10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

(Mark One)

 

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2007.

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-14617

 

ANDREW CORPORATION

(Exact name of Registrant as specified in its charter)

 

DELAWARE   36-2092797
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer identification No.)

 

3 Westbrook Corporate Center, Suite 900 Westchester, Illinois 60154

(Address of principal executive offices and zip code)

 

(708) 236-3600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


  

Name of Each Exchange on which Registered


Common Stock, $0.01 par value    The Nasdaq Stock Market LLC
Common Stock Purchase Rights    The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes X    No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act

Yes     No X

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X    No

 

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer X    Accelerated filer     Non-accelerated filer

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes      No X

 

The aggregate market value of common stock held by non-affiliates of the registrant as of March 31, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1.6 billion, based on the closing sale price as reported on The Nasdaq Stock Market. The number of outstanding shares of the Registrant’s common stock as of November 15, 2007 was 156,100,349.

 

1


Table of Contents

TABLE OF CONTENTS

 

Part I          

Item 1

   Business    3

Item 1A

   Risk Factors    12

Item 1B

   Unresolved Staff Comments    18

Item 2

   Properties    18

Item 3

   Legal Proceedings    19

Item 4

   Submission of Matters to a Vote of Security Holders    20

Part II

         

Item 5

  

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

   21

Item 6

   Selected Financial Data    23

Item 7

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    24

Item 7A

   Quantitative and Qualitative Disclosures About Market Risk    41

Item 8

   Financial Statements and Supplementary Data    42
     Consolidated Statements of Operations    42
     Consolidated Balance Sheets    43
     Consolidated Statements of Cash Flows    44
     Consolidated Statements of Change in Shareholders’ Equity    45
     Notes to Consolidated Financial Statements    46
     Report of Independent Registered Public Accounting Firm    80

Item 9

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    83

Item 9A

   Controls and Procedures    83

Item 9B

   Other Information    83

Part III

         

Item 10

   Directors and Executive Officers of the Registrant    84

Item 11

   Executive Compensation    89

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   109

Item 13

   Certain Relationships and Related Transactions    111

Item 14

   Principal Accountant Fees and Services    111

Part IV

         

Item 15

   Exhibits and Financial Statement Schedules    113
     Schedule II – Valuation and Qualifying Accounts    113
     Index to Exhibits    114
     Signatures    120
     Exhibits    121

 

2


Table of Contents

PART I

Item 1.  Business

 

General Business

 

Andrew Corporation was incorporated in 1987 under the laws of the State of Delaware as successor to an Illinois corporation organized in 1947. Originally founded as a partnership in 1937, its executive offices are located in Westchester, Illinois, which is approximately 10 miles west of Chicago. Unless otherwise indicated herein or as the context otherwise requires, all references herein to “Andrew”, the “company”, “we”, “us” or “our” are to Andrew Corporation and its subsidiaries.

 

On June 26, 2007, we entered into a definitive merger agreement with CommScope, Inc (“CommScope”). Under the terms of the agreement, each share of Andrew common stock will be converted into the right to receive $15.00, comprised of $13.50 per share in cash and an additional $1.50 per share in either cash, CommScope common stock, or a combination of cash and CommScope common stock totaling $1.50 per share, at CommScope’s election. The merger agreement contains termination rights for both CommScope and Andrew. Under certain circumstances, including if our board of directors recommends a superior proposal to our stockholders and the merger agreement is terminated as a result thereof, we would be required to pay CommScope a termination fee of $75 million. Following the close of the transaction, we will become an indirect wholly-owned subsidiary of CommScope. The merger is subject to regulatory and governmental reviews in the United States and elsewhere, as well as approval by Andrew’s shareholders. We expect the transaction to close prior to the end of calendar year 2007.

 

Our products are primarily based on our core competency, the radio frequency (“RF”) path. We have unique technical skills and marketing strengths in developing products for RF systems. Our products are used in the infrastructure for traditional wireless networks, third generation (“3G”) technologies, voice, data, video and internet services, microwave and satellite communications, and other specialized applications.

 

We operate our five product businesses in two operating groups. Our Antenna and Cable Products and Satellite Communications businesses comprise our Antenna and Cable Products group and our Base Station Subsystems, Network Solutions, and Wireless Innovations businesses comprise our Wireless Network Solutions group. Antenna and Cable Products include coaxial cables, connectors, cable assemblies and accessories as well as base station antennas and terrestrial microwave antennas. Satellite Communications products include earth station antennas, high frequency and radar antennas, direct-to-home (“DTH”) antennas and very small aperture terminal (“VSAT”) antennas. Base Station Subsystems products are integral components of wireless base stations and include products such as power amplifiers, filters, duplexers and combiners that are sold individually or as parts of integrated subsystems. Network Solutions products include software and equipment to locate wireless E-911 callers as well as equipment and services for testing and optimizing wireless networks. Wireless Innovations products are used to extend and enhance the coverage of wireless networks in areas where signals are difficult to send or receive, and include both complete systems and individual components.

 

On November 6, 2007, we announced that we had entered into a definitive agreement for the sale of our Satellite Communications business to Resilience Capital Partners (“Resilience”). We expect the transaction to close by the end of calendar year 2007.

 

In the past three fiscal years, we have also completed several smaller strategic acquisitions intended to expand our product portfolio and strengthen our market leading positions. The fiscal 2005 acquisition of ATC Tower Services enhanced our service offerings, and provided an additional distribution channel for our products. The fiscal 2006 acquisition of Precision Antennas, Ltd. (“Precision”) included products and technology that allowed us to offer a more comprehensive antenna product line. Additionally, the fiscal 2006 acquisition of CellSite Industries (“CSI”) provided us with a lower cost platform for warranty and repair services. In fiscal 2007, we acquired EMS Wireless (“EMS”), a major designer and manufacturer of base station antennas.

 

The wireless infrastructure market has experienced growth in the three years ended September 30, 2007. Capital spending worldwide on infrastructure continues to grow as our customers build and upgrade networks to address demand for basic voice and next generation data services. Key industry trends, such as minutes of use, number of subscribers, wireless penetration, and third generation service adoption, remain positive.

 

3


Table of Contents

We have a significant international manufacturing and distribution presence. Sales of products exported from the United States or manufactured abroad accounted for approximately 67% of our sales in fiscal 2007, 57% in fiscal 2006, and 56% in fiscal 2005. Over the last decade, we have significantly increased our international manufacturing and distribution capabilities in some of the fastest developing wireless infrastructure markets. Developing countries represent some of the greatest growth opportunities for wireless communications, as wireless technology is the most cost efficient communications infrastructure for these regions. We believe that developing markets such as China and India have significant long-term growth potential. We built new manufacturing facilities in China and India in fiscal 1998 and have continued to expand operations in these regions. These facilities have allowed us to more effectively reach customers and increase sales in the Asian market. We relocated a significant portion of the manufacturing of our filter product line to China and in fiscal 2007, we opened a new cable and antenna manufacturing facility in Goa, India.

