e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 28, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33278
HARRIS STRATEX NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-5961564 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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637 Davis Drive
Morrisville, North Carolina
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27560 |
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(Address of principal executive offices)
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(Zip Code) |
(919) 767-3250
(Registrants telephone number, including area code)
Indicate by checkmark whether the registrant (l) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer,
a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act (check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the
Exchange Act). Yes o No þ
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Class of Stock |
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Shares Outstanding as of January 31, 2007 |
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Class A Common Stock, par value $0.01 per share |
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25,505,703 |
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Class B Common Stock, par value $0.01 per share |
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32,913,377 |
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Total shares of common stock outstanding |
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58,419,080 |
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HARRIS STRATEX NETWORKS, INC.
FORM 10-Q
For the Quarter Ended December 28, 2007
INDEX
This Quarterly Report on Form 10-Q contains trademarks of Harris Stratex Networks, Inc.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HARRIS STRATEX NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Quarter Ended |
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Two Quarters Ended |
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December 28, |
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December 29, |
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December 28, |
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December 29, |
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2007 |
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2006 |
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2007 |
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2006 |
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(In millions, except per common share amounts) |
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Revenue from product sales and services: |
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Revenue from external product sales |
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$ |
148.9 |
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$ |
82.5 |
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$ |
297.5 |
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$ |
164.4 |
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Revenue from product sales with Harris
Corporation |
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3.7 |
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0.9 |
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4.9 |
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1.4 |
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Total revenue from product sales |
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152.6 |
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83.4 |
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302.4 |
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165.8 |
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Revenue from services |
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28.5 |
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17.8 |
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51.0 |
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29.0 |
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Total revenue from product sales and
services |
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181.1 |
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101.2 |
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353.4 |
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194.8 |
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Cost of product sales and services: |
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Cost of external product sales |
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(98.0 |
) |
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(50.5 |
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(204.9 |
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(102.5 |
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Cost of product sales with Harris
Corporation |
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(3.3 |
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(2.1 |
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(3.6 |
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(2.4 |
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Total cost of product sales |
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(101.3 |
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(52.6 |
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(208.5 |
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(104.9 |
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Cost of services |
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(24.8 |
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(13.7 |
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(38.4 |
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(21.6 |
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Cost of sales billed from Harris
Corporation |
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(4.0 |
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(0.1 |
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(4.6 |
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(2.7 |
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Amortization of purchased technology |
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(1.7 |
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(3.5 |
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Total cost of product sales and services |
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(131.8 |
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(66.4 |
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(255.0 |
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(129.2 |
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Gross margin |
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49.3 |
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34.8 |
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98.4 |
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65.6 |
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Research and development expenses |
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(10.9 |
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(8.3 |
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(23.3 |
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(15.7 |
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Selling and administrative expenses |
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(31.2 |
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(16.3 |
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(61.4 |
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(31.1 |
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Selling and administrative expenses
with Harris Corporation |
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(1.7 |
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(1.5 |
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(3.4 |
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(3.2 |
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Total research, development, selling
and administrative expenses |
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(43.8 |
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(26.1 |
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(88.1 |
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(50.0 |
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Amortization of identifiable intangible
assets |
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(1.9 |
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(3.7 |
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Restructuring charges |
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(4.4 |
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(0.7 |
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(8.4 |
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(0.7 |
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Corporate allocations expense from
Harris Corporation |
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(1.8 |
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(3.4 |
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Operating (loss) income |
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(0.8 |
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6.2 |
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(1.8 |
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11.5 |
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Interest income |
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0.4 |
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0.2 |
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1.1 |
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0.3 |
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Interest expense |
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(0.8 |
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(0.3 |
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(1.5 |
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(0.5 |
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(Loss) income before provision for
income taxes |
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(1.2 |
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6.1 |
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(2.2 |
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11.3 |
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Benefit (provision) for income taxes |
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0.2 |
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(0.3 |
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0.4 |
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(0.7 |
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Net (loss) income |
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$ |
(1.0 |
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$ |
5.8 |
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$ |
(1.8 |
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$ |
10.6 |
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Net loss per common share: |
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Basic and diluted |
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$ |
(0.02 |
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N/A |
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$ |
(0.03 |
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N/A |
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Basic and diluted weighted average
shares outstanding |
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58.4 |
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N/A |
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58.4 |
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N/A |
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N/A |
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- Prior to January 26, 2007, the Company was a division of Harris Corporation and there were
no shares outstanding for purposes of income or loss per share calculations. |
See accompanying Notes to Condensed Consolidated Financial Statements.
3
HARRIS STRATEX NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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December 28, |
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June 29, |
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2007 |
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2007 |
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(In millions, except share amounts) |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
73.0 |
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$ |
69.2 |
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Short-term investments and available for sale securities |
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10.0 |
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20.4 |
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Receivables |
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207.6 |
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185.3 |
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Unbilled costs |
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38.4 |
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36.9 |
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Inventories |
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130.0 |
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135.7 |
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Deferred income taxes |
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7.1 |
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4.1 |
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Other current assets |
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22.0 |
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21.7 |
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Total current assets |
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488.1 |
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473.3 |
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Long-Term Assets |
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Property, plant and equipment |
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78.2 |
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80.0 |
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Goodwill |
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314.6 |
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323.6 |
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Identifiable intangible assets |
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137.2 |
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144.5 |
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Capitalized software |
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9.5 |
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9.7 |
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Non-current portion of notes receivable |
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4.1 |
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5.3 |
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Non-current deferred income taxes |
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0.1 |
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0.5 |
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Other assets |
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3.8 |
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1.2 |
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Total long-term assets |
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547.5 |
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564.8 |
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Total assets |
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$ |
1,035.6 |
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$ |
1,038.1 |
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Liabilities and Shareholders Equity |
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Current Liabilities |
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Short-term debt |
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$ |
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$ |
1.2 |
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Current portion of long-term debt |
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7.6 |
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10.7 |
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Accounts payable |
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96.5 |
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84.7 |
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Compensation and benefits |
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7.4 |
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11.5 |
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Other accrued items |
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43.8 |
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44.7 |
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Advance payments and unearned income |
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27.9 |
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22.3 |
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Income taxes payable |
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4.0 |
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6.8 |
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Restructuring liabilities |
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9.8 |
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10.8 |
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Current portion of long-term capital lease obligation to Harris
Corporation |
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2.5 |
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3.1 |
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Due to Harris Corporation |
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16.2 |
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17.2 |
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Total Current Liabilities |
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215.7 |
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213.0 |
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Long-Term Liabilities |
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Long-term debt |
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6.3 |
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8.8 |
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Long-term portion of capital lease obligation to Harris Corporation |
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1.8 |
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2.8 |
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Restructuring and other long-term liabilities |
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8.3 |
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11.8 |
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Redeemable preference shares |
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8.3 |
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8.3 |
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Warrants |
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3.1 |
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3.9 |
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Deferred income taxes |
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23.6 |
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31.5 |
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Total Liabilities |
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267.1 |
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280.1 |
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Commitments and contingencies |
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Shareholders Equity |
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Preferred stock, $0.01 par value; 50,000,000 shares authorized;
none issued |
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Common stock, Class A, $0.01 par value; 300,000,000 shares
authorized; issued and outstanding 25,476,101 shares at December
28, 2007 and 25,400,856 shares at June 29, 2007 |
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0.3 |
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0.3 |
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Common stock, Class B $0.01 par value; 100,000,000 shares
authorized; issued and outstanding 32,913,377 shares at December
28, 2007 and June 29, 2007 |
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0.3 |
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0.3 |
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Additional paid-in-capital |
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784.8 |
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778.3 |
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Accumulated deficit |
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(22.7 |
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(20.9 |
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Accumulated other comprehensive income |
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5.8 |
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Total Shareholders Equity |
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768.5 |
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758.0 |
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Total Liabilities And Shareholders Equity |
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$ |
1,035.6 |
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$ |
1,038.1 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
HARRIS STRATEX NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
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Two Quarters Ended |
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December 28, |
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December 29, |
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2007 |
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2006 |
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(In millions) |
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Operating Activities |
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Net (loss) income |
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$ |
(1.8 |
) |
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$ |
10.6 |
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Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities: |
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Amortization of identifiable intangible assets acquired in the
Stratex acquisition |
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7.2 |
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Depreciation and amortization of property, plant and equipment and
capitalized software |
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9.4 |
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6.2 |
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Non-cash stock-based compensation expense |
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3.6 |
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Non-cash charges for restructuring and inventory write-downs |
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7.8 |
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Decrease in fair value of warrants |
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(0.8 |
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Deferred income tax (benefit) expense |
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(3.5 |
) |
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Changes in operating assets and liabilities: |
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Receivables |
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(20.9 |
) |
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15.4 |
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Unbilled costs and inventories |
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0.6 |
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(23.7 |
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Accounts payable and accrued expenses |
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7.1 |
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(4.5 |
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Advance payments and unearned income |
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5.5 |
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6.4 |
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Due to Harris Corporation |
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0.5 |
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(12.3 |
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Other |
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(2.6 |
) |
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(3.8 |
) |
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Net cash provided by (used in) operating activities |
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12.1 |
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(5.7 |
) |
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Investing Activities |
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Purchases of short-term investments and available for sale securities |
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(4.4 |
) |
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Sales of short-term investments and available for sale securities |
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14.8 |
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Additions of property, plant and equipment |
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(3.6 |
) |
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(1.9 |
) |
Additions of capitalized software |
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(6.5 |
) |
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(3.1 |
) |
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Net cash provided by (used in) investing activities |
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0.3 |
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(5.0 |
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Financing Activities |
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Decrease in short-term debt |
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(1.2 |
) |
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(0.1 |
) |
Payments on long-term debt |
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(5.6 |
) |
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Payments on long-term capital lease obligation to Harris Corporation |
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(2.0 |
) |
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Proceeds from exercise of former Stratex stock options |
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0.9 |
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Net cash and other transfers from Harris Corporation prior to the
Stratex acquisition |
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8.5 |
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Net cash (used in) provided by financing activities |
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(7.9 |
) |
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8.4 |
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Effect of exchange rate changes on cash and cash equivalents |
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(0.7 |
) |
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0.7 |
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Net (decrease) increase in cash and cash equivalents |
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3.8 |
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(1.6 |
) |
Cash and cash equivalents, beginning of year |
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69.2 |
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13.8 |
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Cash and cash equivalents, end of period |
|
$ |
73.0 |
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$ |
12.2 |
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|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 28, 2007
(Unaudited)
Note A Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Harris
Stratex Networks, Inc. and its wholly-owned and majority-owned subsidiaries (we, us and our)
and have been prepared by us, without an audit, in accordance with accounting principles generally
accepted in the United States for interim financial information and with the rules and regulations
of the Securities and Exchange Commission (SEC). Accordingly, they do not include all information
and footnotes necessary for a complete presentation of financial position, results of operations
and changes in cash flows in conformity with U.S. generally accepted accounting principles. In the
opinion of our management, such financial statements reflect all adjustments (consisting only 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 quarter ended December 28, 2007 are not necessarily indicative of the
results that may be expected for the full fiscal year or any subsequent period. The balance sheet
at June 29, 2007 has been derived from our audited financial statements but does not include all
the information and footnotes required by generally accepted accounting principles in the United
States for annual financial statements. We provide complete financial statements in our Annual
Report on Form 10-K, which includes information and footnotes required by the rules and regulations
of the SEC. The information included in this Quarterly Report on Form 10-Q should be read in
conjunction with the Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 29,
2007 (Fiscal 2007 Form 10-K).
The preparation of financial statements in accordance with accounting principles generally
accepted in the United States requires us to make estimates and assumptions that affect the amounts
reported in the condensed financial statements and accompanying notes. Actual results could differ
from those estimates.
Prior to January 26, 2007, we were a division of Harris Corporation (Harris). For periods
prior to January 26, 2007, our consolidated financial statements include the accounts of the MCD
and Harris subsidiaries classified as part of MCD, our financial reporting predecessor entity.
These financial statements have been determined to be our historical financial statements. As used
in these notes, the term MCD refers to the consolidated operations of the Microwave
Communications Division of Harris.
For periods prior to January 26, 2007, our historical financial statements are presented on a
carve-out basis and reflect the assets, liabilities, revenue and expenses that were directly
attributable to MCD as it was operated within Harris. Our condensed consolidated statements of
operations include all of the related costs of doing business, including an allocation of certain
general corporate expenses of Harris, which were in support of MCD, including costs for finance,
legal, treasury, purchasing, quality, environmental, safety, human resources, tax, audit and public
relations departments and other corporate and infrastructure costs. We were allocated $1.8 million
and $3.4 million for these general corporate expenses from Harris during the quarter and two
quarters ended December 29, 2006. These costs represented approximately 10.2 percent and 10.0
percent of the total cost of these allocated services in the quarter and two quarters ended
December 29, 2006. These cost allocations were based primarily on a ratio of our revenue to total
Harris revenue, multiplied by the total headquarters expense of Harris. The allocation of Harris
overhead expenses to us concluded on January 26, 2007. We believe these allocations were made on a
reasonable basis. Harris currently owns approximately 56 percent of our common stock.
