EX-13 11 a03-6365_1ex13.htm EX-13

Exhibit 13

 

ANDREW CORPORATION 2003

 

RESULTS OF OPERATIONS  17

 

Results of Operations

 

Capital investment in wireless infrastructure continued to be weak in 2003, putting pressure on sales and operating margins. To meet the demands of this challenging market, the company took significant steps in 2003 to broaden its product portfolio, improve operating performance and increase financial flexibility.

 

Allen Telecom was acquired in July 2003 for total consideration of $495.0 million in stock, creating the single largest provider of RF (radio frequency) footprint product. Following the acquisition, the company announced a merger integration program that would eliminate at least $52 million of costs annually beginning in 2005. Combined with annual cost savings of approximately $47 million that the company expects to generate from the September 2002 restructuring program, the company anticipates that it will realize savings in excess of $100 million annually beginning in 2005. Major drivers of this cost reduction include relocation of manufacturing to lower labor cost regions, global sourcing of components and utilization of shared services.

 

Sales for 2003 were $1.0 billion, up 17% compared with the prior year, driven by the acquisition of Allen Telecom in July 2003 and Celiant in June 2002. Net income available to common shareholders for 2003 was $9.1 million, or $0.08 per share, compared with a net loss of $26.4 million, or $(0.30) per share in 2002. The loss in 2002 was driven by restructuring and discontinued operations charges. In September 2002, the company initiated plans to restructure and discontinue several non-strategic businesses. After-tax restructuring charges were $6.0 million in 2003 and $25.2 million in 2002. After-tax losses from discontinued operations were $3.2 million in 2003 and $36.8 million in 2002.

 

OUTLOOK Despite challenging conditions in the broader economy and the wireless infrastructure sector over the past three years, the company believes there are several positive factors that lead to a cautiously optimistic outlook. As minutes of use (MOU), total subscribers, data intensive applications and spending on third generation networks (3G) increase, the company believes there will be an increased proportion of capital expenditures on the RF footprint to improve capacity, coverage and quality of service. The company believes that the steps taken to broaden its product portfolio, improve operating performance and increase financial flexibility position the company to capitalize on the opportunities in the wireless infrastructure market.

 

SALES BY PRODUCT GROUP During 2003, sales were classified into the following five primary product groups that the company believes best reflect the company’s complete RF footprint product offering: Antennas, Base Station Subsystems, Cable Products, Network Solutions and Wireless Innovations.

 

DOLLARS IN MILLIONS

 

2003

 

% CHANGE

 

2002

 

% CHANGE

 

2001

 

% CHANGE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales by Product Group

 

 

 

 

 

 

 

 

 

 

 

 

 

Antennas

 

$

265

 

4

%

$

256

 

(20

)%

$

320

 

8

%

Base Station Subsystems

 

236

 

146

%

96

 

NA

 

8

 

NA

 

Cable Products

 

428

 

(13

)%

490

 

(15

)%

579

 

1

%

Network Solutions

 

43

 

 

 

 

 

 

Wireless Innovations

 

42

 

83

%

23

 

(18

)%

28

 

50

%

Total Sales

 

$

1,014

 

17

%

$

865

 

(7

)%

$

935

 

4

%

 

Antenna sales for 2003 were $264.8 million, up 4% from the prior year, driven by the acquisition of Allen Telecom and partially offset by lower sales of broadcast antennas. Antenna sales accounted for 26% of total sales in 2003.

 

Base Station Subsystems sales, consisting of power amplifiers, filters, combiners and integrated products, increased 146% to $236.2 million in 2003, and represented 23% of total sales. This increase was driven by the acquisition of Allen Telecom in 2003 and the full-year benefit of the Celiant acquisition, which occurred in June 2002. The company is currently shipping stand alone products to seven major original equipment manufacturers (OEMs) and designing integrated radio amplifier products for three OEMs. The company believes that pricing pressure experienced in 2003 will moderate as the company offers more value-added and integrated products.

 

Cable Products sales were $428.1 million in 2003 and represented 42% of total sales. Cable sales decreased 13% in 2003 and 15% in 2002. The weak wireless infrastructure market and competitive market conditions resulted in a decline in both unit volume and average selling price over the last two years. Unit volume declined 12%, and average selling prices decreased 9% in 2003. An increased focus on new products such as Heliax Virtual Air™ cable and entry into the broadband cable infrastructure market are expected to mitigate pricing pressure and expand the company’s total addressable market for cable.

 

Network Solutions, which includes geolocation, test and measurement and network optimization services, posted sales of $43.8 million in 2003. Sales in this product group represented 4% of total sales for 2003 and are the result of the Allen Telecom acquisition. Geolocation sales are largely project driven and can experience significant fluctuations on a quarterly basis.

 

Wireless Innovations consists primarily of repeaters and distributed communications products. Sales in 2003, were $41.6 million, up 83% from the prior year due to the acquisition of Allen Telecom. Sales from this product group represented 4% of total sales for the company. Products for the in-building market such as Pico Node-B are an increasing focus of the company and are expected to contribute to future sales growth.

 



 

18  RESULTS OF OPERATIONS

 

ANDREW CORPORATION 2003

 

The company’s top 25 customers represented 65% of total sales in 2003 and Lucent Technologies was the only customer that accounted for more than 10% of total sales. AT&T Wireless was also a significant customer, accounting for more than 10% of total sales in the fourth quarter.

 

DOLLARS IN MILLIONS

 

2003

 

% CHANGE

 

2002

 

% CHANGE

 

2001

 

% CHANGE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales by Region (end use destination)

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

549

 

7

%

$

511

 

(6

)%

$

543

 

(5

)%

Europe, Middle East, Africa (EMEA)

 

278

 

46

%

190

 

6

%

179

 

(6

)%

Asia Pacific

 

187

 

14

%

164

 

(23

)%

213

 

50

%

Total Sales

 

$

1,014

 

17

%

$

865

 

(7

)%

$

935

 

4

%

 

Sales in 2003 increased across all regions, driven by the acquisitions of Allen Telecom and Celiant. In the Americas, sales were $549.0 million, up 7% from the prior year, and represented 54% of total sales. EMEA sales were $278.2 million, up 46% from a year ago, and represented 27% of total sales in 2003. Asia Pacific sales were $187.3 million, up 14% from the prior year, and accounted for 19% of total sales in 2003.

 

Gross profit as a percentage of sales was 27.1% in 2003, 27.5% in 2002 and 33.1% in 2001. Included in cost of goods sold for 2002 was $11.1 million of restructuring costs relating to inventory write-downs. Weakness in the wireless infrastructure market resulted in price erosion, adversely impacting gross profits over the last two years. The company realized some of the benefits in 2003 from cost reduction efforts and restructuring programs, including the relocation of manufacturing operations to new facilities in Mexico and the Czech Republic. The company anticipates that these new facilities will provide significant cost savings in the future, resulting in improved gross margins. The overall gross margin percentage for 2003 was enhanced by the fourth quarter acquisition of Allen Telecom and its Geolocation product line.

 

Gross profit margins vary for the company’s product groups. Generally, Network Solutions and Cable Products exceed the corporate average, Wireless Innovations is approximately equal to the corporate average, and Base Station Subsystems and Antennas are below the corporate average. Cable Products gross profit margins have declined over the last three years due to competitive pricing, with average cable prices declining 9% in 2003. Sales and gross profits for Base Station Subsystems increased as a result of the Celiant acquisition in the third quarter of 2002. With the acquisition of Allen the company will be able to offer more value-added and integrated products, which the company believes will improve Base Station Subsystems margins in the future. Antenna Products gross profit margins decreased slightly in 2003, due primarily to start-up costs at new manufacturing facilities. The relocation of manufacturing to Mexico and the Czech Republic is expected to have a positive impact on Antenna Products gross margins in the second half of 2004.

 

Operating expenses increased 15%, or $33.1 million, in 2003 and 13%, or $27.0 million, in 2002. The 2003 increase in operating expenses was driven by increased investment in research and development and amortization of intangible assets, partially offset by lower restructuring expenses. The 2002 increase in operating expenses was driven by restructuring charges and increased investment in research and development. Sales and administrative costs increased slightly in 2003 due to the addition of Allen’s operations. Excluding the impact of Allen Telecom, the company reduced sales and administrative costs in 2003 and 2002.

 

In September 2002, the company initiated restructuring plans that involved the relocation of manufacturing operations to new locations and the consolidation of certain other facilities into existing locations. The company recorded $24.9 million of restructuring costs in 2002 and an additional $9.2 million in 2003. These costs consisted primarily of employee termination, lease and contract cancellation costs, and fixed asset and inventory relocation costs. The company recorded amortization of intangible assets of $19.2 million in 2003 and $5.1 million in 2002. Intangible asset amortization is largely attributable to intangible assets acquired in the Allen Telecom and Celiant acquisitions. The company expects that intangible asset amortization will increase to $36.8 million in 2004 and decline significantly thereafter.

 

Research and development expense increased $26.2 million, or 45%, in 2003 and $18.0 million, or 45%, in 2002. Research and development represented 8% of sales in 2003 and 7% of sales in 2002. The company has continued to invest heavily in product improvement and development. The majority of these increases in research and development have been focused on the company’s power amplifier business. With the June 2002 acquisition of Celiant, the company has significantly increased its power amplifier operations and research and development spending on power amplifiers. With the acquisition of Allen, the company expects research and development to increase slightly in 2004, but to decrease as a percentage of sales to approximately 6% to 7%.

 

Sales and administrative expense increased $8.6 million, or 6%, in 2003 and decreased $20.9 million, or 13%, in 2002. The increase in 2003 was driven by $13.5 million of additional expenses related to the Allen acquisition, partially offset by the impact of headcount reductions and other cost cutting efforts. Sales and administrative expenses as a percentage of sales were 15%, 16% and 17% in 2003, 2002 and 2001, respectively. The company anticipates that sales and administrative expenses will decrease to between 10% and 11% of total sales in 2005.

 



 

ANDREW CORPORATION 2003

 

RESULTS OF OPERATIONS  19

 

Other income and expense consisted of income of $9.6 million in 2003, income of $3.7 million in 2002, and expense of $7.2 million in 2001. In 2003, the company recognized income of $12.2 million from the sale of assets, primarily due to gains of $9.3 million from the sale of unimproved land in Orland Park, Illinois, and $2.8 million from the sale of the company’s Denton, Texas manufacturing facility. In 2002, the company recognized income of $8.7 million from a gain on the sale of the company’s Russian telecommunication ventures. Interest expense increased $0.6 million to $5.7 million in 2003. This increase is attributed to the sale of $240.0 million of convertible notes in August 2003 and additional long-term debt assumed from Allen Telecom. In 2002, interest expense decreased $2.3 million due to lower debt levels. Interest income decreased $2.0 million to $1.6 million in 2003, as average cash and short-term investment balances were significantly lower than the prior year. Other (income) expense, net was income of $1.5 million in 2003 and expense of $3.6 million and $2.4 million in 2002 and 2001, respectively. The largest item in other (income) expense, net is foreign exchange gains and losses. The weakening of the U.S. dollar, especially against European currencies, was the primary driver of other income in 2003.

