AVIAT NETWORKS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
Form 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
April 3, 2020
or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______ to _______
Commission File Number 001-33278
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AVIAT NETWORKS, INC.
(Exact name of registrant as specified in its charter)
|
||
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Delaware
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20-5961564
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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200 Parker Dr., Suite C100A, Austin, Texas
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78728
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(Address of principal executive offices)
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(Zip Code)
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(408) 941-7100
(Registrant’s telephone number, including area code)
860 N. McCarthy Blvd., Suite 200, Milpitas, California 95035
(Former name, former address and former fiscal year, if changed since last report)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbol(s)
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Name of Each Exchange on Which Registered
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Common Stock
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AVNW
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The Nasdaq Global Select Market
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Indicate by checkmark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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x
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Smaller reporting company
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x
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Emerging growth company
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o
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|||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
The number of shares outstanding of the registrant’s Common Stock as of
April 30, 2020
was
5,393,030
.
AVIAT NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended
April 3, 2020
Table of Contents
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Page
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Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
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Exhibit Index
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3
PART I. FINANCIAL INFORMATION
|
Item 1.
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Financial Statements
|
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
(In thousands, except share and par value amounts)
|
April 3,
2020 |
June 28,
2019 |
|||||
|
ASSETS
|
|||||||
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Current Assets:
|
|||||||
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Cash and cash equivalents
|
$
|
39,208
|
|
$
|
31,946
|
|
|
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Accounts receivable, net
|
48,148
|
|
51,937
|
|
|||
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Unbilled receivables
|
23,420
|
|
27,780
|
|
|||
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Inventories
|
14,190
|
|
8,573
|
|
|||
|
Customer service inventories
|
1,264
|
|
936
|
|
|||
|
Other current assets
|
11,164
|
|
4,825
|
|
|||
|
Total current assets
|
137,394
|
|
125,997
|
|
|||
|
Property, plant and equipment, net
|
17,602
|
|
17,255
|
|
|||
|
Deferred income taxes
|
13,780
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13,864
|
|
|||
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Right of use assets
|
4,608
|
|
—
|
|
|||
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Other assets
|
6,377
|
|
12,077
|
|
|||
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TOTAL ASSETS
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$
|
179,761
|
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$
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169,193
|
|
|
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LIABILITIES AND EQUITY
|
|||||||
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Current Liabilities:
|
|||||||
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Short-term debt
|
$
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9,000
|
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$
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9,000
|
|
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Accounts payable
|
38,434
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35,605
|
|
|||
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Accrued expenses
|
23,170
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22,555
|
|
|||
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Short-term lease liabilities
|
2,396
|
|
—
|
|
|||
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Advance payments and unearned revenue
|
21,485
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13,962
|
|
|||
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Restructuring liabilities
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1,538
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1,089
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|
|||
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Total current liabilities
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96,023
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82,211
|
|
|||
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Unearned revenue
|
8,210
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9,662
|
|
|||
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Long-term lease liabilities
|
2,493
|
|
—
|
|
|||
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Other long-term liabilities
|
620
|
|
820
|
|
|||
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Reserve for uncertain tax positions
|
4,654
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|
3,606
|
|
|||
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Deferred income taxes
|
818
|
|
1,378
|
|
|||
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Total liabilities
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112,818
|
|
97,677
|
|
|||
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Commitments and contingencies (Note 12)
|
|
|
|||||
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Equity:
|
|||||||
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Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued
|
—
|
|
—
|
|
|||
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Common stock, $0.01 par value, 300,000,000 shares authorized, 5,393,030 shares issued and outstanding at April 3, 2020; 5,359,695 shares issued and outstanding at June 28, 2019
|
54
|
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54
|
|
|||
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Additional paid-in-capital
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813,986
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815,196
|
|
|||
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Accumulated deficit
|
(731,884
|
)
|
(730,998
|
)
|
|||
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Accumulated other comprehensive loss
|
(15,213
|
)
|
(12,736
|
)
|
|||
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Total equity
|
66,943
|
|
71,516
|
|
|||
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TOTAL LIABILITIES AND EQUITY
|
$
|
179,761
|
|
$
|
169,193
|
|
|
4
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
|
Nine Months Ended
|
|||||||||||||
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(In thousands, except per share amounts)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
Revenues:
|
|||||||||||||||
|
Revenue from product sales
|
$
|
40,930
|
|
$
|
34,615
|
|
$
|
111,676
|
|
$
|
115,696
|
|
|||
|
Revenue from services
|
20,449
|
|
19,422
|
|
64,314
|
|
63,933
|
|
|||||||
|
Total revenues
|
61,379
|
|
54,037
|
|
175,990
|
|
179,629
|
|
|||||||
|
Cost of revenues:
|
|||||||||||||||
|
Cost of product sales
|
24,676
|
|
23,712
|
|
68,466
|
|
76,670
|
|
|||||||
|
Cost of services
|
14,742
|
|
14,070
|
|
44,688
|
|
46,289
|
|
|||||||
|
Total cost of revenues
|
39,418
|
|
37,782
|
|
113,154
|
|
122,959
|
|
|||||||
|
Gross margin
|
21,961
|
|
16,255
|
|
62,836
|
|
56,670
|
|
|||||||
|
Operating expenses:
|
|||||||||||||||
|
Research and development expenses
|
4,875
|
|
5,350
|
|
15,069
|
|
15,603
|
|
|||||||
|
Selling and administrative expenses
|
15,233
|
|
13,408
|
|
44,334
|
|
41,405
|
|
|||||||
|
Restructuring charges
|
617
|
|
—
|
|
2,175
|
|
796
|
|
|||||||
|
Total operating expenses
|
20,725
|
|
18,758
|
|
61,578
|
|
57,804
|
|
|||||||
|
Operating income (loss)
|
1,236
|
|
(2,503
|
)
|
1,258
|
|
(1,134
|
)
|
|||||||
|
Interest income
|
112
|
|
73
|
|
318
|
|
167
|
|
|||||||
|
Interest expense
|
(19
|
)
|
(7
|
)
|
(23
|
)
|
(88
|
)
|
|||||||
|
Other (expense) income, net
|
—
|
|
(1
|
)
|
—
|
|
(1
|
)
|
|||||||
|
Income (loss) before income taxes
|
1,329
|
|
(2,438
|
)
|
1,553
|
|
(1,056
|
)
|
|||||||
|
Provision for (benefit from) income taxes
|
598
|
|
(6,777
|
)
|
2,439
|
|
(6,955
|
)
|
|||||||
|
Net income (loss)
|
$
|
731
|
|
$
|
4,339
|
|
$
|
(886
|
)
|
$
|
5,899
|
|
|||
|
Net income (loss) per share of common stock outstanding:
|
|||||||||||||||
|
Basic
|
$
|
0.14
|
|
$
|
0.81
|
|
$
|
(0.16
|
)
|
$
|
1.10
|
|
|||
|
Diluted
|
$
|
0.13
|
|
$
|
0.78
|
|
$
|
(0.16
|
)
|
$
|
1.05
|
|
|||
|
Weighted-average shares outstanding:
|
|||||||||||||||
|
Basic
|
5,395
|
|
5,381
|
|
5,390
|
|
5,382
|
|
|||||||
|
Diluted
|
5,457
|
|
5,577
|
|
5,390
|
|
5,634
|
|
|||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
Net income (loss)
|
$
|
731
|
|
$
|
4,339
|
|
$
|
(886
|
)
|
$
|
5,899
|
|
|||
|
Other comprehensive loss:
|
|||||||||||||||
|
Net change in cumulative translation adjustments
|
(2,374
|
)
|
(88
|
)
|
(2,477
|
)
|
(426
|
)
|
|||||||
|
Other comprehensive loss
|
(2,374
|
)
|
(88
|
)
|
(2,477
|
)
|
(426
|
)
|
|||||||
|
Comprehensive (loss) income
|
$
|
(1,643
|
)
|
$
|
4,251
|
|
$
|
(3,363
|
)
|
$
|
5,473
|
|
|||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
|||||
|
Operating Activities
|
|||||||
|
Net (loss) income
|
$
|
(886
|
)
|
$
|
5,899
|
|
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|||||||
|
Depreciation and amortization of property, plant and equipment
|
3,226
|
|
3,408
|
|
|||
|
(Provision) recovery from uncollectible receivables
|
18
|
|
(264
|
)
|
|||
|
Share-based compensation
|
1,315
|
|
1,396
|
|
|||
|
Deferred tax assets, net
|
(475
|
)
|
(6,870
|
)
|
|||
|
Charges for inventory and customer service inventory write-downs
|
751
|
|
404
|
|
|||
|
Loss on disposition of property, plant and equipment, net
|
14
|
|
20
|
|
|||
|
Changes in operating assets and liabilities:
|
|||||||
|
Accounts receivable
|
2,977
|
|
(236
|
)
|
|||
|
Unbilled receivables
|
4,644
|
|
(5,674
|
)
|
|||
|
Inventories
|
(5,810
|
)
|
(698
|
)
|
|||
|
Customer service inventories
|
(930
|
)
|
(170
|
)
|
|||
|
Accounts payable
|
3,170
|
|
3,954
|
|
|||
|
Accrued expenses
|
140
|
|
(3,085
|
)
|
|||
|
Advance payments and unearned revenue
|
6,157
|
|
7,197
|
|
|||
|
Income taxes payable or receivable
|
1,372
|
|
366
|
|
|||
|
Other assets and liabilities
|
(1,058
|
)
|
(307
|
)
|
|||
|
Net cash provided by operating activities
|
14,625
|
|
5,340
|
|
|||
|
Investing Activities
|
|||||||
|
Payments for acquisition of property, plant and equipment
|
(3,945
|
)
|
(4,083
|
)
|
|||
|
Net cash used in investing activities
|
(3,945
|
)
|
(4,083
|
)
|
|||
|
Financing Activities
|
|||||||
|
Proceeds from borrowings
|
27,000
|
|
27,000
|
|
|||
|
Repayments of borrowings
|
(27,000
|
)
|
(27,000
|
)
|
|||
|
Payments for repurchase of common stock
|
(1,772
|
)
|
(1,870
|
)
|
|||
|
Payments for taxes related to net settlement of equity awards
|
(764
|
)
|
(561
|
)
|
|||
|
Proceeds from issuance of common stock under employee stock plans
|
11
|
|
30
|
|
|||
|
Net cash used in financing activities
|
(2,525
|
)
|
(2,401
|
)
|
|||
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
(895
|
)
|
(305
|
)
|
|||
|
Net increase (decrease) in cash, cash equivalents, and rest
ricted cash
|
7,260
|
|
(1,449
|
)
|
|||
|
Cash, cash equivalents, and restricted cash, beginning of period
|
32,201
|
|
37,764
|
|
|||
|
Cash, cash equivalents, and restricted cash, end of period
|
$
|
39,461
|
|
$
|
36,315
|
|
|
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
|
Three Months Ended April 3, 2020
|
||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated Deficit
|
Accumulated Other Comprehensive Loss
|
Total Equity
|
||||||||||||||||||
|
(In thousands, except share amounts)
|
Shares
|
$
Amount
|
||||||||||||||||||||
|
Balance as of December 27, 2019
|
5,414,480
|
|
$
|
54
|
|
$
|
813,867
|
|
$
|
(732,615
|
)
|
$
|
(12,839
|
)
|
$
|
68,467
|
|
|||||
|
Net income
|
—
|
|
—
|
|
—
|
|
731
|
|
—
|
|
731
|
|
||||||||||
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,374
|
)
|
(2,374
|
)
|
||||||||||
|
Issuance of common stock under employee stock plans
|
6,715
|
|
—
|
|
1
|
|
—
|
|
—
|
|
1
|
|
||||||||||
|
Shares withheld for taxes related to vesting of equity awards
|