On January 26, 2007, we acquired Stratex Networks, Inc. (Stratex). The results of operations
and cash flows of Stratex were not included in any of our consolidated financial statements before
January 26, 2007.
6
Note B Recent Accounting Pronouncements
Accounting for Uncertain Tax Positions
On June 30, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No.
48 Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 prescribes a more-likely-than-not threshold for the recognition and derecognition of
tax positions, provides guidance on the accounting for interest and penalties relating to tax
positions and requires that the cumulative effect of applying the provisions of FIN 48 shall be
reported as an adjustment to the opening balance in retained earnings (deficit) or other
appropriate components of equity or net assets. Refer to Note N Income Taxes, for additional
information relating to our accounting for FIN 48 and income taxes.
Accounting for Business Combinations
On December 4, 2007, the FASB issued Statement of Financial Accounting Standards No. 141
(revised 2007), Business Combinations (Statement 141R). Statement 141R requires that, upon a
business combination, the acquired assets, assumed liabilities, contractual contingencies and
contingent liabilities, be recognized and measured at their fair value at the acquisition date.
Statement 141R also requires that acquisition-related costs be recognized separately from the
acquisition and expensed as incurred. In addition, Statement 141R requires that acquired in-process
research and development be measured at fair value and capitalized as an indefinite-lived
intangible asset, and it is therefore not subject to amortization until the project is completed or
abandoned. Moreover, Statement 141R requires changes in deferred tax asset valuation allowances and
acquired income tax uncertainties that are recognized after the measurement period be recognized in
income tax expense. Statement 141R is to be applied prospectively and is effective for fiscal years
beginning on or after December 15, 2008, which for us will be our fiscal 2010.
Accounting for Noncontrolling Interests in Consolidated Financial Statements
On December 4, 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51
(Statement 160). Statement 160 requires that noncontrolling interests (previously referred to as
minority interests) be clearly identified and presented as a component of equity, separate from the
parents equity. Statement 160 also requires that the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly identified and presented
on the face of the consolidated statement of income; that changes in ownership interest be
accounted for as equity transactions; and that when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in that subsidiary and the gain or loss on the deconsolidation of
that subsidiary be measured at fair value. Statement 160 is to be applied prospectively, except for
the presentation and disclosure requirements (which are to be applied retrospectively for all
periods presented) and is effective for fiscal years beginning after December 15, 2008, which for
us will be our fiscal 2010. We are currently evaluating the impact Statement 160 may have on our
financial position, results of operations and cash flows.
Note C Short-Term Investments and Available for Sale Securities
Short-term investments and available for sale securities as of December 28, 2007 consisted of
the following:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
December 28, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
|
|
(In millions) |
|
Corporate notes |
|
$ |
8.8 |
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|
$ |
|
|
|
$ |
|
|
|
$ |
8.8 |
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Government notes |
|
|
1.2 |
|
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|
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|
1.2 |
|
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|
|
Total short-term investments and available for sale securities |
|
$ |
10.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10.0 |
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|
|
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|
Our short-term investments and available for sale securities have maturity dates of less than
one year, with a weighted average maturity of 58 days.
7
Note D Accumulated Other Comprehensive Income (Loss) and Comprehensive Income
The changes in components of our accumulated other comprehensive income (loss) during the two
quarters ended December 28, 2007 and December 29, 2006 were as follows:
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|
|
Short-Term |
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|
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|
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Investments |
|
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Total |
|
|
|
|
|
|
|
|
|
|
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and |
|
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Accumulated |
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|
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Foreign |
|
|
|
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|
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Available |
|
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Other |
|
|
|
Currency |
|
|
Hedging |
|
|
for Sale |
|
|
Comprehensive |
|
|
|
Translation |
|
|
Derivatives |
|
|
Securities |
|
|
Income (Loss) |
|
|
|
(In millions) |
|
Balance at June 29, 2007 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign currency translation |
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 28, 2007 |
|
$ |
5.8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5.8 |
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
$ |
(1.5 |
) |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
(1.4 |
) |
Foreign currency translation |
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2006 |
|
$ |
(4.9 |
) |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) for the quarters ended December 28, 2007 and December 29,
2006 was comprised of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Two Quarters Ended |
|
|
|
December 28, |
|
|
December 29, |
|
|
December 28, |
|
|
December 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Net (loss) income |
|
$ |
(1.0 |
) |
|
$ |
5.8 |
|
|
$ |
(1.8 |
) |
|
$ |
10.6 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
3.1 |
|
|
|
(3.7 |
) |
|
|
5.8 |
|
|
|
(3.4 |
) |
Net unrealized gain (loss) on hedging activities |
|
|
(0.3 |
) |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
1.8 |
|
|
$ |
2.1 |
|
|
$ |
4.0 |
|
|
$ |
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note E Receivables
Our receivables are summarized below:
|
|
|
|
|
|
|
|
|
|
|
December 28, |
|
|
June 29, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
Accounts receivable |
|
$ |
212.5 |
|
|
$ |
190.5 |
|
Notes receivable due within one year net |
|
|
3.6 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
216.1 |
|
|
|
193.8 |
|
Less allowances for collection losses |
|
|
(8.5 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
$ |
207.6 |
|
|
$ |
185.3 |
|
|
|
|
|
|
|
|
8
Note F Inventories
Our inventories are summarized below:
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|
|
|
|
|
|
|
December 28, |
|
|
June 29, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
Finished products |
|
$ |
54.7 |
|
|
$ |
52.9 |
|
Work in process |
|
|
37.3 |
|
|
|
28.6 |
|
Raw materials and supplies |
|
|
59.6 |
|
|
|
68.4 |
|
|
|
|
|
|
|
|
|
|
|
151.6 |
|
|
|
149.9 |
|
Inventory reserves |
|
|
(21.6 |
) |
|
|
(14.2 |
) |
|
|
|
|
|
|
|
|
|
$ |
130.0 |
|
|
$ |
135.7 |
|
|
|
|
|
|
|
|
During the quarter ended December 28, 2007, we recorded a total of $3.7 million for inventory
markdowns which are classified in Cost of product sales on the Statement of Operations during the
quarter ended December 28, 2007 in accordance with the guidance in Emerging Issues Task Force
(EITF) Abstracts Issues No. 96-9 Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring. These markdowns were part of our 2007 restructuring plan (see
Note K).
Our 2007 restructuring plan included product strategies resulting in the product
discontinuance of the Companys MegaStar product line during the second quarter of fiscal 2008. For
international markets, the TruePoint 6500 product replaced MegaStar. MegaStar was produced at the
Companys facility in San Antonio, Texas. Accordingly, during the quarter ended December 28, 2007,
the Company recorded a $1.5 million charge for MegaStar inventory markdowns.
During the second quarter of fiscal 2008, these restructuring activities also resulted in
scaled down operations and reduced activity in Canada, Brazil and China. As a result, we recorded
inventory markdowns of $0.4 million, $1.0 million and $0.8 million in Canada, Brazil and China,
respectively, during the quarter ended December 28, 2007.
Note G Property, Plant and Equipment
Our property, plant and equipment are summarized below:
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|
|
|
|
|
|
|
|
|
December 28, |
|
|
June 29, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
Land |
|
$ |
1.3 |
|
|
$ |
1.3 |
|
Buildings |
|
|
28.5 |
|
|
|
30.8 |
|
Software developed for internal use |
|
|
8.2 |
|
|
|
3.0 |
|
Machinery and equipment |
|
|
122.3 |
|
|
|
123.3 |
|
|
|
|
|
|
|
|
|
|
|
160.3 |
|
|
|
158.4 |
|
Less allowances for depreciation and amortization |
|
|
(82.1 |
) |
|
|
(78.4 |
) |
|
|
|
|
|
|
|
|
|
$ |
78.2 |
|
|
$ |
80.0 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to plant and equipment, including software
amortization, was $3.4 million and $1.5 million during the quarters ended December 28, 2007 and
December 29, 2006, and $ 8.0 million and $3.0 million in the two quarters ended December 28, 2007
and December 29, 2006.
9
Note H Credit Facility and Debt
Our debt consisted of the following at December 28, 2007 and June 29, 2007:
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|
|
|
|
|
|
|
|
|
|
December 28, |
|
|
June 29, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
Credit Facility with Bank: |
|
|
|
|
|
|
|
|
Term Loan A |
|
$ |
2.6 |
|
|
$ |
5.7 |
|
Term Loan B |
|
|
11.3 |
|
|
|
13.8 |
|
Other short-term notes |
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Total |
|
|
13.9 |
|
|
|
20.7 |
|
Less other short-term notes |
|
|
|
|
|
|
(1.2 |
) |
Less current portion |
|
|
(7.6 |
) |
|
|
(10.7 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
6.3 |
|
|
$ |
8.8 |
|
|
|
|
|
|
|
|
As part of the Stratex acquisition, we assumed the existing credit facility of Stratex with a
commercial bank (the Credit Facility). The Credit Facility allows for revolving credit borrowings
of up to $50 million with available credit defined as $50 million less the outstanding balance of
our term loans ($13.9 million as of December 28, 2007) and any usage under the revolving credit
portion which includes our outstanding standby letters of credit ($8.2 million as of December 28,
2007). The Credit Facility is unsecured. The fair value of our debt approximates book values as of
December 28, 2007.
Term Loan A of the Credit Facility requires monthly principal payments of $0.5 million plus
interest at a fixed rate of 6.38 percent through May 2008. Term Loan B requires monthly principal
payments of $0.4 million plus interest at a fixed rate of 7.25 percent through March 2010.
The credit facility agreement contains a minimum tangible net worth covenant and a liquidity
ratio covenant. As of December 28, 2007 we were in compliance with these financial covenants.
As of December 28, 2007, our future principal payment obligations on long-term debt under the
Credit Facility were as follows:
|
|
|
|
|
|
|
Years Ending |
|
|
|
in June |
|
|
|
(In millions) |
|
2008 |
|
$ |
5.1 |
|
2009 |
|
|
5.0 |
|
2010 |
|
|
3.8 |
|
|
|
|
|
Total |
|
$ |
13.9 |
|
|
|
|
|
We have other uncommitted short-term lines of credit aggregating $0.4 million from various
international banks available on December 28, 2007. These lines provide for borrowings at various
interest rates, typically may be terminated upon notice, may be used on such terms as mutually
agreed to by the banks and us and are reviewed annually for renewal or modification.
10
Note I Accrued Warranties
We have accrued for the estimated cost to repair or replace products under warranty at the
time of sale. Changes in warranty liability, which is included as a component of Other accrued
items on the condensed consolidated balance sheets, during the two quarters ended December 28,
2007 and December 29, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended |
|
|
|
December 28, |
|
|
December 29, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Balance as of the beginning of the year |
|
$ |
5.6 |
|
|
$ |
3.9 |
|
Warranty provision for revenue recorded during the period |
|
|
3.7 |
|
|
|
0.7 |
|
Settlements made during the period |
|
|
(3.9 |
) |
|
|
(1.2 |
) |
Other adjustments to liability, including foreign
currency translation during the period |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Balance as of the end of the period |
|
$ |
5.5 |
|
|
$ |
3.5 |
|
|
|
|
|
|
|
|
Note J Warrants
As part of the Stratex acquisition, we assumed warrants to purchase shares of our Class A
common stock. As of December 28, 2007, warrants to purchase 520,445 shares of our Class A common
stock were outstanding. These warrants have an exercise price of $11.80 per common share and will
expire on September 24, 2009. The per share fair value of each warrant was $6.03 and $7.43 on
December 28, 2007 and June 29, 2007, determined based on the Black-Scholes-Merton model with the
assumptions listed in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 28, |
|
June 29, |
|
|
2007 |
|
2007 |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
45.3 |
% |
|
|
43.1 |
% |
Risk-free interest rate |
|
|
3.29 |
% |
|
|
4.91 |
% |
Expected holding period |
|
0.92 year |
|
1.25 years |
As a result of recording these outstanding warrants at fair value at December 28, 2007, we
recorded the change in fair value during the quarter and two quarters ended December 28, 2007 of
$0.3 million and $0.8 million as decreases to selling and administrative expenses on our condensed
consolidated statements of operations. During the two quarters ended December 28, 2007, there were
no warrants exercised.
Note K Restructuring Activities
During the two quarters ended December 28, 2007, Harris Stratex Networks, Inc. (the Company)
continued its restructuring activities implemented within the merger restructuring plans approved
in connection with the January 26, 2007 merger between the Microwave Communications Division of
Harris Corporation and Stratex Networks, Inc. These restructuring plans included the consolidation
of facilities and operations of the predecessor entities in Canada, France, the U.S., China, Brazil
and, to a lesser extent, Mexico, New Zealand and the United Kingdom.