 

Income taxes as a percentage of income from continuing operations was 19.8% in 2003, 19.7% in 2002 and 32.0% in 2001. The effective tax rate for 2003 was lower than the United States federal tax rate due to the favorable impact of benefits from the company’s export sales structure, the utilization of capital losses to offset gains recognized on the asset sales described above and the rate differential on foreign earnings, offset by valuation allowances provided for a portion of the company’s foreign tax credits. The company expects the effective tax rate for 2004 to be approximately 35%, due to the impact of Allen, forecasted improvement in pre-tax income and the non-recurrence of capital loss utilization.

 

Discontinued operations resulted in a loss from operations of $3.2 million and $10.4 million in 2003 and 2002, respectively. The company has discontinued three non-strategic businesses, closing its satellite modem business in September 2002 and selling its shelter and wireless accessories businesses in the first quarter and second quarter of 2003, respectively. In 2002, the company incurred a $26.4 million charge to reduce the net assets of these businesses to their fair value. The disposition of these businesses in 2003 resulted in no significant differences from the company’s original estimates.

 

Net income available to common shareholders for 2003 includes $6.5 million of preferred stock dividends, comprised of a regular quarterly dividend of $0.8 million and conversion premium payments of $5.7 million. As part of the Allen merger, the company issued 991,000 shares of convertible preferred stock, issuing one share for each share of Allen convertible preferred stock. The company paid $5.7 million to induce early conversion of 807,000 shares of preferred stock into 9.3 million shares of the company’s common stock during the fourth quarter of 2003.

 

Liquidity

 

Cash and cash equivalents increased significantly to $286.3 million at September 30, 2003 compared with $84.9 million at September 30, 2002. This increase was primarily due to cash acquired as part of the Allen acquisition and the proceeds from the company’s convertible debt offering. To take advantage of favorable interest rates and to increase financial flexibility, the company raised $240.0 million from the sale of ten-year 3.25% convertible subordinated notes. Working capital was $615.5 million and $240.6 million at September 30, 2003 and 2002, respectively. Management believes that the company’s strong working capital position and ability to generate cash flow from operations will allow the company to meet its normal operating cash requirements.

 

Net cash from operations was $62.4 million in 2003, $155.1 million in 2002, and $160.2 million in 2001. In 2003, net income of $15.5 million included $62.2 million of net non-cash charges, comprised of $74.4 million of depreciation and amortization and a gain of $12.2 million from the sale of assets. In 2002, net loss of $26.4 million included net non-cash charges of $56.3 million of depreciation and amortization, and an $8.7 million gain on the sale of the company’s Russian telecommunication ventures.

 

Net cash costs for restructuring and discontinued operations totaled $1.3 million in 2003, versus $83.5 million of cash provided in 2002. In 2003, net cash costs for restructuring were $5.8 million consisting of a non-cash restructuring accrual of $7.9 million and cash costs of $13.7 million principally for severance and lease termination payments. In 2002, the company incurred non-cash charges of $35.4 million for the accrual of restructuring reserves. In 2003, the company used $1.5 million of cash to complete the closing of its discontinued businesses. In 2002, the company incurred net non-cash charges of $25.9 million to reduce the net assets of discontinued businesses to their fair value. Cash flow from discontinued businesses was reported as a single line item and resulted in cash flow of $6.0 million and $22.2 million in 2003 and 2002, respectively.

 

Changes in operating assets and liabilities resulted in a net decrease in cash of $14.1 million in 2003, compared with a net increase of $50.7 million in 2002. The decrease in 2003 was almost entirely driven by fluctuations in accounts receivable. Cash flow generated from decreases in accounts receivable were $10.7 million in 2003 and $59.0 million in 2002. Quarterly fluctuations in sales and the significant increase in sales in the fourth quarter of 2003 created less cash flow from receivables in 2003. At the end of 2003, average payment terms were slightly longer. Days sales in billed receivables increased to 80 days at the end of 2003, compared with 72 days at the end of 2002.

 



 

20  RESULTS OF OPERATIONS

 

ANDREW CORPORATION 2003

 

Net cash from investing activities was $39.4 million in 2003, and a net use of cash of $170.2 million in 2002 and $79.1 million in 2001.

 

The company’s capital expenditures were $31.9 million in 2003, $40.6 million in 2002, and $72.1 million in 2001. The company reduced capital expenditures by 21% in 2003 and 44% in 2002, due mainly to reductions in spending on manufacturing facilities and management information systems. The $72.1 million of capital expenditures in 2001 was focused mainly on the expansion and improvement of manufacturing facilities in China, Brazil and Scotland.

 

In July 2003, the company acquired Allen Telecom in a stock-for-stock transaction valued at $495.0 million. Allen common shareholders received 1.775 shares of the company’s common stock for each share of Allen common stock. The company incurred $47.6 million of cash costs to complete this merger. The company acquired Allen’s cash and cash equivalents of $95.8 million.

 

In 2002, the company used cash of $239.8 million for acquisitions and received $58.7 million of cash as part of the Celiant acquisition. In June 2002, the company acquired Celiant Corporation for $481.0 million, consisting of 16.3 million shares of the company’s common stock valued at $266.6 million and cash of $214.4 million consisting of purchase consideration and merger costs. In 2002, the company spent an additional $25.4 million on three smaller acquisitions.

 

Proceeds from the sale of businesses and investments were $7.3 million in 2003 and $50.3 million in 2002. In 2003, the company received $7.3 million of proceeds from the sale of two discontinued businesses, selling its equipment shelter business in October 2002 and its wireless accessories business in January 2003. In 2002, the company received $50.3 million of proceeds from the sale of its Russian telecommunication ventures.

 

Proceeds from the sale of property, plant, and equipment were $15.9 million in 2003, $1.0 million in 2002, and $0.7 million in 2001. In 2003, the company received $15.9 million from the sale of property, plant, and equipment, primarily $9.5 million from the sale of unimproved land in Orland Park, Illinois, and $5.3 million from the sale of the company’s Denton, Texas facility.

 

Net cash from financing activities was $89.6 million in 2003, and a net use of cash of $17.9 million and $16.1 million in 2002 and 2001, respectively.

 

In 2003, the company paid down $24.0 million of long-term debt. This included $12.9 million assumed from Allen Telecom, a $3.8 million industrial development bond associated with the company’s equipment shelter business, $1.9 million of borrowing in China and $4.5 million of senior notes. Long-term borrowings of $233.3 million consisted primarily of the $240.0 million ten-year, 3.25%, convertible notes, less issuance costs of $6.9 million. The company reduced its short-term notes payable borrowing by $65.9 million in 2003.

 

The company reduced its total debt outstanding by $20.7 million and $93.4 million in 2002 and 2001, respectively.

 

In 2003, financing activities included $6.5 million of preferred stock dividends, comprised of regular quarterly dividends of $0.8 million and a conversion premium of $5.7 million. In August 2003, the company repurchased 5.0 million shares of common stock for $49.6 million. The company receives cash from the sale of stock under employee and director option plans and the employee stock purchase plan. Under these plans, the company received cash proceeds of $2.3 million in 2003, $2.8 million in 2002, and $2.1 million in 2001.

 

Dividend policy. Although the company has never paid dividends to common shareholders, the Board of Directors periodically reviews this practice and, to date, has elected to retain earnings in the business to finance future investments and operations.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. The first footnote to the company’s consolidated financial statements (Summary of Significant Accounting Policies) describes the major accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, accounting for the allowance for doubtful accounts, sales returns, inventory reserves, warranty costs, depreciation and amortization, goodwill and intangible impairments, contingencies, taxes, pension liabilities, and restructuring and merger integration costs. Actual results could differ materially from these estimates. A material change in these or other estimates could potentially have a material impact on results of operations. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates.

 



 

ANDREW CORPORATION 2003

 

RESULTS OF OPERATIONS  21

 

ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts is based on our assessment of the collectability and the aging of accounts receivable. Although management believes that the current allowance is sufficient to cover existing exposures, there can be no assurance against the deterioration of a major customer’s creditworthiness, or against defaults that are higher than what has been experienced historically. If our estimates of the recoverability of amounts due to us are overstated, it could have an adverse impact on our results of operations.

 

INVENTORIES Inventories are stated at the lower of cost or market. Inventory obsolescence reserves are maintained based on managements’ estimates, historical experience and forecasted demand for the company’s products. A material change in these estimates could adversely impact gross profit.

 

WARRANTY COSTS The company accrues for warranty costs based on historical trends in product return rates. If the company were to experience an increase in warranty claims compared with the company’s historical experience, gross profit could be adversely affected.

 

GOODWILL The company performs an annual impairment test of goodwill on the first day of the company’s fiscal fourth quarter. The company operates its business as a single reporting unit and uses the comparison of total market capitalization to book value as an indicator of impairment. If impairment was indicated, the company would determine the fair value of net assets based on a discounted cash flow model. The company did not find any indicator of impairment in 2003 and therefore no impairment was recorded. Due to uncertain market conditions, it is possible that future tests may indicate impairment in the fair value of goodwill, which could result in non-cash charges, adversely affecting the company’s results of operations.

 

INCOME TAXES The company currently has significant deferred tax assets principally related to foreign tax credits and net operating losses. A valuation allowance has been provided for the portion of the deferred tax assets related to the foreign tax credits and net operating losses, as management believes it is more likely than not that these assets will not be utilized. No valuation allowance has been recorded for the remainder of the company’s deferred tax assets as the company expects the turnaround of deferred tax liabilities, higher taxable income in the United States and tax planning strategies will make the realization of these deferred tax assets more likely than not. Changes in the company’s expectations could result in significant adjustments to the valuation allowance, which would significantly impact the company’s results of operations.

 

RESTRUCTURING At September 30, 2003, the company had a restructuring reserve of $20.4 million for the integration of Allen operations and for the completion of its current restructuring plans. These accruals are based on the company’s best estimates of the costs associated with merger integration and restructuring plans, including employee termination costs, lease cancellation, and other costs. If actual costs of these activities differ significantly from these forecasts, results of operations could be impacted.

 

DEFINED BENEFIT PLANS Some of the company’s employees are covered by defined benefit plans. Approximately 600 current and former employees of the company’s United Kingdom subsidiary, Andrew Ltd., participate in a defined benefit plan. The company also acquired defined benefit plans from Allen Telecom, which cover approximately 1,760 current and former employees. The Allen plans have been frozen and the company plans to fund these plans over the next three to five years. The costs and obligations recorded for these plans are dependent on actuarial assumptions. These assumptions include discount rates, expected return on plan assets, interest costs, expected compensation increases, benefits earned, mortality rates, and other factors. If actual results are significantly different than those forecasted or if future changes are made to these assumptions, the amounts recognized for these plans could change significantly. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods.