(1,681
|
)
|
—
|
|
(18
|
)
|
—
|
|
—
|
|
(18
|
)
|
||||||||||
|
Stock repurchase
|
(26,484
|
)
|
—
|
|
(371
|
)
|
—
|
|
—
|
|
(371
|
)
|
||||||||||
|
Share-based compensation
|
—
|
|
—
|
|
507
|
|
—
|
|
—
|
|
507
|
|
||||||||||
|
Balance as of April 3, 2020
|
5,393,030
|
|
$
|
54
|
|
$
|
813,986
|
|
$
|
(731,884
|
)
|
$
|
(15,213
|
)
|
$
|
66,943
|
|
|||||
|
Three Months Ended March 29, 2019
|
||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in
Capital
|
Accumulated Deficit
|
Accumulated Other Comprehensive Loss
|
Total Equity
|
||||||||||||||||||
|
(In thousands, except share amounts)
|
Shares
|
$
Amount
|
||||||||||||||||||||
|
Balance as of December 28, 2018
|
5,399,357
|
|
$
|
54
|
|
$
|
815,392
|
|
$
|
(739,176
|
)
|
$
|
(12,943
|
)
|
$
|
63,327
|
|
|||||
|
Net income
|
—
|
|
—
|
|
—
|
|
4,339
|
|
—
|
|
4,339
|
|
||||||||||
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
(88
|
)
|
(88
|
)
|
||||||||||
|
Issuance of common stock under employee stock plans
|
8,168
|
|
—
|
|
11
|
|
—
|
|
—
|
|
11
|
|
||||||||||
|
Shares withheld for taxes related to vesting of equity awards
|
(622
|
)
|
—
|
|
(7
|
)
|
—
|
|
—
|
|
(7
|
)
|
||||||||||
|
Stock repurchase
|
(30,961
|
)
|
—
|
|
(433
|
)
|
—
|
|
—
|
|
(433
|
)
|
||||||||||
|
Share-based compensation
|
—
|
|
—
|
|
458
|
|
—
|
|
—
|
|
458
|
|
||||||||||
|
Balance as of March 29, 2019
|
5,375,942
|
|
$
|
54
|
|
$
|
815,421
|
|
$
|
(734,837
|
)
|
$
|
(13,031
|
)
|
$
|
67,607
|
|
|||||
8
|
Nine Months Ended April 3, 2020
|
||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in Capital |
Accumulated Deficit
|
Accumulated Other Comprehensive Loss
|
Total
Stockholders’ Equity |
||||||||||||||||||
|
(In thousands, except share amounts)
|
Shares
|
$ Amount
|
||||||||||||||||||||
|
Balance as of June 28, 2019
|
5,359,695
|
|
54
|
|
815,196
|
|
(730,998
|
)
|
(12,736
|
)
|
71,516
|
|
||||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(886
|
)
|
—
|
|
(886
|
)
|
||||||||||
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,477
|
)
|
(2,477
|
)
|
||||||||||
|
Issuance of common stock under employee stock plans
|
215,423
|
|
2
|
|
9
|
|
—
|
|
—
|
|
11
|
|
||||||||||
|
Shares withheld for taxes related to vesting of equity awards
|
(54,065
|
)
|
(1
|
)
|
(763
|
)
|
—
|
|
—
|
|
(764
|
)
|
||||||||||
|
Stock repurchase
|
(128,023
|
)
|
(1
|
)
|
(1,771
|
)
|
—
|
|
—
|
|
(1,772
|
)
|
||||||||||
|
Share-based compensation
|
—
|
|
—
|
|
1,315
|
|
—
|
|
—
|
|
1,315
|
|
||||||||||
|
Balance as of April 3, 2020
|
5,393,030
|
|
$
|
54
|
|
$
|
813,986
|
|
$
|
(731,884
|
)
|
$
|
(15,213
|
)
|
$
|
66,943
|
|
|||||
|
Nine Months Ended March 29, 2019
|
||||||||||||||||||||||
|
Common Stock
|
Additional
Paid-in Capital |
Accumulated Deficit
|
Accumulated Other Comprehensive Loss
|
Total
Stockholders’ Equity |
||||||||||||||||||
|
(In thousands, except share amounts)
|
Shares
|
$ Amount
|
||||||||||||||||||||
|
Balance as of June 29, 2018
|
5,351,155
|
|
54
|
|
816,426
|
|
(746,359
|
)
|
(12,605
|
)
|
57,516
|
|
||||||||||
|
Cumulative-effect adjustment for ASC Topic 606
|
—
|
|
—
|
|
—
|
|
5,623
|
|
—
|
|
5,623
|
|
||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
5,899
|
|
—
|
|
5,899
|
|
||||||||||
|
Other comprehensive loss, net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
(426
|
)
|
(426
|
)
|
||||||||||
|
Issuance of common stock under employee stock plans
|
182,421
|
|
1
|
|
29
|
|
—
|
|
—
|
|
30
|
|
||||||||||
|
Shares withheld for taxes related to vesting of equity awards
|
(35,088
|
)
|
—
|
|
(561
|
)
|
—
|
|
—
|
|
(561
|
)
|
||||||||||
|
Stock repurchase
|
(122,546
|
)
|
(1
|
)
|
(1,869
|
)
|
—
|
|
—
|
|
(1,870
|
)
|
||||||||||
|
Share-based compensation
|
—
|
|
—
|
|
1,396
|
|
—
|
|
—
|
|
1,396
|
|
||||||||||
|
Balance as of March 29, 2019
|
5,375,942
|
|
$
|
54
|
|
$
|
815,421
|
|
$
|
(734,837
|
)
|
$
|
(13,031
|
)
|
$
|
67,607
|
|
|||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
9
AVIAT NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. The Company and Basis of Presentation
The Company
Aviat Networks, Inc. (the “Company,” “we,” “us,” and “our”) designs, manufactures, and sells a range of wireless 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.
Due to the volume of our international sales, especially in developing countries, we may be susceptible to a number of political, economic, and geographic risks that could harm our business as outlined in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended
June 28, 2019
.
Our 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, 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 we have made estimates, assumptions and judgments affecting the amounts reported in our 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 our management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for such periods. The results for the
three and nine months ended
April 3, 2020
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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended
June 28, 2019
.
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.
We operate on a
52
-week or
53
-week year ending on the Friday closest to June 30. The
nine months ended
April 3, 2020
consisted of
40
weeks while the
nine months ended
2019
included
39
weeks. The three months ended April 3, 2020 and March 29, 2019 consisted of 14 weeks and 13 weeks, respectively. Fiscal year
2020
will be comprised of 53 weeks and will end on
July 3, 2020
.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us 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 our management. We evaluate our estimates and assumptions on an ongoing basis and may employ outside experts to assist us 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, valuation allowances for deferred tax assets, uncertainties in income taxes, lease liabilities, restructuring obligations, product warranty obligations, share-based awards, contingencies, recoverability of long-lived assets and useful lives of property, plant and equipment. The actual results that we experience may differ materially from our estimates.
Summary of Significant Accounting Policies
There have been no material changes in our significant accounting policies as of and for the
nine months ended
April 3, 2020
, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended
June 28, 2019
, with the exception of our adoption of Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842)
10
(ASU 2016-02) (“ASC 842”). See Note 4, “Leases” to the Notes to unaudited condensed consolidated financial statements for discussion of the impact of the adoption of this standard on our policies for leases.
Accounting Standards Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842, which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. We adopted ASC 842, effective
June 29, 2019
, using the modified retrospective transition method with the cumulative effect recognized as an adjustment to the opening balance of our accumulated deficit. Prior-period financial statements were not retrospectively restated. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, assessment of whether a contract was or contains a lease, and initial direct costs for leases that existed prior to
June 28, 2019
. We also elected not to recognize right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of 12 months or less. We elected not to apply the hindsight practical expedient when determining lease term and assessing impairment of ROU assets. See Note 4, “Leases” to the Notes to our unaudited condensed consolidated financial statements for more information.
In June 2018, the FASB issued ASU 2018-07,
Compensation-Stock Compensation: Improvement to Nonemployees Share-Based Payment Accounting
(ASU 2018-07), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. This ASU is effective for fiscal years beginning after December 15, 2018.
We adopted this update during the first quarter of fiscal 2020. The adoption had no material impact on our
unaudited condensed consolidated financial statements
.
Accounting Standards Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform (Topic 848)
. This guidance provides optional guidance related to reference rate reform, which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use LIBOR as a reference rate, and was effective March 12, 2020 through December 31, 2022. We are currently evaluating the potential impact of ASU 2020-04 will have on our unaudited condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740)
. This guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws and rate changes. ASU 2019-12 will be effective for us in our first quarter of fiscal 2022. We are currently evaluating the potential impact that adopting ASU 2019-12 will have on our unaudited condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.
This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 will be effective for us in our first quarter of fiscal 2021, with early adoption permitted. The standard can be adopted either using the prospective or retrospective transition approach. We are evaluating the potential impact adopting ASU 2018-15 will have on our unaudited condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
(ASU 2018-13). The update eliminates, adds, and modifies certain disclosure requirements for fair value measurements. ASU 2018-13 will be effective for us in our first quarter of fiscal 2021 and early adoption is permitted of the entire standard or only the provisions that eliminate or modify disclosure requirements. We are evaluating the impact the adoption of ASU 2018-13 will have on our unaudited condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19,
11
ASU 2019-04, and ASU 2019-05 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 will be effective for us in our first quarter of fiscal 2024, and earlier adoption is permitted. We are evaluating the impact adopting Topic 326 will have on our
unaudited condensed
consolidated financial statements.
Note 2.
Net Income (Loss) Per Share of Common Stock
Net income (loss)
per share is computed using the two-class method, by dividing net income attributable to us by the weighted-average number of shares of our outstanding common stock and participating securities outstanding. Our restricted shares contain rights to receive non-forfeitable dividends and therefore are considered to be participating securities and included in the calculations of net income per basic and diluted common share. Undistributed losses are not allocated to unvested restricted shares as the unvested restricted shares are not contractually obligated to share our losses. The impact on earnings per share of the participating securities under the two-class method was immaterial.
The following table presents the computation of basic and diluted
net income (loss)
per share attributable to our common stockholders:
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In thousands, except per share amounts)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
Numerator:
|
|||||||||||||||
|
Net income (loss)
|
$
|
731
|
|
$
|
4,339
|
|
$
|
(886
|
)
|
$
|
5,899
|
|
|||
|
Denominator:
|
|||||||||||||||
|
Weighted-average shares outstanding, basic
|
5,395
|
|
5,381
|
|
5,390
|
|
5,382
|
|
|||||||
|
Effect of potentially dilutive equivalent shares
|
62
|
|
196
|
|
—
|
|
252
|
|
|||||||
|
Weighted-average shares outstanding, diluted
|
5,457
|
|
5,577
|
|
|
5,390
|
|
|
5,634
|
|
|||||
|
Net income (loss) per share of common stock outstanding:
|
|||||||||||||||
|
Basic
|
$
|
0.14
|
|
|
$
|
0.81
|
|
|
$
|
(0.16
|
)
|
|
$
|
1.10
|
|
|
Diluted
|
$
|
0.13
|
|
|
$
|
0.78
|
|
|
$
|
(0.16
|
)
|
|
$
|
1.05
|
|
The following table summarizes the weighted-average equity awards that were excluded from the diluted
net income (loss)
per share calculations since they were anti-dilutive:
|
Three Months Ended
|
Nine Months Ended
|
||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||
|
Stock options
|
327
|
|
394
|
|
369
|
|
375
|
|
|||
|
Restricted stock units and performance stock units
|
98
|
|
52
|
|
143
|
|
39
|
|
|||
|
Total shares of common stock excluded
|
425
|
|
446
|
|
512
|
|
414
|
|
|||
Note 3. Revenue Recognition
We recognize revenue by applying the following five-step approach: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.
Revenue from product sales is generated predominately from the sales of products manufactured by third-party manufacturers to whom we have outsourced our manufacturing processes. Printed circuit assemblies, mechanical housings, and
12
packaged modules are manufactured by contract manufacturing partners, with periodic business reviews of material levels and obsolescence. Product assembly, product testing, complete system integration, and system testing may either be performed within our own facilities or at the locations of our third-party manufacturers.
Revenue from services includes certain installation, extended warranty, customer support, consulting, training, and education. Maintenance and support services are generally offered to our customers over a specified period of time and from sales and subsequent renewals of maintenance and support contracts. The services noted are recognized based on an over-time recognition model using the cost-input method.