In the second quarter of fiscal 2008, we recorded an additional $4.4 million of restructuring
charges in connection with implementation of these fiscal 2007 plans. The cost of these plans as
they related to reductions in force during the second quarter of fiscal 2008 consisted of
retention, severance and other benefits totaling $0.9 million. We also recorded $1.1 million in
restructuring charges relating to the impairment of a lease and $0.1 million relating to the
write-off of fixed assets. These restructuring activities also resulted in scaled down operations
and reduced activity in Brazil. This reduced activity in Brazil negatively affected the fair value
of a recoverable value-added type tax (ICMS) included in Other
current assets on the Companys balance sheet. We recorded an impairment of $2.3 million in
restructuring charges during the quarter ended December 28, 2007 relating to the reduction in fair
value of ICMS tax recoverable in Brazil.
In the first two quarters of fiscal 2008, we recorded an additional $8.4 million of restructuring
charges in connection with implementation of these fiscal 2007 plans. The cost of these plans as
they relate to the reductions in force during the first two quarters of fiscal 2007 consisted
primarily of retention, severance and other benefits totaling $3.4 million. We also recorded $1.4
million in
11
restructuring charges related to the impairment of a lease and $1.9 million relating to the
write-off of fixed assets and leasehold improvements. These restructuring activities also resulted
in scaled down operations and reduced activity in Brazil. This reduced activity in Brazil
negatively affected the fair value of a recoverable value-added type tax (ICMS) included in
Other current assets on the Companys balance sheet. We recorded an impairment of $2.3 million in
restructuring charges during the quarter ended December 28, 2007 relating to the reduction in fair
value of ICMS tax recoverable in Brazil. These charges to restructuring in the first two quarters
of fiscal 2008 were partially offset by $0.3 million for the reduction in severance estimated to be
paid in France and a $0.3 million reduction in the amount estimated to close out our restructuring
liability in connection with our fiscal year 2006 restructuring plan to transfer our Montreal
manufacturing activities to our San Antonio, Texas facility.
In the third quarter of fiscal 2007, in connection with the Stratex acquisition on January 26,
2007, we recognized $12.0 million of restructuring liabilities representing the fair value of
Stratex restructuring liabilities incurred prior to, and not related to, the acquisition as
summarized in the table below. Those charges related to building lease obligations at four of
Stratexs U.S. facilities.
In the two quarters ended December 28, 2007, we made payments of $1.4 million on these leases,
which reduced the liability by $1.0 million, net of $0.4 million in interest expense. Also during
the two quarters ended December 28, 2007, new information became available with regard to our
utilization of the space under these building lease obligations and we reduced our restructuring
liability by $1.1 million with an offsetting decrease to goodwill under purchase accounting.
The information in the following table summarizes our restructuring activity during the
quarter ended December 28, 2007 and the remaining restructuring liability as of December 28, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Facilities |
|
|
|
|
|
|
and |
|
|
and |
|
|
|
|
|
|
Benefits |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Restructuring liability at June 29, 2007 |
|
$ |
7.8 |
|
|
$ |
10.8 |
|
|
$ |
18.6 |
|
Provision in the two quarters ended December 28, 2007 |
|
|
3.4 |
|
|
|
5.6 |
|
|
|
9.0 |
|
Release of accrual to statement of operations in the two quarters ended December 28, 2007 |
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.6 |
) |
Amount credited to goodwill in the two quarters ended December 28, 2007 |
|
|
|
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
Other adjustments to liability, including foreign currency translation during the period |
|
|
0.6 |
|
|
|
|
|
|
|
0.6 |
|
Non-cash charges in the two quarters ended December 28, 2007 |
|
|
|
|
|
|
(4.1 |
) |
|
|
(4.1 |
) |
Cash payments in the two quarters ended December 28, 2007 |
|
|
(5.0 |
) |
|
|
(1.6 |
) |
|
|
(6.6 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring liability at December 28, 2007 |
|
$ |
6.2 |
|
|
$ |
9.6 |
|
|
$ |
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of restructuring liability at December 28, 2007 |
|
$ |
6.2 |
|
|
$ |
3.6 |
|
|
|
9.8 |
|
Long-term portion of restructuring liability at December 28, 2007 |
|
|
|
|
|
|
6.0 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
Total restructuring liability at December 28, 2007 |
|
$ |
6.2 |
|
|
$ |
9.6 |
|
|
$ |
15.8 |
|
|
|
|
|
|
|
|
|
|
|
Our fiscal year 2007 restructuring plans are expected to be fully implemented by March 28,
2008. The following table summarizes our costs incurred through December 28, 2007 and costs
expected to be incurred for our fiscal 2007 restructuring plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred During |
|
|
Cumulative |
|
|
|
|
|
|
|
|
|
|
Total Costs |
|
|
the Two Quarters |
|
|
Costs Incurred |
|
|
|
|
|
|
Total |
|
|
|
Incurred through |
|
|
Ended |
|
|
through |
|
|
Estimated |
|
|
Restructuring |
|
|
|
June 29, |
|
|
December 28, |
|
|
December 28, |
|
|
Additional Costs |
|
|
Costs Expected |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
to be Incurred |
|
|
to be Incurred |
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
North America Microwave: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefits |
|
$ |
5.1 |
|
|
$ |
2.8 |
|
|
$ |
7.9 |
|
|
$ |
0.6 |
|
|
$ |
8.5 |
|
Facilities and other |
|
|
|
|
|
|
3.2 |
|
|
|
3.2 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America Microwave |
|
$ |
5.1 |
|
|
$ |
6.0 |
|
|
$ |
11.1 |
|
|
$ |
0.6 |
|
|
$ |
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Microwave: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefits |
|
$ |
4.2 |
|
|
$ |
0.1 |
|
|
$ |
4.3 |
|
|
$ |
|
|
|
$ |
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities and other |
|
|
|
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International Microwave |
|
$ |
4.2 |
|
|
$ |
2.4 |
|
|
$ |
6.6 |
|
|
$ |
|
|
|
$ |
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
9.3 |
|
|
$ |
8.4 |
|
|
$ |
17.7 |
|
|
$ |
0.6 |
|
|
$ |
18.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Note L Share-Based Compensation
Compensation expense for share-based awards was $1.9 million and $0.3 million for the quarters
ended December 28, 2007 and December 29, 2006. Compensation expense for share-based awards was
$4.3 million and $0.7 million for the two quarters ended December 28, 2007 and December 29, 2006.
Amounts were included in our consolidated statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Two Quarters Ended |
|
|
|
December 28, |
|
|
December 29, |
|
|
December 28, |
|
|
December 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Cost of product sales and services |
|
$ |
0.5 |
|
|
$ |
|
|
|
$ |
0.7 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
|
0.2 |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
1.2 |
|
|
|
0.3 |
|
|
|
2.9 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense |
|
$ |
1.9 |
|
|
$ |
0.3 |
|
|
$ |
4.3 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants to employees under our 2007 Stock Equity Plan during the quarter and two quarters ended
December 28, 2007 consisted of 12,470 stock option grants and 5,680 performance share awards. The
fair value of each option grant was estimated on the date of grant using the Black-Scholes-Merton
optionpricing model which used the following assumptions: expected volatility of 55.58%; expected
dividend yield of 0.0%; and expected life in years of 5.875.
Upon the exercise of stock options, we issued 8,120 and 85,365 shares during the quarter and
two quarters ended December 28, 2007.
Note M Business Segments
We are organized into three operating segments around the markets we serve: North America
Microwave, International Microwave and Network Operations. The North America Microwave segment
designs, manufactures, sells and services microwave radio products, primarily for cellular network
providers and private network users within North America (U.S. and Canada). The International
Microwave segment designs, manufactures, sells and services microwave radio products, primarily for
cellular network providers and private network users outside of North America. The Network
Operations segment develops, designs, produces, sells and services network management software
systems, primarily for cellular network providers and private network users.
During the quarter and two quarters in the period ended December 28, 2007, we had one customer
in Africa (Mobile Telephone Networks or MTN) that accounted for 12 percent of our total revenue.
Revenue and (loss) income before income taxes by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Two Quarters Ended |
|
|
|
December 28, |
|
|
December 29, |
|
|
December 28, |
|
|
December 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Microwave |
|
$ |
63.8 |
|
|
$ |
58.7 |
|
|
$ |
120.4 |
|
|
$ |
108.6 |
|
International Microwave |
|
|
110.8 |
|
|
|
37.5 |
|
|
|
220.0 |
|
|
|
76.7 |
|
Network Operations |
|
|
6.5 |
|
|
|
5.0 |
|
|
|
13.0 |
|
|
|
9.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
181.1 |
|
|
$ |
101.2 |
|
|
$ |
353.4 |
|
|
$ |
194.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating (Loss) Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Microwave (1) |
|
$ |
0.6 |
|
|
$ |
5.6 |
|
|
$ |
(1.1 |
) |
|
$ |
8.6 |
|
International Microwave (2) |
|
|
(2.0 |
) |
|
|
2.3 |
|
|
|
(2.1 |
) |
|
|
5.9 |
|
Network Operations |
|
|
0.6 |
|
|
|
0.1 |
|
|
|
1.4 |
|
|
|
0.4 |
|
Corporate allocations expense from Harris |
|
|
|
|
|
|
(1.8 |
) |
|
|
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense |
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes |
|
$ |
(1.2 |
) |
|
$ |
6.1 |
|
|
$ |
(2.2 |
) |
|
$ |
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
(1) |
|
During the quarter and two quarters ended December 28, 2007, we recorded $0.7 million and
$1.3 million in amortization of developed technology, tradenames, customer relationships, and
non-compete agreements, $0.3 million and $0.5 million in amortization of the step-up in the
fair value of fixed assets related to the acquisition of Stratex, $4.3 million and $8.1
million in restructuring charges, $1.1 million and $2.1 million in merger-related integration
charges, $0.1 million and $0.9 million in charges for impairment of a lease agreement and
$1.8 million and $4.1 million in FAS 123R share-based compensation in our North America
Microwave segment. Additionally, we recorded $1.9 million for inventory markdowns during the
quarter ended December 28, 2007. |
|
(2) |
|
During the quarter and two quarters ended December 28, 2007, we recorded $2.9 million and
$5.9 million in amortization of developed technology, tradenames, customer relationships, and
non-compete agreements, $0.4 million and $0.9 million in amortization of the step-up in the
fair value of fixed assets related to the acquisition of Stratex, $0.1 million and $0.3
million in restructuring charges, $2.1 million and $3.9 million in merger related integration
charges and $0.1 million and $0.2 million in FAS 123R share-based compensation in our
International Microwave segment. Additionally, we recorded $1.8 million for inventory
markdowns during the quarter ended December 28, 2007. |
Note N Income Taxes
The income tax benefit for the first two quarters of fiscal 2008 reflects our pre-tax loss and
is based on our estimated fiscal 2008 annual effective tax rate. The income tax benefit on the
pre-tax loss for the quarter and two quarters ended December 28, 2007 was $0.2 million and
$0.4 million. The variation between income taxes and income tax expense at the U.S. statutory rate
of 35 percent is primarily due to the consolidation of our foreign operations, which are subject to
income taxes at lower statutory rates.
The income tax provision on pre-tax income for the quarter and two quarters ended December 29,
2006 was $0.3 million and $0.7 million based upon an allocation of tax expense from Harris
Corporation.
We adopted the provisions of FIN 48 on June 30, 2007. FIN 48 prescribes a comprehensive model
for financial statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. As a result of adopting FIN 48, we
recorded a decrease in retained earnings of less than $0.1 million and a corresponding increase to
tax liabilities.
As of December 28, 2007 and June 30, 2007, we had a liability for unrecognized tax benefits of
$28.4 million and $28.1 million for various federal, foreign, and state income tax matters. The
adoption of FIN 48 resulted in a reclassification of deferred tax asset items which included a full
valuation allowance, as well as goodwill for appropriate balance sheet presentation. If the
unrecognized tax benefits associated with these positions are recognized ultimately, they would not
have a material impact on our effective tax rate or our financial position.
We account for interest and penalties related to unrecognized tax benefits as part of our
provision for federal, foreign, and state income tax expense. We accrued an additional amount for
such interest of less than $0.1 million in the quarter and two quarters ended December 28, 2007. No
penalties have been accrued. We accrued less than $0.1 million at June 30, 2007 for the payment of
any such interest.
We expect that the amount of unrecognized tax benefit may change in the next twelve months;
however, it is not expected to have a significant impact on our results of operations, financial
position or cash flows.
We have a number of years with open tax audits which vary from jurisdiction to jurisdiction.
Our major tax jurisdictions include the U.S., Nigeria, Singapore, New Zealand, Poland, South
Africa, France, and the UK. The earliest years still open and subject to ongoing audits as of the
date of adoption of FIN 48 for these jurisdictions are as follows: (i) United States
(Federal/State)2003/2002; (ii) Nigeria2003; (iii) Singapore2000; (iv) New Zealand2003;
(v) Poland2003; (vi) South Africa2001; (vii) France2005; and (viii) UK2006.
Note O Related Party Transactions with Harris
Prior to the Stratex acquisition, Harris provided information services, human resources,
financial shared services, facilities, legal support and supply chain management services to us.