 

Off-Balance Sheet Arrangements

 

The company’s most significant off-balance sheet arrangements are purchase contracts for copper. The company uses copper to manufacture its cable products and thus is exposed to fluctuations in the price of copper. In order to reduce this exposure, the company has entered into contracts with various suppliers. At September 30, 2003, the company had contracts to purchase 38.2 million pounds of copper for $29.5 million.

 

These contracts have set quantities, delivery dates and prices. These contracts qualify for the normal purchase exception within Statement of Financial Accounting Standards No. 133 and therefore, no fair value accounting has been performed and no liability has been recorded on the company’s balance sheet for these contracts. The company records copper into raw materials inventory at the price at which these items are purchased.

 



 

22  RESULTS OF OPERATIONS

 

ANDREW CORPORATION 2003

 

The company has additional off-balance sheet arrangements for contracts that it has entered into for operating leases and letters of credit. Some of the company’s facilities are leased under operating leases. For minimum lease payments for the next five years see Note 11 to the financial statements. The company utilizes letters of credit to back certain financing instruments, insurance policies and payment obligations. These letters of credit are with various financial institutions and have terms of three years or less. At September 30, 2003, the company had letters of credit totaling $13.0 million.

 

Risk Factors

 

Safe Harbor for Forward-Looking Statements. We have made forward-looking statements in this annual report including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements.” In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of the company. Although we have based these statements on the beliefs and assumptions of our management and on information currently available to them, they are subject to risks and uncertainties. We wish to ensure that such statements are accompanied by meaningful cautionary statements, so as to obtain the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. Accordingly, such statements are qualified by reference to the discussion below of certain important factors that could cause actual results to differ materially from those projected in such forward-looking statements.

 

We caution the reader that the list of factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such risk factors, nor can we assess the impact, if any, of such risk factors on our business or the extent to which any factors may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, undue reliance should not be put on any forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The following risks and uncertainties, among others, should be considered in evaluating our growth outlook.

 

Although we expect that our acquisition of Allen will result in benefits to the combined company, we may not realize those benefits because of integration and other challenges. We operate in a market environment that cannot be predicted and that involves significant risks, many of which are beyond our control. Our failure to meet the challenges involved in successfully integrating the operations of Andrew and Allen or to otherwise realize any of the anticipated benefits of the merger, including anticipated cost savings, could seriously harm our results of operations. Realizing the benefits of the merger will depend in part on the integration of technology, operations and personnel. The integration of the companies is a complex, time-consuming and expensive process that could significantly disrupt our business. The challenges involved in this integration include the following: consolidating and rationalizing corporate information technology and administrative infrastructures; consolidating and rationalizing manufacturing operations; combining product offerings; coordinating sales and marketing efforts to effectively communicate the capabilities of the combined company; coordinating and rationalizing research and development activities to enhance introduction of new products and technologies with reduced cost; preserving distribution, marketing or other important relationships of both Andrew and Allen and resolving potential conflicts that may arise; minimizing the diversion of management’s attention from ongoing business concerns and successfully returning managers to regular business responsibilities from their integration planning activities; demonstrating to employees that the business cultures of Andrew and Allen are compatible, maintaining employee morale and retaining key employees; and coordinating and combining overseas operations, relationships and facilities, which may be subject to additional constraints imposed by local laws and regulations.

 

Our management has limited experience integrating operations as substantial, geographically dispersed and decentralized as those of Allen. The combined company may not successfully integrate the operations of Andrew and Allen in a timely manner, and may not realize the anticipated benefits or synergies of the merger to the extent, or in the timeframe, anticipated. The anticipated benefits and synergies relate to cost savings associated with anticipated restructurings and other operational efficiencies, greater economies of scale, and revenue enhancement opportunities. However, these anticipated benefits and synergies are based on projections and assumptions, not actual experience, and assume a successful integration. In addition, our ability to realize these benefits and synergies could be adversely impacted by practical or legal constraints on our ability to combine operations or implement workforce reductions and by risks relating to potential unknown liabilities of Allen. In addition to the integration risks discussed above, in September 2002, we announced a plan to restructure our manufacturing operations and discontinue several non-strategic businesses. Our efforts to successfully integrate the operations of Andrew and Allen may be made even more difficult by the diversion of management and other resources necessary to successfully complete this reorganization. Our management has limited experience in carrying out restructurings as substantial as this. Moreover, if our management is unsuccessful in carrying out our restructuring plans, we are unlikely to achieve expected cost savings, which would reduce our operating margins and income.

 



 

ANDREW CORPORATION 2003

 

RESULTS OF OPERATIONS  23

 

The continuing deterioration of the wireless infrastructure industry could lead to further reductions in capital spending budgets by wireless operators and original equipment manufacturers, which could further adversely affect our revenues, gross margins and income. Our revenues and gross margins will depend significantly on the overall demand for wireless infrastructure subsystems products. Reduced capital spending budgets by wireless operators and original equipment manufacturers caused by the ongoing industry downturn have led to continued soft demand for our products and services, which has resulted in, and may continue to result in, decreased revenues, earnings levels or growth rates. The global economy in general, and the wireless infrastructure market in particular, has weakened and market conditions continue to be challenging. As a result, individuals and companies are delaying or reducing expenditures, including those for wireless infrastructure products. We have observed effects of the global economic downturn in many areas of our business. We have experienced gross margin declines, reflecting the effect of competitive pricing pressures as well as charges associated with previously announced restructurings. In addition, the telecommunications industry has experienced significant consolidation, and this trend is expected to continue. It is possible that we and one or more of our competitors each supply products to the companies that have merged or will merge. This consolidation could result in further delays in purchasing decisions by merged companies or in us playing a decreased role in the supply of products to the merged companies. Further delays or reductions in wireless infrastructure spending could have a material adverse effect on demand for our products and services and, consequently, our results of operations, prospects and stock price.

 

Because we depend on two of our customers for a significant portion of our sales, our sales, operating margins and income would be adversely affected by any disruption of our relationship with those customers or any material adverse change in their businesses. We depend on Lucent Technologies and AT&T Wireless for a significant portion of our sales. Lucent accounted for more than 10% of 2003 sales and the company anticipates that both AT&T Wireless and Lucent will account for more than 10% of sales in 2004. Any disruption of our relationships with Lucent or AT&T Wireless, including any adverse modification of our supply agreements with them or the unwillingness or inability of either of them to perform its obligations under its supply agreement, would adversely affect our sales and, as a result of under absorption of fixed costs, operating margins and income. In addition, any material adverse change in the financial condition of Lucent or AT&T Wireless, or in expenditures by Lucent on RF power amplifiers or by AT&T Wireless on network geolocation products and services, would have similar adverse effects.

 

Our revenues and selling, general and administrative expenses may suffer if we cannot continue to enforce the intellectual property rights on which our business depends or if third parties assert that we violate their intellectual property rights. We generally rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, partners and other parties, to establish and maintain our intellectual property rights in technology and products used in our operations. However, any of our intellectual property rights could be challenged, invalidated or circumvented, or our intellectual property rights may not provide competitive advantages, which could significantly harm our business. Also, because of the rapid pace of technological change in the wireless industry, a portion of our business and our products may rely on key technologies developed by third parties, and we may not be able to obtain licenses and technologies from these third parties on reasonable terms or at all. Third parties also may claim that we are infringing upon their intellectual property rights. Even if we do not believe that our products or business are infringing upon third parties’ intellectual property rights, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to enter into costly settlement or license agreements. If we cannot or do not license the infringed technology at all or on reasonable terms or substitute similar technology from another source, our sales, operating margins and income could suffer.

 

A competitor of the wireless geolocation business of our Allen subsidiary has sued Allen, alleging infringement of that competitor’s patents. On December 11, 2001, a lawsuit was filed against Allen in the United States District Court for the District of Delaware by a competitor, TruePosition, Inc., and its subsidiary, KSI, Inc. In their original complaint, the plaintiffs alleged that Allen, through its Grayson Wireless division, infringed three patents in connection with Allen’s GEOMETRIX wireless geolocation business. On July 16, 2002, the plaintiffs amended their complaint to include four additional patents in the lawsuit. In Allen’s answer to the original complaint, filed on January 18, 2002, and to the amended complaint, filed on July 30, 2002, it has denied all of the plaintiffs’ allegations and asserted a patent infringement counterclaim of one of Allen’s patents and asserted antitrust and business tort counterclaims based on plaintiffs’ bad faith initiation of the present litigation. Allen and plaintiffs have agreed to withdraw claims of infringement with respect to three of plaintiffs’ seven patents in suit and Allen’s patent in suit. The lawsuit relates to all of the geolocation products of our Allen subsidiary, which products have accounted for approximately $221.7 million of Allen’s total sales since their introduction and approximately $37.1 million since the acquisition of Allen (July 16, 2003 to September 30, 2003).

 



 

24  RESULTS OF OPERATIONS

 

ANDREW CORPORATION 2003

 

Plaintiffs are seeking damages for lost profits, price erosion and royalties due to Allen’s alleged infringement and have requested that Allen treble such damages as a result of alleged willful infringement. We believe that plaintiffs have suffered no damages. Plaintiffs are also seeking to enjoin Allen’s alleged infringement. A trial date of April 13, 2004 has been set. We believe that Allen has meritorious defenses against the claims asserted by the plaintiffs, and we intend to vigorously defend the lawsuit. There can be no assurance, however, that we will ultimately prevail in this action. Whether we ultimately win or lose, litigation could be time-consuming and costly and injure our reputation. If the plaintiffs prevail in this action, we may be required to pay a substantial judgment and/or negotiate royalty or license agreements with respect to the patents at issue, and may not be able to enter into such agreements on acceptable terms. Any limitation on our ability to provide a service or product could cause us to lose revenue-generating opportunities and require us to incur additional expenses, either of which could have a material adverse effect on our business. We may also be required to indemnify our customers for any expenses or liabilities resulting from the claimed infringements. These potential costs and expenses, as well as the need to pay any damages awarded in favor of the plaintiffs, which may be material in amount, could increase our selling, general and administrative expenses, reduce our income and adversely affect our liquidity.

 

Continuing and future sales opportunities for our geolocation products and services are uncertain, and if we cannot develop such opportunities, our sales and income will be reduced. The Federal Communications Commission has promulgated regulations requiring wireless communications carriers to provide caller location information for wireless 911 calls. The systems by which this location information is supplied are often described as “E 911 solutions.” Our Allen subsidiary has developed network-based geolocation products and services that enable carriers to effectively implement network-based E 911 solutions. Changes in technology and regulations, or our inability to meet customers’ evolving requirements, could affect our ability to develop continuing and future sales opportunities for Allen’s network-based geolocation products and services. If we cannot develop sales opportunities for Allen’s network-based geolocation products or services or meet customers’ requirements, the sales and income of the combined company would be reduced.

