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. 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 months ended October 1, 2021 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 the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2021.
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 three months ended October 1, 2021 and the three months ended October 2, 2020 both consisted of 13 weeks. Fiscal year 2022 will be comprised of 52 weeks and will end on July 1, 2022. Fiscal 2021 was comprised of 52 weeks and ended on July 2, 2021.
Stock Split
On April 7, 2021 we effected a two-for-one split in the form of a stock dividend to shareholders of record as of April 1, 2021. Common stock, Additional paid-in-capital, per share and equity award amounts for all periods presented have been retrospectively reclassified to reflect the two-for-one stock split in the form of a stock dividend.
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 doubtful accounts, inventory valuation, valuation allowances for deferred tax assets, uncertainties in income taxes, contingencies and recoverability of long-lived assets. 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 October 1, 2021 and for the three months ended October 1, 2021, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 2, 2021.
Accounting Standards Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 of goodwill, separate entity financial statements and interim recognition of enactment of tax laws and rate changes. ASU 2019-12 became effective for us in our first quarter of fiscal 2022. 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 is effective March 12, 2020 through December 31, 2022. We are evaluating the potential impact ASU 2020-04 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, 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. Balance Sheet Components
Cash, Cash Equivalents, and Restricted Cash
The following table provides a summary of the 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)
|
October 1,
2021
|
|
July 2,
2021
|
Cash and cash equivalents
|
$
|
47,313
|
|
|
$
|
47,942
|
|
|
|
|
|
Restricted cash included in other assets
|
227
|
|
|
256
|
|
Total cash, cash equivalents, and restricted cash in the Statement of Cash Flows
|
$
|
47,540
|
|
|
$
|
48,198
|
|
Accounts Receivable, net
Our net accounts receivable are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
October 1,
2021
|
|
July 2,
2021
|
Accounts receivable
|
$
|
61,184
|
|
|
$
|
50,276
|
|
Less: Allowances for doubtful accounts
|
(1,746)
|
|
|
(2,141)
|
|
Total accounts receivable, net
|
$
|
59,438
|
|
|
$
|
48,135
|
|
Inventories
Our inventories are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
October 1,
2021
|
|
July 2,
2021
|
Finished products
|
$
|
16,337
|
|
|
$
|
15,409
|
|
|
|
|
|
Raw materials and supplies
|
7,311
|
|
|
8,027
|
|
Total inventories
|
$
|
23,648
|
|
|
$
|
23,436
|
|
|
|
|
|
Consigned inventories included within raw materials and supplies
|
$
|
6,344
|
|
|
$
|
6,570
|
|
We currently rely on a few vendors for substantially all of our inventory purchases.
We record charges to adjust our inventory and customer service inventory due to excess and obsolete inventory resulting from lower sales forecasts, product transitioning, or discontinuance. The charges during the three months ended October 1, 2021 and October 2, 2020 were classified in cost of product sales as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(In thousands)
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
Excess and obsolete inventory charges
|
$
|
133
|
|
|
$
|
63
|
|
|
|
|
|
Customer service inventory write-downs
|
248
|
|
|
122
|
|
|
|
|
|
Total inventory charges
|
$
|
381
|
|
|
$
|
185
|
|
|
|
|
|
Assets Held for Sale
We consider properties to be Assets held for sale when management approves and commits to a plan to dispose of a property or group of properties. The property held for sale prior to the sale date is separately presented on the balance sheet as Assets held for sale.
During the second quarter of fiscal 2021 management initiated the sale of our facility located in the United Kingdom. We expect to complete the sale by the end of our second fiscal 2022 quarter. The carrying value of this asset held for sale as of October 1, 2021 was $2.2 million, which represents the lower of 1) the carrying value or 2) the fair value of the asset, less estimated costs to sell the asset. We performed an analysis and determined the estimated fair value of the asset, less estimated selling costs, is higher than the carrying value of the asset. As a result, no impairment charge was recorded in our statement of operations.