Revenues related to certain contracts for customized network solutions are recognized over time using the cost input method. In using this input method, we generally apply the cost-to-cost method of accounting where sales and profits are recorded based on the ratio of costs incurred to estimated total costs at completion. Recognition of profit on these contracts requires estimates of the total contract value, the total cost at completion, and the measurement of progress towards completion. Significant judgment is required when estimating total contract costs and progress to completion on the arrangements, as well as whether a loss is expected to be incurred on the contract. If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known to us. We perform ongoing profitability analysis of our service contracts accounted for under this method in order to determine whether the latest estimates of revenues, costs, and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. We establish billing terms at the time project deliverables and milestones are agreed. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled receivables on the unaudited condensed consolidated balance sheet.
Contracts and customer purchase orders are used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of control. We typically satisfy our performance obligations upon shipment or delivery of product depending on the contractual terms. Payment terms to customers generally range from net 30 to 120 days from invoice, which are considered to be standard payment terms. We assess our ability to collect from our customers based primarily on the creditworthiness and past payment history of the customer.
While our customers do not have the right of return, we reserve for estimated product returns as an offset to revenue based primarily on historical trends. Actual product returns may be different than what was estimated. These factors and unanticipated changes in economic and industry condition could make actual results differ from our return estimates.
We present transactional taxes such as sales and use tax collected from customers and remitted to government authorities on a net basis.
Bill-and-Hold Sales
Certain customer arrangements consist of bill-and-hold characteristics under which transfer of control has been met (including the passing of title and significant risk and reward of ownership to the customers). Therefore, the customers can direct the use of the bill-and-hold inventory while we retain physical possession of the product until it is installed at a customer site at a point in time in the future.
Termination Rights
The contract term is determined on the basis of the period over which the parties to the contract have present enforceable rights and obligations. Certain customer contracts include a termination for convenience clause that allows the customer to terminate services without penalty, upon advance notification. We concluded that the duration of support contracts does not extend beyond the non-cancellable portion of the contract.
Variable Consideration
The consideration associated with customer contracts is generally fixed. Variable consideration includes discounts, rebates, refunds, credits, incentives, penalties, or other similar items. The amount of consideration that can vary is not a substantial portion of total consideration.
13
Variable consideration estimates will be re-assessed at each reporting period until a final outcome is determined. The changes to the original transaction price due to a change in estimated variable consideration will be applied on a retrospective
basis, with the adjustment recorded in the period in which the change occurs. Changes to variable consideration will be tracked and material changes disclosed.
Stand-alone Selling Price
Stand-alone selling price is the price at which an entity would sell a good or service on a stand-alone (or separate) basis at contract inception. Under the model, the observable price of a good or service sold separately provides the best evidence of stand-alone selling price. However, in certain situations, stand-alone selling prices will not be readily observable and the entity must estimate the stand-alone selling price.
When allocating on a relative stand-alone selling price basis, any discount provided in the contract is allocated proportionately to all of the performance obligations in the contract.
The majority of products and services that we offer have readily observable selling prices. For products and services that do not, we estimate stand-alone selling price using the market assessment approach based on expected selling price and adjust those prices as necessary to reflect our costs and margins. As part of our stand-alone selling price policy, we review product pricing on a periodic basis to identify any significant changes and revise our expected selling price assumptions as appropriate.
Shipping and Handling
Shipping and handling costs are included as a component of costs of product sales in our unaudited condensed consolidated statements of operations because they are also included in revenue that we bill our customers.
Costs to Obtain a Contract
We have assessed the treatment of costs to obtain or fulfill a contract with a customer. Under ASC 606, we capitalize sales commissions related to multi-year service contracts and amortize the asset over the period of benefit, which is the estimated service period. Sales commissions paid on contract renewals, including service contract renewals, is commensurate with the sales commissions paid on the initial contracts.
We elected the practical expedient to expense sales commissions as incurred when the amortization period of the related asset is one year or less. These costs are recorded as sales and marketing expense and included on our unaudited condensed consolidated balance sheet as accrued expenses until paid. Our amortization expense was not material for the
three and nine months ended
April 3, 2020
.
Contract Balances, Performance Obligations, and Backlog
The following table provides information about receivables and liabilities from contracts with customers (in thousands):
|
|
April 3, 2020
|
|
June 28, 2019
|
|||||
|
Contract Assets
|
|
|
||||||
|
Accounts receivable, net
|
$
|
48,148
|
|
|
$
|
51,937
|
|
|
|
Unbilled receivables
|
23,420
|
|
|
27,780
|
|
|||
|
Capitalized commissions
|
1,031
|
|
955
|
|
||||
|
Contract Liabilities
|
|
|
||||||
|
Advance payments and unearned revenue
|
21,485
|
|
|
13,962
|
|
|||
|
Unearned revenue, long-term
|
8,210
|
|
|
9,662
|
|
|||
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, we may experience unforeseen events that could result in a change to the scope or price associated with an arrangement. When such events occur, we update the transaction price and measure of progress for the performance
14
obligation and recognize the change as a cumulative catch-up to revenue. Because of the nature and type of contracts we engage in, the timeframe to completion and satisfaction of current and future performance obligations can shift; however, this will have no impact on our future obligation to bill and collect.
As of
April 3, 2020
, we had
$29.7 million
in advance payments and unearned revenue and long-term unearned revenue, of which approximately
30%
is expected to be recognized as revenue in the remainder of fiscal
2020
and the balance thereafter. During the
three and nine months ended
April 3, 2020
we recognized approximately
$1.8 million
and
$7.4 million
, respectively, in maintenance service revenue which was included in advance payments and unearned revenue at the beginning of the reporting period.
Remaining Performance Obligations
The aggregate amount of transaction price allocated to our unsatisfied (or partially unsatisfied) performance obligations was approximately
$71.8 million
at
April 3, 2020
. Of this amount, we expect to recognize approximately
60%
as revenue during the next
12 months
, with the remaining amount to be recognized as revenue within
two
to
five
years.
Note 4. Leases
On
June 29, 2019
, the first day of our fiscal 2020, we adopted ASC 842 using the modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of accumulated deficit to be recognized on the date of adoption with prior periods not restated.
We lease facilities under non-cancelable operating lease agreements. These leases have varying terms that range from
one
to
20 years
and contain leasehold improvement incentives, rent holidays and escalation clauses. In addition, some of these leases have renewal options for up to
3 years
.
We determine if an arrangement contains a lease at inception. These operating leases are included in "Right of use assets" on our
April 3, 2020
unaudited condensed consolidated balance sheets and represent our right to use the underlying asset for the lease term. Our obligation to make lease payments are included in "
Short-term lease liabilities
" and "Long-term lease liabilities" on our
April 3, 2020
unaudited condensed consolidated balance sheets. We did not enter into any finance leases during the
nine months ended
April 3, 2020
.
Operating lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we used the incremental borrowing rate based on the remaining lease term at commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives and initial direct costs incurred. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Certain of our lease arrangements include non-lease components and we account for non-lease components together with lease components for all such lease arrangements.
Leases with an initial term of 12 months or less are not recorded on our balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
Adoption of ASC 842
Upon our adoption of ASC 842, we recorded total ROU assets of
$7.9 million
, with corresponding liabilities of
$8.3 million
, on our unaudited condensed consolidated balance sheets. The ROU assets include adjustments for prepayments and accrued lease payments. The adoption did not impact our prior year condensed consolidated statements of operations and statements of cash flows.
As of
April 3, 2020
, total ROU assets were approximately
$4.6 million
, and short-term lease liabilities and long-term lease liabilities were approximately
$2.4 million
and
$2.5 million
, respectively. Cash paid for lease liabilities was
$1.4 million
and
$4.0 million
for the
three and nine months ended
April 3, 2020
, respectively. During the
three and nine months ended
April 3, 2020
, we obtained
$0.2 million
and
$0.3 million
, respectively, of right-of-use assets in exchange for new operating lease obligations.
15
The following summarizes our lease costs, lease term and discount rate for
three and nine months ended
April 3, 2020
(in thousands, except for weighted average):
|
Three Months Ended
|
Nine Months Ended
|
|||||||
|
April 3, 2020
|
April 3, 2020
|
|||||||
|
(In thousands)
|
||||||||
|
Operating lease costs
|
$
|
444
|
|
$
|
1,290
|
|
||
|
Short-term lease costs
|
393
|
|
1,164
|
|
||||
|
Variable lease costs
|
95
|
|
251
|
|
||||
|
Total lease costs
|
$
|
932
|
|
$
|
2,705
|
|
||
|
Weighted average remaining lease term
|
5.6 years
|
|
|
|
Weighted average discount rate
|
6.7
|
%
|
|
Rent expense for operating leases, including rentals on a month-to-month basis, for the three and nine months ended March 29, 2019 were
$0.9 million
and
$2.8 million
, respectively.
As of
April 3, 2020
, our future minimum lease payments under all non-cancelable operating leases with an initial term in excess of one year were as follows (in thousands):
|
Amount
|
||||
|
(In thousands)
|
||||
|
Remainder of 2020
|
$
|
1,274
|
|
|
|
2021
|
1,618
|
|
||
|
2022
|
583
|
|
||
|
2023
|
320
|
|
||
|
2024
|
231
|
|
||
|
Thereafter
|
2,010
|
|
||
|
Total lease payments
|
6,036
|
|
||
|
Less: interest
|
(1,147
|
)
|
||
|
Present value of lease liabilities
|
$
|
4,889
|
|
|
Prior to our adoption of the new lease accounting standard, as of
June 28, 2019
, our future minimum lease payments under all non-cancelable operating leases were as follows:
|
Fiscal years
|
Amount
|
|||
|
(In thousands)
|
||||
|
2020
|
$
|
2,052
|
|
|
|
2021
|
1,268
|
|
||
|
2022
|
456
|
|
||
|
2023
|
243
|
|
||
|
2024
|
249
|
|
||
|
Thereafter
|
2,090
|
|
||
|
Total
|
$
|
6,358
|
|
|
16
Note 5. Balance Sheet Components
Cash, Cash Equivalents, and Restricted Cash
The following table provides a summary of our cash, cash equivalents, and restricted cash reported within our unaudited condensed consolidated balance sheets that reconciles to the corresponding amount in our unaudited condensed consolidated statement of cash flows:
|
(In thousands)
|
April 3,
2020 |
June 28,
2019 |
|||||
|
Cash and cash equivalents
|
$
|
39,208
|
|
$
|
31,946
|
|
|
|
Restricted cash included in other assets
|
253
|
|
255
|
|
|||
|
Total cash, cash equivalents, and restricted cash in the Statement of Cash Flows
|
$
|
39,461
|
|
$
|
32,201
|
|
|
Accounts Receivable, net
Our net accounts receivable are summarized below:
|
(In thousands)
|
April 3,
2020 |
June 28,
2019 |
|||||
|
Accounts receivable
|
$
|
49,973
|
|
$
|
53,539
|
|
|
|
Less: Allowances for collection losses
|
(1,825
|
)
|
(1,602
|
)
|
|||
|
Total accounts receivable, net
|
$
|
48,148
|
|
$
|
51,937
|
|
|
Inventories
Our inventories are summarized below:
|
(In thousands)
|
April 3,
2020 |
June 28,
2019 |
|||||
|
Finished products
|
$
|
8,489
|
|
$
|
4,894
|
|
|
|
Raw materials and supplies
|
5,701
|
|
3,679
|
|
|||
|
Total inventories
|
$
|
14,190
|
|
$
|
8,573
|
|
|
|
Consigned inventories included within raw materials and supplies
|
$
|
2,620
|
|
$
|
1,649
|
|
|
We currently rely on a few vendors for substantially all of our inventory purchases.