 

Operating Segments

 

We operate our business in two operating groups, Antenna and Cable Products and Wireless Network Solutions, which reflect the two main product areas (passive and active electronic components, respectively) that we manufacture. We believe this structure allows us to better position ourselves for opportunities in the rapidly changing wireless infrastructure market and better leverage the many opportunities for collaboration and efficiencies in supporting customers who have a global presence.

 

Our two business groups are comprised of five reportable segments: the Antenna and Cable Products group consists of Antenna and Cable Products and Satellite Communications; the Wireless Network Solutions group consists of Base Station Subsystems, Network Solutions, and Wireless Innovations. The following table sets forth sales and percentages of total sales represented by our five reporting segments during the last three fiscal years:

 

Dollars in millions    2007   

% of

Sales

    2006   

% of

Sales

    2005   

% of

Sales

 

Sales by Segment

                                 

Antenna and Cable Products

                                 

Antenna and Cable

   $1,412    64 %   $1,248    58 %   $1,050    53 %

Satellite Communications

   104    5 %   122    6 %   140    7 %

Total Antenna and Cable Products

   1,516    69 %   1,370    64 %   1,190    61 %

Wireless Network Solutions

                                 

Base Station Subsystems

   404    18 %   505    24 %   446    23 %

Network Solutions

   87    4 %   91    4 %   157    8 %

Wireless Innovations

   188    9 %   180    8 %   168    9 %

Total Wireless Network Solutions

   679    31 %   776    36 %   771    39 %

Total Sales

   $2,195    100 %   $2,146    100 %   $1,961    100 %

 

Further information on our operating segments is contained in Note 13, Segment and Geographic Information, of the Notes to Consolidated Financial Statements.

 

Antenna and Cable Products

 

We are a market leader for commercial base station antennas serving global market needs for all wireless protocols. Base station antennas are the first critical component of wireless infrastructure that captures wireless signals from users’ handsets and sends it to operators’ base stations. The base station antenna transmits and receives this wireless signal with a series of passive radiating elements that are tuned to the wireless operator’s frequency band. We offer a diverse product line of base station antennas ranging in size from approximately two feet in length to large, tower-mounted antennas in excess of twenty feet in length. The product line contains a variety of innovative products including technology to optimize the performance in CDMA and W-CDMA markets. We hold significant intellectual property that is used to create innovative products, such as the Andrew Teletilt® system, which is a remotely-controlled variable electrical downtilt base station antenna system that can be adjusted in minutes, without costly site downtime. This allows customers to enhance their network performance while reducing operating expenses. The most recent addition to this product line is a series of multi-band variable electric downtilt antennas. The multi-band function allows operators to utilize just one antenna when overlaying an existing network with a new technology such as UMTS (W-CDMA).

 

4


Table of Contents

We manufacture a full line of microwave antennas for applications such as fixed-line telecommunications networks, broadband wireless, wireless infrastructure, and others. The microwave antenna takes the RF signal from a microwave radio, focuses the beam and reflects the signal to a microwave antenna at another location in the network. Microwave radio networks are commonly used by telecommunications companies for telephone, internet, video and data transmission. They are also used by cellular operators to link cell sites with switching centers and by private companies, such as gas pipelines, electric utilities and railroads, for their internal communications needs. We strengthened our leadership position in microwave antennas with the fiscal 2006 acquisition of Precision Antennas, Ltd., a Stratford, England-based designer and manufacturer of microwave antennas used primarily for cellular network backhaul.

 

We combine antenna products from both the base station and microwave antenna groups to service the emerging WiMAX market. Point-to-point and point-to-multi-point antennas are used in fixed WiMAX applications. Traditional base station antennas are used in mobile WiMAX deployments. Our cable products, described below, are also used to service this market segment.

 

Cable products include coaxial cables, connectors, cable assemblies and accessories. Coaxial cable is a two-conductor, radio frequency transmission line with the smaller of the two conductors centrally located inside the larger, tubular conductor. It is principally used to carry radio frequency signals. We sell our semi-flexible and elliptical waveguide cable products under the trademark HELIAX®. In October 2006, we introduced a premium-quality family of corrugated aluminum cable as a cost-effective, high quality extension to our industry-leading HELIAX® family of copper corrugated transmission line systems. HELIAX® corrugated aluminum cable and accessories are produced and distributed globally as a high performing but lower cost alternative to our most popular and widely-used copper-based cable.

 

We believe that we distinguish ourselves from our competition by offering technically advanced and higher performance cable products. Examples of this are the new aluminum cables and the Andrew Virtual AirTM (“AVA”) feeder cable. AVA cables offer excellent attenuation performance and lower system costs by allowing wireless operators to utilize smaller diameter cables and the aluminum cables have virtually the same RF performance in a lighter weight and more easily installed product. AVA and aluminum cables are manufactured in 7/8” and 1 5/8” diameters.

 

In addition to bulk cable, we provide cable connectors, accessories and assemblies marketed under the HELIAX® brand name. Coaxial cable connectors attach to cable and facilitate transmission line attachment to antenna and radio equipment. We provide multiple connector families, including OnePiece™ and Positive Stop™ connectors. Cable accessories protect and facilitate installation of coaxial cable and antennas on cell site towers and into equipment buildings. Accessories include lightning surge protectors, hangers, adaptors and grounding kits, including Arrestor Plus®, ArrestorPortII™, KwikClamp™, SureGround™, and Compact SureGround™ lines. SureFlex™ coaxial cable assemblies, used to connect the main feeder cable line to the antenna, are made up of smaller sized HELIAX® cable and the Andrew patented SureFlex™ connectors.

 

We also manufacture a full line of steel infrastructure components including steel antenna mounts, coaxial cable support components, and equipment platforms. Antenna mounts are utilized to facilitate mounting of base station or terrestrial microwave antennas to any type of elevated structure. Coaxial cable support components are utilized to create a secure pathway for coaxial cable between the antenna and radio equipment. Equipment platforms are utilized to provide a secure foundation for radio equipment.

 

We provide a full range of products suitable for in-cabinet applications and a wide range of traditional cable assemblies utilizing solid copper, braid, semi-rigid and conformable cables, as well as some technically unique cables for special applications. We combine assemblies and supporting products according to customer specifications in “cabinet kits” to help reduce an original equipment manufacturer’s (“OEM”) overall operational cost of building cabinets.

