AVIAT NETWORKS, INC.
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 Quarterly Report
on Form 10-Q. 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, the effects of COVID-19 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;
•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;
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•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;
•general 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;
•the impact of tariffs, the adoption of trade restrictions affecting our
products or suppliers, a United States withdrawal from or significant
renegotiation of trade agreements, the occurrence of trade wars, the closing of
border crossings, and other changes in trade regulations or relationships; 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 2020 Annual Report on Form 10-K filed with
the SEC on August 27, 2020 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
2021 and 2020 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 2, 2021 is referred
to as "fiscal 2021" or "2021" and our fiscal year ended July 3, 2020 is referred
to as "fiscal 2020" or "2020."
Overview
We anticipate modest growth in revenue in fiscal 2021. We have a healthy backlog
entering fiscal 2021 for North American private network projects and we
anticipate continuing our strong momentum across these verticals. We have made
inroads into the U.S. rural broadband and wireless internet service provider
areas and there is now further evidence now of investment to support 5G
deployments with our U.S. service provider customers. Internationally, we are
continuing 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.
In March 2020 , the World Health Organization characterized the current
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 has had and is likely to continue to have an impact on our
operations, supply chains and distribution systems. COVID-19 pandemic has led to
an increase in 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
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monitoring the impact of COVID-19 pandemic on our 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 October 2, 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 months ended October 2, 2020 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.
Operations Review
The market for mobile backhaul continued to be our primary addressable market
segment globally in the first quarter of fiscal 2021. 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. Our position
continues to be 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 Annual Report on Form 10-K
filed with the SEC on August 27, 2020 , 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.
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 . Revenue by region
for the three months ended October 2, 2020 and September 27, 2019 and the
related changes were as follows:
Three Months Ended
September 27,
(In thousands, except percentages) October 2, 2020 2019 $ Change % Change
North America $ 45,499 $ 39,767 $ 5,732 14.4 %
Africa and the Middle East 10,571 10,593 (22) (0.2) %
Europe and Russia 2,262 3,407 (1,145) (33.6) %
Latin America and Asia Pacific 7,958 4,847 3,111 64.2 %
Total revenue $ 66,290 $ 58,614 $ 7,676 13.1 %
Our revenue in North America increased by $5.7 million , or 14.4%, during the
first quarter of fiscal 2021 compared with the same period of fiscal 2020
primarily due to an increase in private network projects as well as an increase
in mobile operator sales.
Our revenue in Africa and the Middle East was consistent for the first quarter
of fiscal 2021 compared with the same period of fiscal 2020.
Revenue in Europe and Russia decreased by $1.1 million , or 33.6%, for the first
quarter of fiscal 2021 compared with the same period of fiscal 2020 primarily
due to lower sales to mobile operator customers in the region.
Revenue in Latin America and Asia Pacific increased by $3.1 million , or 64.2%,
during the first quarter of fiscal 2021 compared with the same period of fiscal
2020 primarily due to higher sales to mobile operator customers in the region.
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September 27,
(In thousands, except percentages) October 2, 2020 2019 $ Change % Change
Product sales $ 44,464 $ 36,594 $ 7,870 21.5 %
Services 21,826 22,020 (194) (0.9) %
Total revenue $ 66,290 $ 58,614 $ 7,676 13.1 %
Our revenue from product sales increased by
Three Months Ended
(In thousands, except percentages) October 2, 2020 September 27, 2019 $ Change % Change
Revenue $ 66,290 $ 58,614 $ 7,676 13.1 %
Cost of revenue 42,041 36,058 5,983 16.6 %
Gross margin $ 24,249 $ 22,556 $ 1,693 7.5 %
% of revenue 36.6 % 38.5 %
Product margin % 37.2 % 43.1 %
Service margin % 35.3 % 30.8 %
Gross margin for the first quarter of fiscal 2021 increased by $1.7 million , or
7.5% compared with the same quarter of fiscal 2020. Our gross margin increased
from the same period last year primarily due to the increased volume of product
sales and improved profitability of services.
Product margin as a percentage of product revenue decreased in the first quarter
of fiscal 2021 compared with the same period of fiscal 2020 primarily due to
product and regional mix. Service margin as a percentage of service revenue
increased in the first quarter of fiscal 2021 compared with the same period in
fiscal 2020 from improved profitability in most regions.
Research and Development Expenses
Three Months Ended
(In thousands, except percentages) October 2, 2020 September 27, 2019 $ Change % Change
Research and development $ 4,847 $ 5,216 $ (369) (7.1) %
% of revenue 7.3 % 8.9 %
Our research and development expenses decreased by $0.4 million , or 7.1%, in the
first quarter of fiscal 2021 compared with the same period of fiscal 2020
primarily due to cost savings initiatives implemented in the second half of
fiscal 2020.
Selling and Administrative Expenses
Three Months Ended
(In thousands, except percentages) October 2, 2020 September 27, 2019 $ Change % Change
Selling and administrative $ 12,837 $ 14,644 $ (1,807) (12.3) %
% of revenue 19.4 % 25.0 %
Our selling and administrative expenses decreased by $1.8 million , or 12.3%, in
the first quarter of fiscal 2021 compared with the same period in fiscal 2020
primarily due to cost savings initiatives implemented in the second half of
fiscal 2020.
Restructuring Charges
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September 27,
(In thousands, except percentages) October 2, 2020 2019 $ Change % Change
Restructuring charges $ - $ 1,177 $ (1,177) - %
We recognized in the first quarter of fiscal 2020 restructuring charges of $1.2
million related to the Fiscal 2020 Plan, which was primarily to consolidate
product development, right size our resources to support our International
business and other support functions.