Property, Plant and Equipment, net
Our property, plant and equipment, net are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
October 1,
2021
|
|
July 2,
2021
|
Land
|
$
|
210
|
|
|
$
|
210
|
|
Buildings and leasehold improvements
|
6,917
|
|
|
6,914
|
|
Software
|
21,368
|
|
|
21,370
|
|
Machinery and equipment
|
51,329
|
|
|
51,244
|
|
Total property, plant and equipment, gross
|
79,824
|
|
|
79,738
|
|
Less: Accumulated depreciation and amortization
|
(69,148)
|
|
|
(68,037)
|
|
Total property, plant and equipment, net
|
$
|
10,676
|
|
|
$
|
11,701
|
|
Included in the total plant, property and equipment above were $0.4 million and $0.3 million of assets in progress which have not been placed in service as of October 1, 2021 and July 2, 2021, 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
|
|
|
(In thousands)
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
Depreciation and amortization
|
$
|
1,264
|
|
|
$
|
1,254
|
|
|
|
|
|
Accrued Expenses
Our accrued expenses are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
October 1,
2021
|
|
July 2,
2021
|
Accrued compensation and benefits
|
$
|
8,175
|
|
|
$
|
13,455
|
|
Accrued agent commissions
|
2,133
|
|
|
2,348
|
|
Accrued warranties
|
3,318
|
|
|
3,228
|
|
Other
|
11,124
|
|
|
9,123
|
|
Total accrued expenses
|
$
|
24,750
|
|
|
$
|
28,154
|
|
Accrued Warranties
We accrue for the estimated cost to repair or replace products under warranty. Changes in our warranty liability, which are included as a component of accrued expenses in our unaudited condensed consolidated balance sheets, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(In thousands)
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
Balance as of the beginning of the period
|
$
|
3,228
|
|
|
$
|
3,196
|
|
|
|
|
|
Warranty provision recorded during the period
|
498
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumption during the period
|
(408)
|
|
|
(373)
|
|
|
|
|
|
Balance as of the end of the period
|
$
|
3,318
|
|
|
$
|
3,107
|
|
|
|
|
|
Advance Payments and Unearned Revenue
Our advance payments and unearned revenue are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
October 1,
2021
|
|
July 2,
2021
|
Advance payments
|
$
|
1,278
|
|
|
$
|
2,445
|
|
Unearned revenue
|
34,205
|
|
|
29,859
|
|
Total advance payments and unearned revenue
|
$
|
35,483
|
|
|
$
|
32,304
|
|
Excluded from the balances above are $8.5 million and $8.6 million in long-term unearned revenue as of October 1, 2021 and July 2, 2021, respectively.
Note 3. 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. We did not have any fair value measurements of liabilities to disclose. 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 measured at fair value on a recurring basis as of October 1, 2021 and July 2, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2021
|
|
July 2, 2021
|
|
Valuation Inputs
|
(In thousands)
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
17,602
|
|
|
$
|
17,602
|
|
|
$
|
26,847
|
|
|
$
|
26,847
|
|
|
Level 1
|
Bank certificates of deposit
|
$
|
3,009
|
|
|
$
|
3,009
|
|
|
$
|
3,288
|
|
|
$
|
3,288
|
|
|
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 October 1, 2021 and July 2, 2021, 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 are classified within Level 2.
As of October 1, 2021 and July 2, 2021, we did not have any recurring assets that were valued using significant unobservable inputs.
Our policy is to recognize asset 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 three months of fiscal 2022 and 2021, we had no transfers between levels of the fair value hierarchy of our assets measured at fair value.
Note 4. Leases
The Company has 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.
We determine if an arrangement contains a lease at inception. These operating leases are included in "Right of use assets" on our unaudited condensed consolidated balance sheets and represent our right to use the underlying asset for the lease term. Our obligations to make lease payments are included in "Short-term lease liabilities" and "Long-term lease liabilities" on our unaudited condensed consolidated balance sheets. We did not enter into any finance leases during the three months ended October 1, 2021.
The following summarizes our lease costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
October 1,
2021
|
|
October 2, 2020
|
|
|
|
|
|
|
(In thousands)
|
|
|
Operating lease costs
|
|
$
|
317
|
|
|
$
|
313
|
|
|
|
|
|
Short-term lease costs
|
|
687
|
|
|
458
|
|
|
|
|
|
Variable lease costs
|
|
27
|
|
|
68
|
|
|
|
|
|
Total lease costs
|
|
$
|
1,031
|
|
|
$
|
839
|
|
|
|
|
|
The following summarizes our lease term and discount rate for the three months ended October 1, 2021:
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
7.93
|
Weighted average discount rate
|
|
5.7
|
%
|
|
|
|
As of October 1, 2021, 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 2022
|
|
$
|
668
|
|
2023
|
|
713
|
|
2024
|
|
596
|
|
2025
|
|
615
|
|
2026
|
|
555
|
|
Thereafter
|
|
1,708
|
|
Total lease payments
|
|
4,855
|
|
Less: interest
|
|
(1,163)
|
|
Present value of lease liabilities
|
|
$
|
3,692
|
|
Note 5. Credit Facility and Debt
On May 17, 2021, we entered into Amendment No. 4 to Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank (the “SVB Credit Facility”) which extended the expiration date to June 28, 2024. 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 U.S. and Singapore entities. 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 October 1, 2021, available credit under the SVB Credit Facility was $22.5 million, reflecting the lower available limit of $25.0 million less outstanding letters of credit of $2.5 million. We did not borrow against the SVB Credit Facility during the first quarter of fiscal 2022 and there was no borrowing outstanding as of October 1, 2021 or July 2, 2021.