 

A substantial portion of our sales are outside the United States. Conducting business in international markets involves risks and uncertainties such as foreign exchange rate exposure and political and economic instability that could lead to reduced international sales and reduced profitability associated with such sales, which would reduce our sales and income. A significant portion of our sales are outside the United States, and in recent years we have significantly increased our international manufacturing capabilities. We anticipate that international sales will continue to represent a substantial portion of our total sales and that continued growth and profitability will require further international expansion. Identifiable foreign exchange rate exposures result primarily from currency fluctuations, accounts receivable from customer sales, the anticipated purchase of products from affiliates and third-party suppliers and the repayment of intercompany loans denominated in foreign currencies with our foreign subsidiaries. International business risks also include political and economic instability, tariffs and other trade barriers, longer customer payment cycles, burdensome taxes, restrictions on the repatriation of earnings, expropriation or requirements of local or shared ownership, compliance with local laws and regulations, terrorist attacks, developing legal systems, reduced protection of intellectual property rights in some countries, cultural and language differences, and difficulties in managing and staffing operations. We believe that international risks and uncertainties could lead to reduced international sales and reduced profitability associated with such sales, which would reduce our sales and income.

 

In addition, we expect a significant portion of our sales will be in China. While we were not materially adversely affected by the recent outbreak of Severe Acute Respiratory Syndrome (SARS) in China and we will, if necessary, be able to ship product into China from other manufacturing facilities to meet demand in China, there can be no assurance that a new outbreak of SARS, with attendant travel restrictions, adverse impact on the Chinese economy and telecommunications business and other known and unknown potential consequences, would not materially reduce our sales.

 

Charges to earnings resulting from the application of the purchase method of accounting with respect to our merger with Allen may reduce our income. In accordance with United States generally accepted accounting principles, we are accounting for our merger with Allen using the purchase method of accounting, which results in charges to earnings that could have a material adverse effect on the market value of our common stock. Under the purchase method of accounting, we allocated the total estimated purchase price to Allen’s net tangible assets, amortizable intangible assets, and intangible assets with indefinite lives based on their fair values as of the date of completion of the merger, and recorded the excess of the purchase price over those fair values as goodwill. We will incur additional depreciation and amortization expense over the useful lives of certain of the net tangible and intangible assets acquired in connection with the merger. In addition, to the extent the value of goodwill or intangible assets with indefinite lives becomes impaired, we will be required to incur charges, which may be material, relating to the impairment of those assets. These depreciation, amortization, and potential impairment charges will reduce our income.

 



 

ANDREW CORPORATION 2003

 

RESULTS OF OPERATIONS  25

 

The competitive pressures we face could lead to reduced demand or lower prices for our products and services in favor of our competitors’ products and services, which could harm our sales, gross margins and prospects. We encounter aggressive competition from numerous and varied competitors in all areas of our business, and compete primarily on the basis of technology, performance, price, quality, reliability, brand, distribution, customer service and support. If we fail to develop new products and services, periodically enhance our existing products and services, or otherwise compete successfully, it would reduce our sales and prospects. Further, we may have to continue to lower the prices of many of our products and services to stay competitive. If we cannot reduce our costs in response to competitive price pressures, our gross margins would decline.

 

If we cannot continue to rapidly develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability, we may lose market share and our revenues may suffer. The process of developing new wireless technology products and services is complex and uncertain, and failure to anticipate customers’ changing needs and emerging technological trends accurately and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our investments will eventually result in products that the market will accept. After a product is developed, we must be able to manufacture sufficient volumes quickly and at low costs. To accomplish this, we must accurately forecast volumes, mix of products and configurations that meet customer requirements, which we may not be able to do successfully.

 

Among the factors that make a smooth transition from current products to new products difficult are delays in product development or manufacturing, variations in product costs, delays in customer purchases of existing products in anticipation of new product introductions and customer demand for the new product. Our revenues and gross margins may suffer if we cannot make such a transition effectively and also may suffer due to the timing of product or service introductions by our suppliers and competitors. This is especially challenging when a product has a short life cycle or a competitor introduces a new product just before our own product introduction. Furthermore, sales of our new products may replace sales of some of our current products, offsetting the benefit of even a successful product introduction. There may also be overlaps in our current product portfolios resulting from our recent merger with Allen that we will need to reconcile. If we incur delays in new product introductions, or do not accurately estimate the market effects of new product introductions, given the competitive nature of its industry, future demand for our products and our revenues may be seriously harmed.

 

The price of our outstanding securities may suffer if we cannot control fluctuations in our sales and operating results. Historically, our quarterly and annual sales and operating results have fluctuated. We expect fluctuations to continue in the future. In addition to general economic and political conditions, the following factors affect our sales: the timing of significant customer orders, our inability to forecast future sales due to our just-in-time supply approach, changes in competitive pricing, wide variations in profitability by product line, variations in operating expenses, the timing of announcements or introductions of new products by us, our competitors or our respective customers, the acceptance of those products, relative variations in manufacturing efficiencies and costs, and the relative strength or weakness of international markets. Since our quarterly and annual sales and operating results vary, we believe that period-to-period comparisons are not necessarily meaningful, and you should not rely on those comparisons as indicators of our future performance. Due to the foregoing factors, it is possible that in some future quarter or quarters our revenues or operating results will not meet the expectations of the public stock market analysts or investors, which could cause the price of our outstanding securities to decline.

 

If we cannot continue to attract and retain highly qualified people our revenues, gross margin and income may suffer. We believe that our future success significantly depends on our ability to attract, motivate and retain highly qualified management, technical and marketing personnel. The competition for these individuals is intense. From time to time, there may be a shortage of skilled labor, which may make it more difficult and expensive for us to attract, motivate and retain qualified employees. We believe our inability to do so could negatively impact the demand for our products and services and consequently our financial condition and operating results.

 

Our costs and business prospects may be affected by increased government regulation, a factor which is largely beyond our control. We are not directly regulated in the U.S., but many of our U.S. customers and the telecommunications industry generally are subject to Federal Communications Commission regulation. In overseas markets, there are generally similar governmental agencies that regulate our customers. We believe that regulatory changes could have a significant negative effect on our business and operating results by restricting our customers’ development efforts, making current products obsolete or increasing competition. Our customers must obtain regulatory approvals to operate certain of our products. Any failure or delay by any of our customers to obtain these approvals would adversely impact our ability to sell our products. The enactment by governments of new laws or regulations or a change in the interpretation of existing regulations could adversely affect the market

 



 

26  RESULTS OF OPERATIONS

 

ANDREW CORPORATION 2003

 

for our products. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such products, generally following extensive investigation and deliberation over competing technologies. In the past, the delays inherent in this governmental approval process have caused, and may in the future cause, the cancellation or postponement of the deployment of new technologies. These delays could have a material adverse effect on our revenues, gross margins and income.

 

Allegations of health risks from wireless equipment may negatively affect our results of operations. Allegations of health risks from the electromagnetic fields generated by base stations and mobile handsets, and the lawsuits and publicity relating to them, regardless of merit, could affect our operations negatively by leading consumers to reduce their use of mobile phones or by causing us to allocate resources to these issues.

 

The price of our common stock historically has been volatile. The market price of our common stock historically has experienced and may continue to experience high volatility, and the broader stock market has experienced significant price and volume fluctuations in recent years. Some of the factors that can affect our stock price include the following: actual, or market expectations of, fluctuations in capital spending by wireless operators and original equipment manufacturers on wireless infrastructure; the announcement of new products, services or technological innovations by us or our competitors; continued variability in our revenue or earnings; changes in quarterly revenue or earnings estimates for us made by the investment community; delays or postponements of wireless infrastructure deployments, including 3G technology, regardless of whether such deployments have an actual impact on our orders or sales; and speculation in the press or investment community about our strategic position, financial condition, results of operations, business or significant transactions.

 

General market conditions and domestic or international macroeconomic and geopolitical factors unrelated to our performance may also affect the price of our common stock. For these reasons, investors should not rely on historical trends to predict future stock prices or financial results. In addition, following periods of volatility in a company’s securities, securities class action litigation against a company is sometimes instituted. This type of litigation could result in substantial costs and the diversion of management time and resources. We anticipate that we will continue to face these types of risks.

 

Market Risks

 

The company is exposed to market risks from changes in interest rates, foreign exchange rates and commodities as follows:

 

Interest Rate Risk The company had $319.1 million in debt outstanding at September 30, 2003 in the form of lines of credit and debt agreements at both fixed and variable rates. The company is exposed to interest rate risk primarily through its variable rate debt, which totaled $5.3 million or 1.7% of the company’s total debt. A 100 basis point increase in interest rates would not have a material effect on the company’s financial position, results of operations or cash flows. Andrew currently does not use derivative instruments to manage its interest rate risk.

 

Foreign Currency Risk The company’s international operations represent a substantial portion of its overall operating results and asset base. In many cases, the company’s products are produced at manufacturing facilities in foreign countries to support sales in those markets. During fiscal year 2003, sales of products exported from the United States or manufactured abroad were 56% of total sales. The company’s identifiable foreign exchange rate exposures result primarily from accounts receivable from customer sales, anticipated purchases of product from affiliates and third-party suppliers and the repayment of intercompany loans with foreign subsidiaries denominated in foreign currencies. The company primarily manages its foreign currency risk by making use of naturally offsetting positions that include the establishment of local manufacturing facilities that conduct business in local currency. The company also selectively utilizes derivative instruments such as forward exchange contracts to manage the risk of exchange fluctuation. These instruments held by the company are not leveraged and are not held for trading or speculative purposes.

 

Commodity Risk The company uses various metals in the production of its products. Copper, which is used to manufacture coaxial cable, is the most significant of these metals. As a result, the company is exposed to fluctuations in the price of copper. In order to reduce this exposure, the company has entered into contracts with various suppliers to purchase almost all of its forecasted copper requirements for fiscal year 2004. At September 30, 2003 the company had contracts to purchase 38.2 million pounds of copper for $29.5 million.