The charges for those services were billed to us primarily based on actual usage. During the
quarter and two quarters ended December 29, 2006, Harris charged us $1.5 million and $3.2 million
for those services.
14
On January 26, 2007, we entered into a Transition Services Agreement with Harris to provide
for certain services during the periods subsequent to the Stratex acquisition. These services also
are charged to us based primarily on actual usage and include database management, supply chain
operating systems, eBusiness services, sales and service, financial systems, back office material
resource planning support, HR systems, internal and information systems shared services support,
network management and help desk support, and server administration and support. During the quarter
and two quarters ended December 28, 2007, Harris charged us $1.7 million and $3.4 million for these
services.
We have sales to, and purchases from, other Harris entities from time to time. Prior to
January 26, 2007, the entity initiating the transaction sold to the other Harris entity at cost or
transfer price, depending on jurisdiction. The entity making the sale to the end customer recorded
the profit on the transaction above cost or transfer price, depending on jurisdiction. Subsequent
to January 26, 2007, these purchases and sales are recorded at market price. Our sales to other
Harris entities were $3.7 million and $0.9 million for the quarters ended December 28, 2007 and
December 29, 2006 and $4.9 million and $1.4 million for the two quarters ended December 28, 2007
and December 29, 2006. We also recognized costs associated with related party purchases from Harris
of $4.0 million and $0.1 million for the quarters ended December 28, 2007 and December 29, 2006 and
4.6 million, and $2.7 million for the two quarters ended December 28, 2007 and December 29, 2006.
Harris was the primary source of our financing and equity activities through January 26, 2007,
the date of the Stratex acquisition. During the two quarters ended December 29, 2006, Harris net
investment in us increased by $8.5 million.
Additionally, through the date of the Stratex acquisition, Harris loaned cash to us to fund
our international entities, and we distributed excess cash back to Harris. This arrangement ended
on January 26, 2007. We recognized interest income and expense on these loans. The amount of
interest income and expense for the quarter and two quarters ended December 29, 2006 was not
significant.
The unpaid amounts billed from Harris are included within Due to Harris Corporation on the
condensed consolidated balance sheets. Additionally, we have other receivables and payables in the
normal course of business with Harris. These amounts are netted within Due to Harris Corporation
on the condensed consolidated balance sheets. Total receivables from Harris were $1.8 million and
$0.7 million at December 28, 2007 and June 29, 2007. Total payables to Harris were $18.0 million
and $17.9 million at December 28, 2007 and June 29, 2007.
Prior to January 26, 2007, MCD used certain assets in Canada owned by Harris that were not
contributed to us as part of the Combination Agreement. We continue to use these assets in our
business and, on January 26, 2007, we entered into a five-year lease agreement with Harris for
these assets. This agreement is a capital lease under generally accepted accounting principles with
an initial lease obligation balance of $5.9 million and the related asset amount included in
property, plant and equipment on our balance sheet.
During the first quarter of fiscal 2008, we recognized an impairment charge of $1.3 million on
a portion of these assets which is included in our restructuring charges. We also recognized an
increase of $0.4 million to the lease obligation balance during the quarter ended December 28, 2007
from a recapitalization under the lease terms, primarily because of the impairment charge discussed
above and a rescheduling of the lease payments. Quarterly lease payments are due to Harris based on
the amount of 103 percent of Harris annual depreciation calculated in accordance with U.S.
generally accepted accounting principles. Our depreciation expense on this capital lease was $0.5
million and $0.9 million during the quarter and two quarters ended December 28, 2007.
During the first quarter of fiscal 2008, we paid Harris $2.0 million under this capital lease
obligation resulting from the $1.3 million impairment discussed above and the principal payments.
As of December 28, 2007, our total capital lease obligation to Harris was $4.3 million.
Note P Legal Proceedings
On February 8, 2007, a court order was entered against Stratex do Brasil, a subsidiary of
Harris Stratex Networks Operating Company, in Brazil, to enforce performance of an alleged
agreement between the former Stratex Networks, Inc. entity and a supplier. We have not determined
what, if any, liability this may result in, as the court did not award any damages. We have
appealed the decision to enforce the alleged agreement, and do not expect this litigation to have a
material adverse effect on our business, operating results or financial condition.
From time to time, we may be involved in various legal claims and litigation that arise in the
normal course of our operations. While the results of such claims and litigation cannot be
predicted with certainty, we currently believe that we are not a party to any litigation the final
outcome of which is likely to have a material adverse effect on our financial position, results of
operations or cash flows. However, should we not prevail in any such litigation; it could have a
materially adverse impact on our operating results, cash flows or financial position.
15
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Harris Stratex Networks, Inc.
We have reviewed the condensed consolidated balance sheet of Harris Stratex Networks, Inc. and
subsidiaries as of December 28, 2007, the related condensed consolidated statements of operations
for the quarter and two quarters ended December 28, 2007 and December 29, 2006, and the condensed
consolidated statements of cash flows for the two quarters ended December 28, 2007 and December 29,
2006. These financial statements are the responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the Public Company Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Harris Stratex Networks, Inc.
and subsidiaries as of June 29, 2007, and the related consolidated statements of operations and
cash flows for the year then ended, not presented herein, and in our report dated August 16, 2007,
we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet as of June 29, 2007,
is fairly stated, in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 1, 2008
16
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning 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), which include, without limitation, statements about the market for
our technology, our strategy and competition. Such statements are based upon current expectations
that involve risks and uncertainties. Any statements contained herein that are not statements of
historical fact may be deemed forward-looking statements. For example, the words believes,
anticipates, plans, expects, intends and similar expressions are intended to identify
forward-looking statements. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statements. Factors that might
cause such a discrepancy include, but are not limited to, those discussed below under the
discussions of Risk Factors set forth in our annual report on Form 10-K filed with the Securities
and Exchange Commission on August 27, 2007. All forward looking statements in this document are
based on information available to us as of the date hereof and we assume no obligation to update
any such forward-looking statements.
Acquisition of Stratex Networks, Inc. and Combination with MCD
On January 26, 2007, Harris Stratex Networks, Inc. (the Company, HSTX, Harris Stratex,
we, us and our) completed its merger (the Stratex acquisition) with Stratex Networks, Inc.
(Stratex) pursuant to a Formation, Contribution and Merger Agreement among Harris, Stratex, and
Stratex Merger Corp., as amended and restated on December 18, 2006 and amended by letter agreement
on January 26, 2007. In the transaction, Stratex Merger Corp., a wholly-owned subsidiary of the
Company, merged with and into Stratex with Stratex as the surviving corporation (renamed as Harris
Stratex Networks Operating Corporation). Concurrently with the merger of Stratex and Stratex
Merger Corp. (the merger), Harris contributed the Microwave Communications Division (MCD),
along with $32.1 million in cash (comprised of $26.9 million contributed on January 26, 2007 and
$5.2 million held by the Companys foreign operating subsidiaries on January 26, 2007) to the
Company and the Company assumed the liabilities (with certain exceptions) of MCD (the contribution
transaction).
Pursuant to the merger, each share of Stratex common stock was converted into one-fourth of a
share of our Class A common stock, and a total of 24,782,153 shares of our Class A common stock
were issued to the former holders of Stratex common stock. In the contribution transaction, Harris
contributed the assets of MCD, along with $32.1 million in cash, and in exchange, we assumed
certain liabilities of Harris related to MCD and issued 32,913,377 shares of our Class B common
stock to Harris. As a result of these transactions, Harris owned approximately 57 percent and the
former Stratex shareholders owned approximately 43 percent of our total outstanding stock
immediately following the closing.
We completed the Stratex acquisition to create a leading global communications solutions
company offering end-to-end wireless transmission solutions for mobile and fixed-wireless service
providers and private networks.
The Stratex acquisition was accounted for as a purchase business combination with MCD
considered the acquiror for accounting purposes. Thus, the historical results discussed herein for
periods prior to January 26, 2007 represent the separate financial results of MCD on a carve-out
basis. Total consideration paid by us was approximately $493.1 million as summarized in the
following table:
|
|
|
|
|
Calculation of Allocable Purchase Price |
|
January 26, 2007 |
|
|
|
(In millions) |
|
Value of Harris Stratex Networks shares issued to Stratex Networks stockholders |
|
$ |
464.9 |
|
Value of Stratex Networks vested options assumed |
|
|
15.5 |
|
Acquisition costs |
|
|
12.7 |
|
|
|
|
|
Total allocable purchase price |
|
$ |
493.1 |
|
|
|
|
|
Overview
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations, which is sometimes referred to in this Quarterly Report on Form 10-Q as the MD&A, is
provided as a supplement to, should be read in conjunction with, and is qualified in its entirety
by reference to our condensed consolidated financial statements and related notes presented under
Item 1. Financial Statements of this report.
17
The following is a list of the sections of the MD&A, together with the perspective of our
management on the contents of these sections of the MD&A, which is intended to make reading these
pages more productive:
|
|
|
Business Considerations a general description of our businesses; the drivers of these
businesses and our strategy for achieving value and key indicators that are relevant to us
in the microwave communications industry. |
|
|
|
|
Operations Review an analysis of our consolidated results of operations and of the
results in each of its three operating segments, to the extent the operating segment
results are helpful to gaining an understanding of our business as a whole. |
|
|
|
|
Liquidity, Capital Resources and Financial Strategies an analysis of cash flows,
contractual obligations, off-balance sheet arrangements, commercial commitments, financial
risk management, impact of foreign exchange and impact of inflation. |
|
|
|
|
Critical Accounting Policies and Estimates a discussion of accounting policies and
estimates that require the most judgment and a discussion of accounting pronouncements that
have been issued but not yet implemented by us and their potential impact. |
Business Considerations
General
MCD was a leading global provider of turnkey wireless transmission solutions and comprehensive
network management software, with an extensive services suite. With innovative products and a broad
portfolio, MCD was a market share leader in North America and a top-tier provider in international
markets, most notably in the growing Middle East/Africa region. Stratex Networks was a leading
provider of innovative wireless transmission solutions to mobile wireless carriers and data access
providers around the world. As a result of the combination of the two historical businesses, Harris
Stratex was formed and has become a leading independent wireless networks solutions provider,
focused on delivering 1) microwave digital radio and other communications products, systems and
professional services for private network operators and mobile telecommunications providers; and
2) turnkey end-to-end network management and service assurance solutions for broadband and
converged networks. Our three segments serve markets for microwave products and services in North
America Microwave, International Microwave and network management software solutions worldwide or
Network Operations. All of our revenue, income and cash flow are derived from the sale of these
products, systems, software and services. We generally sell directly to the end customer. However,
to extend our global footprint and maximize our penetration in certain markets, we sometimes sell
through agents, resellers and/or distributors, particularly in international markets.
Our mission statement is: Harris Stratex Networks offers the most reliable, flexible,
scalable, and easy to use wireless network solutions in the world for mobile, government and
private networks. Every day, we build lasting customer relationships, grow our company and build
new value for our shareholders by listening to our customers, delivering innovative products
matched to market demand and offering superior service and quality. Were committed to helping
customers meet their competitive demands by building new wireless networks, upgrading existing
networks and providing complete professional services.
Drivers of Harris Stratex Businesses and Strategy for Achieving Value
We are committed to our mission statement, and we believe that executing the mission statement
creates value. Consistent with this commitment, we currently focus on these key drivers:
|
|
|
Achieving profitable revenue growth in all segments; |
|
|
|
|
Focusing on operating efficiencies and cost reductions; and |
|
|
|
|
Maintaining an efficient capital structure. |
Achieving Profitable Revenue Growth in All Segments
We are a global provider of wireless transmission networks solutions. We focus on capitalizing
on our strength in the North American market by continuing to win opportunities with wireless
telecommunications providers as well as federal, state and other private network operators. Growth
opportunities will come from network and capacity expansion and the evolution to IP networking in
both the public and private segments. Other growth drivers include the emerging triple-play
services (voice, data and video) market in the public sector, the trend towards network hardening
and interoperability for public safety and disaster response agencies and the
18
FCC directive to
relocate frequency bands in the 2 GHz range to open up spectrum for Advanced Wireless Services.
Wireless transmission systems are particularly well-suited to meet increasing demand for
high-reliability, high-bandwidth networks that are more secure and better protected against natural
and man-made disasters.
We are focused on increasing international revenue by offering innovative new products and
expanding regional sales channels to capture greenfield network opportunities. We also focus on two
major evolutionary trends in the global communications market by 1) penetrating large regional
mobile telecom operators to participate in network expansion and new third-generation (3G)
network opportunities; and 2) enabling the migration to Internet Protocol (IP) networking in both
the public and private segments by providing both IP-enabled and IP-centric wireless transmission
solutions.
We offer a broad range of engineering and other professional services for network planning,
systems architecture design and project management as a global competitive advantage. We will
expand our Network Operations offerings in microwave and non-microwave opportunities to create a
differentiator for our total solutions offerings.