 

In fiscal 2007, we sold our Yantai, China facility and inventory and equipment related to our broadband cable product line to Andes Industries, Inc. (“Andes”). Concurrent with the sale, we exercised the conversion feature of a note receivable from Andes, obtained in a previous transaction, for a 30% equity ownership interest in Andes.

 

In addition to the products described above, we have historically maintained a group of field construction employees that perform value-added services for our customers. The U.S.-based construction services group offers tower erection, antenna and cable line installation, civil and electrical installation and project management services to our OEM and service provider customers.

 

5


Table of Contents

Satellite Communications

 

The Satellite Communications Group is comprised of four product groups: 1) DTH / VSAT; 2) earth station antennas and systems; 3) government / radar products; 4) and earth station electronics. This product group includes antennas, support products, electronic equipment and systems engineering for applications in the consumer, enterprise and government/military markets.

 

On November 6, 2007, we announced that we had entered into a definitive agreement for the sale of our Satellite Communications business to Resilience. We expect the transaction to close by the end of calendar year 2007. Under the agreement, we will receive $9 million in cash at closing, $5 million in notes that will mature three years after closing, and an ownership stake of between 17 and 20 percent in the new satellite communications company that Resilience will establish with the acquired Andrew assets. Additionally, we may receive up to $25 million in cash after three years, based on the new company’s achievement of certain financial targets. We expect to record a non-cash charge to earnings of approximately $15 million to $20 million in the first quarter of fiscal 2008 related to the transaction.

 

Base Station Subsystems

 

Base Station Subsystems products are integral components of wireless base stations and include products such as power amplifiers, filters, duplexers and combiners. These products cover all of the major wireless standards and frequency bands and are sold individually or as part of integrated subsystems.

 

We design and manufacture high power single and multi-carrier RF power amplifiers. RF power amplifiers are required by wireless communication systems to boost the radio signal power for transmission across long distances and are usually located within base stations. Our RF power amplifier products range in power from 10 to 500 watts of output power and in frequency ranges from 450 MHz to 2500 MHz. Our power amplifiers are custom designed for each OEM customer and are available for most wireless standards, including 2G, 2.5G, and 3G technologies. We market next generation single and multi-carrier, highly linear power amplifiers with digital pre-distortion technology and are currently working with major OEMs and service providers to design their next generation power amplifier products.

 

We design and manufacture filters, duplexers, combiners and integrated antenna combining units for OEM and operator customers. RF transmit filters are used to filter high power unwanted transmit signals to meet frequency regulations and interference requirements in the different allocated wireless frequency bands. Transmit combiners allow the combination of multiple signals into one transmit antenna. RF receive filters are used to select intended signals and isolate these signals from unwanted interference and noise. Duplexers are used to allow one antenna to both transmit and receive signals.

 

We also supply tower-mounted amplifiers to OEMs and wireless operators that use these products to improve network performance. Tower-mounted amplifiers improve network performance by filtering and amplifying as close as possible to the actual receiving antenna, thus eliminating additional signal loss and noise. For this application, integrated receiving filters and amplifiers are directly mounted at the top of the cell site tower.

 

To support more sophisticated antenna filtering applications and to improve overall performance and costs, we are supplying integrated antenna combining units to leading OEMs. This product provides antenna-filtering functions for both transmitted and received signals and low-power amplification for received signals. These integrated antenna combining units also have control functions for antenna supervision and antenna remote electrical tilt control.

 

Additionally, we provide repair, replacement and excess and obsolescent equipment management services of wireless and power equipment through our After Market Services operation. We entered this service area through the acquisition of CSI, based in Milpitas, California. The charter of our After Market Services group is to provide turnkey post sales support for OEMs and wireless carriers to reduce the costs of network maintenance through a repair service that is unmatched in speed, cost effectiveness and quality.

 

On October 24, 2007, we announced that we had entered into a transaction with Nokia Siemens Networks (“NSN”) whereby NSN purchased from us intellectual property related to NSN’s filter products for wireless networks. NSN and its affiliates will also purchase products completed pursuant to the parties’ existing purchase agreements and have the option to acquire certain fixed assets and inventory related to the manufacture of NSN’s filter products. We will continue to provide certain research and development services to NSN.

 

6


Table of Contents

Network Solutions

 

Network Solutions includes location services systems, network optimization analysis systems, and engineering and consulting services. We are one of two major suppliers of network-based geolocation systems capable of providing wireless operators with the equipment and software necessary to locate wireless callers. We believe our network-based Geometrix® product can exceed the accuracy and reliability requirements set by the FCC for E-911 networks. The system can locate calls that transition between analog and digital sites, as well as calls in which the caller is a subscriber, roamer or non-subscriber. The Geometrix® product can be used with many air interfaces including CDMA, GSM, and UMTS and requires no changes in wireless service and no modifications or replacement of existing handsets. In addition, the system was designed to accommodate a variety of location-based services, such as fleet management, concierge services, mobile commerce, wireless information directories and other security related location dependent services. We have added location technologies such as A-GPS and wireless network location-related elements to our offering as part of the Mobile Location Center (“MLC”). These incremental capabilities enhance Geometrix® to better support commercial and enterprise location service enablement and expand our market reach around the world.

 

Included in Network Solutions are engineering and consulting services offered under the Comsearch brand. Comsearch is a leading provider of frequency planning and coordination services as well as spectrum management consulting and field engineering services. Our engineering expertise in spectrum sharing, microwave and satellite interconnectivity, and regulatory license administration has enabled us to develop a broad client base of operators, OEMs, broadcast, cable and private industry telecommunications users. Our spectrum sharing software is currently licensed and utilized by major operators and consultants to perform analysis in most domestic markets, and our software for microwave system design and administration is operational in Asia, Europe, North America and South America.

 

Wireless Innovations

 

Our Wireless Innovations solutions are used worldwide to extend and enhance the coverage of wireless networks. The products and services this group delivers provide coverage and capacity enhancement directly to the wireless operators and indirectly through OEMs and third-party entities. We offer products as well as a suite of services, including system design, installation, commissioning, monitoring, and full turnkey capability from simple solutions to customized solutions for major infrastructure projects throughout the world. Typical turnkey projects include coverage of highway tunnels, subway and railway systems, shopping centers, airports, convention centers, store fronts, office buildings, campuses and many more applications. Our products support numerous customers, including single operators, shared networks with neutral host operators and public safety wireless networks.