We record recovery or charges to adjust our inventory and customer service inventory due to excess and obsolete inventory resulting from lower sales forecast, product transitioning, or discontinuance. The recovery or charges during the
three and nine months ended
April 3, 2020
and
March 29, 2019
were classified in cost of product sales as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
Excess and obsolete inventory (recovery) charges
|
$
|
(13
|
)
|
$
|
(64
|
)
|
$
|
156
|
|
$
|
(311
|
)
|
|||
|
Customer service inventory write-downs
|
250
|
|
313
|
|
595
|
|
715
|
|
|||||||
|
Total inventory charges
|
$
|
237
|
|
$
|
249
|
|
$
|
751
|
|
$
|
404
|
|
|||
17
Property, Plant and Equipment, net
Our property, plant and equipment, net are summarized below:
|
(In thousands)
|
April 3,
2020 |
June 28,
2019 |
|||||
|
Land
|
$
|
710
|
|
$
|
710
|
|
|
|
Buildings and leasehold improvements
|
11,723
|
|
11,668
|
|
|||
|
Software
|
17,603
|
|
17,556
|
|
|||
|
Machinery and equipment
|
52,288
|
|
49,733
|
|
|||
|
Total property, plant and equipment, gross
|
82,324
|
|
79,667
|
|
|||
|
Less: Accumulated depreciation and amortization
|
(64,722
|
)
|
(62,412
|
)
|
|||
|
Total property, plant and equipment, net
|
$
|
17,602
|
|
$
|
17,255
|
|
|
Included in the total plant, property and equipment above were
$3.9 million
and
$2.8 million
of assets in progress which have not been placed in service as of
April 3, 2020
and
June 28, 2019
, respectively.
Depreciation and amortization expense related to property, plant and equipment, including amortization of software developed for internal use, was as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
Depreciation and amortization
|
$
|
1,111
|
|
$
|
1,024
|
|
$
|
3,226
|
|
$
|
3,408
|
|
|||
Accrued Expenses
Our accrued expenses are summarized below:
|
(In thousands)
|
April 3,
2020 |
June 28,
2019 |
|||||
|
Accrued compensation and benefits
|
$
|
8,501
|
|
$
|
7,583
|
|
|
|
Accrued agent commissions
|
2,160
|
|
2,035
|
|
|||
|
Accrued warranties
|
3,250
|
|
3,323
|
|
|||
|
Other
|
9,259
|
|
9,614
|
|
|||
|
Total accrued expenses
|
$
|
23,170
|
|
$
|
22,555
|
|
|
Accrued Warranties
We accrue for the estimated cost to repair or replace products under warranty. Changes in our warranty liability, which is included as a component of accrued expenses in our unaudited condensed consolidated balance sheets were as follows:
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
Balance as of the beginning of the period
|
$
|
3,197
|
|
$
|
3,416
|
|
$
|
3,323
|
|
$
|
3,196
|
|
|||
|
Warranty provision recorded during the period
|
492
|
|
466
|
|
1,249
|
|
1,632
|
|
|||||||
|
Consumption during the period
|
(439
|
)
|
(448
|
)
|
(1,322
|
)
|
(1,394
|
)
|
|||||||
|
Balance as of the end of the period
|
$
|
3,250
|
|
$
|
3,434
|
|
$
|
3,250
|
|
$
|
3,434
|
|
|||
18
Advance Payments and Unearned Revenue
Our advance payments and unearned revenue are summarized below:
|
(In thousands)
|
April 3,
2020 |
June 28,
2019 |
|||||
|
Advance payments
|
$
|
3,313
|
|
$
|
1,534
|
|
|
|
Unearned revenue
|
18,172
|
|
12,428
|
|
|||
|
Total advance payments and unearned revenue
|
$
|
21,485
|
|
$
|
13,962
|
|
|
Excluded from the balances above are
$8.2 million
and
$9.7 million
in long-term unearned revenue as of
April 3, 2020
and
June 28, 2019
, respectively.
Note 6. 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. We maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value and establish a three-level fair value hierarchy that prioritizes the 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 carrying amounts, estimated fair values, and valuation input levels of our assets and liabilities that are measured at fair value on a recurring basis as of
April 3, 2020
and
June 28, 2019
were as follows:
|
|
April 3, 2020
|
June 28, 2019
|
Valuation Inputs
|
||||||||||||||
|
(In thousands)
|
Carrying Amount
|
Fair Value
|
Carrying Amount
|
Fair Value
|
|||||||||||||
|
Assets:
|
|||||||||||||||||
|
Cash and cash equivalents:
|
|||||||||||||||||
|
Money market funds
|
$
|
21,393
|
|
$
|
21,393
|
|
$
|
15,121
|
|
$
|
15,121
|
|
Level 1
|
||||
|
Bank certificates of deposit
|
$
|
3,282
|
|
$
|
3,282
|
|
$
|
1,989
|
|
$
|
1,989
|
|
Level 2
|
||||
|
Other current assets:
|
|||||||||||||||||
|
Foreign exchange forward contracts
|
$
|
41
|
|
$
|
41
|
|
$
|
—
|
|
$
|
—
|
|
Level 2
|
||||
|
Liabilities:
|
|||||||||||||||||
|
Other accrued expenses:
|
|||||||||||||||||
|
Foreign exchange forward contracts
|
$
|
296
|
|
$
|
296
|
|
$
|
7
|
|
$
|
7
|
|
Level 2
|
||||
We classify items within Level 1 if quoted prices are available in active markets. Our Level 1 items mainly are money market funds. As of
April 3, 2020
and
June 28, 2019
, these money market funds were valued at $
1.00
net asset value per share.
We classify items in 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. Our bank certificates of deposit and foreign exchange forward contracts are classified within Level 2. Foreign currency forward contracts are measured at fair value using observable foreign currency exchange rates. The changes in fair value related to our foreign currency forward contracts were recorded in cost of revenues on our unaudited condensed consolidated statements of operations.
As of
April 3, 2020
and
June 28, 2019
, we did not have any recurring assets or liabilities that were valued using significant unobservable inputs.
19
Our policy is to recognize asset or liability transfers among Level 1, Level 2, and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During
the first nine months of fiscal
2020
and
2019
, we had no transfers between levels of the fair value hierarchy of our assets or liabilities measured at fair value.
Note 7. Credit Facility and Debt
On June 10, 2019, we entered into Amendment No. 2 to Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank (the “SVB Credit Facility”). On May 4, 2020, we entered into Amendment No. 3 to Third Amended and Restated Loan and Security Agreement which extended the expiration date to June 28, 2021. The SVB Credit Facility provides for a
$25.0 million
accounts receivable formula-based revolving credit facility that can be borrowed by our U.S. company, with a
$25.0 million
sublimit that can be borrowed by our Singapore subsidiary. Loans may be advanced under the SVB Credit Facility based on a borrowing base equal to a specified percentage of the value of eligible accounts of the borrowers under the SVB Credit Facility. The borrowing base is subject to certain eligibility criteria. Availability under the accounts receivable formula based revolving credit facility can also be utilized to issue letters of credit with a
$12.0 million
sublimit. We may prepay loans under the SVB Credit Facility in whole or in part at any time without premium or penalty. As of
April 3, 2020
, available credit under the SVB Credit Facility was
$14.5 million
, reflecting the calculated borrowing base of
$25.0 million
less existing borrowings of
$9.0 million
and outstanding letters of credit of
$1.5 million
.
The SVB Credit Facility carries an interest rate computed, at our option, based on either (i) at the prime rate reported in the Wall Street Journal plus a spread of
0.50%
to
1.50%
, with such spread determined based on our adjusted quick ratio; or (ii) if we satisfy a minimum adjusted quick ratio, a LIBOR rate determined in accordance with the SVB Credit Facility, plus a spread of
2.75%
. Any outstanding Singapore subsidiary borrowed loans shall bear interest at an additional
2.00%
above the applicable prime or LIBOR rate. During
the first nine months of fiscal
2020
, the weighted-average interest rate on our outstanding loan was
4.24%
. As of
April 3, 2020
and
June 28, 2019
, our outstanding debt balance under the SVB Credit Facility was
$9.0 million
, and the interest rate was
3.75%
and
6.00%
, respectively.
The SVB Credit Facility contains quarterly financial covenants including minimum adjusted quick ratio and minimum profitability (EBITDA) requirements. In the event our adjusted quick ratio falls below a certain level, cash received in our accounts with Silicon Valley Bank may be directly applied to reduce outstanding obligations under the SVB Credit Facility. The SVB Credit Facility also imposes certain restrictions on our ability 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 under certain circumstances. Certain of our assets, including accounts receivable, inventory, and equipment, are pledged as collateral for the SVB Credit Facility. Upon an event of default, outstanding obligations would be immediately due and payable. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default at a per annum rate of interest equal to
5.00%
above the applicable interest rate. As of
April 3, 2020
, we were in compliance with the quarterly financial covenants contained in the SVB Credit Facility, as amended. The
$9.0 million
borrowing was classified as a current liability as of
April 3, 2020
and
June 28, 2019
.
On September 28, 2018, we entered into Amendment No. 1 (the “Amendment”) to the Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank. Among other things, the Amendment provides for the definition of Quick Assets set forth in the Agreement to be modified to include up to the lesser of (a)
50%
of unbilled accounts receivable or (b)
$7.0 million
.
In addition, we have a short-term line of credit for up to
$0.3 million
from a bank in New Zealand to support the operations of our subsidiary located there. This line of credit provides for up to
$0.2 million
in short-term advances at various interest rates, all of which was available as of
April 3, 2020
and
June 28, 2019
. The line of credit also provides for the issuance of standby letters of credit and company credit cards, of which
$0.1 million
was outstanding as of
April 3, 2020
. This line of credit may be terminated upon notice, is reviewed annually for renewal or modification, and is supported by a corporate guarantee.
20
Note 8. Restructuring Activities
The following table summarizes our restructuring-related activities during the
nine months ended
April 3, 2020
:
|
Severance and Benefits
|
Facilities and Other
|
Total
|
|||||||||||||||||||||||||
|
(In thousands)
|
Q3 2020 Plan
|
Fiscal 2020 Plan
|
Fiscal
2018-2019 Plan |
Fiscal
2016-2017 Plan |
Fiscal
2013-2014
Plan
|
Fiscal
2015-2016
Plan
|
|||||||||||||||||||||
|
Accrual balance, June 28, 2019
|
$
|
—
|
|
$
|
—
|
|
$
|
1,023
|
|
$
|
2
|
|
$
|
64
|
|
$
|
238
|
|
$
|
1,327
|
|
||||||
|
Charges (recovery), net
|
—
|
|
1,280
|
|
(103
|
)
|
—
|
|
—
|
|
—
|
|
1,177
|
|
|||||||||||||
|
Cash payments
|
—
|
|
(60
|
)
|
(229
|
)
|
(2
|
)
|
—
|
|
—
|
|
(291
|
)
|
|||||||||||||
|
Foreign exchange impact
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(9
|
)
|
(9
|
)
|
|||||||||||||
|
Accrual balance, September 27, 2019
|
—
|
|
1,220
|
|
691
|
|
—
|
|
64
|
|
229
|
|
2,204
|
|
|||||||||||||
|
Charges, net
|
—
|
|
381
|
|
—
|
|
—
|
|
—
|
|
—
|
|
381
|
|
|||||||||||||
|
Cash payments
|
—
|
|
(385
|
)
|
(280
|
)
|
—
|
|
—
|
|
—
|
|
(665
|
)
|
|||||||||||||
|
Accrual balance, December 27, 2019
|
1,216
|
|
411
|
|
—
|
|
|
64
|
|
|
229
|
|
|
1,920
|
|
||||||||||||
|
Charges, net
|
595
|
|
22
|
|
—
|
|
—
|
|
—
|
|
—
|
|
617
|
|
|||||||||||||
|
Cash payments
|
(15
|
)
|
(598
|
)
|
(157
|
)
|
—
|
|
—
|
|
—
|
|
(770
|
)
|
|||||||||||||
|
Accrual balance, April 3, 2020
|
$
|
580
|
|
$
|
640
|
|
$
|
254
|
|
$
|
—
|
|
$
|
64
|
|
$
|
229
|
|
$
|
1,767
|
|
||||||
As of
April 3, 2020
,
$1.5 million
of the accrual balance was in short-term restructuring liabilities while
$0.3 million
was included in other long-term liabilities on our unaudited condensed consolidated balance sheets.
During the third quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q3 2020 Plan”) in order to continue to reduce its operating costs and improve profitability to optimize its business model and increase efficiencies. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2021.
During the fourth quarter of fiscal 2019, our Board of Directors approved a restructuring plan (the “Fiscal 2020 Plan”) to primarily consolidate product development, right size our resources to support our international business and other support functions. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2021.
We completed the restructuring activities under our fiscal 2018-2019 restructuring plan (the “Fiscal 2018-2019 Plan”) by the end of fiscal 2019. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid by the end of fiscal 2020.