Interest Income, Interest Expense and Other (Expense) Income, Net
Three Months Ended
(In thousands, except percentages) October 2, 2020 September 27, 2019 $ Change % Change
Interest income $ 36 $ 86 $ (50) (58.1) %
Interest expense $ (1) $ (3) $ 2 (66.7) %
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 and discounts on customer letters of credit.
Income Taxes
Three Months Ended
September 27,
(In thousands, except percentages) October 2, 2020 2019 $ Change % Change
Income before income taxes $ 6,600 $ 1,602 $ 4,998 312.0 %
Provision for income taxes $ 664 $ 1,548 $ (884) (57.1) %
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 quarter of fiscal 2021 was primarily due to tax
expense related to profitable subsidiaries. The tax expense for the first
quarter of fiscal 2020 was primarily due to tax expense related to profitable
subsidiaries and a $0.6 million increase in our reserves for uncertain tax
positions.
During the first quarter of 2021, we received a tax refund of $1.2 million from
the Federal Revenue of Brazil related to our withholding tax refund claim and
recorded minimal tax expense related to interest as a discrete item.
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 and a material increase or decrease in net income
in the period in which we change our judgment. During the first quarter of
fiscal 2021, we did not record any adjustment to valuation allowance on our U.S.
deferred tax assets.
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Liquidity, Capital Resources, and Financial Strategies
Sources of Cash
As of October 2, 2020 , our total cash and cash equivalents were $36.2 million .
Approximately $21.3 million , or 58.9%, was held in the United States . The
remaining balance of $14.9 million , or 41.1%, was held by entities outside the
United States . Of the amount of cash and cash equivalents held by our foreign
subsidiaries at October 2, 2020 , $14.4 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 income
adjusted for non-cash items and changes in operating assets and liabilities. Net
cash provided by operating activities was $4.2 million for the first three
months of fiscal 2021, compared to $5.6 million for the first three months of
fiscal 2020; this difference was primarily related to a net change in Accounts
receivable and partially offset by the net change in Net income. Net cash
provided by noncash items was $2.8 million for the first three months 2021,
compared to $2.3 million for the comparable period in Fiscal 2020. The net
changes in operating assets and liabilities resulted in a net use of cash of
$4.5 million for the first three months of fiscal 2021, compared to net cash
provided by $3.3 million for the same period in fiscal 2020.
Changes in operating assets and liabilities resulted in a net use of cash for
the first three months of fiscal 2021 was primarily related to Accounts
receivable that fluctuate from period to period, depending on the amount, timing
of sales and billing activities and cash collections; and the timing of Accrued
expenses. The use of cash from assets and liabilities was partially offset by
cash provided by the timing of payments of Accounts payable and changes in
Inventory due to demand and our focus on inventory management.
Investing Activities
Net cash used in investing activities was $1.0 million and $1.3 million for the
first three months of fiscal 2021 and 2020, respectively, which consisted of
capital expenditures. During the remainder of fiscal year 2021, we expect to
spend approximately $4.0 million for capital expenditures, primarily on
equipment for development and manufacturing of new products and IT
infrastructure.
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
$8.7 million for the first three months of fiscal 2021, primarily due to $9.0
million repayment of short-term debt.
As of October 2, 2020 , our principal sources of liquidity consisted of $36.2
million in cash and cash equivalents; $23.5 million of available credit under
our $25.0 million credit facility with Silicon Valley Bank ("SVB Credit
Facility") which matures on June 28, 2021 , and future collections of receivables
from customers. 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 maturity date of the SVB Credit Facility
to June 28, 2021 . While we intend to continue to renew the SVB Credit Facility
annually, there can be no assurance that the SVB Credit Facility will be
renewed. 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, or that we will have a
sufficient borrowing base under such facility. If we are not in compliance with
the financial covenants or do not have sufficient eligible accounts receivable
to support our borrowing base, borrowings under the SVB Credit Facility may not
be available or our borrowing base 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
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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.
As of October 2, 2020 , we were in compliance with the quarterly financial
covenants, as amended, contained in the SVB Credit Facility. We repaid the
outstanding balance of $9.0 million during the first three months of fiscal
2021; therefore, there was no amount outstanding as of October 2, 2020 .
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 October 2, 2020 and
July 3, 2020 . 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 2, 2020 and July 3, 2020 . This facility may be
terminated upon notice, is reviewed annually for renewal or modification, and is
supported by a corporate guarantee.
Restructuring Payments
We had liabilities for restructuring activities totaling $1.8 million as of
October 2, 2020 , 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 2020 Annual Report on Form 10-K filed with
the SEC on August 27, 2020 include our commercial commitments and contractual
obligations. During the first three months of fiscal 2021, 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 2020 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
In accordance with the definition under SEC rules (Item 303(a)(4)(ii) of
Regulation S-K), any of the following qualify as off-balance sheet arrangements:
•any obligation under certain guarantee contracts;
•a retained or contingent interest in assets transferred to an unconsolidated
entity or similar entity or similar arrangement that serves as credit, liquidity
or market risk support to that entity for such assets;
•any obligation, including a contingent obligation, under certain derivative
instruments; and
•any obligation, including a contingent obligation, arising out of a material
variable interest held by us in an unconsolidated entity that provides
financing, liquidity, market risk or credit risk support to us, or engages in
leasing, hedging or research and development services with us.
Currently we are not participating in transactions that generate relationships
with unconsolidated entities or financial partnerships, including variable
interest entities, and we do not have any material retained or contingent
interest in assets as defined above. As of October 2, 2020 , we did not have
material financial guarantees or other contractual commitments that are
reasonably likely to adversely affect liquidity. In addition, we are not
currently a party to any related party transactions that materially affect our
results of operations, cash flows or financial condition.
As of October 2, 2020 , we had commercial commitments of $58.7 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.
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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 2020 Annual Report on Form 10-K.
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