 

We provide a full line of RF repeaters and optical distribution systems, boosters, and passive components. They can be used as an efficient and low-cost alternative to base stations in areas where coverage is more critical than additional capacity. Our active products have built-in intelligence, facilitating easy setup and optimization to reduce installation costs. They have superior RF and control characteristics which translate to a reduction in customers’ operating expenses. These products can be used for both single and multi-operator applications. The products may be used with any wireless technology and are available in virtually all frequency bands from 70MHz to 2500MHz, for use in public and private wireless communications systems.

 

We offer a wide array of coverage products consisting of both passive and active components that extend wireless network coverage into buildings and other areas where it is difficult to get wireless reception. Our intelligent optical network distribution product line, ION®, is a customer solution for everything from indoor to urban city center coverage, while the RF repeater line, Node (network optimized distribution element), is used for rural area coverage, suburban communities and as a head-end solution for both passive and active indoor coverage.

 

We extend our active offering with a complement of passive components including antennas, cable, hybrid couplers, combiners, power splitters, cable taps and termination loads. Our Cell-Max™ antennas are especially designed for in-building use and are omni-directional or directional, single or multi-band to provide high reliability and low cost. Our RADIAX® coaxial cables, connectors and accessories are especially designed and customized for tunnel coverage. RADIAX® is a coaxial cable with slots in the outer conductor that allow for homogenous RF coverage in elongated environments. We also offer small specialty cables that meet stringent fire codes and are flexible enough to bend around corners and over walls for all in-building applications.

 

International Activities

 

Our international operations represent a substantial portion of our overall operating results and asset base. Our principal manufacturing facilities outside the United States are located in Brazil, China, Czech Republic, Germany, India, Mexico, and the United Kingdom. Most of our plants ship to international markets.

 

7


Table of Contents

During fiscal 2007, our sales of products exported from the United States or manufactured abroad were $1,463 million or 67% of total sales compared with $1,217 million or 57% of total sales in fiscal 2006 and $1,095 million or 56% of total sales in fiscal 2005. Our exports from the United States amounted to $57 million in fiscal 2007, $61 million in fiscal 2006, and $72 million in fiscal 2005.

 

Sales and income on a country-by-country basis can vary considerably year to year. Further information on our international operations is contained in Note 13, Segment and Geographic Information, of the Notes to Consolidated Financial Statements.

 

Our international operations are subject to a number of risks including currency fluctuations, changes in foreign governments and their policies, expropriation, or requirements of local or shared ownership. We believe that the geographic dispersion of our sales and assets, as well as our political risk insurance, mitigate some of these risks.

 

Marketing and Distribution

 

Our worldwide sales force is organized into groups that support worldwide OEM customers and regional service provider customers. We support major OEMs with dedicated global account teams focused solely on each OEM. The teams are responsible for all activity with these customers, including global coordination of our relationship with the OEM. The service provider and OEM sales force is organized by region, with teams divided between the Americas; Europe, Middle East, and Africa (“EMEA”); Asia Pacific; and China. These regional teams are responsible for all accounts in the region, including the local offices of the worldwide OEMs, local OEMs, service providers, and distributors.

 

Our satellite communications sales organization promotes our products to service providers, system integrators, OEMs and end users for broadcast, broadband, data and voice applications of satellite communications technology. This sales force is organized under three geographic areas: Americas, EMEA and Asia Pacific.

 

Our sales force is responsible for relationship management and has a broad range of knowledge of our entire product line. Sales teams are trained to sell all of our products and are familiar with our vast array of technical and physical resources that may be leveraged to solve customers’ problems. For example, when greater product knowledge is needed, the sales teams introduce systems engineers, who work together to satisfy customer needs.

 

We have a worldwide manufacturing and distribution network. Many of our manufacturing facilities also serve as distribution centers. We have twenty facilities that are exclusively distribution centers, located in thirteen countries around the world. These distribution centers allow us to quickly and efficiently meet the demands of our global and regional customers.

 

Major Customers

 

Our largest customers are OEMs and wireless service providers. In fiscal 2007, aggregate sales to the ten largest customers accounted for 55% of total consolidated sales compared to 52% in fiscal 2006 and 54% in fiscal 2005. Sales to Ericsson and Nokia Siemens Networks were 12% and 11% of total sales, respectively, in fiscal 2007. The top 25 customers accounted for 71%, 69%, and 69% of total sales in fiscal 2007, 2006, and 2005, respectively.

 

Manufacturing Locations

 

We typically develop, design, fabricate, manufacture and assemble the products we sell. In addition, we utilize contract manufacturers for power amplifiers and certain filter products. Our manufacturing facilities are located worldwide, and each facility shares a company-wide commitment to quality and continuous improvement. We have worked to ensure that our manufacturing processes and systems are based on the quality model developed by the International Organization for Standardization (“ISO”), and that identical management guidelines are used at our different locations to produce interchangeable products of the highest quality. Quality assurance teams oversee design, international standards adherence, and verification and control of processes. We have 36 manufacturing and distribution locations that have received ISO 9000 certification, the most widely recognized standard for quality management.

 

Our major manufacturing facilities are as follows:

 

North America:    Joliet, Illinois is our principal manufacturing facility in the U.S. The Joliet facility manufactures HELIAX® coaxial cable, connectors, cable assemblies, microwave transmission lines, air dielectric cable, and RADIAX® radiating cables. Our primary manufacturing facility relocated from Orland Park to Joliet, Illinois in January 2007 and we are in the process of selling our Orland Park, Illinois manufacturing facility. Our corporate headquarters relocated to a leased facility in Westchester, Illinois in fiscal 2006.

 

8


Table of Contents

Other U.S. manufacturing facilities include: Forest, Virginia (geolocation systems, power amplifiers), Smithfield, North Carolina (DTH, VSAT antennas), Euless, Texas (steel components), and Norcross, Georgia (base station antennas), which was acquired with EMS in December 2007. In addition, we operate two non-U.S. manufacturing facilities in North America; Whitby, Canada (cable assemblies, earth station and government antennas), and Reynosa, Mexico (microwave, earth station and base station antennas). In fiscal 2007, we closed our Amesbury, Massachusetts and Nogales, Mexico facilities as a result of outsourcing North American-made filter products to a contract manufacturer and transferring production of other products to other North American facilities.

 

Asia Pacific:    Our Suzhou, China facility manufactures HELIAX® coaxial cable, RADIAX® cable, connectors, accessories, cable assemblies, filters, and base station antennas. We also operate a filter manufacturing facility in Shenzhen, China. Power amplifier products are supplied by a third-party contract manufacturer in China. In fiscal 2007, we completed the construction of a new facility in Goa, India, which manufactures HELIAX® coaxial cable, connectors, cable assemblies, microwave and base station antennas.