For further information, see “Note 7. Restructuring Activities” in Part II, Item 8 of our
2019
Form 10-K.
Note 9. Equity
Stock Repurchase Program
In
May 2018
, our board of directors approved a stock repurchase program, which does not have an expiration date, for the repurchase of up to
$7.5 million
of our common stock.
The following table summarizes the repurchases of our common stock:
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In thousands, except share amounts)
|
April 3, 2020
|
March 29, 2019
|
April 3, 2020
|
March 29,
2019 |
|||||||||||
|
Number of shares repurchased
|
26,484
|
|
30,961
|
|
128,023
|
|
122,546
|
|
|||||||
|
Aggregate purchase price, including commissions
|
$
|
373
|
|
$
|
434
|
|
$
|
1,773
|
|
$
|
1,873
|
|
|||
21
All repurchased shares were retired.
As of
April 3, 2020
,
$3.4 million
remained available under our stock repurchase program. In February 2020, we suspended the stock repurchase program.
Stock Incentive Programs
As of
April 3, 2020
, we had
two
stock incentive plans for our employees and nonemployee directors, the 2018 Incentive Plan and the 2007 Stock Equity Plan, as amended and restated effective November 13, 2015. During the
three months ended
April 3, 2020
, we granted
46,500
market-based stock units. During the nine
months ended
April 3, 2020
, we granted
84,202
restricted stock units,
51,706
performance restricted stock units,
46,500
market-based stock units and
126,118
stock options to purchase shares of our common stock.
Total compensation expense for share-based awards included in our unaudited condensed consolidated statements of operations was as follows:
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
By Expense Category:
|
|||||||||||||||
|
Cost of revenues
|
$
|
53
|
|
$
|
44
|
|
$
|
149
|
|
$
|
144
|
|
|||
|
Research and development
|
33
|
|
42
|
|
92
|
|
123
|
|
|||||||
|
Selling and administrative
|
421
|
|
372
|
|
1,074
|
|
1,129
|
|
|||||||
|
Total share-based compensation expense
|
$
|
507
|
|
$
|
458
|
|
$
|
1,315
|
|
$
|
1,396
|
|
|||
|
By Types of Award:
|
|||||||||||||||
|
Options
|
$
|
197
|
|
$
|
116
|
|
$
|
460
|
|
$
|
271
|
|
|||
|
Restricted and performance stock awards and units
|
310
|
|
342
|
|
855
|
|
1,125
|
|
|||||||
|
Total share-based compensation expense
|
$
|
507
|
|
$
|
458
|
|
$
|
1,315
|
|
$
|
1,396
|
|
|||
As of
April 3, 2020
, there was approximately
$1.1 million
of total unrecognized compensation expense related to non-vested stock options granted which are expected to be recognized over a weighted-average period of
2.1
years. As of
April 3, 2020
, there was
$1.7 million
of total unrecognized compensation expense related to non-vested stock awards which are expected to be recognized over a weighted-average period of
2.1
years.
Note 10
. Segment and Geographic Information
We operate in
one
reportable business segment: the design, manufacturing, and sale of a range of wireless networking products, solutions, and services. O
ur financial performance is regularly reviewed by our chief operating decision maker
who is our chief executive officer.
We report revenue by region and country based on the location where our customers accept delivery of our products and services. Revenue by region for the
three and nine months ended
April 3, 2020
and
March 29, 2019
was as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29, 2019
|
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
North America
|
$
|
37,250
|
|
$
|
28,581
|
|
$
|
113,489
|
|
$
|
93,660
|
|
|||
|
Africa and the Middle East
|
9,230
|
|
11,079
|
|
28,679
|
|
39,058
|
|
|||||||
|
Europe and Russia
|
1,903
|
|
3,326
|
|
7,728
|
|
10,271
|
|
|||||||
|
Latin America and Asia Pacific
|
12,996
|
|
11,051
|
|
26,094
|
|
36,640
|
|
|||||||
|
Total revenue
|
$
|
61,379
|
|
$
|
54,037
|
|
$
|
175,990
|
|
$
|
179,629
|
|
|||
During the nine months ended
April 3, 2020
, Motorola Solutions, Inc. accounted for
10%
of our total revenue. No customer accounted for 10% of our total revenue during the three months ended April 3, 2020. During the
three months ended
March 29, 2019
, Mobile Telephone Networks Group (MTN Group) and Globe Telecom, Inc. (Globe) accounted for
13%
and
12%
, respectively, of our total revenue
.
During the
nine months ended
March 29, 2019
, MTN Group accounted for
12%
of our
22
total revenue
.
As of
April 3, 2020
, MTN Group and Digitec accounted for
16%
and
11%
of our accounts receivable, respectively.
As of
June 28, 2019
, MTN Group and Globe accounted for
10%
and
11%
of our accounts receivable, respectively.
We have entered into separate and distinct contracts with Globe and MTN Group, as well as separate arrangements with their various subsidiaries. The loss of a significant portion of business from any significant customers could adversely affect our unaudited condensed consolidated financial statements.
Note 11. Income Taxes
Our effective tax rate varies from the U.S. federal statutory rate of
21%
due to results of foreign operations that are subject to income taxes at different statutory rates and certain jurisdictions where we cannot recognize tax benefits on current losses. During interim periods, we accrue tax expenses for jurisdictions that are anticipated to be profitable for fiscal 2020.
The determination of our income taxes for the
nine months ended
April 3, 2020
and
March 29, 2019
was based on our estimated annual effective tax rate adjusted for losses in certain jurisdictions for which no tax benefit can be recognized. Our tax expense for the
nine months ended
April 3, 2020
was primarily due to tax expense related to profitable subsidiaries and a
$0.4 million
increase in our reserves for uncertain tax positions. The tax benefit for the
nine months ended
March 29, 2019
was primarily due to tax expense related to profitable subsidiaries, net against the
$1.6 million
release of valuation allowance due to the potential foreign tax refund to be received
from the Department of Federal Revenue of Brazil.
We continue to record a partial valuation allowance on our U.S. deferred tax assets which primarily represent future income tax benefits associated with our operating losses. Realization of our deferred tax assets is dependent on generating sufficient pre-tax book income in future periods. Although we believe it is more likely than not that future income will be sufficient to allow us to recover the value of a portion of our U.S. deferred tax assets, realization is not assured and future events could cause us to change our judgment. If future events cause us to conclude that it is not more likely than not that we will be able to recover more or less of the current anticipated portion of deferred tax assets, we would be required to either decrease or increase the valuation allowance on our deferred tax assets at that time, which would result in a charge to income tax expense (benefit) and a material increase or decrease in net income in the period in which we change our judgment. During the
third quarter
of fiscal
2020
, we did not record any adjustment to valuation allowance on our U.S. deferred tax assets.
We entered into a tax sharing agreement with Harris Corporation (Harris) effective on January 26, 2007, the acquisition date of Stratex. The tax sharing agreement addresses, among other things, the settlement process associated with pre-merger tax liabilities and tax attributes that were attributable to the Microwave Communication Division when it was a division of Harris. There have been no settlement payments recorded since the acquisition date.
We have a number of open income tax audits covering various tax years, which vary from jurisdiction to jurisdiction. Our major tax jurisdictions where audits are pending include Singapore, Nigeria, and Saudi Arabia. The earliest years that are open and subject to potential audits are as follows: U.S. - 2003; Singapore - 2011; Nigeria - 2006: Saudi Arabia - 2010, and Ivory Coast - 2016.
We account for interest and penalties related to unrecognized tax benefits as part of our provision for federal, foreign and state income taxes. Such interest expense was not material for the
three and nine months ended
April 3, 2020
and
March 29, 2019
.
On March 27, 2020, the US enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act which provided certain tax relief measures including, but not limited to, (1) a five-year net operating loss carryback, (2) changes in the deduction of interest, (3) acceleration of alternative minimum tax credit (AMT) refunds, and (4) a technical correction to allow accelerated deductions for qualified improvement property. The Tax Cuts and Jobs Act repealed the corporate AMT credit and allowed taxpayers to claim any unused AMT credit over four tax years beginning in tax year 2018. The CARES Act allows for acceleration of the refundable AMT credit up to 100% of the AMT credit to be refunded in tax year 2018. In connection with our analysis of the impact of the CARES Act, we have reclassified the refundable AMT credit of
$3.4 million
from long-term to short-term receivable and recorded no income tax effects on the other tax relief measures of the CARES Act. We continue to examine the elements of CARES Act and the impact they may have on our future business.
Note 12
. Commitments and Contingencies
Purchase Orders and Other Commitments
From time to time in the normal course of business, we may enter into purchasing agreements with our suppliers that require us to accept delivery of, and remit full payment for, finished products that we have ordered, finished products that we
23
requested be held as safety stock, and work in process started on our behalf, in the event we cancel or terminate 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 we have no present intention to cancel or terminate any of these agreements, we currently do not believe that we have any future liability under these agreements. As of
April 3, 2020
, we had outstanding purchase obligations with our suppliers or contract manufacturers of
$22.7 million
. In addition, we had contractual obligations of approximately
$2.1 million
associated with software licenses as of
April 3, 2020
.
Financial Guarantees and Commercial Commitments
Guarantees issued by banks, insurance companies, or other financial institutions are contingent commitments issued to guarantee our performance under borrowing arrangements, such as bank overdraft facilities, tax and customs obligations, and similar transactions, or to ensure our 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
April 3, 2020
, we had no guarantees applicable to our debt arrangements.
We have 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
April 3, 2020
, we had commercial commitments of
$57.7 million
outstanding that were not recorded on our unaudited condensed consolidated balance sheets. We do not believe, based on historical experience and information currently available, that it is probable that any significant amounts will be required to be paid on the performance guarantees in the future.
Indemnifications
Under the terms of substantially all of our license agreements, we have agreed to defend and pay any final judgment against our customers arising from claims against such customers that our products infringe the intellectual property rights of a third party. As of
April 3, 2020
, we have not received any notice that any customer is subject to an infringement claim arising from the use of our products; we have not received any request to defend any customers from infringement claims arising from the use of our products; and we have not paid any final judgment on behalf of any customer related to an infringement claim arising from the use of our 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, we cannot estimate the maximum amount of potential future payments, if any, related to our indemnification provisions. As of
April 3, 2020
, we had not recorded any liabilities related to these indemnifications.
Legal Proceedings
We are subject from time to time to disputes with customers concerning our products and services. In May 2016, we received notification of a claim for approximately
$1.0 million
in damages from a customer in Austria alleging that certain of our products were defective. We are continuing to investigate this claim, and at this time an estimate of the reasonably possible loss or range of loss cannot be made. We believe that we have numerous contractual and legal defenses to these disputes, and we intend to dispute them vigorously.
In March 2016, an enforcement action by the Indian Department of Revenue, Ministry of Finance was brought against 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 ("FEMA"). In November 2017, the Indian Department of Revenue, Ministry of Finance also initiated a similar action against Telsima Communications Private Limited (Telsima India) 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, our directors of Aviat India appeared before the Ministry of Finance Enforcement Directorate. No settlement offers were discussed at the meeting and the matter is still ongoing with no subsequent hearing date currently scheduled. We have accrued an immaterial amount representing the estimated probable loss for which we would settle the matter. We currently cannot form an estimate of the range of loss in excess of our amounts already accrued. If the outcome of this matter is greater than the current immaterial amount accrued, we intend to dispute it vigorously.
From time to time, we may be involved in various other legal claims and litigation that arise in the normal course of our operations. We are aggressively defending all current litigation matters. Although there can be no assurances and the outcome of these matters is currently not determinable, we currently believe that none of these claims or proceedings are likely to have a material adverse effect on our financial position. We expect to defend each of these disputes vigorously. There are many uncertainties associated with any litigation and these actions or other third-party claims against us may cause us to incur costly
24
litigation and/or substantial settlement charges. As a result, our 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 our estimates, if any.
We record accruals for our 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. We evaluate, 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. We have not recorded any accrual for loss contingencies associated with such legal claims or litigation discussed above.
Contingent Liabilities
We record 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 unaudited condensed consolidated financial statements; and (ii) the amount of the loss can be reasonably estimated. Disclosure in the Notes to the unaudited condensed consolidated financial statements is required for loss contingencies that do not meet both those conditions if there is a reasonable possibility that a loss may have been incurred. Gain contingencies are not recorded until realized. We expense all legal costs incurred to resolve regulatory, legal, and tax matters as incurred.