Backlog
The backlog of unfilled orders was $230 million at December 28, 2007 compared with
$232 million at July 27, 2007. Substantially all of this backlog is expected to be filled during
calendar year 2008, but we can give no assurance of such fulfillment. Product orders in our current
backlog are subject to changes in delivery schedules or to cancellation at the option of the
purchaser without significant penalty. Accordingly, although useful for scheduling production,
backlog as of any particular date may not be a reliable measure of sales for any future period
because of the timing of orders, delivery intervals, customer and product mix and the possibility
of changes in delivery schedules and additions or cancellations of orders.
Focusing on Operating Efficiencies and Cost Reductions
The principal areas of focus for operating efficiencies and cost management are: 1) reducing
procurement costs through an emphasis on coordinated supply chain management; 2) reducing product
costs through dedicated value engineering resources focused on product value engineering;
3) improving manufacturing efficiencies across all segments; and 4) optimizing facility
utilization.
Maintaining an Efficient Capital Structure
Our capital structure is intended to optimize our cost of capital. We believe a strong capital
position, access to key financial markets, ability to raise funds at a low effective cost and
overall low cost of borrowing provide a competitive advantage. We had $83.0 million in cash, cash equivalents,
short-term investments and available for sale securities as of December 28, 2007.
Key Indicators
We believe our key drivers, when fully implemented, will improve key indicators such as:
revenue, gross margin, net income and operating cash flows.
19
Quarter Ended December 28, 2007 Compared to Quarter Ended December 29, 2006
Revenue and Net (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
181.1 |
|
|
$ |
101.2 |
|
|
|
79.0 |
% |
Net (loss) income |
|
$ |
(1.0 |
) |
|
$ |
5.8 |
|
|
|
N/M |
|
% of revenue |
|
|
(0.6 |
)% |
|
|
5.7 |
% |
|
|
|
|
The results for the second quarter of fiscal 2008 include the operations acquired in the
Stratex acquisition for the entire period while the results for the second quarter of fiscal 2007
include only the results of MCD prior to the merger. Historically, Stratex derived its revenues
primarily from international markets.
Our revenue for the second quarter of fiscal 2008 was $181.1 million, an increase of
$79.9 million or 79.0 percent, compared to the second
quarter of fiscal 2007. Revenue in the second quarter of fiscal 2008
included $91.3 million from sales of former Stratex products and services. Excluding the
impact of the Stratex acquisition, revenue declined $11.4 million, primarily due to a decrease in
the International Microwave segment in sales of the former MCD business products and services.
Revenue in the second quarter of fiscal 2008 included a significant amount of sales of the former
Stratex products and services and fewer sales of products and services of the former MCD business.
The Network Operations segment revenue increased by $1.5 million in the second quarter of fiscal
2008 compared to the second quarter of fiscal 2007, as this segment experienced increased demand
for its service assurance solution with Next Generation Network customers.
Our second quarter fiscal 2008 net loss was $1.0 million compared to net income of
$5.8 million in the second quarter of fiscal 2007, which reflected only MCDs historical
operations. The second quarter fiscal 2008 net loss and second quarter fiscal 2007 net income
included the following purchase accounting adjustments and other expenses related to the
acquisition and integration of Stratex, FAS 123R share-based compensation expense and inventory
markdowns:
|
|
|
|
|
|
|
|
|
|
|
Q2 FY 08 |
|
|
Q2 FY 07 |
|
|
|
(In millions) |
|
Cost of integration activities undertaken in connection with the merger |
|
$ |
3.2 |
|
|
$ |
1.7 |
|
Amortization of the fair value adjustments related to fixed assets |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of developed technology |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of trade names, customer relationships and
non-competition agreements |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease impairment |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS 123R share-based compensation expense |
|
|
1.9 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
Inventory markdowns |
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
17.6 |
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
These charges were classified in either cost of product sales and services or selling and
administrative expenses depending on the nature of the charge in the second quarter of fiscal 2008.
Excluding these charges, our operations were profitable in the second quarter of fiscal 2008.
During the quarter ended December 28, 2007, we continued the restructuring activities and
plans approved in connection with the merger between MCD and Stratex. These restructuring plans
included the consolidation of facilities and operations of the predecessor entities in Canada, France, the
U.S., China, Brazil and, to a lesser extent, Mexico, New Zealand and the United Kingdom.
We recorded an additional $4.4 million of restructuring charges in connection with
implementation of these fiscal 2007 plans during the second quarter of fiscal 2008. The costs
related to reductions in force consisted of retention, severance and other benefits totaling
$0.9 million. We also recorded $1.1 million in restructuring charges relating to the impairment of
a lease and $0.1 million
20
relating to the write-off of fixed assets. These restructuring activities
also resulted in scaled down operations and reduced activity in Brazil, which adversely affected
the fair value of a recoverable value-added type tax (ICMS) included in Other current assets on
the Companys balance sheet. Consequently, we recorded an impairment of $2.3 million in
restructuring charges during the quarter ended December 28, 2007 relating to the reduction in fair
value of ICMS tax recoverable in Brazil.
We expect to fully implement our 2007 restructuring plans by March 28, 2008 and anticipate
that we will incur additional restructuring costs of $0.6 million.
During the second quarter of fiscal 2008, we recorded a total of $3.7 million for inventory
markdowns which have been classified in Cost of product sales on the Statement of Operations
during the quarter ended December 28, 2007 in accordance with the guidance in Emerging Issues Task
Force (EITF) Abstracts Issues No. 96-9 Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
181.1 |
|
|
$ |
101.2 |
|
|
|
79.0 |
% |
Cost of product sales and services |
|
$ |
(131.8 |
) |
|
$ |
(66.4 |
) |
|
|
98.5 |
% |
Gross margin |
|
$ |
49.3 |
|
|
$ |
34.8 |
|
|
|
41.7 |
% |
% of revenue |
|
|
27.2 |
% |
|
|
34.4 |
% |
|
|
|
|
Our second quarter fiscal 2008 gross margin was $49.3 million, or 27.2 percent of revenue,
compared to $34.8 million, or 34.4 percent of revenue in the second quarter of fiscal 2007. Our
second quarter fiscal 2008 gross margin was reduced by $3.7 million in markdowns of inventory,
$1.7 million of amortization on developed technology, $0.2 million of amortization of the fair
value of adjustments for fixed assets acquired from Stratex and $0.9 million of merger integration
costs. In the second quarter of fiscal 2007, we did not incur such costs. Gross margin increased in
the second quarter fiscal 2008 primarily due to sales of former Stratex products and services (such
as Eclipse) in our International Microwave segment and an increase in revenue from our Network
Operations segment.
Our gross margin percentage in the second quarter of fiscal 2008 was comparatively lower than
the gross margin percentage in the second quarter of fiscal 2007 because of the expenses described
above and because our International Microwave segment revenue included a significant amount of the
lower-margin, low-capacity version of Eclipse microwave radio sales in the second quarter of fiscal
2008. In addition, we experienced a shift in sales from the Africa and Europe, Middle East and
Russia regions to the Latin America and Asia Pacific regions, where prices for our products and
services are generally lower. Finally, we absorbed an increase in freight and service costs during
the second quarter of fiscal 2008. We anticipate product mix and increased freight and service
costs will continue to impact International Microwave segment gross margins to a similar extent for
the remainder of fiscal year 2008.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
181.1 |
|
|
$ |
101.2 |
|
|
|
79.0 |
% |
Research and development expenses |
|
$ |
10.9 |
|
|
$ |
8.3 |
|
|
|
31.3 |
% |
% of revenue |
|
|
6.0 |
% |
|
|
8.2 |
% |
|
|
|
|
Research and development (R&D) expenses were $10.9 million in the second quarter of fiscal
2008, compared to $8.3 million in the second quarter of fiscal 2007. As a percent of revenue, these
expenses decreased from 8.2 percent in the second quarter of fiscal 2007 to 6.0 percent in the
second quarter of fiscal 2008 due to higher revenue. The majority of the increase in spending in
the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007 was attributable to
the R&D activities acquired from Stratex. Some of the increase was attributable to higher spending
in the second quarter of fiscal 2008 related to our TRuepoint 6000 development efforts.
21
Selling and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
181.1 |
|
|
$ |
101.2 |
|
|
|
79.0 |
% |
Selling and administrative expenses |
|
$ |
32.9 |
|
|
$ |
17.8 |
|
|
|
84.8 |
% |
% of revenue |
|
|
18.2 |
% |
|
|
17.6 |
% |
|
|
|
|
Our second quarter fiscal 2008 selling and administrative (S&A) expenses increased to
$32.9 million from $17.8 million in the second quarter of fiscal 2007. As a percentage of revenue,
these expenses increased from 17.6 percent of revenue in the second quarter of fiscal 2007 to
18.2 percent of revenue in the second quarter of fiscal 2008. The majority of the increase in
spending in the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007 was
attributable to S&A expenses associated with the former Stratex business. The remainder of the
increase was due to higher selling expenses associated with the increase in revenue, and increased
costs incurred for compliance with Sarbanes-Oxley requirements. We anticipate that the total cost
of compliance with Sarbanes-Oxley will be approximately $3.0 million in fiscal 2008.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
(Loss) income before income taxes |
|
$ |
(1.2 |
) |
|
$ |
6.1 |
|
|
|
N/M |
|
Income tax benefit (provision) |
|
$ |
0.2 |
|
|
$ |
(0.3 |
) |
|
|
N/M |
|
% of (loss) income before income taxes |
|
|
16.7 |
% |
|
|
4.9 |
% |
|
|
|
|
The income tax benefit of $0.2 million for the second quarter of fiscal 2008 reflected our
pre-tax loss based on our estimated annual effective tax rate. The variation between income taxes
and income tax expense at the statutory rate of 35 percent was primarily due to the consolidation
of our foreign operations, which are subject to income taxes at lower statutory rates.
The income tax provision for the second quarter of fiscal 2007 was $0.3 million and was based
upon an allocation of tax expense from Harris.
Discussion of Business Segments
North America Microwave Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
63.8 |
|
|
$ |
58.7 |
|
|
|
8.7 |
% |
Segment operating income |
|
$ |
0.6 |
|
|
$ |
5.6 |
|
|
|
(89.3 |
)% |
% of revenue |
|
|
0.9 |
% |
|
|
9.5 |
% |
|
|
|
|
North America Microwave segment revenue increased by $5.1 million or 8.7 percent from the
second quarter of fiscal 2007 to the second quarter of fiscal 2008. Revenue for the second quarter
of fiscal 2008 included $6.1 million from sales of former Stratex products and services. Revenue
drivers in the North America Microwave segment include customer demand for increased bandwidth,
footprint expansion and the 2 gigahertz microwave relocation for advanced wireless services from
mobile operators.
Our second quarter fiscal 2008 operating income was reduced by the following amounts related
to the acquisition of Stratex and our restructuring plans: $0.3 million amortization of the fair
value adjustments for fixed assets, $0.7 million amortization of developed technology, trade names,
customer relationships, and non-compete agreements, $4.3 million of restructuring charges,
$0.1 million in charges for impairment of a lease agreement and $1.1 of integration expenses
undertaken in connection with the merger. The North
22
America Microwave segment second quarter fiscal
2008 operating income was further reduced by $1.9 million of the markdowns of inventory discussed
above.
We also recorded $1.8 million in FAS 123R share-based compensation expense during the second
quarter of fiscal 2008 in our North America Microwave segment compared to $0.3 million in the
second quarter of fiscal 2007.
International Microwave Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
110.8 |
|
|
$ |
37.5 |
|
|
|
195.5 |
% |
Segment operating (loss) income |
|
$ |
(2.0 |
) |
|
$ |
2.3 |
|
|
|
(187.0 |
) |
% of revenue |
|
|
(1.8 |
)% |
|
|
6.1 |
% |
|
|
|
|
International Microwave segment revenue increased by $73.3 million or 195.5 percent in the
second quarter of fiscal 2008 compared to the second quarter of fiscal 2007. Revenue in the second
quarter of fiscal 2008 included $85.2 million from sales of former Stratex products and
services. Excluding the impact of the revenue from Stratex products and services, our International
Microwave segment revenue decreased by $11.9 million as sales are transitioning to the products and
services of the former Stratex business. International Microwave segment revenue in the second
quarter of fiscal 2008 included a significant amount of sales of the former Stratex business and
fewer sales of the former MCD business.
International Microwave segment had an operating loss of $2.0 million for the second quarter
of fiscal 2008 compared to operating income of $2.3 million for the second quarter of fiscal 2007.
The operating loss for the second quarter of fiscal 2008 reflected the following charges related to
the acquisition of Stratex: $0.4 million amortization of the fair value adjustments for fixed
assets, $2.9 million amortization of developed technology, tradenames, customer relationships,
contract backlog and non-compete agreements, and $0.1 million of restructuring charges and
$2.1 million of integration expenses associated with the merger. Our second quarter fiscal 2008
operating loss was further increased by $1.8 million of markdowns of inventory. In addition, we
experienced a shift in sales from the Africa and Europe, Middle East and Russia regions to the
Latin America and Asia Pacific regions, where prices for our products and services are generally
lower. Finally, we absorbed an increase in freight and service costs during the second quarter of
fiscal 2008. We anticipate product mix and freight and service costs will continue to impact
International Microwave segment gross margins to a similar extent for the remainder of fiscal year
2008.