 

Europe:    Our Lochgelly, Scotland facility manufactures HELIAX® coaxial cable, RADIAX® cable, elliptical waveguide and machined components. Our Stratford, England facility manufactures terrestrial microwave antennas. Our principal facility in Brno, Czech Republic manufactures cable assemblies, flexible waveguide and terrestrial microwave antennas. We also operate significant facilities in Agrate and Capriate, Italy (filters), Buchdorf, Germany (repeaters and other wireless innovation products), and Faenza, Italy (fiber optic and in-building coverage systems). In September 2006, we sold our Arad, Romania filter manufacturing facility to a contract manufacturer.

 

South America:    Our Sorocaba, Brazil facility provides products for the Central and South American markets. This facility manufactures HELIAX® coaxial cable, connectors, accessories, cable assemblies, elliptical waveguide, base station antennas, and terrestrial microwave products.

 

Raw Materials and Components

 

Our products are manufactured from both standard components and parts that are built to our specifications by other manufacturers. We use various raw materials such as copper, aluminum and plastics in the manufacture of our products. Copper, which is used to manufacture coaxial cable, represents a significant portion of our costs and, as a result, we are exposed to fluctuations in the price of copper. In order to reduce this exposure, we have negotiated copper purchase contracts with various suppliers to purchase approximately 17% of our forecasted copper requirements for fiscal 2008. As of September 30, 2007, we had contracts to purchase 9.7 million pounds of copper for $32 million. We consider our sources of supply for all raw materials to be adequate and are not dependent upon any single supplier for a significant portion of materials used in our products.

 

Some of our products include specialized components manufactured by suppliers. We are dependent upon sole suppliers for certain key components for our power amplifier operations. If these sources were not able to provide these components in sufficient quantity and quality on a timely and cost-efficient basis, it could materially impact our results of operations until another qualified supplier is found. We believe that our supply contracts and our supplier contingency plans mitigate some of this risk.

 

Research and Development

 

We believe that the successful marketing of our products depends upon our research, engineering and production skills. Research and development activities are undertaken for new product development and for product and manufacturing process improvement. In fiscal 2007, 2006 and 2005, we spent $111 million, $113 million, and $108 million, respectively, on research and development activities. A substantial amount of the fiscal 2007, 2006 and 2005 research and development activities were focused on base station subsystems products.

 

Intellectual Property and Intangible Assets

 

As of September 30, 2007, we had $36 million of intangible assets, net of accumulated amortization, consisting of patents, technology, supply agreements and various other intangible assets that we have acquired through acquisitions. A significant portion of our intangible assets relate to patents, patent applications and related technology acquired with the fiscal 2002 Celiant and fiscal 2003 Allen Telecom acquisitions. Our internally developed intangible assets, such as patents, are not recorded on our balance sheet. Currently, we hold approximately 1,039 active patents, expiring at various times between 2008 and 2028. We attempt to obtain patent protection for significant developments whenever possible. We believe that, while patents and other intangible assets in the aggregate are valuable to our business, we are not materially dependent on any one individual patent or intangible asset.

 

9


Table of Contents

Competition

 

We believe that we are a leading global supplier of communications products and systems to the wireless subsystem infrastructure market. As the wireless industry continues to consolidate, we believe that we have the ability to provide total customer solutions, including virtually all components of a wireless base station that are outsourced by OEMs and wireless service providers. This allows us to better meet the performance and cost efficiency requirements of our customers who benefit from the availability of a single source for their entire wireless infrastructure needs. We also believe that we differentiate ourselves by offering superior product quality, service and continual technological enhancement. While we believe that few of our competitors can match our complete product offering, we face several strong competitors that compete with a significant portion of our total product offering. In addition, there are a number of small independent companies that compete with portions of our product lines.

 

Representative competitors in our five primary product groups are as follows:

 

Product Group   Representative Competitors

Antenna and Cable Products

  RFS, NK, Huber + Suhner, Eupen, CommScope, Amphenol, Powerwave Technologies and Kathrein

Base Station Subsystems

  Powerwave Technologies, RFS and Kathrein

Satellite Communications

  General Dynamics, Patriot, CalAmp and NJRC

Network Solutions

  TruePosition, Qualcomm, Agilent Technologies, Comarco Wireless Technologies and Ericsson TEMS

Wireless Innovations

  Powerwave Technologies, LGC Wireless, Comba Telecom Systems, Dekolink Wireless and MobileAccess

 

Backlog and Seasonality

 

Our backlog of orders believed to be firm was $304 million and $316 million as of September 30, 2007 and 2006, respectively. Due to the variability of shipments under large contracts, customers’ seasonal installation considerations and variations in product mix and in profitability of individual orders, we can experience wide quarterly fluctuations in sales and income. These variations are expected to continue in the future. Consequently, it is more meaningful to focus on annual rather than interim results.

 

Environment

 

We are committed to demonstrating the highest standard of global environmental management and achieving environmental best practices. Eleven locations have been awarded certifications for ISO 14001, an international standard for environmental management systems. We continue to seek to improve our environmental management system and practices, including resource conservation and pollution prevention. We engage in a variety of activities to comply with various federal, state and local laws and regulations involving the protection of the environment and believe we are in compliance with relevant statutory requirements. Such environmental statutory requirements include European Union Directives RoHS 2002/95/EC, which restricts of the use of certain hazardous substances, and WEEE 2002/96/EC, which governs material declaration requirements of electrical and electronic equipment. Compliance with such laws and regulations does not currently have a significant effect on our capital expenditures, earnings, or competitive position. We have no knowledge of any environmental condition that might individually or in the aggregate have a material adverse effect on our financial condition.

 

Employees

 

At September 30, 2007, we employed 11,251 people, 3,642 of whom were located in the United States. Of these 11,251 people, 1,798 were temporary workers, 259 of whom were located in the United States. As a matter of policy, we seek to maintain good relations with our employees at all locations. From a global, company-wide perspective, we believe we have a good relationship with our employees. Based on our experience, periods of labor unrest or work stoppage have not caused a material impact on our operations or results.

 

10


Table of Contents

Regulation

 

Although we are not directly regulated by any single governmental agency in the United States, most of our customers and the telecommunications industry, in general, are subject to regulation by the Federal Communications Commission (FCC). The FCC controls the granting of operating licenses, allocation of transmission frequencies and the performance characteristics of certain products. This regulation has not adversely affected our operations. Outside of the United States, where some of our customers are government-owned and operated entities, changes in government economic policy and communications regulation have affected in the past and may be expected to affect in the future the volume of our non-U.S. business. However, historically these regulations have not been detrimental to our non-U.S. operations taken as a whole.