 



 

ANDREW CORPORATION 2003

 

CONSOLIDATED STATEMENTS OF OPERATIONS  27

 

 

 

YEAR ENDED SEPTEMBER 30

 

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Sales

 

$

1,014,486

 

$

864,801

 

$

935,276

 

Cost of products sold

 

739,341

 

627,093

 

625,367

 

Gross Profit

 

275,145

 

237,708

 

309,909

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

Research and development

 

84,151

 

57,977

 

39,934

 

Sales and administrative

 

148,867

 

140,307

 

161,223

 

Intangible amortization

 

19,222

 

5,121

 

150

 

Restructuring

 

9,222

 

24,908

 

 

 

 

261,462

 

228,313

 

201,307

 

 

 

 

 

 

 

 

 

Operating Income

 

13,683

 

9,395

 

108,602

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Interest expense

 

5,675

 

5,079

 

7,413

 

Interest income

 

(1,649

)

(3,617

)

(2,645

)

Other (income) expense, net

 

(1,453

)

3,576

 

2,442

 

Gain on the sale of assets and investments

 

(12,216

)

(8,713

)

 

 

 

(9,643

)

(3,675

)

7,210

 

Income from Continuing Operations Before Income Taxes

 

23,326

 

13,070

 

101,392

 

 

 

 

 

 

 

 

 

Income taxes

 

4,622

 

2,578

 

32,444

 

Income from Continuing Operations

 

18,704

 

10,492

 

68,948

 

 

 

 

 

 

 

 

 

Discontinued Operations

 

 

 

 

 

 

 

Loss from operations of discontinued operations, net of tax benefit

 

3,184

 

10,484

 

7,326

 

Loss on disposal of discontinued operations, net of tax benefit

 

 

26,387

 

 

 

 

3,184

 

36,871

 

7,326

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

15,520

 

(26,379

)

61,622

 

 

 

 

 

 

 

 

 

Preferred Stock Dividends

 

6,459

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Available to Common Shareholders

 

$

9,061

 

$

(26,379

)

$

61,622

 

 

 

 

 

 

 

 

 

Basic and Diluted Income from Continuing Operations per Average Share of Common Stock Outstanding

 

$

0.11

 

$

0.12

 

$

0.85

 

Basic and Diluted Net Income (Loss) per Average Share of Common Stock Outstanding

 

$

0.08

 

$

(0.30

)

$

0.76

 

 

 

 

 

 

 

 

 

Average Basic Shares Outstanding

 

109,822

 

87,197

 

81,382

 

Average Diluted Shares Outstanding

 

109,866

 

87,295

 

81,542

 

 

See Notes to Consolidated Financial Statements.

 



 

28  CONSOLIDATED BALANCE SHEETS

 

ANDREW CORPORATION 2003

 

 

 

SEPTEMBER 30

 

DOLLARS IN THOUSANDS

 

2003

 

2002

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

286,269

 

$

84,871

 

Accounts receivable, less allowances (2003-$10,662; 2002-$6,516)

 

326,282

 

215,406

 

Inventories

 

247,750

 

133,993

 

Other current assets

 

29,131

 

42,913

 

Total Current Assets

 

889,432

 

477,183

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Goodwill

 

821,398

 

396,295

 

Intangible assets, less amortization

 

93,086

 

47,344

 

Other assets

 

50,398

 

3,809

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land and land improvements

 

20,926

 

17,890

 

Buildings

 

116,038

 

98,714

 

Equipment

 

469,296

 

448,036

 

Allowance for depreciation

 

(387,341

)

(365,605

)

 

 

218,919

 

199,035

 

Total Assets

 

$

2,073,233

 

$

1,123,666

 

 

See Notes to Consolidated Financial Statements.

 



 

ANDREW CORPORATION 2003

 

CONSOLIDATED BALANCE SHEETS  29

 

 

 

SEPTEMBER 30

 

DOLLARS IN THOUSANDS

 

2003

 

2002

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable

 

$

284

 

$

66,184

 

Accounts payable

 

124,646

 

69,835

 

Accrued expenses and other liabilities

 

58,893

 

49,538

 

Compensation and related expenses

 

52,255

 

28,434

 

Restructuring

 

20,414

 

15,329

 

Current portion of long-term debt

 

17,466

 

7,250

 

Total Current Liabilities

 

273,958

 

236,570

 

 

 

 

 

 

 

Deferred Liabilities

 

73,941

 

28,461

 

 

 

 

 

 

 

Long-Term Debt, less current portion

 

301,364

 

13,391

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

Redeemable convertible preferred stock (par value, $50 a share: 183,720 shares outstanding)

 

9,186

 

 

Common stock (par value, $.01 a share: 400,000,000 shares authorized; 160,900,657 shares issued in 2003 and 102,718,210 shares issued in 2002, including treasury)

 

1,609

 

1,027

 

Additional paid-in capital

 

649,667

 

145,764

 

Accumulated other comprehensive loss

 

(14,115

)

(46,089

)

Retained earnings

 

805,435

 

796,374

 

Treasury stock, at cost (2,608,290 shares in 2003; 4,500,493 shares in 2002)

 

(27,812

)

(51,832

)

Total Stockholders’ Equity

 

1,423,970

 

845,244

 

Total Liabilities and Stockholders’ Equity

 

$

2,073,233

 

$

1,123,666

 

 

See Notes to Consolidated Financial Statements.

 



 

30  CONSOLIDATED STATEMENTS OF CASH FLOWS

 

ANDREW CORPORATION 2003

 

 

 

YEAR ENDED SEPTEMBER 30

 

DOLLARS IN THOUSANDS

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Cash Flows from Operations

 

 

 

 

 

 

 

Net Income (Loss)

 

$

15,520

 

$

(26,379

)

$

61,622

 

 

 

 

 

 

 

 

 

Adjustments to Net Income (Loss)

 

 

 

 

 

 

 

Depreciation

 

55,182

 

51,195

 

46,401

 

Amortization

 

19,222

 

5,121

 

4,523

 

Gain on the sale of assets and investments

 

(12,216

)

(8,713

)

 

Other

 

56

 

(339

)

(2,240

)

 

 

 

 

 

 

 

 

Restructuring and Discontinued Operations

 

 

 

 

 

 

 

Restructuring costs

 

(5,782

)

35,400

 

 

Discontinued operations costs, net of taxes

 

(1,483

)

25,903

 

 

Operating cash flow from discontinued operations

 

5,961

 

22,221

 

15,330

 

 

 

 

 

 

 

 

 

Change in Operating Assets/Liabilities

 

 

 

 

 

 

 

Decrease in accounts receivable

 

10,736

 

59,011

 

3,603

 

Decrease in inventories

 

783

 

6,665

 

4,134

 

(Increase) decrease in other assets

 

(19,200

)

(10,724

)

5,049

 

(Decrease) increase in accounts payable and other liabilities

 

(6,413

)

(4,240

)

21,730

 

Net Cash From Operations

 

62,366

 

155,121

 

160,152

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Capital expenditures

 

(31,859

)

(40,561

)

(72,065

)

Acquisition of businesses

 

(47,664

)

(239,757

)

(21,380

)

Cash acquired in acquisitions

 

95,750

 

58,705

 

 

Proceeds from sale of businesses and investments

 

7,286

 

50,301

 

 

Investments in and advances to affiliates, net

 

 

58

 

13,651

 

Proceeds from sale of property, plant and equipment

 

15,870

 

1,016

 

724

 

Net Cash From (Used for) Investing Activities

 

39,383

 

(170,238

)

(79,070

)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Long-term debt payments

 

(23,969

)

(44,658

)

(14,516

)

Long-term debt borrowings

 

233,308

 

 

289

 

Notes payable (payments) borrowings, net

 

(65,911

)

23,927

 

(3,945

)

Preferred stock dividends

 

(6,459

)

 

 

Payments to acquire treasury stock

 

(49,600

)

 

 

Stock purchase and option plans

 

2,265

 

2,840

 

2,053

 

Net Cash From (Used for) Financing Activities

 

89,634

 

(17,891

)

(16,119

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

10,015

 

5,502

 

2,549

 

Increase (Decrease) for the Year

 

201,398

 

(27,506

)

67,512

 

 

 

 

 

 

 

 

 

Cash and equivalents at beginning of year

 

84,871

 

112,377

 

44,865

 

Cash and Equivalents at End of Year

 

$

286,269

 

$

84,871

 

$

112,377

 

 

See Notes to Consolidated Financial Statements.

 



 

ANDREW CORPORATION 2003

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY  31

 

DOLLARS IN THOUSANDS

 

REDEEMABLE
CONVERTIBLE
PREFERRED
STOCK

 

COMMON
STOCK

 

ADDITIONAL
PAID-IN
CAPITAL

 

ACCUMULATED
OTHER
COMPREHENSIVE
LOSS

 

RETAINED
EARNINGS

 

TREASURY
STOCK

 

TOTAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2000

 

$

 

$

1,027

 

$

64,136

 

$

(35,801

)

$

761,131

 

$

(247,548

)

$

542,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock purchase and option plans

 

 

 

 

 

1,734

 

 

 

 

 

3,321

 

5,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

(8,972

)

 

 

 

 

(8,972

)

Net Income

 

 

 

 

 

 

 

 

 

61,622

 

 

 

61,622

 

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

52,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2001

 

$

 

$

1,027

 

$

65,870

 

$

(44,773

)

$

822,753

 

$

(244,227

)

$

600,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock purchase and option plans

 

 

 

 

 

1,007

 

 

 

 

 

4,701

 

5,708

 

Shares issued-Celiant purchase

 

 

 

 

 

78,887

 

 

 

 

 

187,694

 

266,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability

 

 

 

 

 

 

 

(5,470

)

 

 

 

 

(5,470

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

4,154

 

 

 

 

 

4,154

 

Net Loss

 

 

 

 

 

 

 

 

 

(26,379

)

 

 

(26,379

)

Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,695

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2002

 

$

 

$

1,027

 

$

145,764

 

$

(46,089

)

$

796,374

 

$

(51,832

)

$

845,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of shares

 

 

 

 

 

 

 

 

 

 

 

(49,600

)

(49,600

)

Stock purchase and option plans

 

 

 

 

 

(729

)

 

 

 

 

5,728

 

4,999

 

Shares issued-Allen purchase

 

 

 

552

 

451,711

 

 

 

 

 

 

 

452,263

 

Preferred stock

 

49,554

 

 

 

80,475

 

 

 

 

 

 

 

130,029

 

Preferred stock conversion

 

(40,368

)

30

 

(27,554

)

 

 

 

 

67,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in minimum pension liability

 

 

 

 

 

 

 

2,387

 

 

 

 

 

2,387

 

Derivatives-foreign currency forward contracts

 

 

 

 

 

 

 

(418

)

 

 

 

 

(418

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

30,005

 

 

 

 

 

30,005

 

Net Income

 

 

 

 

 

 

 

 

 

15,520

 

 

 

15,520

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

(6,459

)

 

 

(6,459

)

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

41,035

 

Balance at September 30, 2003

 

$

9,186

 

$

1,609

 

$

649,667

 

$

(14,115

)

$

805,435

 

$

(27,812

)

$

1,423,970

 

 

See Notes to Consolidated Financial Statements.