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.
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 October 1, 2021, we were in compliance with the quarterly financial covenants contained in the SVB Credit Facility, as amended.
We also obtained an uncommitted short-term line of credit of $0.4 million from a bank in New Zealand to support the operations of our New Zealand subsidiary. This line of credit provides for up to $0.3 million in short-term advances at various interest rates, all of which was available as of October 1, 2021 and July 2, 2021. 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 October 1, 2021 and July 2, 2021. This line of credit may be terminated upon notice, is reviewed annually for renewal or modification, and is supported by a corporate guarantee.
Note 6. Revenue Recognition
Contract Balances, Performance Obligations, and Backlog
The following table provides information about receivables and liabilities from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2021
|
|
July 2, 2021
|
Contract Assets
|
|
|
|
|
Accounts receivable, net
|
|
$
|
59,438
|
|
|
$
|
48,135
|
|
Unbilled receivables
|
|
$
|
39,667
|
|
|
$
|
37,521
|
|
Capitalized commissions
|
|
$
|
1,571
|
|
|
$
|
1,720
|
|
Contract Liabilities
|
|
|
|
|
Advance payments and unearned revenue
|
|
$
|
35,483
|
|
|
$
|
32,304
|
|
Unearned revenue, long-term
|
|
$
|
8,496
|
|
|
$
|
8,592
|
|
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 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 October 1, 2021, we had $44.0 million in advance payments and unearned revenue and long-term unearned revenue, of which approximately 45% is expected to be recognized as revenue in the remainder of fiscal 2022 and the balance thereafter. During the three months ended October 1, 2021 we recognized $6.9 million of 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 $82.0 million at October 1, 2021. Of this amount, we expect to recognize approximately 70% as revenue during the next 12 months, with the remaining amount to be recognized as revenue within two to five years.
Note 7. 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. Our financial performance is regularly reviewed by our chief operating decision maker who is our Chief Executive Officer (“CEO”).
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 months ended October 1, 2021 and October 2, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(In thousands)
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
North America
|
$
|
50,937
|
|
|
$
|
45,499
|
|
|
|
|
|
Africa and the Middle East
|
10,702
|
|
|
10,571
|
|
|
|
|
|
Europe and Russia
|
2,703
|
|
|
2,262
|
|
|
|
|
|
Latin America and Asia Pacific
|
8,816
|
|
|
7,958
|
|
|
|
|
|
Total revenue
|
$
|
73,158
|
|
|
$
|
66,290
|
|
|
|
|
|
The loss of a significant portion of business from any significant customers could adversely affect our unaudited condensed consolidated financial statements.
Customers accounting for 10% or more of our total revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motorola Solutions, Inc.
|
|
15
|
%
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Less than 10.0%
Customers accounting for 10% or more of our accounts receivable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2021
|
|
July 2, 2021
|
Motorola Solutions, Inc.
|
|
13
|
%
|
|
*
|
Mobile Telephone Networks Group (MTN Group)
|
|
10
|
%
|
|
14
|
%
|
*Less than 10.0%
Note 8. 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.
As of October 1, 2021, $1.9 million remained available under our stock repurchase program. The repurchase program was suspended temporarily from February 2020 to February 2021. During the first quarter of fiscal 2022, we repurchased 22,543 shares of our common stock in the open market for an aggregate purchase price, including commissions, of $0.7 million. These shares were recorded as treasury stock and we do not anticipate retiring them. Treasury stock did not participate in the two-for-one stock split in the form of a stock dividend paid on April 7, 2021.
Stock Incentive Programs
As of October 1, 2021, we had one stock incentive plan for our employees and non-employee directors, the 2018 Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of share-based awards in the form of stock options, stock appreciation rights, restricted stock awards and units, and performance share awards and units.
Under the 2018 Plan, option exercise prices are equal to the fair market value of our common stock on the date the options are granted using our closing stock price. After vesting, options generally may be exercised within seven years after the date of grant.