 

Certain of our wireless communications products must conform to a variety of domestic, foreign and international regulatory specifications established to, among other things, maintain public safety, avoid interference among users of radio frequencies and permit interconnection of equipment. Regulatory bodies worldwide have adopted and are adopting or revising standards for wireless communications products, which standards may change from time to time. The emergence or evolution of regulations and industry standards for wireless products, through official standards committees or widespread use by service providers, could require us to modify our products.

 

Our business depends on the availability of radio frequencies to service providers for use in the operation of two-way wireless communications systems. Radio frequencies are subject to extensive regulation under the laws of the United States, foreign laws and international treaties. Each country has different regulations and regulatory processes for wireless communications equipment and uses of radio frequencies. The regulatory environment in which our customers operate is subject to significant change, the results and timing of which are uncertain. The process of establishing new regulations for wireless frequencies and allocating such frequencies to service providers is complex and lengthy. For example, in many countries, it took several years before 3G wireless communications were available to the public because of the need to: (i) determine what frequencies to use for the service; (ii) clear the necessary spectrum of its current users, if necessary; (iii) establish regulations for this new wireless service; (iv) auction the spectrum or otherwise determine the frequency licensees; and (v) build out the necessary infrastructure. Our customers and potential customers may not be able to obtain spectrum licenses for their planned uses of our equipment. Failure by the regulatory authorities to allocate suitable, sufficient radio frequencies for such uses in a timely manner could deter potential customers from ordering our products and seriously harm our business.

 

Unlike calls placed from landline telephones in the U.S., calls for emergency (E-911) assistance from wireless phones historically were not traceable to specific locations in many cases. In response to this public safety issue, the FCC issued a series of orders requiring that service providers implement a system to locate E-911 callers. We offer a network-based system for locating wireless phone users making E-911 calls.

 

Government Contracts

 

We do not have material contracts that are subject to renegotiation of profits or termination at the election of any governmental agency.

 

Available Information

 

The SEC maintains an internet site, www.sec.gov, through which you may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and other information statements, as well as amendments to these reports. In addition, we make these reports available free of charge on our internet website, www.andrew.com. We are not including the information on our website as a part of, or incorporating it by reference into, this annual report on Form 10-K.

 

We maintain a corporate governance page on our website. This website includes, among other items, the Andrew Corporation Governance Principles for the Board of Directors, charters of each committee of the Board, the Andrew Code of Conduct and information regarding our Whistleblower Policy. The corporate governance information can be found at www.andrew.com.

 

11


Table of Contents

Item 1A.  Risk Factors

 

Cautionary Statement regarding 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”, that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs, and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or other written statements or in oral communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, and conference calls. Words such as “expect,” “anticipate,” “outlook,” “forecast,” “potential,” “could,” “project,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate,” “should,” “would”, “may,” “will,” “assume,” variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated, intended, expected, believed, estimated, projected or planned including, but not limited to, those described below and in other reports we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our business, financial condition and results of operations could be materially and adversely affected.

 

We wish to ensure that such forward-looking 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, you are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date they are made and, except to the extent required by law, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

Risks Related To Our Business

 

Deterioration of the wireless infrastructure industry could lead to reductions in capital spending budgets by wireless operators and original equipment manufacturers, which could adversely affect our revenues, gross margins and income.    Our revenues and gross margins depend significantly on the overall demand for wireless infrastructure subsystems products. A reduction in capital spending budgets by wireless operators and OEMs caused by an economic downturn or by other factors could lead to a softening in demand for our products and services, which could result in a decrease in revenues and earnings.

 

The telecommunications industry has experienced significant consolidation and this trend is expected to continue. Recent examples of this consolidation are Lucent’s merger with Alcatel and AT&T Wireless’ merger with Cingular. 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 has and could continue to result in delays in purchasing decisions by merged companies or in us playing a decreased role in the supply of products to the merged companies. Delays or reductions in wireless infrastructure spending could have a material adverse effect on demand for our products. We depend on several large OEMs and wireless service providers for a significant portion of our business. In fiscal 2007, the top 25 customers accounted for 71% of sales. Any disruption in our relationships with our major customers could adversely affect our sales, operating margins, net income and stock price.

 

12


Table of Contents

A substantial portion of our manufacturing capacity and business activity is 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.    Approximately 67% of our sales are outside the United States. 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 inter-company 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, difficulties managing and staffing operations and difficulties maintaining good employee relations. 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.

 

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 face intense competition from a variety of 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.

 

Our failure to meet the challenges involved in successfully integrating acquisitions or to otherwise realize the anticipated benefits of acquisitions could adversely affect our results of operations.    Over the last several years we have completed numerous acquisitions. While we believe that these acquisitions provide strategic growth opportunities for us, our inability to successfully integrate operations in a timely manner may result in us not realizing the anticipated benefits or synergies of these acquisitions. The integration of companies is a complex, time-consuming and expensive process that could significantly disrupt our business. The anticipated benefits and synergies of acquisitions 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. The challenges involved in successfully integrating acquisitions include: consolidating and rationalizing information systems and manufacturing operations, combining product offerings, coordinating and rationalizing research and development activities, preserving distribution, marketing and other important relationships, 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.

 

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, product mix 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. 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 our industry, future demand for our products and our revenues may be seriously harmed.

 

13


Table of Contents

We cannot assure you that the sale of our Satellite Communications business will be completed on terms acceptable to us, or at all.    On May 3, 2007, we announced our intention to sell our Satellite Communications business. On November 6, 2007, we announced that we had entered into a definitive agreement for the sale of our Satellite Communications business to Resilience. We expect the transaction to close by the end of calendar year 2007. Although we have signed a definitive sale agreement, there can be no assurance that all of the conditions to the closing of the sale will be satisfied and, therefore, there can be no assurance that we will complete this divestiture. If we do not complete the intended divestiture, we will have incurred significant transaction expenses and may continue to realize ongoing operating losses in connection with the Satellite Communications business.

 

As of September 30, 2007, we determined that, as a result of continuing operating losses, lower short-term business prospects as compared to previous forecasts, and, despite significant numbers of initial indications of interest, the low number of remaining substantive bids resulting from our efforts to sell the Satellite Communications business, an indicator of impairment existed in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As such, we performed a test of the recoverability of the carrying value of the long-lived assets and incurred a non-cash impairment charge in the year ended September 30, 2007 of approximately $32 million to reduce the carrying value of long-lived assets to their estimated fair value. As a result of our agreement to sell our Satellite Communications business to Resilience, we expect to record a non-cash charge to earnings of between $15 million and $20 million in the first quarter of fiscal 2008.