Periodically, we review 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, we reflect the estimated loss in our unaudited condensed consolidated statement 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 our unaudited condensed consolidated financial statements. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise estimates accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.
COVID-19
In March 2020, the World Health Organization characterized a recent pandemic of respiratory illness caused by novel coronavirus disease, known as COVID-19, as a pandemic. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 virus. The COVID-19 virus may have an impact on our operations, supply chains and distribution systems and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking or requiring. The extent to which the COVID-19 pandemic impacts our business, prospects and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating activities can resume. Management is actively monitoring the impact of COVID-19 on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce.
Our first priority remains the health and safety of our employees and their families. Employees whose tasks can be done off-site have been instructed to work from home. Our manufacturing sites support essential businesses and remain operational. We are maintaining social distancing for workers on-site and have enhanced cleaning protocols and usage of personal protective equipment, where appropriate.
The impact to our supply chain lead times and ability to fulfill orders was minimal for the three months ended April 3, 2020. However, depending on pandemic-related factors like the uncertain duration of temporary manufacturing restrictions as well as our ability to perform field services during shelter in place orders, we could experience constraints and delays in fulfilling customer orders in future periods. We are monitoring, assessing and adapting to the situation and preparing for implications to our business, supply chain and customer demand. We expect these challenges to continue until business and economic activities return to more normal levels. The financial results for the three and nine months ended April 3, 2020 reflect some of the reduced activity experienced during the period in various locations around the world and are not necessary indicative of the results for the full year.
25
Note 13. Subsequent Event
The United States and other countries are experiencing a major global health pandemic related to the outbreak of a novel strain of coronavirus, COVID-19. Due to the current economic uncertainty stemming from the impact of the COVID-19 pandemic, on April 21, 2020, we entered into a Paycheck Protection Program Note (the “Note”) effective April 21, 2020 with Silicon Valley Bank as the lender (“Lender”) in an aggregate principal amount of
$5.9 million
pursuant to the Paycheck Protection Program under the CARES Act (the “PPP Loan”). Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of one percent (
1%
) per annum, with the first
six months
of interest deferred. Commencing seven months after the effective date of the PPP Loan, we are required to pay the Lender equal monthly payments of principal and interest as required to fully amortize the PPP Loan by April 21, 2022. The PPP Loan is unsecured and guaranteed by the Small Business Administration (the “SBA”).
On April 22, 2020, we received proceeds of
$5.9 million
from the PPP Loan. At the time when we applied for the PPP Loan, we had qualified to receive the funds pursuant to the then published qualification requirements. On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance regarding qualification requirements for public companies. Based on our assessment of the new guidance, we repaid the principal and interest on the PPP Loan.
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 statements of, about, concerning or regarding: 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; 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 the Company. 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 document. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, but are not limited to, the following:
|
•
|
the impact of COVID-19 on our business, operations and cash flows;
|
|
•
|
continued price and margin erosion as a result of increased competition in the microwave transmission industry;
|
|
•
|
the impact of the volume, timing, and customer, product, and geographic mix of our product orders;
|
|
•
|
our ability to meet financial covenant requirements which could impact, among other things, our liquidity;
|
|
•
|
the timing of our receipt of payment for products or services from our customers;
|
|
•
|
our ability to meet projected new product development dates or anticipated cost reductions of new products;
|
|
•
|
our suppliers’ inability to perform and deliver on time as a result of their financial condition, component shortages, or other supply chain constraints;
|
|
•
|
customer acceptance of new products;
|
|
•
|
the ability of our subcontractors to timely perform;
|
|
•
|
continued weakness in the global economy affecting customer spending;
|
26
|
•
|
retention of our key personnel;
|
|
•
|
our ability to manage and maintain key customer relationships;
|
|
•
|
uncertain economic conditions in the telecommunications sector combined with operator and supplier consolidation;
|
|
•
|
our failure to protect our intellectual property rights or defend against intellectual property infringement claims by others;
|
|
•
|
the results of our restructuring efforts;
|
|
•
|
the ability to preserve and use our net operating loss carryforwards;
|
|
•
|
the effects of currency and interest rate risks;
|
|
•
|
the effects of current and future government regulations, including the effects of current restrictions on various commercial and economic activities in response to the COVID-19 pandemic;
|
|
•
|
g
eneral economic conditions, including uncertainty regarding the timing, pace and extent of an economic recovery in the United States and other countries where we conduct business;
|
|
•
|
the conduct of unethical business practices in developing countries;
|
|
•
|
the impact of political turmoil in countries where we have significant business; and
|
|
•
|
our ability to implement our stock repurchase program or that it will enhance long-term stockholder value.
|
Other factors besides those listed here also could adversely affect us. See “Item 1A. Risk Factors” in our fiscal
2019
Annual Report on Form 10-K filed with the SEC on
August 27, 2019
for more information regarding factors that may cause our 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
2020
and
2019
Results
The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes. In the discussion herein, our fiscal year ending
July 3, 2020
is referred to as “fiscal
2020
” or “
2020
” and our fiscal year ended
June 28, 2019
is referred to as “fiscal
2019
” or “
2019
.”
Overview
We anticipate our overall revenue in fiscal 2020 to be higher in North America barring any unforeseen impacts from customers budgets and timelines and the ability to execute field services, offset by lower revenue from our international regions
, compared to fiscal 2019
. This expectation is based on actual order volumes in fiscal 2019 and our observation of customer spending patterns to date during fiscal 2020. In
the first nine months of fiscal
2020,
we added to the backlog we had entering fiscal 2020 for our North America private network projects and we anticipate continuing momentum across these verticals. We have made inroads into the U.S. rural broadband and wireless internet service provider areas and there is evidence now of investment to support 5G deployments with our U.S. service provider customers. Internationally, we take a more conservative view of our revenue opportunity based on a variety of factors that have led to an overall capital spending decline and increased competitive intensity, especially from vendors based in China. While there is an attractive pipeline of international revenue opportunity, it has less clarity on timing and we are maintaining our lower international expectations with respect to fiscal 2020.
27
In March 2020, the World Health Organization characterized a recent pandemic of respiratory illness caused by novel coronavirus disease, known as COVID-19, as a pandemic. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 virus. The COVID-19 virus has had and is likely to continue to have an impact on our operations, supply chains and distribution systems and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking or requiring. The extent to which the COVID-19 pandemic impacts our business, prospects and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating activities can resume. Management is actively monitoring the impact of COVID-19 on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce.
Our first priority remains the health and safety of our employees and their families. Employees whose tasks can be done offsite have been instructed to work from home. Our manufacturing sites remain operational, and we are maintaining social distancing and have enhanced cleaning protocols and usage of personal protective equipment, where appropriate.
The impact to our supply chain lead times and ability to fulfill orders was minimal for the three months ended April 3, 2020. However, depending on pandemic-related factors like the uncertain duration of temporary manufacturing restrictions as well as our ability to perform field services during shelter in place orders, we could experience constraints and delays in fulfilling customer orders in future periods. We are monitoring, assessing and adapting to the situation and preparing for implications to our business, supply chain and customer demand. We expect these challenges to continue until business and economic activities return to more normal levels. The financial results for the three and nine months ended April 3, 2020 reflect some of the reduced activity experienced during the period in various locations around the world and are not necessary indicative of the results for the full year.
Operations Review
The market for mobile backhaul continues to be our primary addressable market segment globally in fiscal 2020. In North America, we supported long-term evolution (“LTE”) deployments of our mobile operator customers, public safety network deployments for state and local governments, and private network implementations for utilities and other customers. In international markets, our business continued to rely on a combination of customers increasing their capacity to handle subscriber growth, the ongoing build-out of some large 3G deployments, and LTE deployments. We continue to support our customers for 5G and LTE readiness and ensure that our technology roadmap is well aligned with evolving market requirements. We continue to find that our strength in turnkey and after-sale support services is a differentiating factor that wins business for us and enables us to expand our business with existing customers in all markets. However, as disclosed above and in the “Risk Factors” section in Item 1A of our fiscal
2019
Annual Report on Form 10-K, a number of factors could prevent us from achieving our objectives, including ongoing pricing pressures attributable to competition and macroeconomic conditions in the geographic markets that we service, including the ongoing effects of the COVID-19 pandemic.
Revenue
We manage our sales activities primarily on a geographic basis in North America and three international geographic regions: (1) Africa and the Middle East, (2) Europe and Russia, and (3) Latin America and Asia Pacific.
The three and nine months ended April 3, 2020 consisted of an additional week compared to the same periods of fiscal 2019.
Revenue by region for the
three and nine months ended
April 3, 2020
and
March 29, 2019
and the related changes were as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
North America
|
$
|
37,250
|
|
$
|
28,581
|
|
$
|
8,669
|
|
30.3
|
%
|
$
|
113,489
|
|
$
|
93,660
|
|
$
|
19,829
|
|
21.2
|
%
|
|||||||
|
Africa and the Middle East
|
9,230
|
|
11,079
|
|
(1,849
|
)
|
(16.7
|
)%
|
28,679
|
|
39,058
|
|
(10,379
|
)
|
(26.6
|
)%
|
|||||||||||||
|
Europe and Russia
|
1,903
|
|
3,326
|
|
(1,423
|
)
|
(42.8
|
)%
|
7,728
|
|
10,271
|
|
(2,543
|
)
|
(24.8
|
)%
|
|||||||||||||
|
Latin America and Asia Pacific
|
12,996
|
|
11,051
|
|
1,945
|
|
17.6
|
%
|
26,094
|
|
36,640
|
|
(10,546
|
)
|
(28.8
|
)%
|
|||||||||||||
|
Total revenue
|
$
|
61,379
|
|
$
|
54,037
|
|
$
|
7,342
|
|
13.6
|
%
|
$
|
175,990
|
|
$
|
179,629
|
|
$
|
(3,639
|
)
|
(2.0
|
)%
|
|||||||
Our revenue in North America
increased
by
$8.7 million
, or
30.3%
, during the
third quarter
of fiscal
2020
compared with the same period of fiscal
2019
.
Revenue in North America
increased
by
$19.8 million
, or
21.2%
, during
the first nine months
28
of fiscal
2020
compared with the same period of fiscal
2019
.
The increase in North America revenue during the three and
nine months of fiscal
2020
was due to
an increase in private network projects as well as an increase in mobile operator sales compared to fiscal
2019
.
Our revenue in Africa and the Middle East
decreased
by
$1.8 million
, or
16.7%
, for the
third quarter
of fiscal
2020
compared with the same period of fiscal
2019
. Revenue in Africa and the Middle East
decreased
by
$10.4 million
, or
26.6%
,
during
the first nine months of fiscal
2020
compared with the same period of fiscal
2019
.
The decrease in revenue was primarily due to decreased sales to our large mobile operator customers in the region.
Revenue in Europe and Russia
decreased
by
$1.4 million
, or
42.8%
, for the
third quarter
of fiscal
2020
compared with the same period of fiscal
2019
. Revenue in Europe and Russia
decreased
by
$2.5 million
, or
24.8%
,
during
the first nine months of fiscal
2020
compared with the same period of fiscal
2019
. The decrease was due to lower sales to mobile operator customers in the region.
Revenue in Latin America and Asia Pacific
increased
by
$1.9 million
, or
17.6%
, during the
third quarter
of fiscal
2020
compared with the same period of fiscal
2019
.
The increase came from additional sales to mobile customers in fiscal 2020.
Revenue in Latin America and Asia Pacific
decreased
by
$10.5 million
, or
28.8%
,
during
the first nine months of fiscal
2020
compared with the same period of fiscal
2019
. The decrease was due to
lower sales to mobile operator customers in the region.
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
Product sales
|
$
|
40,930
|
|
$
|
34,615
|
|
$
|
6,315
|
|
18.2
|
%
|
$
|
111,676
|
|
$
|
115,696
|
|
$
|
(4,020
|
)
|
(3.5
|
)%
|
|||||||
|
Services
|
20,449
|
|
19,422
|
|
1,027
|
|
5.3
|
%
|
64,314
|
|
63,933
|
|
381
|
|
0.6
|
%
|
|||||||||||||
|
Total revenue
|
$
|
61,379
|
|
$
|
54,037
|
|
$
|
7,342
|
|
13.6
|
%
|
$
|
175,990
|
|
$
|
179,629
|
|
$
|
(3,639
|
)
|
(2.0
|
)%
|
|||||||
Our revenue from product sales
increased
by
$6.3 million
, or
18.2%
, for the
third quarter
of fiscal
2020
compared with the same quarter of fiscal
2019
.