We also recorded $0.1 million in FAS 123R share-based compensation expense during the second
quarter of fiscal 2008 in our International Microwave segment compared to none in the second
quarter of fiscal 2007.
Network Operations Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Q2 FY 08 |
|
Q2 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
6.5 |
|
|
$ |
5.0 |
|
|
|
30.0 |
% |
Segment operating income |
|
$ |
0.6 |
|
|
$ |
0.1 |
|
|
|
500.0 |
% |
% of revenue |
|
|
9.2 |
% |
|
|
2.0 |
% |
|
|
|
|
Network Operations segment revenue increased by 30 percent from the second quarter of fiscal
2007 to the second quarter of fiscal 2008. This segment had operating income of $0.6 million in the
second quarter of fiscal 2008 compared to operating income of $0.1 million in the second quarter of
fiscal 2007. Additionally, operating income as a percentage of sales increased to 9.2 percent in
the second quarter of fiscal 2008 compared to 2.0 percent in the second quarter of fiscal 2007. The
increase in revenue resulted primarily from an increase in software and license revenue in the
second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.
The Network Operations segment experienced increased demand in the second quarter of fiscal
2008 for its service assurance solution with Next Generation Network customers compared to the
second quarter of fiscal 2007 as a result of new features and
23
functionality in our product
offerings. The increase in second quarter fiscal 2008 operating income and as a percentage of
revenue compared to second quarter fiscal 2007 was driven by product mix including an increase in
higher margin software and license revenue and a decrease in selling and administrative expenses as
a percentage of revenue.
Two Quarters Ended December 28, 2007 Compared to the Two Quarters Ended December 29, 2006
Revenue and Net (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
353.4 |
|
|
$ |
194.8 |
|
|
|
81.4 |
% |
Net (loss) income |
|
$ |
(1.8 |
) |
|
$ |
10.6 |
|
|
|
N/M |
|
% of revenue |
|
|
(0.5 |
)% |
|
|
5.4 |
% |
|
|
|
|
N/M = Not meaningful
H1 FY = First half of fiscal year or first two quarters of fiscal year
The results for the first two quarters of fiscal 2008 include the operations acquired in the
Stratex acquisition for the entire period while the results for the first two quarters of fiscal
2007 include only the results of MCD prior to the merger. Historically, Stratex derived its
revenues primarily from international markets.
Our revenue for the first two quarters of fiscal 2008 was $353.4 million, an increase of
$158.6 million or 81.4 percent, compared to the first two
quarters of fiscal 2007. Revenue in the first two quarters of fiscal
2008 included $159.7 million from sales of former Stratex products and services. Excluding
the impact of the Stratex acquisition, revenue declined $1.1 million, primarily due to a decrease
in the International Microwave segment in sales of the former MCD business products and services.
Revenue in the first half of fiscal 2008 included a significant amount of sales of the former
Stratex products and services and fewer sales of the former MCD business. The Network Operations
segment revenue increased by $3.5 million in the first two quarters of fiscal 2008 compared to the
first two fiscal quarters of fiscal 2007, as this segment experienced increased demand for its
service assurance solution with Next Generation Network customers.
Our first two quarters fiscal 2008 net loss was $1.8 million compared to net income of $10.6
million in the first two quarters of fiscal 2007, which reflected only MCDs historical operations.
Our net loss was $1.0 million in the two quarters ended December 28, 2007 compared to net income of
$5.8 million in the two quarters ended December 29, 2006 which reflected only MCDs historical
operations. The net loss in the two quarters ended December 28, 2007 and net income in the two
quarters ended December 29, 2006 included the following purchase accounting adjustments and other
expenses related to the acquisition and integration of Stratex, FAS 123R share-based compensation
expense and inventory markdowns:
|
|
|
|
|
|
|
|
|
|
|
H1 FY 08 |
|
|
H1 FY 07 |
|
|
|
(In millions) |
|
Cost of integration activities undertaken in connection with the merger |
|
$ |
6.0 |
|
|
$ |
1.7 |
|
Amortization of the fair value adjustments related to fixed assets |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of developed technology |
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of trade names, customer relationships and
non-competition agreements |
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease impairment |
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FAS 123R share-based compensation expense |
|
|
4.3 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
Inventory markdowns |
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
31.9 |
|
|
$ |
2.4 |
|
|
|
|
|
|
|
|
These charges were classified in either cost of product sales and services or selling and
administrative expenses depending on the nature of the charge in the two quarters ended December
28, 2007. Excluding these charges, our operations were profitable in the two quarters ended
December 28, 2007.
24
During the two quarters ended December 28, 2007, we continued the restructuring activities and
plans approved in connection with the merger between MCD and Stratex. These restructuring plans
included the consolidation of facilities and operations of the predecessor entities in Canada,
France, the U.S., China, Brazil and, to a lesser extent, Mexico, New Zealand and the United
Kingdom.
We recorded an additional $8.4 million of restructuring charges in connection with
implementation of these fiscal 2007 plans during the two quarters ended December 28, 2007. The
costs related to reductions in force consisted primarily of retention, severance and other benefits
totaling $3.4 million. We also recorded $1.9 million in restructuring charges related to the
impairment of a lease, $1.4 million relating to the write-off of fixed assets and leasehold
improvements and $2.3 million relating to the reduction in fair value of ICMS tax recoverable in
Brazil.
These charges to restructuring in the first two quarters of fiscal 2008 were partially offset
by $0.3 million for the reduction in severance estimated to be paid in France and a $0.3 million
reduction in the amount estimated to close out our restructuring liability in connection with our
fiscal year 2006 restructuring plan to transfer our Montreal manufacturing activities to our San
Antonio, Texas facility.
We expect to fully implement our 2007 restructuring plans by March 28, 2008 and anticipate
that we will incur additional restructuring costs of $0.6 million.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
353.4 |
|
|
$ |
194.8 |
|
|
|
81.4 |
% |
Cost of product sales and services |
|
$ |
(255.0 |
) |
|
$ |
(129.2 |
) |
|
|
97.4 |
% |
Gross margin |
|
$ |
98.4 |
|
|
$ |
65.6 |
|
|
|
50.0 |
% |
% of revenue |
|
|
27.8 |
% |
|
|
33.7 |
% |
|
|
|
|
Gross margin for the first two quarters of fiscal 2008 was $98.4 million, or 27.8 percent of
revenue, compared to $65.6 million, or 33.7 percent of revenue in the first two quarters of fiscal
2007. Our first two quarters fiscal 2008 gross margin was reduced by $3.7 million in markdowns of
inventory, $3.5 million of amortization on developed technology and $0.4 million of amortization of
the fair value of adjustments for fixed assets acquired from Stratex and $1.5 million of merger
integration costs. In the first two quarters of fiscal 2007, we did not incur costs for these items
in our gross margin. The increase in gross margin during the first two quarters of fiscal 2008
resulted from sales of former Stratex products and services primarily in our International
Microwave segment and gross margin generated by the increase in revenue from our Network Operations
segment.
Our gross margin percentage in the first two quarters of fiscal 2008 was comparatively lower
than the gross margin percentage in the first two quarters of fiscal 2007 because of the expenses
described above and because our International Microwave segment revenue included a significant
amount of the lower-margin, low-capacity version of Eclipse microwave radio sales in the first two
quarters of fiscal 2008. In addition, we experienced a shift in sales from the Africa and Europe,
Middle East and Russia regions to the Latin America and Asia Pacific regions, where prices for our
products and services are generally lower. Finally, we absorbed an increase in freight and service
costs during the first two quarters of fiscal 2008. We anticipate product mix and increased freight
and service costs will continue to impact International Microwave segment gross margins to a
similar extent for the remainder of fiscal year 2008.
25
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
353.4 |
|
|
$ |
194.8 |
|
|
|
81.4 |
% |
Research and development expenses |
|
$ |
23.3 |
|
|
$ |
15.7 |
|
|
|
48.4 |
% |
% of revenue |
|
|
6.6 |
% |
|
|
8.1 |
% |
|
|
|
|
Research and development (R&D) expenses were $23.3 million in the first two quarters of
fiscal 2008, compared to $15.7 million in the first two quarters of fiscal 2007. As a percent of
revenue, these expenses decreased from 8.1 percent in the first two quarters of fiscal 2007 to
6.6 percent in the first two quarters of fiscal 2008 due to higher revenue. The majority of the
increase in spending in the first two quarters of fiscal 2008 compared to the first two quarters of
fiscal 2007 was attributable to the R&D activities acquired from Stratex. Some of the increase was
attributable to higher spending in the first two quarters of fiscal 2008 related to our
TRuepoint 6000 development efforts.
Selling and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
353.4 |
|
|
$ |
194.8 |
|
|
|
81.4 |
% |
Selling and administrative expenses |
|
$ |
64.8 |
|
|
$ |
34.3 |
|
|
|
88.9 |
% |
% of revenue |
|
|
18.3 |
% |
|
|
17.6 |
% |
|
|
|
|
Our first two quarters of fiscal 2008 selling and administrative (S&A) expenses increased to
$64.8 million from $34.3 million in the first two quarters of fiscal 2007. As a percentage of
revenue, these expenses increased from 17.6 percent of revenue in the first two quarters of fiscal
2007 to 18.3 percent of revenue in the first two quarters of fiscal 2008 due primarily to
$4.5 million of expenses incurred related to integration activities undertaken in connection with
the merger. The majority of the increase in spending in the first two quarters of fiscal 2008
compared to the first two quarters of fiscal 2007 was attributable to the S&A expenses associated
with the former Stratex business. The remainder of the increase was due to higher selling expenses
associated with the increase in revenue, and increased costs incurred for compliance with
Sarbanes-Oxley requirements. We anticipate that the total cost of compliance with Sarbanes-Oxley
will be approximately $3.0 million in fiscal 2008.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
(Loss) income before income taxes |
|
$ |
(2.2 |
) |
|
$ |
11.3 |
|
|
|
N/M |
|
Income tax benefit (provision) |
|
$ |
0.4 |
|
|
$ |
(0.7 |
) |
|
|
N/M |
|
% of (loss) income before income taxes |
|
|
18.2 |
% |
|
|
6.2 |
% |
|
|
|
|
The income tax benefit of $0.4 million for the first two quarters of fiscal 2008 reflected our
pre-tax loss based on our estimated annual effective tax rate. The variation between income taxes
and income tax expense at the statutory rate of 35 percent was primarily due to the consolidation
of our foreign operations, which are subject to income taxes at lower statutory rates.
The income tax provision for the first two quarters of fiscal 2007 was $0.7 million and was
based upon an allocation of tax expense from Harris.
26
Discussion of Business Segments
North America Microwave Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
120.4 |
|
|
$ |
108.6 |
|
|
|
10.9 |
% |
Segment operating (loss) income |
|
$ |
(1.1 |
) |
|
$ |
8.6 |
|
|
|
(112.8 |
)% |
% of revenue |
|
|
(0.9 |
)% |
|
|
7.9 |
% |
|
|
|
|
North America Microwave segment revenue increased by $11.8 million or 10.9 percent from the
first two quarters of fiscal 2007 to the first two quarters of fiscal 2008. Revenue for the first
two quarters of fiscal 2008 included $13.0 million from sales of former Stratex products
and services. Revenue drivers in the North America Microwave segment include customer demand for
increased bandwidth, footprint expansion and the 2 gigahertz microwave relocation for advanced
wireless services from mobile operators.
Our first two quarters of fiscal 2008 operating loss was increased by the following amounts
related to the acquisition of Stratex: $0.5 million amortization of the fair value adjustments for
fixed assets, $1.3 million amortization of developed technology, trade names, customer
relationships, and non-compete agreements, $8.1 million of restructuring charges, $0.9 million in
charges for impairment of a lease agreement and $2.1 of integration expenses undertaken in
connection with the merger including the reduction in force at our Montreal facility. The North
America Microwave segment first two quarters fiscal 2008 operating loss was further increased by
$1.9 million of the markdowns of inventory discussed above.
The North America Microwave segment operating results were also negatively impacted because we
recorded $4.1 million in FAS 123R share-based compensation expense during the first two quarters of
fiscal 2008 compared to $0.7 million in the first two quarters of fiscal 2007.
International Microwave Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
220.0 |
|
|
$ |
76.7 |
|
|
|
186.8 |
% |
Segment operating loss |
|
$ |
(2.1 |
) |
|
$ |
5.9 |
|
|
|
(135.6 |
)% |
% of revenue |
|
|
(1.0 |
)% |
|
|
7.7 |
% |
|
|
|
|
International Microwave segment revenue increased by $143.3 million or 186.8 percent in the
first two quarters of fiscal 2008 compared to the first two quarters of fiscal 2007. Revenue in the
first two quarters of fiscal 2008 included $146.7 million from sales of former Stratex
products and services. Excluding the impact of the revenue from Stratex products and services, our
International Microwave segment revenue decreased by $3.4 million as sales are transitioning to the
products and services of the former Stratex business. International Microwave segment revenue in
the second quarter of fiscal 2008 included a significant amount of sales of the former Stratex
business and fewer sales of the former MCD business.