Restricted stock units are not transferable until vested and the restrictions lapse upon the achievement of continued employment or service over a specified time period. Restricted stock units issued to employees generally vest three years from the date of grant (three-year cliff or annually over three years). Restricted stock units issued to non-executive board members annually generally vest on the day before the annual stockholders’ meeting.
Vesting of performance share awards and units is subject to the achievement of predetermined financial performance criteria and continued employment through the end of the applicable period. Market-based stock units vest upon meeting certain predetermined share price performance criteria and continued employment through the end of the applicable period.
During the three months ended October 1, 2021, we granted 46,533 restricted stock units, 46,533 market-based stock units and 114,012 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
|
|
|
(In thousands)
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
By Expense Category:
|
|
|
|
|
|
|
|
Cost of revenues
|
$
|
68
|
|
|
$
|
72
|
|
|
|
|
|
Research and development
|
76
|
|
|
40
|
|
|
|
|
|
Selling and administrative
|
719
|
|
|
459
|
|
|
|
|
|
Total share-based compensation expense
|
$
|
863
|
|
|
$
|
571
|
|
|
|
|
|
By Types of Award:
|
|
|
|
|
|
|
|
Options
|
$
|
174
|
|
|
$
|
167
|
|
|
|
|
|
Restricted and performance stock awards and units
|
689
|
|
|
404
|
|
|
|
|
|
Total share-based compensation expense
|
$
|
863
|
|
|
$
|
571
|
|
|
|
|
|
As of October 1, 2021, there was approximately $1.6 million of total unrecognized compensation expense related to non-vested stock options granted which is expected to be recognized over a weighted-average period of 1.8 years. As of October 1, 2021, there was $6.0 million of total unrecognized compensation expense related to non-vested stock awards which is expected to be recognized over a weighted-average period of 1.7 years.
Note 9. Restructuring Activities
The following table summarizes our restructuring-related activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Benefits
|
|
Facilities and Other
|
|
Total
|
(In thousands)
|
|
Fiscal 2021 Plan
|
|
Q4 2020 Plan
|
|
Prior Years' Plan
|
|
Prior Years’ plan
|
|
|
Accrual balance, July 2, 2021
|
|
2,209
|
|
|
$
|
216
|
|
|
$
|
64
|
|
|
$
|
248
|
|
|
$
|
2,737
|
|
Charges
|
|
628
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
659
|
|
Cash payments
|
|
(326)
|
|
|
(49)
|
|
|
—
|
|
|
—
|
|
|
(375)
|
|
Foreign exchange impact
|
|
(7)
|
|
|
—
|
|
|
—
|
|
|
(6)
|
|
|
(13)
|
|
Accrual balance, October 1, 2021
|
|
$
|
2,504
|
|
|
$
|
198
|
|
|
$
|
64
|
|
|
$
|
242
|
|
|
$
|
3,008
|
|
As of October 1, 2021, the accrual balance of $3.0 million was in short-term restructuring liabilities on our unaudited condensed consolidated balance sheets.
Fiscal 2021 Plan
During the third and fourth quarter of fiscal 2021, our Board of Directors approved a restructuring plan (the “Fiscal 2021 Plan”) to continue to reduce our operating costs and improve profitability. Payments related to the accrued restructuring balances for this plan are expected to be fully paid in fiscal 2022.
Q4 2020 Plan
During the fourth quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q4 2020 Plan”) in order to continue to reduce our operating costs and improve profitability to optimize our business model and increase efficiencies. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2022.
Prior Years’ Plan
In January 2018, we reached a settlement with a certain foreign government for grant liabilities which allowed us to reduce our estimated payments relating to prior years’ restructuring plan by $0.3 million. During the third quarter of fiscal 2015, with the intent to bring our operational cost structure in line with the changing dynamics of the microwave radio and telecommunications markets, we initiated a restructuring plan (the “Fiscal 2015-2016 Plan”) to lower fixed overhead costs and operating expenses and to preserve cash flow. Activities under the Fiscal 2015-2016 Plan primarily included reductions in workforce across the Company, but primarily in operations outside the United States. Payments related to the accrued restructuring liability balance for this plan are expected to be paid in fiscal 2022.
Note 10. Income Taxes
Our effective tax rate varies from the U.S. federal statutory rate of 21% primarily due to results of foreign operations that are subject to income taxes at different statutory rates and certain jurisdictions where we cannot recognize tax benefit on current losses. During interim periods, we accrue tax expenses for jurisdictions that are anticipated to be profitable for fiscal 2022.