Product sales increased compared to the same period in fiscal 2019 in North America, offset in part by a small decrease in international sectors.
Our services revenue
increased
by
$1.0 million
, or
5.3%
, during the
third quarter
of fiscal
2020
compared with the same period of fiscal
2019
.
Higher North America service sales were offset in part by lower service sales in international sectors relative to fiscal 2019.
During the three months ended December 27, 2019, our product revenue was adversely impacted by a cyberattack at one of our contract manufacturing vendors, which constrained capacity by approximately three weeks and led to lower than expected results. The shortfall in product revenue related to the three months ended December 27, 2019 was recognized in the third quarter of fiscal 2020.
Our revenue from product sales
decreased
by
$4.0 million
, or
3.5%
, for
the first nine months of fiscal
2020
compared with the same period of fiscal
2019
.
Increased product sales in North America were offset by a larger volume decrease in international sectors compared to the same period in fiscal
2019
.
Our services revenue
increased
by
$0.4 million
, or
0.6%
, during
the first nine months of fiscal
2020
compared with the same period of fiscal
2019
. Increased sales in N
orth America
were offset by a decrease in international sectors
sales compared to the same period in fiscal
2019
.
Gross Margin
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
Revenue
|
$
|
61,379
|
|
$
|
54,037
|
|
$
|
7,342
|
|
13.6
|
%
|
$
|
175,990
|
|
$
|
179,629
|
|
$
|
(3,639
|
)
|
(2.0
|
)%
|
|||||||
|
Cost of revenue
|
39,418
|
|
37,782
|
|
1,636
|
|
4.3
|
%
|
113,154
|
|
122,959
|
|
(9,805
|
)
|
(8.0
|
)%
|
|||||||||||||
|
Gross margin
|
$
|
21,961
|
|
$
|
16,255
|
|
$
|
5,706
|
|
35.1
|
%
|
$
|
62,836
|
|
$
|
56,670
|
|
$
|
6,166
|
|
10.9
|
%
|
|||||||
|
% of revenue
|
35.8
|
%
|
30.1
|
%
|
35.7
|
%
|
31.5
|
%
|
|||||||||||||||||||||
|
Product margin %
|
39.7
|
%
|
31.5
|
%
|
38.7
|
%
|
33.7
|
%
|
|||||||||||||||||||||
|
Service margin %
|
27.9
|
%
|
27.6
|
%
|
30.5
|
%
|
27.6
|
%
|
|||||||||||||||||||||
Gross
margin for the
third quarter
of fiscal
2020
increased
by
$5.7 million
, or
35.1%
compared with the same quarter of fiscal
2019
. Our gross margin
increased
from the same period last year primarily due to a shift in product sales toward higher margin markets. Gross margin for
the first nine months of fiscal
2020
increased
by
$6.2 million
, or
10.9%
primarily due to a
29
higher volume of business in higher margin markets and higher margin rates for certain projects, offset in part by increased supply chain costs.
Product margin as a percentage of product revenue increased in the
third quarter
of fiscal
2020
compared with the same period of fiscal
2019
primarily due to a shift in product sales toward higher margin markets. Service margin as a percentage of service revenue increased slightly in the
third quarter
of fiscal
2020
compared with the same period in fiscal
2019
.
Product margin as a percentage of product revenue improved in
the first nine months of fiscal
2020
, compared with the same period of fiscal
2019
due to higher volume of business in higher margin markets. This increase was offset in part by increased supply chain costs. Service margin as a percentage of service revenue improved in the first nine months of fiscal 2020 compared with the same period of fiscal 2019 primarily due to higher margin rates for certain projects.
Research and Development Expenses
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
Research and development
|
$
|
4,875
|
|
$
|
5,350
|
|
$
|
(475
|
)
|
(8.9
|
)%
|
$
|
15,069
|
|
$
|
15,603
|
|
$
|
(534
|
)
|
(3.4
|
)%
|
|||||||
|
% of revenue
|
7.9
|
%
|
9.9
|
%
|
8.6
|
%
|
8.7
|
%
|
|||||||||||||||||||||
Our research and development expenses
decreased
by
$0.5 million
, or
8.9%
, in the
third quarter
of fiscal
2020
compared with the same period of fiscal
2019
.
Our research and development expenses decreased by $0.5 million, or 3.4%, for
the first nine months of fiscal
2020
compared to the same period of fiscal
2019
. These decreases were primarily due to timing and consolidation of product development activities, offset in part by payroll costs related to an extra calendar week in the three and nine months of fiscal 2020 calendar, compared to the same periods of fiscal 2019.
Selling and Administrative Expenses
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
Selling and administrative
|
$
|
15,233
|
|
$
|
13,408
|
|
$
|
1,825
|
|
13.6
|
%
|
$
|
44,334
|
|
$
|
41,405
|
|
$
|
2,929
|
|
7.1
|
%
|
|||||||
|
% of revenue
|
24.8
|
%
|
24.8
|
%
|
25.2
|
%
|
23.1
|
%
|
|||||||||||||||||||||
Our selling and administrative expenses
increased
by
$1.8 million
, or
13.6%
, in the
third quarter
of fiscal
2020
compared with the same period in fiscal
2019
. Our selling and administrative expenses
increased
by
$2.9 million
, or
7.1%
, in
the first nine months of fiscal
2020
compared with the same period in fiscal
2019
.
These increases were primarily related to payroll costs related to an extra calendar week in the three and nine months of fiscal 2020 calendar, higher variable compensation and other legal-related costs, compared to the same periods of fiscal 2019.
Restructuring Charges
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
Restructuring charges
|
$
|
617
|
|
$
|
—
|
|
$
|
617
|
|
—
|
%
|
$
|
2,175
|
|
$
|
796
|
|
$
|
1,379
|
|
173.2
|
%
|
|||||||
During the third quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q3 2020 Plan”) in order to continue to reduce its operating costs and improve profitability to optimize its business model and increase efficiencies. We recorded restructuring charges of $0.6 million related to the Q3 2020 Plan in the third quarter of fiscal 2020. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2021.
During the fourth quarter of fiscal 2019, our Board of Directors approved a restructuring plan (the “Fiscal 2020 Plan”) to primarily consolidate product development and, right size our resources to support our international business and other support functions. We recorded restructuring charges of $1.7 million related to the Fiscal 2020 Plan in the nine months ended April 3, 2020. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2021.
30
Interest Income, Interest Expense and Other (Expense) Income, Net
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
Interest income
|
$
|
112
|
|
$
|
73
|
|
$
|
39
|
|
53.4
|
%
|
$
|
318
|
|
$
|
167
|
|
$
|
151
|
|
90.4
|
%
|
|||||||
|
Interest expense
|
$
|
(19
|
)
|
$
|
(7
|
)
|
$
|
(12
|
)
|
171.4
|
%
|
$
|
(23
|
)
|
$
|
(88
|
)
|
$
|
65
|
|
(73.9
|
)%
|
|||||||
|
Other (expense) income, net
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
1
|
|
—
|
%
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
1
|
|
—
|
%
|
|||||||
Interest income reflected interest earned on our cash equivalents which were comprised of money market funds and bank certificates of deposit.
Interest expense was primarily related to interest associated with borrowings under the SVB Credit Facility.
Income Taxes
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
|
(In thousands, except percentages)
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
April 3, 2020
|
March 29, 2019
|
$ Change
|
% Change
|
|||||||||||||||||||||
|
Income (loss) before income taxes
|
$
|
1,329
|
|
$
|
(2,438
|
)
|
$
|
3,767
|
|
(154.5
|
)%
|
$
|
1,553
|
|
$
|
(1,056
|
)
|
$
|
2,609
|
|
(247.1
|
)%
|
|||||||
|
Provision for (benefit from) income taxes
|
$
|
598
|
|
$
|
(6,777
|
)
|
$
|
7,375
|
|
(108.8
|
)%
|
$
|
2,439
|
|
$
|
(6,955
|
)
|
$
|
9,394
|
|
(135.1
|
)%
|
|||||||
We estimate our annual effective tax rate at the end of each quarterly period, and we record 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 expense for
the first nine months of fiscal
2020
was primarily due to tax expense related to profitable subsidiaries and a $0.4 million increase in our reserves for uncertain tax positions. During the first quarter of fiscal 2019, we recorded a net discrete tax benefit of
$1.6 million
for the release of valuation allowance on a deferred tax asset recorded for $1.9 million of refundable withholding tax credit to be received from the Department of Federal Revenue of Brazil, less tax expense of $0.3 million from recognizing an ASC 740-10 reserve previously recorded as a reduction against the deferred tax for the withholding tax credit.
We continue to record a partial valuation allowance on our U.S. deferred tax assets which primarily represent future income tax benefits associated with our operating losses. Realization of our deferred tax assets is dependent on generating sufficient pre-tax book income in future periods. Although we believe it is more likely than not that future income will be sufficient to allow us to recover the value of a portion of our U.S. deferred tax assets, realization is not assured and future events could cause us to change our judgment. If future events cause us to conclude that it is not more likely than not that we will be able to recover more or less of the current anticipated portion of deferred tax assets, we would be required to either decrease or increase the valuation allowance on our deferred tax assets at that time, which would result in a charge to income tax expense (benefit) and a material increase or decrease in net income in the period in which we change our judgment. During the
third quarter
of fiscal
2020
, we did not record any adjustment to valuation allowance on our U.S. deferred tax assets.
Liquidity, Capital Resources, and Financial Strategies
Sources of Cash
As of
April 3, 2020
, our total cash and cash equivalents were
$39.2 million
. Approximately
$21.4 million
, or
54.6%
, was held in the United States. The remaining balance of
$17.8 million
, or
45.4%
, was held by entities outside the United States. Of the amount of cash and cash equivalents held by our foreign subsidiaries at
April 3, 2020
,
$17.4 million
was held in jurisdictions where our undistributed earnings are indefinitely reinvested, and if repatriated, would be subject to foreign withholding taxes.
Operating Activities
Cash provided by or used in operating activities is presented as net (loss) income adjusted for non-cash items and changes in operating assets and liabilities. Net cash provided by operating activities was
$14.6 million
for
the first nine months of fiscal
2020
, compared to cash used in operating activities of
$5.3 million
for
the first nine months of fiscal
2019
; this difference was primarily related to a net change in deferred tax expense. The net contribution of non-cash items decreased cash by
$6.8 million
31
and net changes in operating assets and liabilities increased cash by
$9.3 million
for
the first nine months of fiscal
2020
as compared to the same period in fiscal
2019
.
Changes in operating assets and liabilities resulted in a net increase of
$9.3 million
to cash for
the first nine months of fiscal
2020
, compared to the same period in
2019
. Accounts receivable and unbilled costs fluctuate from period to period, depending on the amount, timing of sales and billing activities and cash collections. The fluctuations in accounts payable and accrued expenses were primarily due to the timing of liabilities incurred and
managing timing of
vendor payments. The change in inventories and in customer service inventories were primarily due to demand and our focus on inventory management. The increase in customer advance payments and unearned revenue was due to the timing of payment from customers and revenue recognition. We used
$1.7 million
in cash during
the first nine months of fiscal
2020
on expenses related to restructuring liabilities.
Investing Activities
Net cash used in investing activities was
$3.9 million
and
$4.1 million
for
the first nine months of fiscal
2020
and
2019
, respectively, which consisted of capital expenditures. During the remainder of fiscal year
2020
, we expect to spend approximately
$1.4 million
for capital expenditures, primarily on equipment for development and manufacturing of new products and to support customer managed services.
Financing Activities
Financing cash flows consist primarily of proceeds and repayments of short-term debt, repurchase of stock and proceeds
from sale of share of common stock through employee equity plans.
Net cash used in financing activities was
$2.5 million
for
the first nine months of fiscal
2020
, primarily due to
$1.8 million
for repurchases of our common stock and a
$0.8 million
payment for taxes related to the net settlement of equity awards.
