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.
AVIAT NETWORKS, INC.
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| (In thousands) | October 2,
2020 | | September 27,
2019 | | | | |
| Net income | $ | 5,936 | | | $ | 54 | | | | | |
| Other comprehensive income (loss): | | | | | | | |
| Net change in cumulative translation adjustments | 414 | | | (513) | | | | | |
| Other comprehensive income (loss) | 414 | | | (513) | | | | | |
| Comprehensive income (loss) | $ | 6,350 | | | $ | (459) | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| | Three Months Ended |
| (In thousands) | October 2,
2020 | | September 27,
2019 |
| Operating Activities | | | |
| Net income | $ | 5,936 | | | $ | 54 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization of property, plant and equipment | 1,254 | | | 1,038 | |
| Provision for (recovery from) uncollectible receivables | 2 | | | (35) | |
| Share-based compensation | 571 | | | 407 | |
| Deferred tax assets, net | 216 | | | (634) | |
| Charges for inventory and customer service inventory write-downs | 185 | | | 337 | |
| Loss on disposition of property, plant and equipment, net | 6 | | | 3 | |
| Noncash lease expense | 562 | | | 1,194 | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (294) | | | 8,570 | |
| Unbilled receivables | (3,185) | | | (2,594) | |
| Inventories | (444) | | | (2,665) | |
| Customer service inventories | (201) | | | (326) | |
| Accounts payable | (135) | | | (3,779) | |
| Accrued expenses | (2,406) | | | 540 | |
| Advance payments and unearned revenue | 3,350 | | | 3,152 | |
| Income taxes payable or receivable | 101 | | | 1,803 | |
| Other assets and liabilities | (703) | | | (125) | |
| Change in lease liabilities | (574) | | | (1,291) | |
| Net cash provided by operating activities | 4,241 | | | 5,649 | |
| Investing Activities | | | |
| Payments for acquisition of property, plant and equipment | (1,018) | | | (1,302) | |
| | | |
| | | |
| Net cash used in investing activities | (1,018) | | | (1,302) | |
| Financing Activities | | | |
| Proceeds from borrowings | 0 | | | 9,000 | |
| Repayments of borrowings | (9,000) | | | (9,000) | |
| Payments for repurchase of common stock | 0 | | | (748) | |
| Payments for taxes related to net settlement of equity awards | (128) | | | (746) | |
| Proceeds from issuance of common stock under employee stock plans | 423 | | | 4 | |
| Net cash used in financing activities | (8,705) | | | (1,490) | |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 89 | | | (318) | |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (5,393) | | | 2,539 | |
| Cash, cash equivalents, and restricted cash, beginning of period | 41,872 | | | 32,201 | |
| Cash, cash equivalents, and restricted cash, end of period | $ | 36,479 | | | $ | 34,740 | |
|
| | | | | | | |
| | 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 restricted 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.
AVIAT NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 2, 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 July 3, 2020 | 5,400,487 | | | $ | 54 | | | $ | 814,337 | | | $ | (730,741) | | | $ | (14,969) | | | $ | 68,681 | |
| Net income | — | | | — | | | — | | | 5,936 | | | — | | | 5,936 | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 414 | | | 414 | |
| Issuance of common stock under employee stock plans | 48,491 | | | — | | | 423 | | | — | | | — | | | 423 | |
| Shares withheld for taxes related to vesting of equity awards | (5,616) | | | — | | | (128) | | | — | | | — | | | (128) | |
| | | | | | | | | | | |
| Share-based compensation | — | | | — | | | 571 | | | — | | | — | | | 571 | |
| | | | | | | | | | | |
| Balance as of October 2, 2020 | 5,443,362 | | | $ | 54 | | | $ | 815,203 | | | $ | (724,805) | | | $ | (14,555) | | | $ | 75,897 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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 September 27, 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 June 28, 2019 | 5,359,695 | | | $ | 54 | | | $ | 815,196 | | | $ | (730,998) | | | $ | (12,736) | | | $ | 71,516 | |
| Net income | — | | | — | | | — | | | 54 | | | — | | | 54 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (513) | | | (513) | |
| Issuance of common stock under employee stock plans | 192,812 | | | 2 | | | 2 | | | — | | | — | | | 4 | |
| Shares withheld for taxes related to vesting of equity awards | (52,384) | | | (1) | | | (745) | | | — | | | — | | | (746) | |
| Stock repurchase | (55,452) | | | (1) | | | (747) | | | — | | | — | | | (748) | |
| Share-based compensation | — | | | — | | | 407 | | | — | | | — | | | 407 | |
| Balance as of September 27, 2019 | 5,444,671 | | | $ | 54 | | | $ | 814,113 | | | $ | (730,944) | | | $ | (13,249) | | | $ | 69,974 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | 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.
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)(“U.S. GAAP”) and with the rules and regulations of the Securities and Exchange Commission (SEC)(“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,October 2, 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.July 3, 2020.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-ownedwholly 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,October 2, 2020 and March 29,September 27, 2019 both consisted of 1413 weeks. Fiscal year 2021 will be comprised of 52 weeks and 13 weeks, respectively.will end on July 2, 2021. Fiscal year 2020 will bewas comprised of 53 weeks and will endended 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 ninethree months ended April 3,October 2, 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)July 3, 2020.
(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,August 2018, the Financial Accounting Standards Board (“FASB”) issued ASC 842, which amendsAccounting Standard Update (“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 existing accounting standardsrequirements for leases. The new standard requires lesseescapitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exceptiondevelop or obtain internal-use software. ASU 2018-15 became effective for us in our first quarter of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement.fiscal 2021. We adopted ASC 842, effective June 29, 2019, usingthis guidance during the modified retrospective transition method with the cumulative effect recognized as an adjustment to the opening balancefirst quarter 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 tofiscal 2021. The adoption had no material impact on our unaudited condensed consolidated financial statements for more information.statements.
In JuneAugust 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) financing2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accountedDisclosure Requirements for under ASC 606. This ASU is effectiveFair Value Measurement (ASU 2018-13). The update eliminates, adds, and modifies certain disclosure requirements for fiscal years beginning after December 15, 2018. fair value measurements. We adopted this update during the first quarter of fiscal 2020.2021. The adoption had no material impact on our unaudited condensed consolidated financial statements.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,
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 StockBalance Sheet Components
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 stockCash, Cash Equivalents, 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.Restricted Cash
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 withprovides 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
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 locationssummary of our third-party manufacturers.
Revenue from services includes certain installation, extended warranty, customer support, consulting, training,cash, cash equivalents, and education. Maintenance and support services are generally offered torestricted cash reported within 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.sheets that reconciles to the corresponding amount in our unaudited condensed consolidated statement of cash flows:
| | | | | | | | | | | |
| (In thousands) | October 2,
2020 | | July 3,
2020 |
| Cash and cash equivalents | $ | 36,226 | | | $ | 41,618 | |
| | | |
| Restricted cash included in other assets | 253 | | | 254 | |
| Total cash, cash equivalents, and restricted cash in the Statement of Cash Flows | $ | 36,479 | | | $ | 41,872 | |
Accounts Receivable, net
Our net accounts receivable are summarized below:
| | | | | | | | | | | |
| (In thousands) | October 2,
2020 | | July 3,
2020 |
| Accounts receivable | $ | 47,041 | | | $ | 46,502 | |
| Less: Allowances for collection losses | (2,014) | | | (1,841) | |
| Total accounts receivable, net | $ | 45,027 | | | $ | 44,661 | |
Inventories
Our inventories are summarized below:
| | | | | | | | | | | |
| (In thousands) | October 2,
2020 | | July 3,
2020 |
| Finished products | $ | 8,686 | | | $ | 9,055 | |
| | | |
| Raw materials and supplies | 5,670 | | | 4,942 | |
| Total inventories | $ | 14,356 | | | $ | 13,997 | |
| | | |
| Consigned inventories included within raw materials and supplies | $ | 3,056 | | | $ | 1,324 | |
We currently rely on a few vendors for substantially all of our inventory purchases.
We record charges to adjust our inventory and customer purchase orders are usedservice inventory due to determineexcess and obsolete inventory resulting from lower sales forecasts, product transitioning, or discontinuance. The charges during the existence of an arrangement. In addition, shipping documentsthree months ended October 2, 2020 and customer acceptances, when applicable, are used to verify delivery and transfer of control. We typically satisfy our performance obligations upon shipment or deliverySeptember 27, 2019 were classified in cost of product depending onsales as follows:
| | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| (In thousands) | October 2,
2020 | | September 27,
2019 | | | | |
| Excess and obsolete inventory charges | $ | 63 | | | $ | 146 | | | | | |
| Customer service inventory write-downs | 122 | | | 191 | | | | | |
| Total inventory charges | $ | 185 | | | $ | 337 | | | | | |
Property, Plant and Equipment, net
Our property, plant and equipment, net are summarized below:
| | | | | | | | | | | |
| (In thousands) | October 2,
2020 | | July 3,
2020 |
| Land | $ | 710 | | | $ | 710 | |
| Buildings and leasehold improvements | 11,742 | | | 11,737 | |
| Software | 21,205 | | | 17,887 | |
| Machinery and equipment | 50,108 | | | 52,293 | |
| Total property, plant and equipment, gross | 83,765 | | | 82,627 | |
| Less: Accumulated depreciation and amortization | (67,203) | | | (65,716) | |
| Total property, plant and equipment, net | $ | 16,562 | | | $ | 16,911 | |
Included in the contractual terms. Payment termstotal plant, property and equipment above were $0.7 million and $3.5 million of assets in progress which have not been placed in service as of October 2, 2020 and July 3, 2020, respectively. Depreciation and amortization expense related to customers generally range from net 30 to 120 days from invoice, whichproperty, plant and equipment, including amortization of software developed for internal use, was as follows:
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| (In thousands) | | | | | October 2,
2020 | | September 27,
2019 |
| Depreciation and amortization | | | | | $ | 1,254 | | | $ | 1,038 | |
Accrued Expenses
Our accrued expenses 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.summarized below:
| | | | | | | | | | | |
| (In thousands) | October 2,
2020 | | July 3,
2020 |
| Accrued compensation and benefits | $ | 9,539 | | | $ | 11,814 | |
| Accrued agent commissions | 2,529 | | | 2,356 | |
| Accrued warranties | 3,107 | | | 3,196 | |
| Other | 9,087 | | | 9,554 | |
| Total accrued expenses | $ | 24,262 | | | $ | 26,920 | |
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.
Accrued Warranties
We present transactional taxes such as sales and use tax collected from customers and remittedaccrue for the estimated cost to government authorities on a net basis.
Bill-and-Hold Sales
Certain customer arrangements consist of bill-and-hold characteristicsrepair or replace products under warranty. Changes in our warranty liability, 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.
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 salesaccrued expenses in our unaudited condensed consolidated statements of operations because they are also included in revenue that we bill our customers.balance sheets were as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| (In thousands) | October 2,
2020 | | September 27,
2019 | | | | |
| Balance as of the beginning of the period | $ | 3,196 | | | $ | 3,323 | | | | | |
| Warranty provision recorded during the period | 284 | | | 504 | | | | | |
| | | | | | | |
| Consumption during the period | (373) | | | (415) | | | | | |
| Balance as of the end of the period | $ | 3,107 | | | $ | 3,412 | | | | | |
Costs to Obtain a ContractAdvance Payments and Unearned Revenue
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
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 are summarized below:
| | | | | | | | | | | |
| (In thousands) | October 2,
2020 | | July 3,
2020 |
| Advance payments | $ | 2,812 | | | $ | 2,529 | |
| Unearned revenue | 22,421 | | | 19,343 | |
| Total advance payments and unearned revenue | $ | 25,233 | | | $ | 21,872 | |
Excluded from the balances above are $8.2 million and $8.1 million in long-term unearned revenue as of which approximately 30% is expected to be recognized as revenue in the remainder of fiscalOctober 2, 2020 and the balance thereafter. During the three and nine months ended AprilJuly 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.
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 |
|
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 |
|
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 |
|
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 6.3. 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. 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 AprilOctober 2, 2020 and July 3, 2020 and June 28, 2019 were as follows:
| | | | April 3, 2020 | | June 28, 2019 | | Valuation Inputs | | October 2, 2020 | | July 3, 2020 | | Valuation Inputs |
| (In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | (In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | |
| Assets: | | | | | | | | | Assets: | | | | | | | | | |
| Cash and cash equivalents: | | | | | | | | | Cash and cash equivalents: | |
| Money market funds | $ | 21,393 |
| | $ | 21,393 |
| | $ | 15,121 |
| | $ | 15,121 |
| | Level 1 | Money market funds | $ | 18,920 | | | $ | 18,920 | | | $ | 18,189 | | | $ | 18,189 | | | Level 1 |
| Bank certificates of deposit | $ | 3,282 |
| | $ | 3,282 |
| | $ | 1,989 |
| | $ | 1,989 |
| | Level 2 | Bank certificates of deposit | $ | 2,538 | | | $ | 2,538 | | | $ | 3,250 | | | $ | 3,250 | | | Level 2 |
| Other current assets: | | | | | | | | | |
| Foreign exchange forward contracts | $ | 41 |
| | $ | 41 |
| | $ | — |
| | $ | — |
| | Level 2 | |
| | Liabilities: | | | | | | | | | Liabilities: | |
| Other accrued expenses: | | | | | | | | | Other accrued expenses: | |
| Foreign exchange forward contracts | $ | 296 |
| | $ | 296 |
| | $ | 7 |
| | $ | 7 |
| | Level 2 | Foreign exchange forward contracts | $ | 0 | | | $ | 0 | | | $ | 14 | | | $ | 14 | | | 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 AprilOctober 2, 2020 and July 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 AprilOctober 2, 2020 and July 3, 2020, and June 28, 2019, we did not have any recurring assets or liabilities that were valued using significant unobservable inputs.
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 ninethree months of fiscal 20202021 and 2019,2020, we had no transfers between levels of the fair value hierarchy of our assets or liabilities 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" (“ROU”) 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 2, 2020.
The following summarizes our lease costs (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 2, 2020 | | September 27, 2019 |
| | (In thousands) |
| Operating lease costs | | $ | 313 | | | $ | 320 | |
| Short-term lease costs | | 458 | | | 484 | |
| Variable lease costs | | 68 | | | 63 | |
| Total lease costs | | $ | 839 | | | $ | 867 | |
The following summarizes our lease term and discount rate for three months ended October 2, 2020:
| | | | | | | | |
| Weighted average remaining lease term | | 7.3 years |
| Weighted average discount rate | | 6.9 | % |
| | |
As of October 2, 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 2021 | | $ | 875 | |
| 2022 | | 623 | |
| 2023 | | 357 | |
| 2024 | | 230 | |
| 2025 | | 236 | |
| Thereafter | | 1,952 | |
| Total lease payments | | 4,273 | |
| Less: interest | | (1,099) | |
| Present value of lease liabilities | | $ | 3,174 | |
Note 5. Credit Facility and Debt
On May 4, 2020, we entered into Amendment No. 3 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, 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 October 2, 2020, available credit under the SVB Credit Facility was $23.5 million, reflecting the lower available limit of $25.0 million less outstanding letters of credit of $1.5 million. As of July 3, 2020, our outstanding debt balance under the SVB Credit Facility, classified as a current liability, was $9.0 million, and the interest rate was 3.75%. We repaid the outstanding debt balance during the quarter ended October 2, 2020.
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 three months of fiscal 2021, the weighted-average interest rate on our outstanding loan was 3.75%.
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 2, 2020, 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 $0.3 million from a bank in New Zealand to support the operations of our New Zealand subsidiary. This line of credit provides for up to $0.2 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 line of credit may be terminated upon notice, is reviewed annually for renewal or modification, and is supported by a corporate guarantee.
Note 7. Credit Facility6. Revenue Recognition
Contract Balances, Performance Obligations, and DebtBacklog
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.
Note 8. Restructuring Activities
The following table summarizesprovides information about receivables and liabilities from contracts with customers (in thousands):
| | | | | | | | | | | | | | |
| | | October 2, 2020 | | July 3, 2020 |
| Contract Assets | | | | |
| Accounts receivable, net | | $ | 45,027 | | | $ | 44,661 | |
| Unbilled receivables | | 31,295 | | | 28,085 | |
| Capitalized commissions | | 1,328 | | | 1,157 | |
| Contract Liabilities | | | | |
| Advance payments and unearned revenue | | 25,233 | | | 21,872 | |
| Unearned revenue, long-term | | 8,182 | | | 8,142 | |
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 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,October 2, 2020, $1.5we had $33.4 million in advance payments and unearned revenue and long-term unearned revenue, of which approximately 68% is expected to be recognized as revenue in the accrualremainder of fiscal 2021 and the balance was in short-term restructuring liabilities while $0.3thereafter. During the three months ended October 2, 2020 we recognized approximately $11.4 million which was included in other long-term liabilitiesadvance 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 $75.4 million at October 2, 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 7. Segment and Geographic Information
We operate in 1 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.
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 2, 2020 and September 27, 2019 was as follows:
| | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| (In thousands) | October 2, 2020 | | September 27, 2019 | | | | |
North America | $ | 45,499 | | | $ | 39,767 | | | | | |
| Africa and the Middle East | 10,571 | | | 10,593 | | | | | |
| Europe and Russia | 2,262 | | | 3,407 | | | | | |
| Latin America and Asia Pacific | 7,958 | | | 4,847 | | | | | |
| Total revenue | $ | 66,290 | | | $ | 58,614 | | | | | |
The loss of a significant portion of business from any significant customers could adversely affect our unaudited condensed consolidated balance sheets.financial statements.
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 balanceCustomers accounting 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 810% or more of our 2019 Form 10-K.total revenue was as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 2, 2020 | | September 27, 2019 |
| Mobile Telephone Networks Group (MTN Group) | | * | | 13 | % |
•Less than 10%
Customers accounting for 10% or more of our accounts receivable was as follows:
| | | | | | | | | | | | | | |
| | October 2, 2020 | | July 3, 2020 |
| MTN Group | | 12 | % | | 21 | % |
Note 9.8. 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.
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 |
|
All repurchased shares were retired. As of April 3,October 2, 2020, $3.4 million remained available under our stock repurchase program. InThe repurchase program has been suspended temporarily since February 2020,2020. Therefore, during the first three months of fiscal 2021, we suspendeddid not repurchase any shares of our common stock in the stock repurchase program.open market.
Stock Incentive Programs
As of April 3,At October 2, 2020, we had two1 stock incentive plansplan for our employees and nonemployeenon-employee directors, the 2018 Incentive Plan (the “2018 Plan”). The 2018 Plan was approved by the stockholders at the fiscal year 2017 Annual Stockholders’ Meeting and it added 500,000 shares to the equity pool of shares available to grant to employees and non-
employee directors. The 2018 Plan also 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 2007 Stock Equity Plan, as amendedrestrictions 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 restated effective November 13, 2015. 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 April 3, October 2, 2020, we granted 46,500 market-based stock units. During the nine months ended April 3, 2020, we granted 84,20237,506 restricted stock units, 51,70635,565 performance restricted stock units 46,500 market-based stock units and 126,118111,811 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 2,
2020 | | September 27,
2019 | | | | |
| By Expense Category: | | | | | | | |
| Cost of revenues | $ | 72 | | | $ | 44 | | | | | |
| Research and development | 40 | | | 27 | | | | | |
| Selling and administrative | 459 | | | 336 | | | | | |
| Total share-based compensation expense | $ | 571 | | | $ | 407 | | | | | |
| By Types of Award: | | | | | | | |
| Options | $ | 167 | | | $ | 110 | | | | | |
| Restricted and performance stock awards and units | 404 | | | 297 | | | | | |
| Total share-based compensation expense | $ | 571 | | | $ | 407 | | | | | |
|
| | | | | | | | | | | | | | | |
| | 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,October 2, 2020, there was approximately $1.1$1.5 millionof total unrecognized compensation expense related to non-vested stock options granted which are expected to be recognized over a weighted-average period of 2.12.3 years. As of April 3,October 2, 2020, there was $1.7$3.1 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.
On September 6, 2016, our Board of Directors authorized and declared a dividend distribution of 1 right (a “Right”) for each outstanding share of our common stock, par value $0.01 per share (the “Common Shares”), to our stockholders of record as of the close of business on September 16, 2016 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, par value $0.01 per share (the “Preferred Shares”), of the Company at an exercise price of $35.00 (the “Exercise Price”) per one one-thousandth of a Preferred Share, subject to adjustment. Until the rights become exercisable, they will not be evidenced by separate certificates and will trade automatically with shares of the Company’s common stock. The Rights have a de minimis fair value. The complete terms of the Rights are set forth in a Tax Benefit Preservation Plan (the “Plan”), dated as of September 6, 2016, between the Company and Computershare Inc., as rights agent. By adopting the Plan, we are helping to preserve the value of certain deferred tax benefits, including those generated by net operating losses (collectively, the “Tax Benefits”), which could be lost in the event of an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended. The Plan reduces the likelihood that changes in our investor base have the unintended effect of limiting our use of the Tax Benefits. The Plan expired on September 6, 2019. On March 3, 2020, our Board of Directors reauthorized the Plan at the same term with a Record Date of March 13, 2020. On August 27, 2020, we entered into the Amended and Restated Tax Benefit Preservation Plan (the “Amended and Restated Plan”) with Computershare Inc. as Rights Agent.
The Amended and Restated Plan, reauthorized by our Board of Directors on March 3, 2020, will be subject to our shareholders approval at our upcoming Annual Shareholders’ Meeting to be held on November 11, 2020.
Note 10. Segment and Geographic Information9. Restructuring Activities
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 byThe following table summarizes 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 revenuerestructuring-related activities during the three months ended April 3, 2020. During the three months endedMarch 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 endedMarch 29, 2019, MTN Group accounted for 12% of ourOctober 2, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and Benefits | | Facilities and Other | | Total |
| (In thousands) | Q4 2020 Plan | | Q3 2020 Plan | | Fiscal 2020 | | Fiscal 2018-2019 Plan | | Prior Years' Plan | | Fiscal 2015-2016 Plan | | |
| Accrual balance, July 3, 2020 | $ | 1,557 | | | $ | 431 | | | $ | 360 | | | $ | 90 | | | $ | 64 | | | $ | 236 | | | $ | 2,738 | |
| | | | | | | | | | | | | |
| Cash payments | (345) | | | (170) | | | (269) | | | (90) | | | (39) | | | 0 | | | (913) | |
| Foreign exchange impact | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 10 | | | 10 | |
| Accrual balance, October 2, 2020 | $ | 1,212 | | | $ | 261 | | | $ | 91 | | | $ | 0 | | | $ | 25 | | | $ | 246 | | | $ | 1,835 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
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total revenue. As of April 3,October 2, 2020,, MTN Group and Digitec accounted for 16% and 11% the accrual balance 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$1.8 million was in short-term restructuring liabilities on our unaudited condensed consolidated financial statements.balance sheets.
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. The Q4 2020 Plan is being implemented starting with our fourth fiscal quarter of 2020 through the second fiscal quarter of 2021. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2021.
Q3 2020 Plan
During the third quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q3 2020 Plan”) in order 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 2021.
Fiscal 2020 Plan
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.
Fiscal 2018-2019 Plan
During the fourth quarter of fiscal 2018, our Board of Directors approved a restructuring plan (the “Fiscal 2018-2019 Plan”) to consolidate back-office support functions and align resources by geography to lower our expense structure. We completed the restructuring activities under the Fiscal 2018-2019 Plan at the end of fiscal 2019. Payments related to the accrued restructuring liability balance for this plan are expected to be fully paid in fiscal 2021.
Fiscal 2015-2016 Plan
In January 2018, we reached a settlement with 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. We completed the restructuring
activities under the Fiscal 2015-2016 Plan as of July 1, 2016. Payments related to the accrued restructuring liability balance for this plan are expected to be paid in fiscal 2021.
For further information, see “Note 7. Restructuring Activities” in Part II, Item 8 of our 2020 Form 10-K.
Note 11.10. 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 benefits on current losses.losses, and partial valuation allowance against US federal and state deferred tax assets. During interim periods, we accrue tax expenses for jurisdictions that are anticipated to be profitable for fiscal 2020.2021.
The determination of our income taxes for the ninethree months ended April 3, October 2, 2020 and March 29,September 27, 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 three months ended April 3, October 2, 2020 was primarily due to tax expense related to profitable subsidiaries. The tax expense for the three months ended September 27, 2019 was primarily due to tax expense related to profitable subsidiaries and a $0.4$0.6 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 thirdfirst quarter of fiscal 2020,2021, 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)(“Harris”) effective on January 26, 2007, the acquisition date of Stratex.Stratex Networks, Inc. (“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 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 - 2011;2015; Nigeria - 2006: Saudi Arabia - 2010,2014, and Ivory Coast - 2016.2017.
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 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, October 2, 2020 and March 29,September 27, 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. InDuring the third quarter of fiscal 2020, 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 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.
The following table presents the computation of basic and diluted net income per share:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| (In thousands, except per share amounts) | October 2,
2020 | | September 27,
2019 | | | | |
| Numerator: | | | | | | | |
| Net income | $ | 5,936 | | | $ | 54 | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted-average shares outstanding, basic | 5,411 | | | 5,347 | | | | | |
| Effect of potentially dilutive equivalent shares | 135 | | | 183 | | | | | |
| Weighted-average shares outstanding, diluted | 5,546 | | | 5,530 | | | | | |
| | | | | | | |
| Net income per share of common stock outstanding: | | | | | | | |
| Basic | $ | 1.10 | | | $ | 0.01 | | | | | |
| Diluted | $ | 1.07 | | | $ | 0.01 | | | | | |
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 2,
2020 | | September 27,
2019 | | | | |
| Stock options | 171 | | | 378 | | | | | |
| Restricted stock units and performance stock units | 25 | | | 35 | | | | | |
| Total shares of common stock excluded | 196 | | | 413 | | | | | |
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 April 3,October 2, 2020, we had outstanding purchase obligations with our suppliers or contract manufacturers of $22.7$23.5 million. In addition, we had contractual obligations of approximately $2.1$1.4 million associated with software licenses as of April 3,October 2, 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,October 2, 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,October 2, 2020, we had commercial commitments of $57.7$58.7 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 thethese 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,October 2, 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,October 2, 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. WeAlthough we believe that we have numerous contractual and legal defenses to these disputes, andat this time 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
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 ("FEMA"). 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 virus.pandemic. The COVID-19 viruspandemic 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 pandemic on the Company’sour 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,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, assessingcontinue to monitor, assess and adaptingadapt to the situation and preparingprepare 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,October 2, 2020 reflect some of the reduced activity experienced during the period in various locations around the world and are not necessarynecessarily indicative of the results for the full year.
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.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;
•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 20192020 Annual Report on Form 10-K filed with the SEC on August 27, 20192020 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 20202021 and 20192020 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” and our fiscal year ended June 28, 2019 is referred to as “fiscal 2019” or “2019.“2020.”
Overview
We anticipate our overallmodest growth in 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 the2021. We have a healthy backlog we had entering fiscal 20202021 for our North AmericaAmerican 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 takeare 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, 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.
intensity.
In March 2020, the World Health Organization characterized a recent pandemic ofthe 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 virus.pandemic. The COVID-19 viruspandemic has had and is likely to continue to have an impact on our operations, supply chains and distribution systems andsystems. 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
monitoring the impact of COVID-19 pandemic on the Company’sour 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,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 and nine months ended April 3,October 2, 2020 reflect some of the reduced activity experienced during the period in various locations around the world and are not necessarynecessarily indicative of the results for the full year.
Operations Review
The market for mobile backhaul continuescontinued to be our primary addressable market segment globally in the first quarter of fiscal 2020.2021. 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. We continueOur 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 fiscal 2019Annual 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, including the ongoing effects of the COVID-19 pandemic.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. 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 thethree and nine months ended April 3, October 2, 2020 and March 29,September 27, 2019 and the related changes were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| (In thousands, except percentages) | October 2, 2020 | | September 27, 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 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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$5.7 million, or 30.3%14.4%, during the thirdfirst quarter of fiscal 20202021 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
of fiscal2020 compared with the same period of fiscal 2019. The increase in North America revenue during the three and nine months of fiscal2020 wasprimarily due to an increase in private network projects as well as an increase in mobile operator sales compared to fiscal 2019.sales.
Our revenue in Africa and the Middle East decreased by $1.8 million, or 16.7%,was consistent for the thirdfirst quarter of fiscal 20202021 compared with the same period of fiscal 2019. 2020.
Revenue in AfricaEurope and the Middle EastRussia decreased by $10.4$1.1 million, or 26.6%33.6%, during for the first nine monthsquarter of fiscal2020 2021 compared with the same period of fiscal 2019. The decrease in revenue was2020 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$3.1 million, or 17.6%64.2%, during the thirdfirst quarter of fiscal 20202021 compared with the same period of fiscal 2019. The increase came from additional sales2020 primarily due 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 lowerhigher sales to mobile operator customers in the region.
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| (In thousands, except percentages) | April 3, 2020 | | March 29, 2019 | | $ Change | | % Change | | April 3, 2020 | | March 29, 2019 | | $ Change | | % Change | (In thousands, except percentages) | October 2, 2020 | | September 27, 2019 | | $ Change | | % Change | |
| Product sales | $ | 40,930 |
| | $ | 34,615 |
| | $ | 6,315 |
| | 18.2 | % | | $ | 111,676 |
| | $ | 115,696 |
| | $ | (4,020 | ) | | (3.5 | )% | Product sales | $ | 44,464 | | | $ | 36,594 | | | $ | 7,870 | | | 21.5 | % | |
| Services | 20,449 |
| | 19,422 |
| | 1,027 |
| | 5.3 | % | | 64,314 |
| | 63,933 |
| | 381 |
| | 0.6 | % | Services | 21,826 | | | 22,020 | | | (194) | | | (0.9) | % | |
| Total revenue | $ | 61,379 |
| | $ | 54,037 |
| | $ | 7,342 |
| | 13.6 | % | | $ | 175,990 |
| | $ | 179,629 |
| | $ | (3,639 | ) | | (2.0 | )% | Total revenue | $ | 66,290 | | | $ | 58,614 | | | $ | 7,676 | | | 13.1 | % | |