further information.
Exposure on Cash Equivalents
The Company had $51.0 million in total cash and cash equivalents as of September 27, 2024. Cash equivalents totaled $6.4 million as of September 27, 2024 and were comprised of money market funds and bank certificates of deposit. Cash equivalents have been recorded at fair value. Fair value is measured using inputs that fall into a three-level hierarchy that prioritizes the inputs used to measure fair value based on observability of such inputs. For more information on the fair value measurements of cash equivalents, refer to Note 5. Fair Value Measurements of Assets and Liabilities of the Notes for further information.
The Company’s cash equivalents earn interest at fixed rates; therefore, changes in interest rates will not generate a gain or loss on these investments unless they are sold prior to maturity. The weighted-average days to maturity for cash equivalents held as of September 27, 2024 was 51 days, and these investments had an average yield of approximately 5.4% per annum. A 10% change in interest rates on the Company’s cash equivalents is not expected to have a material impact on its financial position, results of operations, or cash flows.
Exposure on Borrowings
As of September 27, 2024, the Company had $48.8 million outstanding under its Term Loan and $35.0 million outstanding under its Revolver.
29
The Company’s borrowings under the current Credit Facility bear interest at either: (a) Adjusted Term 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.
A 10% change in interest rates is estimated to have a $0.6 million impact on annual interest expense on the Company’s outstanding long-term debt as of September 27, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2024, the Company’s management concluded that our disclosure controls and procedures were not effective as of June 28, 2024 due to certain material weaknesses in internal control over financial reporting. Refer to Part II, Item 9A. Controls and Procedures in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2024 for further information.
During the first quarter of fiscal 2025, the Company implemented actions designed to improve our internal control over financial reporting and remediate these material weaknesses, including (i) providing training to the applicable control performers related to the importance of timely execution of control activities for which they are responsible; (ii) beginning the redesign of controls over the determination of the appropriate period for revenue recognition, controls over arrangements where revenue is recognized over time and controls related to the review and approval of journal entries, and (iii) implementing a formal monitoring program to perform the necessary evaluations to ascertain whether the components of internal control are present and functioning, including implementing corrective actions as necessary.
These steps are subject to ongoing senior management review, as well as oversight by the audit committee of our Board of Directors. While significant progress has been made to remediate the material weaknesses, the material weaknesses will not be considered remediated until the associated controls operate effectively for a sufficient period of time and management concludes, through testing, that the controls are operating effectively. We will continue to monitor the design and effectiveness of these and other processes, procedures and controls and make further changes management deems appropriate.
The Company’s management, with the participation of our President and CEO, and Chief Financial Officer (“CFO”), completed an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of September 27, 2024. The Company’s CEO and CFO have concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were not effective as of September 27, 2024, due to the material weaknesses described above not being fully remediated as of the date of the evaluation.
Changes in Internal Controls over Financial Reporting
Except as noted above, there were no changes to our internal controls over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) that occurred during the quarter ended September 27, 2024 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including its CEO and CFO, does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings as of September 27, 2024, please refer to “Legal Proceedings” and “Contingent Liabilities” under Note 12. Commitments and Contingencies of the Notes to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, which are incorporated into this item by reference.
Item 1A. Risk Factors
Investors should carefully review and consider the information regarding certain factors which could materially affect our business, operating results, cash flows, and financial condition set forth under Item 1A, Risk Factors, in our fiscal 2024 Annual Report on Form 10-K filed with the SEC on October 4, 2024.
There have been no material changes from the risk factors described in our Annual Report, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Insider Trading Arrangements
During the three months ended September 27, 2024, none of the Company’s directors or officers adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K.
31
Item 6. Exhibits
The following exhibits are filed or furnished herewith or are incorporated by reference to exhibits previously filed with the SEC:
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Filed herewith.
**
Furnished herewith.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AVIAT NETWORKS, INC. (Registrant)
Date: November 5, 2024
By:
/s/ Michael Connaway
Michael Connaway Senior Vice President and Chief Financial Officer (duly authorized officer)