 

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 may 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.

 

We may be liable for enhancement of the damages awarded at trial (up to trebling) plus other costs and lost opportunities in connection with our intellectual property litigation with TruePosition.    On September 14, 2007, a jury ruled in favor of TruePosition, finding that Andrew had willfully infringed a single TruePosition patent in providing a mobile location system to the customer, and the jury awarded $45 million in damages to TruePosition. As a result of the jury verdict in the case, we have recorded a $45 million pre-tax charge to our earnings in the fourth quarter of fiscal 2007, which is our reasonable estimate of the probable loss if we are not successful with our post-verdict motions and, if necessary, appeal and the jury verdict is not reduced, set aside or overturned. On October 1, 2007, TruePosition filed a motion seeking a permanent injunction and a motion seeking to increase the damages awarded up to trebling the amount as well as the fees and expenses of its counsel. TruePosition may also seek to recover interest on the judgment. The litigation with TruePosition may result in the loss of future revenue opportunities, including opportunities to manufacture and sell products using uplink time difference of arrival (U-TDOA) technology; however, we are not currently able to assess the likelihood or magnitude of such potential losses.

 

We are subject to risks related to product defects which could result in product recalls and could subject us to warranty claims which are greater than anticipated. If we were to experience a product recall or an increase in warranty claims compared with our historical experience, our sales and operating results could be adversely affected.    We test our products through a variety of means. However, there can be no assurance that our testing will reveal latent defects in our products, which may not become apparent until after the products have been sold into the market. Accordingly, there is a risk that product defects will occur, which could require a product recall. Product recalls can be expensive to implement and, if a product recall occurs during the product’s warranty period, we may be required to replace the defective product. In addition, a product recall may damage our relationship with our customers, and we may lose market share with our customers. We offer warranties on most products. The specific terms and conditions of the warranties offered vary depending upon the products sold. We accrue for warranty costs based on the number of units sold, the type of products sold, historical and anticipated rates of warranty claims and cost per claim. We regularly review these forecasts and make adjustments as needed. If we were to experience a product recall or an increase in warranty claims compared with our historical experience, our sales and operating results could be adversely affected.

 

14


Table of Contents

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.    We are not directly regulated in the United States, but many of our U.S. customers and the telecommunications industry generally are subject to Federal Communications Commission regulations. 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 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.

 

The Chinese government could delay issuance of anticipated new wireless network licenses.    The Chinese government is planning to issue licenses for its next generation wireless network. The new Chinese network will become the technical standard with which wireless infrastructure will be designed, manufactured and deployed in China. It is anticipated that these licenses will be issued in the next twelve to eighteen months. Additionally, we anticipate an increase in wireless infrastructure spending associated with the build-out of the anticipated new network. Significant delays of license issuance could adversely affect our financial results.

 

Compliance with European Union environmental directives could be difficult and costly for us.    The European Union has issued directives governing the design of energy-using products, the restriction of the use of certain hazardous substances and the waste (disposal) of electrical and electronic equipment. These directives require companies to change the way they design, manufacture, track and bring new products into the market. Certain products we manufacture and distribute throughout the European Union will need to comply with these directives. If we are not able to comply with these directives, customer shipments and financial results may be adversely affected.

 

The goodwill balance on our balance sheet is tested annually for possible valuation impairment and any non-cash impairment charges could adversely affect our financial results.    We test our goodwill balance for possible impairment as of July 1 each year, or on an interim basis if circumstances dictate, based on the five reporting units of our business. As a result of the losses generated by Base Station Subsystems in the first six months of fiscal 2007, we determined that an interim test of the goodwill for Base Station Subsystems was required. We completed our assessment of Base Station Subsystems in the third quarter of fiscal 2007 and, as a result, recorded a non-cash impairment loss of $108 million. We completed our annual assessment of Satellite Communications in the fourth quarter of fiscal 2007 and, as a result, recorded a non-cash impairment loss of $13 million related to goodwill. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment. In estimating the fair value of the business for the purpose of our annual or periodic analyses, we make estimates and judgments about the future cash flows of these businesses. Although our cash flow forecasts are based on assumptions that are consistent with plans and estimates we are using to manage the underlying business, there is significant judgment in determining the cash flows attributable to these businesses. If actual results are different from our forecasts, future tests may indicate additional impairments of goodwill, and additional non-cash charges, that may adversely affect our results of operations. If, in the course of our annual or interim valuation testing procedures we determine that a portion of the consolidated goodwill balance is impaired, any non-cash charge would adversely affect our financial results.

 

The manufacture of our power amplifiers and certain of our filter products have been outsourced to companies that specialize in electronics contract manufacturing.    The manufacturing of our power amplifier products has been performed by a leading electronics contract manufacturer for the past several years. Additionally, in September 2006, we announced that we are outsourcing the manufacture of our European and North American-made filters to another leading electronics contract manufacturer. We will continue to manufacture certain filter products at our Shenzhen, China facility. Our use of contract electronics manufacturers increases the risk of product supply disruption and intellectual property misappropriation. Disruption of product supplies could affect customer relationships, sales and profits. Intellectual property misappropriation could affect our competitiveness in power amplifier and certain filter product lines which would depress long-term sales and profits.

 

15


Table of Contents

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.

 

We may need to renegotiate our credit facility.    As of September 30, 2007, we were in violation of one of our debt covenants, principally due to the $45 million liability recorded in connection with the TruePosition intellectual property litigation and the classification of convertible notes as current liabilities, as the holders of the notes may require us to repurchase the notes in August 2008. We obtained a waiver from the lenders that allows us to utilize the entire $250 million until the earlier of December 31, 2007 or the closing of the proposed CommScope transaction. If the transaction does not close by December 31, 2007, we may need to renegotiate our credit facility with our lenders. We may not be able to obtain additional waivers, if required, or renegotiate our credit facility under terms that are favorable to the company.

 

Beginning in fiscal 2003, the Sarbanes-Oxley Act of 2002 (the “Act”) has required us to comply with numerous provisions focused on upgraded disclosures and corporate governance, increasing our cost and complexity of being a public company.    Beginning in fiscal 2005, we have been required, pursuant to Section 404 of the Act, to include an internal control report of management in our annual report on Form 10-K. As revised in 2007 by the SEC’s “Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports,” the internal control report must contain (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, and (3) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective.

 

We acknowledge our responsibility for internal controls over financial reporting and seek to continually improve those controls. We believe our process for documenting, evaluating and monitoring our internal control over financial reporting is consistent with the objectives of Section 404 of the Act. We devote significant resources to maintaining our system of internal controls. We believe the inability to implement and maintain adequate internal controls and to comply with Section 404 of the Sarbanes-Oxley Act in future periods could negatively impact investor confidence in the accuracy and integrity of our financial statements.