As of
April 3, 2020
, our principal sources of liquidity consisted of
$39.2 million
in cash and cash equivalents;
$14.5 million
of available credit under our
$25.0 million
SVB Credit Facility and future collections of receivables from customers. On May 4, 2020, we entered into Amendment No. 3 to Third Amended and Restated Loan and Security Agreement which extended the expiration date to June 28, 2021. We regularly require 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 our credit and sovereign risk. Historically, our primary sources of liquidity have been cash flows from operations and credit facilities.
We believe that our existing cash and cash equivalents, the available line of credit under the SVB Credit Facility, and future cash collections from customers will be sufficient to provide for our anticipated requirements for working capital and capital expenditures for at least the next 12 months. On May 4, 2020, we entered into Amendment No. 3 to Third Amended and Restated Loan and Security Agreement which extended the expiration date to June 28, 2021. In addition, there can be no assurance that our business will generate cash flow from operations, that we will be in compliance with the quarterly financial covenants contained in the SVB Credit Facility, that we will have a sufficient borrowing base under such facility, or that anticipated operational improvements will be achieved. If we are not in compliance with the financial covenants or do not have sufficient eligible accounts receivable to support our borrowing base,
our borrowing base under the SVB Credit Facility
may be diminished. Over the longer term, if we are unable to maintain cash balances or generate sufficient cash flow from operations to service our obligations that may arise in the future, we may be required to sell assets, reduce capital expenditures, or obtain financing. If we need to obtain additional financing, we cannot be assured that it will be available on favorable terms, or at all. Our ability to make scheduled principal payments or pay interest on or refinance any future indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the microwave communications market and to general economic, political, financial, competitive, legislative, and regulatory factors beyond our control such as COVID-19.
As of
April 3, 2020
, we were in compliance with the quarterly financial covenants, as amended, contained in the SVB Credit Facility. The
$9.0 million
borrowing was classified as a current liability as of
April 3, 2020
and
June 28, 2019
.
In addition, we have an uncommitted short-term line of credit of
$0.3 million
from a bank in New Zealand to support the operations of our subsidiary located there. This line of credit provides for
$0.2 million
in short-term advances at various interest rates, all of which was available as of
April 3, 2020
and
June 28, 2019
. The line of credit also provides for the issuance of standby letters of credit and company credit cards, of which
$0.1 million
was outstanding as of
April 3, 2020
. This facility may be terminated upon notice, is reviewed annually for renewal or modification, and is supported by a corporate guarantee.
32
Restructuring Payments
We had liabilities for restructuring activities totaling
$1.8 million
as of
April 3, 2020
,
$1.5 million
of which was classified as current liabilities and expected to be paid out in cash over the next 12 months. We expect to fund these future payments with available cash and cash provided by operations.
Contractual Obligations
The amounts disclosed in our fiscal
2019
Annual Report on Form 10-K filed with the SEC on
August 27, 2019
include our commercial commitments and contractual obligations. During
the first nine months of fiscal
2020
, no material changes occurred in our contractual obligations to purchase goods and services or to make payments under operating leases or our contingent liabilities on outstanding letters of credit, guarantees, and other arrangements as disclosed in our fiscal
2019
Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of
April 3, 2020
, we had commercial commitments of
$57.7 million
.
Please refer to “Note 12 Commitments and Contingencies” of the Notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for Contractual Obligations and Off-Balance Sheet Arrangements.
Critical Accounting Estimates
For information about our 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 our fiscal
2019
Annual Report on Form 10-K other than for the impact of adopting new lease accounting standards.
Please refer to “Note 4 Leases” of the Notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates. We employ established policies and procedures governing the use of financial instruments to manage our exposure to such risks.
Exchange Rate Risk
We conduct business globally in numerous currencies and are therefore exposed to foreign currency risks. We use derivative instruments to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. We do not hold or issue derivatives for trading purposes or make speculative investments in foreign currencies.
We use foreign exchange forward contracts to hedge forecasted foreign currency transactions relating to forecasted sales and purchase transactions. Beginning the fourth quarter of fiscal 2015, we no longer prepared contemporaneous documentation of hedges for the new foreign exchange forward contracts we entered. As a result, the foreign exchange hedges no longer qualified as cash flow hedges. The changes in fair value related to the hedges were recorded in income or expenses line items on our statements of operations.
We also enter 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.
33
As of
April 3, 2020
, we had four foreign currency forward contracts outstanding as follows:
|
Currency
|
Notional Contract Amount (Local Currency)
|
Notional Contract Amount (USD)
|
|||||
|
(In thousands)
|
|||||||
|
Canadian dollar
|
600
|
|
$
|
440
|
|
||
|
Euro
|
3,028
|
|
3,358
|
|
|||
|
New Zealand dollar
|
5,000
|
|
3,206
|
|
|||
|
Singapore dollar
|
1,200
|
|
860
|
|
|||
|
Total of all currency forward contracts
|
$
|
7,864
|
|
||||
Net foreign exchange (income) loss, net
recorded in our unaudited condensed consolidated statements of operations during the
three and nine months ended
April 3, 2020
and
March 29, 2019
was as follows:
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||
|
(In thousands)
|
April 3,
2020 |
March 29,
2019 |
April 3,
2020 |
March 29,
2019 |
|||||||||||
|
Amount included in costs of revenues
|
$
|
(534
|
)
|
$
|
22
|
|
$
|
(478
|
)
|
$
|
193
|
|
|||
Certain of our international business is transacted in non-U.S. dollar currency. As discussed above, we utilize foreign currency hedging instruments to minimize the currency risk of international transactions. The impact of translating the assets and liabilities of foreign operations to U.S. dollars for
the first nine months of fiscal
2020
and 2019
were
$2.5 million
and
$0.4 million
, respectively, was included as a component of stockholders’ equity. As of
April 3, 2020
and
June 28, 2019
, the cumulative translation adjustment decreased our equity by
$15.2 million
and
$12.7 million
, respectively.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents and borrowings under our credit facility.
Exposure on Cash Equivalents
We had
$39.2 million
in total cash and cash equivalents as of
April 3, 2020
. Cash equivalents totaled
$24.7 million
as of
April 3, 2020
and were comprised of money market funds and bank certificates of deposit. Cash equivalents investments have been recorded at fair value on our balance sheet.
Our 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
April 3, 2020
was
37.7
days, and these investments had an average yield of approximately
5.98%
per annum. A 10% change in interest rates on our cash equivalents is not expected to have a material impact on our financial position, results of operations, or cash flows.
Exposure on Borrowings
Our borrowings outstanding under the SVB Credit Facility incurred interest at the prime rate plus a spread of
0.50%
to
1.50%
with such spread determined based on our adjusted quick ratio. During
the first nine months of fiscal
2020
, our weighted-average interest rate was
4.24%
, and the interest expense on these borrowings was insignificant.
A 10% change in interest rates on the current borrowings or on future borrowings is not expected to have a material impact on our financial position, results of operations, or cash flows since interest on our borrowings is not material to our overall financial position.
34
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on management’s evaluation, with participation of our President and
Chief Executive Officer (“CEO”), and Chief Financial officer (“CFO”)
, as of the end of the period covered by this report, our CEO and CFO has concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of
April 3, 2020
, are effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and is accumulated and communicated to management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Controls over Financial Reporting
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
April 3, 2020
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our 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.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to Legal Proceedings under “Note 12 Commitments and Contingencies” of the Notes to unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
The recent COVID-19 pandemic and related economic repercussions have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic could have a material adverse effect on our business, liquidity, consolidated results of operations and consolidated financial condition.
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in all industries around the world. These events have directly affected our business and have exacerbated the potential negative impact from many of the risks described in our Form 10-K for the year ended June 28, 2019, including those relating to the global economy, our sales cycle, our global supply chain, and our employees. For example, we are facing logistical challenges including border closures, travel restrictions and an inability to commute to certain facilities and job sites, as we provide services and products to our customers. We are also experiencing inefficiencies surrounding stay-at-home orders and remote work arrangements.
Given the nature and significance of the events described above, we are not able to enumerate all potential risks to our business; however, we believe that in addition to the impacts described above, other current and potential impacts of these recent events include, but are not limited to:
|
•
|
disruption to our supply chain for certain components essential to our business, including restrictions on importing and exporting products;
|
|
•
|
liquidity challenges, including impacts related to delayed customer payments;
|
|
•
|
cybersecurity issues, as digital technologies may become more vulnerable and experience a higher rate of cyberattacks in the current environment of remote connectivity;
|
|
•
|
litigation risk and possible loss contingencies related to COVID-19 and its impact, including with respect to commercial contracts, employee matters and insurance arrangements;
|
|
•
|
reduction of our global workforce to adjust to market conditions, including severance payments, retention issues, and an inability to hire employees when market conditions improve;
|
|
•
|
infections and quarantining of our employees and the personnel of our customers, suppliers and other third parties in areas in which we operate;
|
|
•
|
actions undertaken by national, regional and local governments and health officials to contain the virus or treat its effects; and
|
|
•
|
a structural shift in the global economy and changes in the way people work, travel and interact, or in connection with a global recession or depression.
|
The combination of events described above have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic could have a material adverse effect on our business, liquidity, consolidated results of operations and consolidated financial condition. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Overview of Business; Operating Environment and Key Factors Impacting Fiscal 2020 and 2019 Results
.”
Investors should also 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
2019
Annual Report on Form 10-K filed with the SEC on
August 27, 2019
.
We do not believe that there have been any other material additions or changes to the risk factors previously disclosed in our fiscal
2019
Annual Report on Form 10-K, except as disclosed as above, although we may disclose changes to such factors
36
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
Following is a summary of stock repurchases for the three months ended
April 3, 2020
:
|
Period
|
Total Number of Shares Repurchased
|
Average Price Paid per Share
|
Total Number of Shares Repurchased as Part of Publicly Announced Program
|
Approximate Dollar Value of Shares that May Yet be Repurchased Under the Program
(1)
(in thousands)
|
||||||||||
|
December 28, 2019 through January 24, 2020
|
17,197
|
|
$
|
14.20
|
|
17,197
|
|
$
|
3,541
|
|
||||
|
January 25, 2020 through February 28, 2020
|
9,287
|
|
$
|
13.72
|
|
9,287
|
|
$
|
3,414
|
|
||||
|
February 29, 2020 through April 3, 2020
|
—
|
|
$
|
—
|
|
—
|
|
$
|
3,414
|
|
||||
|
Total
|
26,484
|
|
||||||||||||
(1)
Stock Repurchase Programs
In
May 2018
, our board of directors approved a stock repurchase program, which does not have an expiration date, for the repurchase of up to
$7.5 million
of our common stock. During the
three months ended
April 3, 2020
, we repurchased
$0.4 million
of our common stock in the open market. As of
April 3, 2020
,
$3.4 million
remained available under our stock repurchase program. In February 2020, we suspended the stock repurchase program.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
37
Item 6. Exhibits
The following exhibits are filed herewith or incorporated by reference to exhibits previously filed with the SEC:
|
Exhibit Number
|
Descriptions
|
|
|
2.1
|
||
|
3.1
|
||
|
3.2
|
||
|
3.3
|
||
|
4.1
|
||
|
4.2+
|
||
|
10.1+
|
||
|
31.1*
|
||
|
31.2*
|
||
|
32.1**
|
||
|
101.INS
|
XBRL Instance Document
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
*
|
Filed herewith.
|
|
|
**
|
Furnished herewith.
|
|
|
+
|
Constitutes management contracts or compensatory plans or arrangements.
|
|
38
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:
May 12, 2020
|
By:
|
/s/ Eric Chang
|
|
Eric Chang
Chief Financial Officer (duly authorized officer)
|
|
39
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. The Company and Basis Of PresentationNote 2. Net Income (loss) Per Share Of Common StockNote 3. Revenue RecognitionNote 4. LeasesNote 5. Balance Sheet ComponentsNote 6. Fair Value Measurements Of Assets and LiabilitiesNote 7. Credit Facility and DebtNote 8. Restructuring ActivitiesNote 9. EquityNote 10. Segment and Geographic InformationNote 11. Income TaxesNote 12. Commitments and ContingenciesNote 13. Subsequent EventItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits