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TMCNet:  AVIAT NETWORKS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 05, 2013]

AVIAT NETWORKS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) 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 forward-looking statements, including statements of, about, concerning or regarding: our plans, strategies and objectives for future operations; 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 19 -------------------------------------------------------------------------------- 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 Aviat Networks. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should therefore be considered in light of various important factors, including those set forth in this document.

Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include the following: • continued price 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 projected new product development dates or anticipated cost reductions of new products; • our suppliers' inability to perform and deliver on time as a result of their financial condition, component shortages or other supply chain constraints; • customer acceptance of new products; • the ability of our subcontractors to timely perform; • continued weakness in the global economy affecting customer spending; • 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; • the timing of our receipt of payment for products or services from our customers; • our failure to protect our intellectual property rights or defend against intellectual property infringement claims by others; • the effects of currency and interest rate risks; and • the impact of political turmoil in countries where we have significant business.

Other factors besides those listed here also could adversely affect us. See "Item 1A. Risk Factors" in our fiscal 2012 Annual Report on Form 10-K 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, along with provisions of the Private Securities Litigation Reform Act of 1995, and we undertake no obligation, other than as imposed by law, to update 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 2012 and 2013 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 consolidated financial statements and the accompanying notes. In the discussion below, our fiscal year ending June 28, 2013 is referred to as "fiscal 2013" or "2013" and fiscal year ended June 29, 2012 as "fiscal 2012" or "2012".

We generate revenue by designing, developing, manufacturing and supporting a range of wireless networking products, solutions and services for mobile and fixed communications service providers, private network operators, government agencies, transportation and utility companies, public safety agencies and broadcast system operators across the globe. Our products include point-to-point (PTP) digital microwave transmission systems designed for first/last mile access, middle 20 -------------------------------------------------------------------------------- mile/backhaul, and long distance trunking applications. We also provide network management software solutions to enable operators to deploy, monitor and manage our systems, third party equipment such as antennas, routers, and multiplexers, necessary to build and deploy a wireless transmission network, and a full suite of turnkey support services.

We work continuously to improve our established brands and to create new products that meet our customers' evolving needs and preferences. Our fundamental business goal is to generate superior returns for our stockholders over the long term. We believe that increases in revenue, operating profits and earnings per share are the key measures of financial performance for our business.

Our strategic focus in the second half of fiscal 2013 will be to continue to accelerate innovation and optimize our product portfolio, improve costs and operational efficiencies, grow our revenue and create a sustainable, profitable business model. To do this, we have examined our products, markets, facilities, development programs, and operational flows to ensure we are focused on what we do well and what will differentiate us in the future. We will continue working to streamline management processes to attain the efficiency levels required by the markets in which we do business.

While the general trend of increasing demand for bandwidth to support mobile networks applies in all markets, we expect to see quarter-to-quarter fluctuations within markets and with individual customers based on customers' past purchasing patterns. As well, seasonality is a factor that impacts our business. Our fiscal third quarter revenue and orders have historically been lower than the revenue and orders in the immediately preceding second quarter because many of our customers utilize a significant portion of their capital budgets at the end of their fiscal year, which is typically the calendar year and coincides with our second fiscal quarter. The majority of our customers begin a new fiscal year on January 1, and capital expenditures tend to be lower in an organization's first quarter than in its fourth quarter. We anticipate that this seasonality will continue. The seasonality between the second quarter and third quarter may be affected by a variety of additional factors, including changes in the global economy and other factors. Please refer to the section entitled "Risk Factors" in Item 1A in our fiscal 2012 Annual Report on Form 10-K.

Operations Review During the first two quarters of fiscal 2013, we secured orders and continued to expand our footprint with our customers in the mobile operator market using our current technology and service capabilities. The market for mobile backhaul continues to be our primary addressable market segment and the demand for increasing the backhaul capacity in our customers' networks continues to grow in line with our expectations. In the quarter we saw increased demand in North America as we supported the LTE deployments of our key customers.

Internationally 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 the emergence of early stage LTE deployments. Our position continues to be to support our customers for 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 of our 2012 Annual Report on Form 10-K, a number of factors could prevent us from achieving our objectives, including ongoing pricing pressures attributable to competition and macroeconomic conditions in the geographic markets that we service.

During the first two quarters of fiscal 2013, we incurred restructuring expenses under the Fiscal 2011 Plan that will allow us to reduce our operational costs.

We intend to complete remaining restructuring activities under the Fiscal 2011 Plan during fiscal 2013.

In the fourth quarter of fiscal 2012, we re-evaluated our reportable segments primarily due to changes in our management, product platform and business processes, and determined that we operate in one single reportable industry segment. Accordingly, financial information for the second quarter and first two quarters of fiscal 2012 has been recast to conform with the current reportable segment disclosure.

Revenue We manage our sales activities primarily on a geographic basis in North America and three international geographic regions: Africa and Middle East, Europe and Russia, and Latin America and Asia Pacific. Revenue by region for the second quarter and first two quarters of fiscal 2013 and 2012 and the related changes are shown in the table below: 21 -------------------------------------------------------------------------------- Quarter Ended Two Quarters Ended (In millions, except December 28, December 30, $ % percentages) December 28, 2012 December 30, 2011 $ Change % Change 2012 2011 Change Change North America $ 41.4 $ 44.2 $ (2.8 ) (6.3 )% $ 80.1 $ 81.2 $ (1.1 ) (1.4 )% Africa and Middle East 63.9 24.0 39.9 166.3 % 112.9 66.7 46.2 69.3 % Europe and Russia 9.2 15.8 (6.6 ) (41.8 )% 21.6 28.2 (6.6 ) (23.4 )% Latin America and Asia Pacific 14.5 21.0 (6.5 ) (31.0 )% 29.4 40.3 (10.9 ) (27.0 )% Total Revenue $ 129.0 $ 105.0 $ 24.0 22.9 % $ 244.0 $ 216.4 $ 27.6 12.8 % Our revenue in North America decreased $2.8 million, or 6.3%, and $1.1 million, or 1.4%, respectively, during the second quarter and first two quarters of fiscal 2013 compared with the same periods of fiscal 2012. In the fiscal 2013 periods, we saw improved sales with North American mobile operators which were attributable to their ongoing buildout of LTE capable networks in the region. At the same time, North America sales to power utilities and state and local government private networks were down in the second quarter and in the first two quarters of fiscal 2013 compared with the same periods in fiscal 2012. The reduction was due to the timing of completion of distinct projects which tend to vary from quarter to quarter and year to year. We do not believe the decline indicates a trend in the private network business. We completed our first sales of low latency projects to a private network operator in the first half of fiscal 2013.

Our revenue in Africa and Middle East increased substantially over the same periods in fiscal 2012, up $39.9 million, or 166.3% for the second quarter and $46.2 million, or 69.3%, for the first two quarters in fiscal 2013. Throughout the first half of fiscal 2013, demand from mobile operator customers in Africa has been strong due to their increased investment in network transmission capacity in order to accommodate their growth in network data traffic and increase their service competitiveness. The second fiscal quarter each year tends to be seasonally high in our business. That seasonality is driven in part by mobile operators utilizing a significant portion of their capital budgets at the end of their fiscal year, which is the calendar year and coincides with our second fiscal quarter.

Revenue from mobile operators in Europe and Russia declined $6.6 million for both the second quarter and first two quarters of fiscal 2013 compared to the same periods in fiscal 2012. We believe this decrease was related to economic difficulty experienced generally throughout Europe.

Revenue in Latin America and Asia Pacific declined $6.5 million, or 31.0%, and $10.9 million, or 27.0%, respectively, during the second quarter and first two quarters of fiscal 2013 compared with the same periods of fiscal 2012. The decrease was primarily due to a decline in customer purchases in Asia as some of our bigger customers continue to deploy large orders that we delivered in the past year as they begin to roll out LTE service.

Our revenue from product sales was up by $20.1 million, or 27.1%, and $14.8 million, or 9.1%, respectively, during the second quarter and first two quarters of fiscal 2013 compared with the same periods of fiscal 2012. The increase came primarily from strong sales in Africa, offset in part by reductions in North America, Europe and Asia. Our services revenue was up by $3.9 million, or 12.6%, and $12.8 million, or 24.1%, respectively, during the second quarter and first two quarters of fiscal 2013 compared with the same periods of fiscal 2012. The increase in the fiscal 2013 periods came from additional services delivered in North America and Africa, offset in part by a decrease in Asia Pacific.

During the second quarter of fiscal 2013 and first two quarters of fiscal 2013 and 2012, the MTN Group in Africa accounted for more than 10% of our total revenue. We have entered into separate and distinct contracts with MTN Group as well as separate arrangements with MTN Group subsidiaries. The loss of all MTN Group business could adversely affect our results of operations, cash flows and financial position.

Gross Margin 22-------------------------------------------------------------------------------- Quarter Ended Two Quarters Ended (In millions, except December 28, December 30,percentages) December 28, 2012 December 30, 2011 $ Change % Change 2012 2011 $ Change % Change Revenue $ 129.0 $ 105.0 $ 24.0 22.9 % $ 244.0 $ 216.4 $ 27.6 12.8 % Cost of revenue 90.3 73.1 17.2 23.5 % 171.6 151.8 19.8 13.0 % Gross margin $ 38.7 $ 31.9 $ 6.8 21.3 % $ 72.4 $ 64.6 $ 7.8 12.1 % % of revenue 30.0 % 30.4 % 29.7 % 29.9 % Gross margin for the second quarter and first two quarters of fiscal 2013 increased $6.8 million, or 21.3%, and $7.8 million, or 12.1%, respectively, compared with the same periods of fiscal 2012. The increase in gross margin was due largely to higher sales volume and product mix for both the second quarter and the first half of fiscal 2013 compared with the same periods in fiscal 2012.

Gross margin as a percentage of revenue remained approximately the same for the fiscal 2013 periods compared with the same periods of fiscal 2012. We anticipate improvements in gross margin rates over time as our new product sales represent a larger share of our revenues.

Research and Development Expenses Quarter Ended Two Quarters Ended (In millions, except December 28, December 30, percentages) December 28, 2012 December 30, 2011 $ Change % Change 2012 2011 $ Change % Change Research and development expenses $ 9.8 $ 8.8 $ 1.0 11.4 % $ 19.1 $ 17.8 $ 1.3 7.3 % % of revenue 7.6 % 8.4 % 7.8 % 8.2 % Our research and development ("R&D") expenses increased $1.0 million, or 11.4%, and $1.3 million, or 7.3%, respectively, in the second quarter and first two quarters of fiscal 2013 compared with the same periods in fiscal 2012. The increase in R&D expenses was primarily due to increases in personnel expenses and share-based compensation, reflecting our investment in our new product development projects. We continue to invest in new product features, new functionality and lower cost platforms that we believe will enable our product lines to retain their technology leads in a cost effective manner.

Selling and Administrative Expenses Quarter Ended Two Quarters Ended (In millions, December 28, December 30, except percentages) December 28, 2012 December 30, 2011 $ Change % Change 2012 2011 $ Change % Change Selling and administrative expenses $ 23.7 $ 25.3 $ (1.6 ) (6.3 )% $ 46.4 $ 49.9 $ (3.5 ) (7.0 )% % of revenue 18.4 % 24.1 % 19.0 % 23.1 % Our selling and administrative expenses declined $1.6 million, or 6.3%, and $3.5 million or 7.0%, respectively, in the second quarter and first two quarters of fiscal 2013 compared with the same periods of fiscal 2012, primarily as a result of the restructuring programs we implemented over the past years. The decrease for the second quarter of fiscal 2013 was due primarily to a $0.9 million reduction in personnel expenses, a $0.4 million reduction in professional services, a $0.4 million reduction in agent commissions driven by lower fee-based revenues, and a $0.4 million decrease in bad debt expense, partially offset by a $0.4 million increase in sales related expenses and a $0.3 million increase in share-based compensation expenses. The decrease for the first half of fiscal 2013 was due primarily to a $2.0 million reduction in professional services, a $1.9 million reduction in personnel expenses, a $1.3 million reduction in telecommunication and facility expenses, partially offset by a $0.6 million increase in sales related expenses and a $0.8 million increase in share-based compensation expenses.

Restructuring Charges During the first quarter of fiscal 2011, we initiated the Fiscal 2011 Plan to reduce our operational costs. The Fiscal 2011 Plan was intended to bring our cost structure in line with the changing business environment of the worldwide microwave radio and telecommunication markets, primarily in North America, Europe and Asia. Activities under the Fiscal 2011 Plan included the reductions in force to reduce our operating expenses and downsizing or closures of our Morrisville, North Carolina, Santa Clara, California, Montreal, Canada and certain international field offices.

23 --------------------------------------------------------------------------------Our restructuring charges for the second quarter and first two quarters of fiscal 2013 and 2012 are summarized in the table below: Quarter Ended Two Quarters Ended (In millions, December 28, December 30, except percentages) December 28, 2012 December 30, 2011 $ Change % Change 2012 2011 $ Change % Change Restructuring $ 0.2 $ 0.1 $ 0.1 100.0 % $ 0.5 $ 1.0 $ (0.5 ) (50.0 )% Restructuring charges increased $0.1 million in the second quarter of fiscal 2013 compared with the same quarter of fiscal 2012 due to severance and related benefit charges. Restructuring charges declined $0.5 million in the first two quarters of fiscal 2013 compared with the same period of fiscal 2012 primarily due to the absence of a $0.7 million facilities charge in the first half of fiscal 2012 primarily related to the sublease and relocation of our Morrisville, North Carolina office during the period.

Our restructuring expenses consisted primarily of severance and related benefit charges, and to a lesser extent, facilities costs related to obligations under non-cancelable leases for facilities that we ceased to use. We intend to complete remaining restructuring activities under the Fiscal 2011 Plan in fiscal 2013.

Other Expense, Interest Income and Interest Expense Quarter Ended Two Quarters Ended (In millions) December 28, 2012 December 30, 2011 December 28, 2012 December 30, 2011 Other expense, net $ - $ (0.3 ) $ (0.6 ) $ (0.3 ) Interest income 0.2 0.1 0.5 0.3 Interest expense (0.2 ) (0.4 ) (0.5 ) (0.8 ) Other expense for the first two quarters of fiscal 2013 and fiscal 2012 consisted primarily of transactional tax assessments related to certain international entities.

Interest expense was primarily related to interest associated with borrowings, term loan and letters of credit under our credit facilities and, in the first half of fiscal 2012, also included preference dividends on our $8.25 million redeemable preference shares. The $8.25 million preference shares were redeemed at their carrying value on January 30, 2012, funded by a two-year term loan of $8.25 million under our credit facility at a fixed interest rate of 5% per annum.

Income Taxes Quarter Ended Two Quarters Ended (In millions, except December 28, percentages) December 28, 2012 December 30, 2011 $ Change 2012 December 30, 2011 $ Change Income (loss) from continuing operations before income taxes $ 4.9 $ (9.2 ) $ 14.1 $ 5.6 $ (11.9 ) $ 17.5 Provision for income taxes $ 9.9 $ 0.8 $ 9.1 $ 11.4 $ 1.8 $ 9.6 % of income (loss) from continuing operations before income taxes 202.0 % (8.7 )% 203.6 % (15.1 )% We estimate our annual effective rate at the end of each quarterly period, and we record the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. In jurisdictions with a year-to-date loss where no tax benefit can be recognized and jurisdictions where we are unable to estimate an annual effective tax rate are excluded from the annual effective tax rate. That determination also reflected tax expense and benefit generated in certain foreign jurisdictions. The tax expense for the second quarter and first two quarters of fiscal 2013 was primarily attributable to an increase in our reserve for uncertain tax positions of $9.9 million and $11.4 million, respectively, as the result of additional information obtained during recent tax examinations in certain countries. The tax expense for the second quarter and first two quarters of fiscal 2012 was primarily 24 -------------------------------------------------------------------------------- attributable to profitable foreign entities for which we have accrued income taxes. We accrued tax expenses for foreign jurisdictions that are anticipated to be profitable for fiscal 2013.

Our effective tax rate varies from the U.S. federal statutory rate of 35% 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.

Loss from Discontinued Operations Quarter Ended Two Quarters Ended (In millions) December 28, 2012 December 30, 2011 $ Change December 28, 2012 December 30, 2011 $ Change Loss from discontinued operations, net of tax $ (0.3 ) $ (2.8 ) $ 2.5 $ (1.7 ) $ (5.9 ) $ 4.2 Our discontinued operations consist of the WiMAX business, which was sold to EION on September 2, 2011. We completed the business transition with EION in fiscal 2012. The loss from discontinued operations decreased $2.5 million and $4.2 million, respectively, in the second quarter and first two quarters of fiscal 2013 compared with the same same periods in fiscal 2012. The loss incurred in the first two quarters of fiscal 2013 was primarily due to write-down of certain WiMAX deferred cost of sales that were not transferred to EION and certain expenses we incurred to support a remaining customer obligation. The loss in the first two quarters of fiscal 2012 included operating expenses we incurred to transition the business and a $2.0 million loss on disposition of the WiMAX business.

Liquidity, Capital Resources and Financial Strategies Sources of Cash As of December 28, 2012, our total cash and cash equivalents were $94.8 million.

Approximately $31.9 million, or 33.6% of our total cash and cash equivalents, was held by entities domiciled in the United States. The remaining balance of $62.9 million or 66.4% was held by entities outside the United States. Of the amount of cash and cash equivalents held by our foreign subsidiaries at December 28, 2012, $49.3 million was held in jurisdictions where our undistributed earnings are indefinitely reinvested, and would be subject to U.S. taxes if repatriated..

As of December 28, 2012, our principal sources of liquidity consisted of the $94.8 million in cash and cash equivalents, $23.8 million of available credit under our current $40.0 million credit facility with SVB, and future collections of receivables from customers. We regularly require letters of credit from some customers that request extended payment terms up to one year or more. From time to time, these letters of credit are discounted without recourse shortly after shipment occurs in order to meet immediate liquidity requirements and to reduce our credit and sovereign risk. Historically our primary sources of liquidity have been cash flows from operations, credit facilities and cash proceeds from sale of our equity securities. During the first two quarters of fiscal 2013, our total cash and cash equivalents decreased by $1.2 million primarily due to $3.5 million million cash provided by operating activities, $3.6 million of cash used for capital expenditures, and $2.1 million repayment on our long-term debt.

Cash provided by operating activities was $3.5 million in the first two quarters of fiscal 2013 primarily due to a decrease in unbilled costs of $9.1 million, an increase in customer advance payments and unearned income of $11.4 million, an increase in reserve for uncertain tax positions of $11.4 million, and taking into account our net loss of $7.5 million adjusted by non-cash expense items of $10.3 million, but was partially offset by an increase in receivables of $10.3 million and a net decrease in accounts payable and accrued expenses of $18.0 million. The decrease in unbilled costs was due to the completion of customer projects during the period. The increase in customer advance payments and unearned income was due to the timing of revenue recognition on several large contracts. Our accounts receivable increased during the first two quarters of fiscal 2013 primarily due to a larger volume of billings in the period. The decrease in accounts payable and accrued expenses was primarily due to the timing of disbursements. We also used $1.3 million in cash during the first two quarters of fiscal 2013 related to restructuring liabilities.

During the remainder of fiscal year 2013, we expect to spend approximately $7.5 million for capital expenditures primarily on equipment for development of new products and improvement of our information technology infrastructure which will enable more automated supply chain management and financial reporting and lead to process and cost efficiency and ability to scale our business. We currently believe that our existing cash and cash equivalents, the available line of credit under the SVB facility and future cash collections from customers will be sufficient to provide for our anticipated requirements for working capital and capital expenditures for the next 12 months and the foreseeable future. There can be no 25-------------------------------------------------------------------------------- assurance, however, that our business will generate cash flow, or that anticipated operational improvements will be achieved. If we are unable to maintain cash balances or generate sufficient cash flow from operations to service our obligations or liability for uncertain tax positions that may arise in the future, we may be required to sell assets, reduce capital expenditures, or obtain financing. If we need to obtain additional financing, we cannot be assured that it will be available on favorable terms, or at all. Our ability to make scheduled principal payments or pay interest on or refinance any future indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the microwave communications market and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

Available Credit Facility, Borrowings and Repayment of Debt As of December 28, 2012, we had $23.8 million of credit available under our revolving credit facility with SVB. The total amount of revolving credit available was $40.0 million less $10.8 million in outstanding borrowings and $5.4 million in outstanding standby letters of credit issued under the SVB facility.

In an amendment to the facility effective November 2, 2011, the commitment of $40.0 million under the facility was extended to expire on February 28, 2014 and provides for (1) advance borrowings at the prime rate published in the Wall Street Journal, (2) fixed term Eurodollar loans for up to six months at LIBOR plus a spread of between 2.00% to 2.75% based on the company's current leverage ratio, (3) a two-year term loan in the amount of $8.3 million at a fixed rate of 5% per annum expiring on January 31, 2014, and (4) the issuance of standby or commercial letters of credit. As of December 28, 2012, we had $6.0 million advance borrowings under the credit facility which we do not expect to repay within the next 12 months. The term loan drawn on January 30, 2012 is repaid in 24 equal monthly installments of principal plus accrued interest commencing February 29, 2012. The SVB facility contains a minimum liquidity ratio covenant and a minimum profitability covenant and is secured by certain of the company's assets including accounts receivable, inventory, and equipment. The facility also imposes certain restrictions on our ability to pay dividends or make distributions to our stockholders under certain circumstances.

Based on financial covenants included as part of the amended SVB credit facility effective September 28, 2012, we must maintain, as measured at the last day of each fiscal quarter beginning September 28, 2012 through December 27, 2013, (1) no less than a minimum liquidity ratio of 1.50 to 1 (defined as the ratio of total domestic unrestricted cash and cash equivalents plus short-term and long-term marketable securities plus the lesser of 25% of eligible accounts receivable or $12.5 million to total obligations outstanding with the bank) and (2) minimum consolidated EBITDA measured for each fiscal quarter. As of December 28, 2012, we were in compliance with these financial covenants.

Restructuring Payments We have a liability for restructuring activities totaling $1.4 million as of December 28, 2012, $0.9 million of which is classified as current liability and expected to be paid out in cash over the next 12 months. We expect to fund these future payments with available cash and cash flow provided by operations.

Contractual Obligations and Commercial Commitments The amounts disclosed in our Fiscal 2012 Form 10-K include our commercial commitments and contractual obligations. During the first two quarters of fiscal 2013, no material changes occurred in our contractual cash obligations to repay debt, to purchase goods and services and to make payments under operating leases or our commercial commitments and contingent liabilities on outstanding letters of credit, guarantees and other arrangements as disclosed in our Fiscal 2012 Form 10-K. Please refer to Note 13, "Commitments and Contingencies" in this Form 10-Q. During the first two quarters of fiscal 2013, we recorded $11.4 million in our reserve for uncertain tax positions, as set forth in Note 11, "Income Taxes" in this Form 10-Q. As of December 28, 2012, we were not able to determine the timing of future payment on the uncertain tax position liability.

Critical Accounting Estimates For information about our critical accounting estimates, see the "Critical Accounting Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Fiscal 2012 Form 10-K.

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