International Microwave segment had an operating loss of $2.1 million for the first two
quarters of fiscal 2008 compared to operating income of $5.9 million for the first two quarters of
fiscal 2007. The operating loss for the first two quarters of fiscal 2008 reflected the following
charges related to the acquisition of Stratex: $0.9 million amortization of the fair value
adjustments for fixed assets, $5.9 million amortization of developed technology, tradenames,
customer relationships, contract backlog and non-compete agreements, and $0.3 million of
restructuring charges and $3.9 million of integration expenses associated with the merger.
Our first two quarters fiscal 2008 operating loss was further increased by $1.8 million of
markdowns of inventory. In addition, we experienced a shift in sales from the Africa and Europe,
Middle East and Russia regions to the Latin America and Asia Pacific regions, where prices for our
products and services are generally lower. Finally, we absorbed an increase in freight and service
costs
27
during the first two quarters of fiscal 2008. We anticipate product mix and increased freight
and service costs will continue to impact International Microwave segment gross margins to a
similar extent for the remainder of fiscal year 2008.
We also recorded $0.2 million in FAS 123R share-based compensation expense during the first
two quarters of fiscal 2008 in our International Microwave segment compared to none in the first
two quarters of fiscal 2007.
Network Operations Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
H1 FY 08 |
|
H1 FY 07 |
|
Increase/(Decrease) |
|
|
(In millions, except percentages) |
Revenue |
|
$ |
13.0 |
|
|
$ |
9.5 |
|
|
|
36.8 |
% |
Segment operating income |
|
$ |
1.4 |
|
|
$ |
0.4 |
|
|
|
250.0 |
% |
% of revenue |
|
|
10.8 |
% |
|
|
4.2 |
% |
|
|
|
|
Network Operations segment revenue increased by 36.8 percent from the first two quarters of
fiscal 2007 to the first two quarters of fiscal 2008. This segment had operating income of
$1.4 million in the first two quarters of fiscal 2008, which more than tripled compared to
operating income of $0.4 million in the first two quarters of fiscal 2007. Additionally, operating
income as a percentage of sales increased to 10.8 percent in the first two quarters of fiscal 2008
compared to 4.2 percent in the first two quarters of fiscal 2007. The increase in revenue resulted
primarily from an increase in software and license revenue in the first two quarters of fiscal 2008
compared to the first two quarters of fiscal 2007.
The Network Operations segment experienced increased demand in the first two quarters of
fiscal 2008 for its service assurance solution with Next Generation Network customers compared to
the first two quarters of fiscal 2007 as a result of new features and functionality in our product
offerings. The increase in first two quarters fiscal 2008 operating income and as a percentage of
revenue compared to first two quarters of fiscal 2007 was driven by product mix including an
increase in higher margin software and license revenue and a decrease in selling and administrative
expenses as a percentage of revenue.
Related Party Transactions with Harris
Prior to the Stratex acquisition, Harris provided information services, human resources,
financial shared services, facilities, legal support and supply chain management services to us.
The charges for those services were billed to us primarily based on actual usage. During the
quarter and two quarters ended December 29, 2006, Harris charged us $1.5 million and $3.2 million
for those services.
On January 26, 2007, we entered into a Transition Services Agreement with Harris to provide
for certain services during the periods subsequent to the Stratex acquisition. These services also
are charged to us based primarily on actual usage and include database management, supply chain
operating systems, eBusiness services, sales and service, financial systems, back office material
resource planning support, HR systems, internal and information systems shared services support,
network management and help desk support, and server administration and support. During the quarter
and two quarters ended December 28, 2007, Harris charged us $1.7 million and $3.4 million for these
services.
We have sales to, and purchases from, other Harris entities from time to time. Prior to
January 26, 2007, the entity initiating the transaction sold to the other Harris entity at cost or
transfer price, depending on jurisdiction. The entity making the sale to the end customer recorded
the profit on the transaction above cost or transfer price, depending on jurisdiction. Subsequent
to January 26, 2007, these purchases and sales are recorded at market price. Our sales to other
Harris entities were $3.7 million and $0.9 million for the quarters ended December 28, 2007 and
December 29, 2006 and $4.9 million and $1.4 million for the two quarters ended December 28, 2007
and December 29, 2006. We also recognized costs associated with related party purchases from Harris
of $4.0 million and $0.1 million for the quarters ended December 28, 2007 and December 29, 2006 and
4.6 million, and $2.7 million for the two quarters ended December 28, 2007 and December 29, 2006.
Harris was the primary source of our financing and equity activities through January 26, 2007,
the date of the Stratex acquisition. During the two quarters ended December 29, 2006, Harris net
investment in us increased by $8.5 million.
Additionally, through the date of the Stratex acquisition, Harris loaned cash to us to fund
our international entities, and we distributed excess cash back to Harris. This arrangement ended
on January 26, 2007. We recognized interest income and expense on
28
these loans. The amount of interest income and expense for the quarter and two quarters ended
December 29, 2006 was not significant.
The unpaid amounts billed from Harris are included within Due to Harris Corporation on the
condensed consolidated balance sheets. Additionally, we have other receivables and payables in the
normal course of business with Harris. These amounts are netted within Due to Harris Corporation
on the condensed consolidated balance sheets. Total receivables from Harris were $1.8 million and
$0.7 million at December 28, 2007 and June 29, 2007. Total payables to Harris were $18.0 million
and $17.9 million at December 28, 2007 and June 29, 2007.
Prior to January 26, 2007, MCD used certain assets in Canada owned by Harris that were not
contributed to us as part of the Combination Agreement. We continue to use these assets in our
business and, on January 26, 2007, we entered into a five-year lease agreement with Harris for
these assets. This agreement is a capital lease under generally accepted accounting principles with
an initial lease obligation balance of $5.9 million and the related asset amount included in
property, plant and equipment on our balance sheet.
During the first quarter of fiscal 2008, we recognized an impairment charge of $1.3 million on
a portion of these assets which is included in our restructuring charges. We also recognized an
increase of $0.4 million to the lease obligation balance during the quarter ended December 28, 2007
from a recapitalization under the lease terms, primarily because of the impairment charge discussed
above and a rescheduling of the lease payments. Quarterly lease payments are due to Harris based on
the amount of 103 percent of Harris annual depreciation calculated in accordance with U.S.
generally accepted accounting principles. Our depreciation expense on this capital lease was $0.5
million and $0.9 million during the quarter and two quarters ended December 28, 2007.
During the first quarter of fiscal 2008, we paid Harris $2.0 million under this capital lease
obligation resulting from the $1.3 million impairment discussed above and the principal payments.
As of December 28, 2007, our total capital lease obligation to Harris was $4.3 million.
29
Liquidity and Capital Resources
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Two Quarters Ended |
|
|
|
December 28, |
|
|
December 29, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Net cash provided by (used in) operating activities |
|
$ |
12.1 |
|
|
$ |
(5.7 |
) |
Net cash provided by (used in) investing activities |
|
|
0.3 |
|
|
|
(5.0 |
) |
Net cash (used in) provided by financing activities |
|
|
(7.9 |
) |
|
|
8.4 |
|
Effect of foreign exchange rate changes on cash |
|
|
(0.7 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
3.8 |
|
|
$ |
(1.6 |
) |
|
|
|
|
|
|
|
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with a remaining maturity of three
months or less at the time of purchase to be cash equivalents. Our cash and cash equivalents
increased by $3.8 million to $73.0 million at the end of the second quarter of fiscal 2008. We
generated $12.1 million in cash flow from operations, $14.8 million in cash and cash equivalents
from the sale of short-term investments and realized proceeds from the exercise of stock options of
$0.9 million. These increases to cash and cash equivalents were partially offset by our purchase of
short-term investments totaling $4.4 million, $3.6 million in purchases of property, plant and
equipment, $6.5 million in additions to capitalized software, the repayment of $1.2 million in
short-term debt and principal payments of $5.6 million on long-term debt.
Our cash and cash equivalents decreased by $1.6 million to $12.2 million at the end of the
first two quarters of fiscal 2007, primarily due to $8.5 million in cash and other transfers from
Harris which were more than offset by $1.9 million in purchases of property, plant and equipment,
$3.1 of additions to capitalized software and $5.7 million cash and cash equivalents used in
operations.
We currently believe that existing cash, cash equivalents, short-term investments and
available for sale securities, funds generated from operations and access to our credit facility
will be sufficient to provide for our anticipated requirements for working capital and capital
expenditures for the next 12 months and the foreseeable future. We estimate that approximately
$10 million to $12 million of our cash will be used in integration and restructuring activities
during the next 12 months. Our total additions of capitalized software and property, plant and
equipment for fiscal year 2008 are expected to be in the range of $16 million to $20 million.
We do not anticipate other significant non-operational cash payments during the remainder of
fiscal 2008.
There can be no 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, 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.
Net Cash Provided by (Used in) Operating Activities
Our net cash and cash equivalents provided by operating activities was $12.1 million in the
first two quarters of fiscal 2008 compared to $5.7 million used in operating activities in the
first two quarters of fiscal 2007. Operating cash flow in the first two quarters of fiscal 2008 was
positively affected by increases in accounts payable and accrued expenses ($7.1 million), an
increase in advance payments and unearned income ($5.5 million) and other cash flow from
operations. These increases to operating cash flow were partially offset by an increase of $20.9
million in receivables during the first two fiscal quarters of fiscal 2008.
30
Net Cash Provided by (Used in) Investing Activities
Our net cash provided by investing activities was $0.3 million in the first two quarters of
fiscal 2008 compared to $5.0 million used in investing activities during the first two quarters of
fiscal 2007. Net cash used in investing activities in the first two quarters of fiscal 2008 was
$4.4 million in purchases of short-term investments, $6.5 million of additions of capitalized
software primarily for the purchase and implementation of new enterprise-wide information systems
and $3.6 million of additions of property, plant and equipment. These uses of cash in investing
activities during the first two quarters of fiscal 2008 were more than offset by the receipt of
$14.8 million in proceeds from the sale and maturity of short-term investments and available for
sale securities. Net cash used in investing activities in the first two quarters of fiscal 2007 was
due to $1.9 million of additions of plant and equipment and $3.1 million of additions of
capitalized software.
Net Cash (Used in) Provided by Financing Activities
Our net cash used in financing activities in the first two quarters of fiscal 2008 was
$7.9 million compared to $8.4 million provided by financing activities in the first two quarters of
fiscal 2007. The net cash used in financing activities in the first two quarters of fiscal 2008 was
for the repayment of $1.2 million in short-term debt, payment of $2.0 million on our capital lease
obligation to Harris and $5.6 million in principal payments on long-term debt. We received
$0.9 million in proceeds from the exercise of former Stratex options. In the first two quarters of
fiscal 2007, our cash provided by financing activities was primarily from net cash and other
transfers from Harris totaling $8.5 million.
Sources of Liquidity
At December 28, 2007, our principal sources of liquidity consisted of $83.0 million in cash,
cash equivalents, short-term investments and available for sale securities and $27.9 million of
available credit under our $50 million credit facility.
Available Credit Facility and Repayment of Debt
We have $27.9 million of credit available against our $50 million revolving credit facility
with a commercial bank as mentioned above. The total amount of revolving credit available is
$50 million less the outstanding balance of the term loan portion and any usage under the revolving
credit portion. The balance of the term loan portion of our credit facility was $13.9 million as of
December 28, 2007 and there were $8.2 million outstanding in standby letters of credit as of that
date, which are defined as usage under the revolving credit portion of the facility. There were no
borrowings under the short-term debt portion of the facility as of December 28, 2007. As the term
loans are repaid, additional credit will be available under the revolving credit portion of the
facility.
Depending on the results of our operations and the growth of our business, we may require
additional financing which may not be available to us in the required time frame on commercially
reasonable terms, if at all. We are currently negotiating a new credit facility with major
financial institutions. However, we believe that we have the financial resources needed to meet our
business requirements for at least the next 12 months.
Our debt consisted of the following at December 28, 2007 and June 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
December 28, |
|
|
June 29, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(In millions) |
|
Credit Facility with Bank: |
|
|
|
|
|
|
|
|
Term Loan A |
|
$ |
2.6 |
|
|
$ |
5.7 |
|
Term Loan B |
|
|
11.3 |
|
|
|
13.8 |
|
Other short-term notes |
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Total |
|
|
13.9 |
|
|
|
20.7 |
|
Less current portion and short-term notes |
|
|
(7.6 |
) |
|
|
(11.9 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
6.3 |
|
|
$ |
8.8 |
|
|
|
|
|
|
|
|
Term Loan A of the Credit Facility requires monthly principal payments of $0.5 million plus
interest at a fixed rate of 6.38 percent through May 2008. Term Loan B requires monthly principal
payments of $0.4 million plus interest at a fixed rate of 7.25 percent through March 2010.
31
At December 28, 2007, our future debt principal payment obligations were as follows:
|
|
|
|
|
|
|
Years Ending |
|
|
|
in June |
|
|
|
(In millions) |
|
2008 |
|
$ |
5.1 |
|
2009 |
|
|
5.0 |
|
2010 |
|
|
3.8 |
|
|
|
|
|
Total |
|
$ |
13.9 |
|
|
|
|
|
Based on covenants included as part of the credit facility we have to maintain, as measured at
the last day of each fiscal quarter, tangible net worth of at least $54 million plus: 1) 25 percent
of net income, as determined in accordance with U.S. GAAP (exclusive of losses); and 2) 50 percent
of any increase to net worth due to subordinated debt or net equity proceeds from either public or
private offerings (exclusive of issuances of stock under our employee benefit plans) for such
quarter and all preceding quarters since December 31, 2005. We also have to maintain, as measured
at the last day of each fiscal month, a ratio of not less than 1.25 determined as follows: (a) the
sum of total unrestricted cash and cash equivalents plus short-term and long-term marketable
securities plus 25 percent of all accounts receivable due to us minus certain outstanding bank
services and reserve for foreign currency contract transactions divided by (b) the aggregate amount
of outstanding borrowings and other obligations to the bank. As of December 28, 2007, we were in
compliance with these financial covenants.
Restructuring and Severance Payments
We had total liability for restructuring activities of $15.8 million as of December 28, 2007,
of which $9.8 million was classified as a current liability and expected to be paid out in cash
over the next 12 months. We anticipate recording an additional $0.6 million during the third fiscal
quarter of fiscal 2008 under our current restructuring plans.
Contractual Obligations
At December 28, 2007, we had contractual cash obligations for repayment of debt and related
interest, purchase obligations to acquire goods and services, payments for operating lease
commitments, obligations to Harris, payments on our restructuring and severance liabilities,
redemption of our preference shares and payment of the related required dividend payments and other
current liabilities on our balance sheet in the normal course of business. The amounts disclosed in
our Fiscal 2007 Form 10-K included our contractual obligations as of June 29, 2007. During the two
quarters ended December 28, 2007, no material changes occurred in our contractual obligations,
except that our purchase obligations to acquire goods and services increased from June 29, 2007 by
$15.4 million to $39.0 million. The increase was due to additional purchase obligations with our
contract manufacturers.
Commercial Commitments
We have entered into commercial commitments in the normal course of business including surety
bonds, standby letters of credit and other arrangements with financial institutions and insurers
primarily relating to the guarantee of future performance on certain contracts to provide products
and services to customers. The amounts disclosed in our Fiscal 2007 Form 10-K include our
commercial commitments. During the two quarters ended December 28, 2007, no material changes
occurred in our commercial commitments and contingent liabilities on outstanding letters of credit,
guarantees and other arrangements as disclosed in our Fiscal 2007 Form 10-K.
Use of Estimates and Critical Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, and the
application of U.S. GAAP requires management to make estimates that affect our reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent assets and
liabilities. In many instances, we could have reasonably used different accounting estimates. In
other instances, changes in the accounting estimates from period to period are reasonably likely to
occur. Accordingly, actual results could differ significantly from the estimates made by
management. To the extent that there are material differences between these estimates and actual
results, our future financial statement presentation of our financial condition or results of
operations may be affected.
32
On an ongoing basis, we evaluate our estimates, including those related to revenue
recognition, provision for doubtful accounts and sales returns, provision for inventory
obsolescence, fair value of investments, fair value of acquired intangible assets and goodwill,
useful lives of intangible assets and property and equipment, income taxes, restructuring
obligations, product warranty obligations, and contingencies and litigation, among others. We base
our estimates on historical experience, our assessment of current factors impacting the estimates
and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. We refer to accounting estimates of
this type as critical accounting estimates.
Critical Accounting Policies
Our Condensed Consolidated Financial Statements (Unaudited) and accompanying Notes are
prepared in accordance with U.S. generally accepted accounting principles. Preparing financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the
application of our accounting policies. Our significant accounting policies are described in Note B
Significant Accounting Policies in our Notes to Consolidated Financial Statements included in
our Fiscal 2007 Form 10-K. Critical accounting policies and estimates are those that require
application of managements most difficult, subjective or complex judgments, often as a result of
matters that are inherently uncertain and may change in subsequent periods. Critical accounting
policies and estimates for us include: (i) revenue recognition, (ii) provisions for excess and
obsolete inventory losses, (iii) goodwill and intangible assets, and (iv) income taxes and tax
valuation allowances. For additional discussion of our critical accounting policies and estimates,
see our Managements Discussion and Analysis of Financial Condition and Results of Operations in
our Fiscal 2007 Form 10-K.
Impact of Recently Issued Accounting Pronouncements
As described in Note B Recent Accounting Pronouncements in our Notes to Condensed
Consolidated Financial Statements included in this Form 10-Q, there are accounting pronouncements
that have recently been issued but have not yet been implemented by us. Note B in this Form 10-Q
describes the potential impact that these pronouncements are expected to have, if known, on our
financial position, results of operations and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of doing business, we are exposed to the risks associated with foreign
currency exchange rates and changes in interest rates. We employ established policies and
procedures governing the use of financial instruments to manage our exposure to such risks.
Exchange Rate Risk
We use foreign exchange contracts to hedge both balance sheet and off-balance sheet future
foreign currency commitments. Generally, these foreign exchange contracts offset foreign currency
denominated inventory and purchase commitments from suppliers; accounts receivable from, and future
committed sales to, customers; and inter-company loans. We believe the use of foreign currency
financial instruments reduces the risks that arise from doing business in international markets. At
December 28, 2007, we had open foreign exchange contracts with a notional amount of $63.6 million
($52.5 million at June 29, 2007), of which $19.3 million ($15.1 million at June 29, 2007) were
designated as Statement 133 hedges and $44.3 million ($37.4 million at June 29, 2007) were not
designated as Statement 133 hedges. At December 28, 2007, contract expiration dates range from less
than one month to 1.5 months with a weighted average contract life of approximately one month. More
specifically, the foreign exchange contracts designated as Statement 133 hedges have been used
primarily to hedge currency exposures from customer orders denominated in non-functional currencies
currently in backlog.
As of December 28, 2007, we estimated that a pre-tax gain of less than $0.1 million would be
reclassified into earnings from comprehensive income within the next 1.5 months related to these
cash flow hedges.
We immediately recognize in earnings any portion of a derivatives change in fair value which
is assessed as ineffective in accordance with the provisions of Statement 133. Amounts included in
our Statements of Operations in the first two quarters of fiscal 2008 and the first two quarters of
fiscal 2007 representing hedge ineffectiveness were not significant.
We recognized less than $0.1 million, in our Statements of Operations in the quarter and two
quarters ended December 28, 2007 and December 29, 2006 related to the component of the derivative
instruments gain or loss excluded from the assessment of hedge ineffectiveness. All of these
derivatives were recorded at their fair value on the balance sheet in accordance with
Statement 133.
33
Factors that could impact the effectiveness of our hedging programs for foreign currency
include accuracy of sales estimates, volatility of currency markets and the cost and availability
of hedging instruments. A 10 percent adverse change in currency exchange rates would have an impact
of $5.7 million on the fair value of such instruments.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term
investments and bank debt.
Exposure on Short-term Investments: We do not use derivative financial instruments in our
short-term investment portfolio. We invest in high-credit quality issues and, by policy, limit the
amount of credit exposure to any one issuer and country. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio liquidity. The portfolio is
also diversified by maturity to ensure that funds are readily available as needed to meet our
liquidity needs. This policy reduces the potential need to sell securities in order to meet
liquidity needs and therefore the potential effect of changing market rates on the value of
securities sold.
We had $83.0 million in cash, cash equivalents and short-term investments at December 28,
2007. Short-term investments totaled $10.0 million at December 28, 2007. At December 28, 2007,
short-term investments had contractual maturities ranging from 1 month to 8 months.
The primary objective of our short-term investment activities is to preserve principal while
maximizing yields, without significantly increasing risk. Our short-term investments are at fixed
interest rates; therefore, changes in interest rates will not generate a gain or loss on these
investments unless they are sold prior to maturity. Actual gains and losses due to the sale of our
short-term investments prior to maturity have been not been significant. The average number of days
to maturity for short-term investments held at December 28, 2007 was 58 days and had an average
yield of 5.25 percent per annum. The average number of days to maturity for our cash equivalents at
December 28, 2007 was 4 days and had an average yield of 4.9 percent per annum. The potential loss
in fair value resulting from a hypothetical 10 percent decrease in quoted market price was
approximately $1.0 million at December 28, 2007.
As of December 28, 2007, unrealized gains on short-term investments were less than
$0.1 million. The investments have been recorded at fair value on our balance sheet.
Exposure on Borrowings: Any borrowings under the revolving portion of our credit facility will
be at an interest rate of the banks prime rate or LIBOR plus 2 percent. As of December 28, 2007 we
had $27.9 million of available credit. All of our borrowings at December 28, 2007 bear interest at
fixed rates. A hypothetical 10 percent change in interest rates would not have a material impact on
our financial position, results of operations or cash flows.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures: Our management, with the participation of
our principal executive officer and principal financial officer, has evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) (the Exchange Act), as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive
officer and principal financial officer have concluded that as of December 28, 2007, our disclosure
controls and procedures were effective.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 by our fiscal
year ending June 27, 2008. The notification of such compliance is due no later than the time we
file our annual report on Form 10-K for the fiscal year ending June 27, 2008. We believe we will
have adequate resources and expertise, both internal and external, in place to meet this
requirement. However, there is no guarantee that our efforts will result in managements ability to
conclude, or our independent registered public accounting firm to attest, that our internal control
over financial reporting is effective as of June 27, 2008.
34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements
Notes to Condensed Consolidated Financial Statements Note P.
Item 1A. Risk Factors.
Investors should carefully review and consider the information regarding certain factors which
could materially affect our business, operating results, cash flows and financial condition set
forth under Item 1A. Risk Factors in our Fiscal 2007 Form 10-K. We do not believe that there have
been any material changes to the risk factors previously disclosed in our Fiscal 2007 Form 10-K,
although we may disclose changes to such factors or disclose additional factors from time to time
in our future filings with the SEC. Additional risks, such as the
relative proportions of higher margin and lower margin products sold
during any quarter, increased costs for Sarbanes-Oxley
compliance and for continuing integration of our merged operations and
systems and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Our 2007 Annual Meeting of Shareholders was held on November 14, 2007. A total of 55,404,169
of our outstanding shares were represented in person or by proxy at the meeting. This represented
approximately 95% of our shares issued, outstanding and entitled to be voted at the 2007 Annual
Meeting of Shareholders.
Proposal 1: Shareholders elected four Class A nominees and five Class B nominees to our Board
of Directors for a one-year term expiring at the Annual Meeting of Shareholders in 2008, or until
their successors are elected and qualified. The vote tabulation for individual directors was:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
For |
|
Withheld |
Class A Nominee |
|
|
|
|
|
|
|
|
Charles D. Kissner |
|
|
47,176,820 |
|
|
|
8,227,349 |
|
William A. Hasler |
|
|
52,170,427 |
|
|
|
3,233,742 |
|
Clifford H. Higggerson |
|
|
55,142,521 |
|
|
|
261,648 |
|
Edward F. Thompson |
|
|
55,130,501 |
|
|
|
273,668 |
|
Class B Nominee |
|
|
|
|
|
|
|
|
Guy M. Campbell |
|
|
32,913,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric C. Evans |
|
|
32,913,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard L. Lance |
|
|
32,913,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Mohsen Sohi |
|
|
32,913,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. James C. Stoffel |
|
|
32,913,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal 2: To ratify our Audit Committees appointment of Ernst & Young LLP as our
independent registered public accountants for the fiscal year ending June 27, 2008.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
For |
|
Against |
|
Abstain |
|
55,362,802 |
|
|
|
18,142 |
|
|
|
23,225 |
|
Proposal 2 was approved by our shareholders.
35
Item 6. Exhibits.
The following exhibits are filed herewith or incorporated by reference to exhibits previously
filed with the SEC:
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
(15)
|
|
Letter Regarding Unaudited Interim Financial Information. |
|
|
|
(31.1)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
|
(31.2)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
|
(32.1)
|
|
Section 1350 Certification of Chief Executive Officer. |
|
|
|
(32.2)
|
|
Section 1350 Certification of Chief Financial Officer. |
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
HARRIS STRATEX NETWORKS, INC.
(Registrant)
|
|
Dated: February 5, 2008 |
By: |
/s/ Sarah A. Dudash
|
|
|
|
Sarah A. Dudash |
|
|
|
Vice President and Chief Financial Officer
(principal financial officer and duly authorized officer) |
|
|
37
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
(15)
|
|
Letter Regarding Unaudited Interim Financial Information. |
|
|
|
(31.1)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
|
(31.2)
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
|
(32.1)
|
|
Section 1350 Certification of Chief Executive Officer. |
|
|
|
(32.2)
|
|
Section 1350 Certification of Chief Financial Officer. |