 



 

32  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

ANDREW CORPORATION 2003

 

1. Summary of Significant Accounting Policies

 

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries in which the company exercises control. All intercompany accounts and transactions have been eliminated.

 

CASH EQUIVALENTS The company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. The carrying amount of cash equivalents approximates fair value due to the relative short-term maturity of these investments.

 

INVENTORIES Inventories are stated at the lower of cost or market. Most of the company’s inventories are valued on the first-in, first-out (FIFO) method. Inventories stated under the last-in, first-out (LIFO) method represent 25% of total inventories in 2003 and 49% of total inventories in 2002. If the FIFO method, which approximates current replacement cost, had been used for these LIFO inventories, the total amount of these inventories would have remained unchanged. Inventories consisted of the following at September 30, 2003 and 2002, net of reserves:

 

DOLLARS IN THOUSANDS

 

2003

 

2002

 

 

 

 

 

 

 

Raw materials

 

$

112,130

 

$

27,553

 

Work in process

 

44,513

 

44,477

 

Finished goods

 

91,107

 

61,963

 

 

 

$

247,750

 

$

133,993

 

 

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost.  Approximately half of the company’s assets are depreciated using the straight-line method, and approximately half are depreciated using accelerated methods for both financial reporting and tax purposes. Both of these methods are based on estimated useful lives of these assets. Buildings are depreciated over ten to thirty years and equipment is depreciated over three to eight years. Depreciation of leasehold improvements is based on the term of the related lease or the estimated useful life, whichever is shorter. Maintenance, repairs, and minor renewals and betterments are charged to expense. Depreciation expense was $55.2 million, $51.2 million, and $46.4 million for 2003, 2002, and 2001, respectively.

 

REVENUE RECOGNITION Revenue is principally recognized from the sale of products and services when a product is shipped or a service is performed. The company has two major product groups, Network Solutions and Wireless Innovations, for which a substantial portion of the revenue is recognized based on contractual terms. Network Solutions and Wireless Innovations sales were $43.8 million and $41.6 million in 2003, respectively (see Note 14).

 

With the acquisition of Allen Telecom, the company acquired a new product group, Network Solutions. The majority of the revenue in this product group is from the company’s geolocation product line, where revenue is principally recognized pursuant to Emerging Issues Task Force Issue 00-21, Accounting for Multiple Element Revenue Arrangements. These multiple element arrangement contracts include 1) territory design, 2) delivery of hardware and software and 3) testing and acceptance. These elements represent separate earnings processes and revenue is allocated among them based on the fair value of each element. The fair value of these elements is based on negotiated contracts and stand-alone pricing of these components. Revenue is recognized on the completion of each element, since each element is distinct and functionally independent.

 

The company has significantly expanded its Wireless Innovations product offering with the acquisition of Allen Telecom. A large portion of the revenue recognized in this product category is for complete system sales. Revenue on these system sales is recognized based on contractual terms such as customer acceptance.

 

SHIPPING AND HANDLING CHARGES Shipping and handling costs billed to customers are recorded as revenue and the related expenses are recorded in cost of products sold.

 

IDENTIFIABLE INTANGIBLE ASSETS The company reports identifiable intangible assets net of accumulated amortization. Accumulated amortization on intangible assets was $26.4 million and $6.7 million at September 30, 2003 and 2002, respectively. The company amortizes intangible assets, excluding goodwill and trademarks, over their estimated useful lives, which range from one to ten years. Intangible assets consisted of the following:

 

 

 

SEPTEMBER 30

 

DOLLARS IN THOUSANDS

 

2003

 

2002

 

 

 

 

 

 

 

Customer contracts and relationships, net of accumulated amortization of $12,513 in 2003 and $2,335 in 2002

 

$

34,292

 

$

14,252

 

Patents and technology, net of accumulated amortization of $13,097 in 2003 and $3,715 in 2002

 

50,022

 

33,047

 

Trademarks-indefinite life

 

5,600

 

 

Other, net of accumulated amortization of $786 in 2003 and $680 in 2002

 

3,172

 

45

 

 

 

$

93,086

 

$

47,344

 

 

The company’s scheduled amortization expense over the next five years is as follows:

 

DOLLARS IN MILLIONS

 

2004

 

2005

 

2006

 

2007

 

2008

 

 

 

$

36.8

 

$

19.0

 

$

14.6

 

$

10.3

 

$

1.0

 

 



 

ANDREW CORPORATION 2003

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  33

 

GOODWILL The company adopted the Financial Accounting Standards Board (FASB), Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, during fiscal year 2002. Under the provisions of SFAS No. 142, the company tests goodwill for impairment on an annual basis. The company has elected to perform its annual impairment review on the first day of its fiscal fourth quarter. The impairment review performed for fiscal year 2003 indicated no impairment of goodwill, but due to uncertain market conditions, it is possible that future impairment reviews may indicate impairment of the fair value of goodwill, which could result in non-cash charges, adversely affecting the company’s results of operations.

 

FOREIGN CURRENCY TRANSLATION The functional currency for the company’s foreign operations is predominantly the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using year-end exchange rates for assets and liabilities and average monthly exchange rates for revenue and expense accounts. Adjustments resulting from translation are included in accumulated other comprehensive loss, a separate component of stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in determining net income. Net gains and (losses) resulting from foreign currency transactions that are included in other income (expense), net were $2.2 million, ($2.1) million and ($3.3) million for 2003, 2002 and 2001, respectively.

 

HEDGING AND DERIVATIVE INSTRUMENTS The company is exposed to changes in foreign exchange rates as a result of its foreign operations. The company primarily manages its foreign currency risk by making use of naturally offsetting positions. These natural hedges include the establishment of local manufacturing facilities that conduct business in local currency. The company also selectively utilizes derivative instruments such as forward exchange contracts to manage the risk of exchange fluctuations. These instruments held by the company are not leveraged and are not held for trading or speculative purposes.

 

In fiscal year 2003 the company used forward exchange contracts, designated as cash flow hedges to manage its foreign currency exposure on intercompany loans between its subsidiaries. The unrealized losses on these forward contracts was $0.4 million and recorded to accumulated other comprehensive loss and a loss of $0.1 million was recorded in other expense for hedge ineffectiveness. The company designated additional forward contracts as a net investment hedge of its Australian subsidiary. The unrealized losses on these forward contracts was $0.8 million and recorded to accumulated other comprehensive loss and a loss of $0.07 million was recorded in other expense for hedge ineffectiveness. The fair value of all these contracts was a liability of $1.0 million and recorded in other current liabilities. Hedge ineffectiveness is assessed based on the movement of forward contracts rates compared to the movement of current exchange rates.

 

ACCUMULATED OTHER COMPREHENSIVE LOSS The cumulative balances included in other comprehensive loss are as follows:

 

 

 

YEAR ENDED SEPTEMBER 30, 2003

 

DOLLARS IN THOUSANDS

 

FOREIGN
CURRENCY
TRANSLATION

 

MINIMUM
PENSION LIABILITY,
NET OF TAX

 

CASH FLOW
HEDGES

 

ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

September 30, 2001

 

$

(44,773

)

$

 

$

 

$

(44,773

)

Foreign currency translation

 

4,154

 

 

 

4,154

 

Minimum pension liability

 

 

(5,470

)

 

(5,470

)

September 30, 2002

 

(40,619

)

(5,470

)

 

(46,089

)

Foreign currency translation

 

30,005

 

 

 

30,005

 

Decrease in minimum pension liability

 

 

2,387

 

 

2,387

 

Cash flow hedges

 

 

 

(418

)

(418

)

September 30, 2003

 

$

(10,614

)

$

(3,083

)

$

(418

)

$

(14,115

)

 



 

34  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

ANDREW CORPORATION 2003

 

INCOME TAXES Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes.

 

STOCK-BASED COMPENSATION The company accounts for stock-based compensation awards pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations which prescribe the use of the intrinsic value-based method. Accordingly, no compensation cost is recognized for stock options since the exercise price of these stock options equals the market price of the underlying stock on the date of the grant.

 

Pro forma information regarding income and earnings per share as required by SFAS No. 148 has been determined as if the company had accounted for its stock option plans under the fair value method. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2003, 2002 and 2001, respectively: risk-free interest rate of 3.98%, 4.09% and 4.62%; dividend yield of 0%; a volatility factor of .577, .538, and .523, and a weighted average expected life of the options of six years.

 

The following table shows the company’s pro forma net income and earnings per share as if the company had recorded the fair value of stock options as compensation expense.

 

 

 

YEAR ENDED SEPTEMBER 30

 

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Reported income (loss) available to common shareholders

 

$

9,061

 

$

(26,379

)

$

61,622

 

Less: Stock-based compensation, net of tax

 

(7,224

)

(6,924

)

(6,053

)

Pro forma net income (loss) available to common shareholders

 

1,837

 

(33,303

)

55,569

 

Reported basic and diluted net income (loss) per share

 

$

0.08

 

$

(0.30

)

$

0.76

 

Pro forma basic and diluted net income (loss) per share

 

$

0.02

 

$

(0.38

)

$

0.68

 

 

For additional information regarding stock-based compensation, see Note 13.

 

USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

RECLASSIFICATIONS Certain previously reported amounts have been reclassified to conform to the current period presentation.

 

RECENTLY ISSUED ACCOUNTING POLICIES In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The provisions of this statement will be effective for exit or disposal activities initiated after December 31, 2002. The company’s current restructuring plan, initiated in September 2002, is being accounted for under the previously existing accounting principles for restructuring, primarily Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The company accrued pre-tax charges of $36.0 million when the company’s management approved the current restructuring plan. If the company had accounted for this restructuring plan under SFAS No. 146, certain costs such as employee termination benefits of $11.8 million and lease and contract cancellation costs of $2.5 million included in this $36.0 million would have been recognized over the restructuring period as incurred and not accrued in fiscal year 2002.

 

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The company does not expect that the adoption of this statement will have a material effect on the company’s financial statements.

 

ADOPTION OF NEW ACCOUNTING POLICIES At the beginning of fiscal year 2003, the company adopted SFAS No. 143, Accounting and Reporting for Obligations Associated with the Retirement of Tangible Long-Lived Assets and the Associated Asset Retirement Costs and SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of Statement 13, and Technical Corrections. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. SFAS No. 145 modifies reporting of extinguishment of debt and amends accounting for leases. The adoption of these statements did not impact the company’s results of operations.

 

Starting in the second quarter of 2003, the company adopted the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation. See disclosure above on stock-based compensation for the disclosures required by SFAS No. 148.

 

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51 (FIN 46), which requires variable interest entities (commonly referred to as SPEs) to be consolidated by the primary beneficiary of the entity if certain criteria are met. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 became effective for the company during the third quarter of 2003. The company has no variable interest entities.