The determination of our income taxes for the three months ended October 1, 2021 and October 2, 2020 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 benefit for the three months ended October 1, 2021 was primarily due to tax expense related to U.S. and profitable subsidiaries. The tax expense for the three months ended October 2, 2020 was primarily due to tax expense related to profitable subsidiaries.
We entered into a tax sharing agreement with Harris Corporation (“Harris”) effective on January 26, 2007, the acquisition date of Stratex Networks, Inc. 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. To the extent we become more profitable in the U.S. in the future and utilize these tax attributes, we may be required to make certain payments to Harris which are currently not estimable.
We have a number of open income tax audits covering various tax years, which vary from jurisdiction to jurisdiction. Our major tax jurisdictions that are open and subject to potential audits include the U.S., Singapore, Nigeria, Saudi Arabia and the Ivory Coast. The earliest years for these jurisdictions are as follows: U.S. - 2003; Singapore - 2015; Nigeria - 2006; Saudi Arabia - 2019, and Ivory Coast - 2017.
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 months ending October 1, 2021 and October 2, 2020.
On December 27, 2020, the U.S. enacted the Consolidated Appropriations Act of 2021 (“CAA”) which extended and expanded certain tax relief measures created by the CARES Act, including, but not limited to, (1) second round of Payroll Protection Program loans, and (2) the Employer Retention Credit for 2021.
On March 11, 2021, the U.S. enacted the American Rescue Plan Act of 2021 (“ARPA”) which expands Section 162(m) to cover the next five most highly compensated employees for the taxable year, in addition to the “covered employees” effective for taxable years beginning after December 31, 2026. We continue to examine the elements of the CAA and ARPA and the impact they may have on our future business.
Note 11. Net Income Per Share of Common Stock
Net income 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.
On April 7, 2021 we effected a two-for-one split in the form of a stock dividend to shareholders of record as of April 1, 2021. Common stock, Additional paid-in-capital, per share and equity award amounts for all periods presented have been retrospectively reclassified to reflect the two-for-one stock split in the form of a stock dividend. The following table presents the computation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(In thousands, except per share amounts)
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
4,682
|
|
|
$
|
5,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic
|
11,159
|
|
|
10,822
|
|
|
|
|
|
Effect of potentially dilutive equivalent shares
|
795
|
|
|
270
|
|
|
|
|
|
Weighted-average shares outstanding, diluted
|
11,954
|
|
|
11,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock outstanding:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.42
|
|
|
$
|
0.55
|
|
|
|
|
|
Diluted
|
$
|
0.39
|
|
|
$
|
0.54
|
|
|
|
|
|
The following table summarizes the weighted-average equity awards that were excluded from the diluted net income per share calculations since they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
(In thousands)
|
October 1,
2021
|
|
October 2,
2020
|
|
|
|
|
Stock options
|
24
|
|
|
171
|
|
|
|
|
|
Restricted stock units and performance stock units
|
27
|
|
|
25
|
|
|
|
|
|
Total shares of common stock excluded
|
51
|
|
|
196
|
|
|
|
|
|
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 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 October 1, 2021, we had outstanding purchase obligations with our suppliers or contract manufacturers of $43.8 million. In addition, we had contractual obligations of approximately $4.0 million associated with software licenses as of October 1, 2021.
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 October 1, 2021, 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 October 1, 2021, we had commercial commitments of $64.0 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 these 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 October 1, 2021, 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 October 1, 2021, 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 damages from a customer alleging that certain of our products were defective which we settled with an immaterial amount during the third quarter of 2021.
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 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.
In March 2016, an enforcement action by the Indian Department of Revenue, Ministry of Finance was brought against our subsidiary 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. In November 2017, the Indian Department of Revenue, Ministry of Finance also initiated a similar action against Telsima Communications Private Limited (“Telsima India”), a subsidiary of the Company, 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.
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 pandemic. The COVID-19 pandemic 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 the COVID-19 pandemic on our financial condition, liquidity, operations, suppliers, industry, and workforce. Additionally we have undertaken measures to protect our employees, suppliers, and customers, including encouraging, and in many cases requiring employees to work remotely as appropriate. We have also modified some of our controls procedures but those changes have not been significant.
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.
Our gross margin in the current quarter was negatively impacted by inflationary pressures incurred to overcome supply chain and logistical bottlenecks. These were partially offset by price increases and surcharges. We continue to monitor, assess and adapt to the situation and prepare 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 months ended October 1, 2021 reflect some of the reduced activity experienced during the period in various locations around the world and are not necessarily indicative of the results for the full year.