 



 

ANDREW CORPORATION 2003

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  35

 

Starting in fiscal year 2002, the company adopted SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Under the new statements, goodwill is no longer amortized but is subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. Goodwill amortization included in sales and administrative expense in fiscal year 2001 was $4,373,000 and an additional $211,000 of goodwill amortization was included in loss from discontinued operations. If this goodwill amortization expense had been excluded from reported earnings per share it would increase both basic and diluted earnings per share by $.05 for income from continuing operations and net income for fiscal year 2001.

 

The company adopted SFAS No. 144, Accounting and Reporting for the Impairment or Disposal of Long-Lived Assets, in fiscal year 2002. SFAS No. 144 expands the use of discontinued operations from a reporting segment of an entity to the lower level of a component of an entity as defined by SFAS No. 144. The company’s closing of its equipment shelter, wireless accessories and satellite modem businesses was accounted for as discontinued operations under the provisions of SFAS No. 144 (see Note 9). All periods presented have been restated to exclude the operating results of these businesses from continuing operations. The results of operations of these businesses have been reported net of income taxes as discontinued operations.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 required the company to report the convertible preferred stock issued on July 15, 2003 in connection with the Allen Telecom acquisition (see Note 12) as a component of stockholders’ equity.

 

2. Business Acquisitions

 

In June 2002, the company acquired Celiant Corporation, which designed, manufactured and marketed radio frequency (RF) power amplifiers for use in wireless communications networks. Total purchase consideration was $481.0 million consisting of $203.1 million in cash, 16,278,805 shares of the company’s common stock valued at $266.6 million, and $11.3 million of acquisition related costs. The 16,278,805 shares were valued at $16.38, the February 15, 2002 closing price, the last trading day before the acquisition agreement was signed. These 16,278,805 shares represented 16.6% of the company’s total shares outstanding at September 30, 2002. The company acquired $58.7 million of cash in the Celiant acquisition, making the company’s net cash expenditure $155.7 million for this acquisition. The assets and liabilities of Celiant were recorded based upon their fair value determined by management and by an independent appraisal. An allocation of the purchase price is as follows:

 

DOLLARS IN THOUSANDS

 

 

 

 

 

 

 

Net tangible assets

 

$

97,700

 

Intangible assets

 

42,800

 

Goodwill

 

340,504

 

Total purchase consideration

 

$

481,004

 

 

Celiant’s results of operations have been included with the company’s since June 4, 2002. Pro forma results of operations, assuming the acquisition of Celiant occurred on October 1, 2001 are presented at the bottom of this footnote. Celiant commenced operations on June 1, 2001 as a spin out of Lucent Technologies’ power amplifier business. Lucent did not maintain the amplifier business as a separate business unit and external financial statements historically have not been prepared. Presenting meaningful pro forma financial data for fiscal year 2001 would have required the company to make significant estimates based on forward-looking information, and therefore the company is not providing pro forma financial data for fiscal year 2001.

 

The company also made three smaller acquisitions in fiscal year 2002. The company acquired Quasar Microwave Technology Ltd., a British manufacturer of microwave and millimeter wave radio components. The company purchased selected assets of Antenna Bad Blankenburg, a German manufacturer of telematics equipment for the automotive industry. The company also purchased selected assets and intellectual property of WSIL Inc., a British manufacturer of power amplifiers. The company paid $23.9 million for these acquisitions and accounted for these transactions using the purchase method of accounting. These acquisitions resulted in $15.2 million of goodwill and $5.9 million of intangible assets. Pro forma results of operations, assuming these acquisitions occurred at the beginning of fiscal year 2001, were not materially different from the reported results of operations.

 

In fiscal year 2003, the company purchased Allen Telecom, Inc., a global provider of wireless infrastructure equipment and services to many of the largest wireless communications carriers and original equipment manufacturers (OEMs). The company completed this merger on July 15, 2003, following approval by both Allen Telecom and Andrew stockholders. The merger price was determined by negotiations between Andrew and Allen and was a stock-for-stock transaction in which Allen common shareholders received 1.775 shares of newly issued Andrew common stock for each share of Allen common stock. The exchange ratio of 1.775 represented a premium of approximately 21% over the trading price of Allen’s common stock near the merger date. The company

 



 

36  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

ANDREW CORPORATION 2003

 

believes that this premium was justified by the combined company’s ability to provide total customer solutions, including virtually the entire base station RF footprint. The combined company can also deliver integrated components that better meet the performance and cost efficiency requirements of OEMs. In this transaction Andrew issued 55,231,126 shares of common stock, which represented 36.0% of the company’s total shares outstanding at July 16, 2003.

 

The company also issued 991,070 shares of redeemable convertible preferred stock, issuing one share for each share of Allen redeemable convertible preferred stock. The total purchase consideration was $495.0 million, consisting of shares of Andrew stock valued at $452.9 million, $23.7 million to buyout Allen stock options and $18.4 million of acquisition related costs. Andrew common shares issued in this transaction were valued at $8.20 a share, the average closing price for three days, including the day the merger was announced, February 18, 2003, and the day before and the day after the announcement.

 

A preliminary allocation of the purchase consideration to tangible and intangible assets was based upon an estimate of fair value determined by management and independent valuation specialists. Based on these preliminary estimates the purchase consideration was allocated as follows:

 

DOLLARS IN THOUSANDS

 

 

 

Net tangible assets, excluding convertible preferred stock

 

$

119,011

 

Convertible preferred stock

 

(130,028

)

Intangible assets

 

62,476

 

Restructuring reserve

 

(13,680

)

Net deferred tax asset

 

34,217

 

Goodwill

 

422,993

 

Total purchase consideration

 

$

494,989

 

 

The $119.0 million of net tangible assets, excluding the convertible preferred stock, are made up of the following:

 

DOLLARS IN THOUSANDS

 

 

 

Cash and cash equivalents

 

$

95,750

 

Accounts receivable

 

101,860

 

Inventory

 

100,104

 

Property, plant and equipment, and other assets

 

79,977

 

Accounts payable and other liabilities

 

(127,619

)

Defined benefit and postretirement plans

 

(49,026

)

Debt

 

(82,035

)

Net tangible assets

 

$

119,011

 

 

Independent valuation specialists identified $62.5 million of intangible assets with a weighted average life of four years. These intangible assets and their associated useful lives are as follows:

 

DOLLARS IN THOUSANDS

 

VALUE

 

USEFUL LIFE
IN YEARS

 

Patents and related technology

 

$

25,900

 

4

 

Customer relationships

 

8,500

 

10

 

Customer contract

 

21,600

 

1.5

 

Trademarks

 

5,600

 

Indefinite

 

Other intangibles

 

876

 

3

 

 

 

$

62,476

 

 

 

 

The fair value of Allen’s redeemable convertible preferred stock was estimated to be $131.20 per share, based on the market price of these instruments at July 15, 2003. Allen carried these instruments on their balance sheet at the liquidation preference of $50.00 a share. The $81.20 per share increase in fair value resulted in an $80.5 million purchase accounting adjustment that the company recorded to additional paid-in capital. The company acquired Allen’s noncontributory defined benefit plans as well as post-retirement medical and life insurance plans (see Note 5). Based on an actuarial study, the company recorded additional liabilities totaling $30.6 million to bring the total liabilities recorded for these plans to $49.0 million.

 

As part of integrating the operations of Andrew and Allen, the company will incur costs to consolidate and realign operations. The company currently has an integration plan in place where the company anticipates incurring $13.7 million of employee termination, lease cancellation and other costs. These plans will result in the termination of approximately 380 Allen employees. The company has not finalized the integration plans for all of its operations and anticipates accruing additional integration costs within the next six months when these costs have been determined.

 

The deferred tax asset of $34.2 million reflects the elimination of Allen’s previously recorded net deferred tax assets as well as adjustments to record the difference between the tax basis and book basis of certain purchase accounting adjustments and the recording of the identifiable intangible assets.

 

The company acquired $95.8 million of cash in the Allen acquisition and incurred $47.6 million of cash costs resulting in the company’s net cash acquired of $48.2 million for this acquisition.

 



 

ANDREW CORPORATION 2003

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  37

 

Allen’s results of operations have been included with the company’s since July 16, 2003 and Celiant’s results have been included in the company’s results since June 4, 2002. Pro forma results of operations, assuming these acquisitions occurred on October 1, 2001, are as follows:

 

 

 

YEAR ENDED SEPTEMBER 30, 2002

 

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

ANDREW

 

CELIANT
OCTOBER 1, 2001
TO JUNE 4, 2002

 

CELIANT
PRO FORMA
ADJUSTMENTS

 

ALLEN

 

ALLEN
PRO FORMA
ADJUSTMENTS

 

ANDREW
PRO FORMA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

864,801

 

$

228,519

 

$

 

$

378,318

 

$

 

$

1,471,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

10,492

 

12,311

 

(8,892

)

(2,248

)

(14,882

)

(3,219

)

Preferred stock dividends

 

$

 

$

 

$

 

$

(1,572

)

$

(2,303

)

$

(3,875

)

Income (loss) from continuing operations, available to common shareholders

 

$

10,492

 

$

12,311

 

$

(8,892

)

$

(3,820

)

$

(17,185

)

$

(7,094

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average diluted shares outstanding

 

87,295

 

 

10,837

 

 

55,231

 

153,363

 

Income (loss) from continuing operations, per common share

 

$

0.12

 

 

 

 

 

$

(0.05

)

 

 

 

 

 

 

 

YEAR ENDED SEPTEMBER 30, 2003

 

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

 

 

 

 

ANDREW

 

ALLEN
OCTOBER 1, 2002
TO JULY 15, 2003

 

PRO FORMA
ADJUSTMENTS

 

ANDREW
PRO FORMA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

$

1,014,486

 

$

379,415

 

$

 

$

1,393,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

18,704

 

23,218

 

(9,341

)

32,581

 

Preferred stock dividends

 

 

 

 

 

$

(6,459

)

$

(3,067

)

$

 

$

(9,526

)

Income (loss) from continuing operations, available to common shareholders

 

 

 

 

 

$

12,245

 

$

20,151

 

$

(9,341

)

$

23,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average diluted shares outstanding

 

 

 

 

 

109,866

 

 

43,561

 

153,427

 

Income from continuing operations, per common share

 

 

 

 

 

$

0.11

 

 

 

$

0.15

 

 

The Celiant pro forma adjustments consist of interest expense and amortization of the intangible assets acquired in the Celiant acquisition. The company estimates that it would have had to borrow an additional $63.0 million in notes payable at 3.0%, resulting in an after-tax interest expense of $0.8 million. The amortization of the $42.8 million of intangibles over this eight-month period would have created an additional $8.1 million of after-tax amortization expense.

 

The Allen pro forma adjustments consist of interest expense and amortization of the intangible assets acquired in the Allen acquisition. The company estimates that it would have had to borrow an additional $48.0 million in notes payable at 3.0%, resulting in an after-tax interest expense of $0.9 million in 2002 and $0.7 million in 2003. The amortization of the $62.5 million of intangibles would have created an additional after-tax amortization expense of $14.3 million in 2002 and $8.6 million in 2003. In addition, if the redeemable convertible preferred stock had been outstanding since October 2001 as reflected in these pro formas, Allen’s 2002 interest expense would have been reduced by an after-tax amount of $0.4 million and preferred dividend payments would have increased by $2.3 million.

 



 

38  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

ANDREW CORPORATION 2003

 

3. Per Share Data

 

The following table sets forth the computation of basic and diluted earnings per

 

 

 

YEAR ENDED SEPTEMBER 30

 

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Basic Earnings (Loss) per Share

 

 

 

 

 

 

 

Income from continuing operations

 

$

18,704

 

$

10,492

 

$

68,948

 

Preferred stock dividends

 

(6,459

)

 

 

Income from continuing operations available to common shareholders

 

12,245

 

10,492

 

68,948

 

Average basic shares outstanding

 

109,822

 

87,197

 

81,382

 

Basic income from continuing operations per share

 

$

0.11

 

$

0.12

 

$

0.85

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

15,520

 

$

(26,379

)

$

61,622

 

Preferred stock dividends

 

(6,459

)

 

 

 

Net income (loss) available to common shareholders

 

9,061

 

(26,379

)

61,622

 

Average basic shares outstanding

 

109,822

 

87,197

 

81,382

 

Basic net income (loss) per share

 

$

0.08

 

$

(0.30

)

$

0.76

 

 

 

 

 

 

 

 

 

Diluted Earnings (Loss) per Share

 

 

 

 

 

 

 

Income from continuing operations

 

$

18,704

 

$

10,492

 

$

68,948

 

Preferred stock dividends

 

(6,459

)

 

 

Income from continuing operations available to common shareholders

 

12,245

 

10,492

 

68,948

 

Average basic shares outstanding

 

109,822

 

87,197

 

81,382

 

Effect of dilutive securities: stock options

 

44

 

98

 

160

 

Average diluted shares outstanding

 

109,866

 

87,295

 

81,542

 

Diluted income from continuing operations per share

 

$

0.11

 

$

0.12

 

$

0.85

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

15,520

 

$

(26,379

)

$

61,622

 

Preferred stock dividends

 

(6,459

)

 

 

Net income (loss) available to common shareholders

 

9,061

 

(26,379

)

61,622

 

Average basic shares outstanding

 

109,822

 

87,197

 

81,382

 

Effect of dilutive securities: stock options

 

44

 

 

160

 

Average diluted shares outstanding

 

109,866

 

87,197

 

81,542

 

Diluted net income (loss) per share

 

$

0.08

 

$

(0.30

)

$

0.76

 

 

The 183,720 shares of convertible preferred stock outstanding at September 30, 2003 can potentially be converted into 2,117,557 shares of the company’s common stock.  These shares were not included in the calculation of earnings per share because including these shares and excluding the convertible preferred stock dividends would have increased reported earnings per share.

 

For fiscal year 2002, 98,000 diluted shares were not included in the calculation of the net loss per share because these shares would have reduced the reported net loss per share. Options to purchase 5,530,000, 5,569,000, and 3,664,000, shares of common stock in 2003, 2002 and 2001, respectively, were not included in the computation of diluted shares because the options’ exercise prices were greater than the average market price of the common shares.

 

The company’s convertible subordinated notes are potentially convertible into 17,531,568 shares of the company’s common stock. These shares were not included in the computation of diluted earnings per share because the conversion price of these notes is greater than the average market price of the common shares.

 



 

ANDREW CORPORATION 2003

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  39

 

4. Investments in and Advances to Affiliates

 

On December 4, 2001, the company completed the sale of its interest in a group of Russian telecommunications companies, which were accounted for under the equity method. The company received $50.3 million, net of $0.3 million of Russian withholding tax, for the sale of these investments. These investments were sold to Antel Holdings Ltd. The company sold the following investments: 49% of ZAO Rascom, 45% of ZAO Metrocom, 45% of MAcommnet, 64.4% of Magistral Telecom and 99.7% of ZAO MKS. As part of this transaction, the company also sold its wholly owned, U.S. based, international telecommunications carrier, Antel. This sale resulted in an $8.7 million pre-tax gain and an after-tax gain of $7.3 million.

 

5. Defined Benefit Plans

 

UNITED KINGDOM Approximately 600 current and former employees of the company’s United Kingdom subsidiary, Andrew Ltd., participate in a defined benefit plan. Benefits are based on an employee’s final pensionable salary. The plan’s assets are held by a trust, the Andrew Ltd. Pension and Life Assurance Plan, and an independent third party manages the investments. The plan assets are invested in equity and debt securities and are not invested in the company’s common stock. The company’s accumulated benefit obligation under this plan was $42.9 million and $36.6 million at September 30, 2003 and 2002, respectively. At September 30, 2003 the accumulated benefit obligation exceeded the fair value of plan assets and accrued pension costs by $4.5 million. The company recorded this minimum pension liability of $3.1 million to deferred liabilities and to other comprehensive loss net of applicable income taxes.

 

The reconciliation of the beginning and the ending balance of the projected benefit obligation, reconciliation of the beginning and ending balance of the fair value of the plan assets, funded status of the plan and amounts recognized on the company’s consolidated balance sheet are as follows:

 

 

 

SEPTEMBER 30

 

DOLLARS IN THOUSANDS

 

2003

 

2002

 

 

 

 

 

 

 

Change in projected benefit obligation

 

 

 

 

 

Projected benefit obligation at beginning of the year

 

$

50,746

 

$

38,004

 

Service costs

 

1,907

 

2,323

 

Interest costs

 

2,854

 

2,386

 

Actuarial loss

 

8,160

 

7,423

 

Benefits paid

 

(1,376

)

(1,909

)

Foreign currency translation adjustment

 

3,832

 

2,519

 

Projected benefit obligation at end of the year

 

66,123

 

50,746

 

 

 

 

 

 

 

Change in plan assets

 

 

 

 

 

Fair value of plan assets at beginning of the year

 

28,833

 

31,836

 

Return on plan assets

 

5,143

 

(4,930

)

Company contribution

 

1,462

 

1,404

 

Contribution by plan participants

 

731

 

701

 

Benefits and expenses paid

 

(1,376

)

(1,909

)

Foreign currency translation adjustment

 

2,158

 

1,731

 

Fair value of plan assets at end of the year

 

36,951

 

28,833

 

 

 

 

 

 

 

Funded status of the plan

 

(29,172

)

(21,913

)

Unrecognized prior service costs

 

128

 

162

 

Unrecognized actuarial loss

 

27,601

 

22,001

 

Net amount recognized

 

(1,443

)

250

 

 

 

 

 

 

 

Amounts recognized on balance sheet consist of:

 

 

 

 

 

Deferred liabilities

 

(4,654

)

(5,633

)

Prepaid pension cost

 

 

251

 

Other long-term assets

 

128

 

162

 

Accumulated other comprehensive loss

 

3,083

 

5,470

 

Net amount recognized

 

$

(1,443

)

$

250

 

 

The components of net periodic pension costs recognized in income are as follows:

 

DOLLARS IN THOUSANDS

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Service costs

 

$

1,176

 

$

1,622

 

$

1,680

 

Interest costs

 

2,854

 

2,386

 

2,315

 

Expected return

 

(1,964

)

(2,300

)

(2,489

)

Amortization of unrecognized net assets

 

 

(21

)

(21

)

Amortization of unrecognized prior service costs

 

42

 

40

 

38

 

Amortization of net loss

 

1,012

 

203

 

 

 

 

$

3,120

 

$

1,930

 

$

1,523

 

 



 

40  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

ANDREW CORPORATION 2003

 

The following actuarial rate assumptions were used in determining the net periodic pension costs recognized in income:

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Discount rate

 

5.50

%

6.25

%

6.50

%

Annual compensation increase

 

3.50

%

4.00

%

4.50

%

Expected return on plan assets

 

6.50

%

7.00

%

7.00

%

Post-retirement pension increase

 

2.50

%

2.50

%

2.75

%

 

The weighted average actuarial rate assumptions used to determine the projected benefit obligation at September 30, 2003 were as follows: discount rate 5.30%, annual compensation increase 3.70%, expected return on plan assets 6.50% and post-retirement pension increase 2.70%.

 

PLANS ACQUIRED FROM ALLEN TELECOM With the acquisition of Allen Telecom on July 15, 2003, the company assumed the Allen noncontributory defined benefit plans as well as post-retirement medical and life insurance plans. The defined benefit plans cover approximately 1,760 current and former employees, including the majority of the full-time domestic salaried and hourly employees of the former Allen Telecom. The pension benefits provided to salaried employees are based on years of service and compensation during the ten-year period prior to retirement, while the benefits provided to hourly employees are based on specified amounts for each year of service. Domestic pension costs are funded in compliance with requirements of the Employee Retirement Income Security Act of 1974, as amended, as employees become eligible to participate. At July 15, 2003 the accumulated benefit obligation under these plans was $77.9 million, which exceeded the fair value of the plan assets by $51.2 million. After the completion of the merger, these plans were frozen, resulting in a decrease in liability of $6.5 million to $44.7 million. In addition to the reserves of $16.9 million acquired from Allen, the company recorded a one-time purchase accounting adjustment of $27.8 million.

 

The post-retirement medical and life insurance plans provide health care and life insurance benefits for certain retired employees who reach retirement age while working with the company. The company’s accumulated benefit obligation under these plans was $4.3 million as of July 15, 2003. In addition to reserves of $1.6 million acquired from Allen, the company recorded a one-time purchase accounting adjustment of $2.8 million for these post-retirement medical and life insurance plans.

 

A reconciliation of the plans’ projected benefit obligation, fair value of plan assets, and funded status are as follows:

 

DOLLARS IN THOUSANDS

 

RETIREMENT
PLANS
PENSION BENEFITS
2003

 

POST-RETIREMENT
MEDICAL PLANS
OTHER BENEFITS
2003

 

 

 

 

 

 

 

Change in projected benefit obligation

 

 

 

 

 

Projected benefit obligation at July 15, 2003

 

$

77,911

 

$

4,339

 

Service costs

 

38

 

 

Interest costs

 

505

 

31

 

Curtailments

 

(6,451

)

 

Disbursements

 

(1,584

)

(27

)

Projected benefit obligation at end of the year

 

70,419

 

4,343

 

 

 

 

 

 

 

Change in plan assets

 

 

 

 

 

Fair value of plan assets at July 15, 2003

 

26,710

 

 

Return on plan assets

 

1,767

 

 

Company contribution

 

1,034

 

27

 

Disbursements