 

Risks Related to Our Common Stock

 

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 are: 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 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.

 

16


Table of Contents

Risks Related to the Pending CommScope Merger

 

CommScope and we may be required to comply with material restrictions or conditions in order to obtain the regulatory approvals to complete the merger and any delays in obtaining regulatory approvals may delay and possibly prevent the merger.    The merger is subject to review by the U.S. Department of Justice and the U.S. Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), and by certain antitrust authorities outside of the United States. Under the HSR Act, CommScope and we are required to make pre-merger notification filings and await the expiration or early termination of the applicable statutory waiting period prior to completing the merger. CommScope and we each filed a Notification and Report Form pursuant to the HSR Act with the U.S. Department of Justice and U.S. Federal Trade Commission on July 16, 2007. On August 15, 2007, CommScope and we each received requests for additional information (commonly referred to as a “second request”) from the Antitrust Division of the U.S. Department of Justice. The second requests were issued under the notification requirements of the HSR Act. The second requests extend the waiting period imposed by the HSR Act until 30 days after CommScope and we have substantially complied with the second requests, unless that period is extended voluntarily by the parties or terminated sooner by the U.S. Department of Justice. CommScope and we have been cooperating fully with the U.S. Department of Justice.

 

The governmental entities from which approvals are required may request additional information from the parties in order to complete their review of the transaction and may condition their approval of the merger on the satisfaction of certain regulatory conditions that may have the effect of imposing restrictions or additional costs on CommScope or us. These conditions could include a complete or partial license, divestiture, spin-off or the sale of certain assets or businesses of either CommScope or us, which may be on terms that are not as favorable to CommScope or us as may have been attainable absent the merger, or other restrictions on the operation of the combined business. While CommScope and we expect to obtain the required regulatory approvals, neither can be certain that all of the required antitrust approvals will be obtained, nor can the parties be certain that the approvals will be obtained within the time limits contemplated by the merger agreement. A delay in obtaining the required approvals may delay and possibly prevent the completion of the merger.

 

CommScope and we are each subject to certain restrictions on the conduct of our business under the terms of the merger agreement.    Under the terms of the merger agreement, CommScope and we have agreed to certain restrictions on the operations of their respective businesses that are customary for transactions similar to the merger. Each has agreed that it will limit the conduct of its business to those actions undertaken in the ordinary course of business. In addition, we have agreed not to undertake, or have agreed to limit, certain corporate actions without the consent of CommScope. Among others, these actions include mergers and acquisitions or dispositions of assets, making loans to third parties, settling litigation matters of a certain size and undertaking capital expenditures in excess of prescribed limits. CommScope has agreed that without our consent it will not take certain actions that include amending its organization documents in a manner materially adverse to its stockholders and acquiring interests in an entity, which acquisition would be expected to impede or delay the governmental approvals required for the merger. Because of these restrictions, CommScope and we may be prevented from undertaking certain actions with respect to the conduct of our respective businesses that we might otherwise have taken if not for the merger agreement.

 

The anticipated benefits of the acquisition may not be realized.    We and CommScope entered into the merger agreement with the expectation that the merger will result in various benefits including, among other things, benefits relating to enhanced revenues, a broader array of infrastructure solutions, the expansion of CommScope’s global distribution and manufacturing capabilities, operational improvements and a diversification of CommScope’s customer base. The merger will present challenges to management, including the integration of the operations, properties and personnel of both companies. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including, but not limited to, whether CommScope can integrate our businesses in an efficient and effective manner, whether there will be increased spending by wireless carriers, the ability of CommScope to manage potential volatility in commodities prices, the reaction of existing or potential competitors to the transaction, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially impact CommScope’s business, financial condition and operating results.

 

CommScope and we both depend on key personnel, and the loss of any of these key personnel because of uncertainty regarding the merger, either before or after the merger, could hurt the businesses of the combined company after the merger.    CommScope and we both depend on the services of our key personnel. Current and prospective employees of CommScope and ours may, either before or after the merger, experience uncertainty about their future roles with CommScope after the merger, which may affect the performance of such personnel adversely and the ability of each company to retain and attract key personnel. The loss of the services of one or more of these key employees or CommScope’s or our inability to attract, train, and retain qualified employees could result in the loss of customers or otherwise inhibit the ability of CommScope to integrate and grow the combined businesses effectively after the merger.

 

17


Table of Contents

The merger may result in a loss of customers.    Some customers may seek alternative sources of product and/or service after the announcement of the merger due to, among other reasons, a desire not to do business with CommScope after the merger or perceived concerns that CommScope may not continue to support and develop certain product lines. Difficulties in combining operations could also result in the loss of, or potential disputes or litigation with, customers. Any steps by management to counter such potential increased customer attrition may not be effective. Failure by management to retain customers could result in worse than anticipated financial performance.

 

If the conditions to the merger are not satisfied or waived, the merger may not occur.    Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger. If the conditions are not satisfied or waived, to the extent permitted by law or the rules or regulations of NASDAQ, the merger will not occur or will be delayed, and each of CommScope and us may lose some or all of the intended benefits of the merger. To the extent that our common stock currently trades based on the merger consideration, if the merger is not consummated, the price of our common stock may decline.

 

The following conditions, in addition to other customary closing conditions, must be satisfied or waived, if permissible, before CommScope and we are obligated to complete the merger:

 

   

The merger agreement must be adopted by the holders of at least a majority of the issued and outstanding shares of our common stock as of the applicable record date;

 

   

The waiting period (and any extension thereof) applicable to the merger pursuant to the HSR Act, or any other applicable competition, merger, antitrust or similar law shall have expired or been terminated;

 

   

Specified governmental consents or certain other approvals shall have been obtained and be in full force and effect;

 

   

There must not be any judgment, injunction, decree or order issued by any court or other governmental entity or any other statute, law, rule, legal restraint or prohibition which prohibits, materially restricts, makes illegal or enjoins consummation of the merger; and

 

   

There must not be any action or proceeding pending by a governmental entity challenging or seeking to prevent the consummation of the merger.

 

The merger agreement limits our ability to pursue an alternative transaction proposal to the merger, and requires us to pay a termination fee if we do so under certain circumstances.    The merger agreement prohibits us from soliciting, initiating, encouraging or facilitating certain alternative transaction proposals with any third party, subject to exceptions set forth in the merger agreement. Further, the merger agreement provides that we may be required to pay a termination fee to CommScope equal to $75 million in certain circumstances. These provisions limit our ability to pursue offers from third parties that could result in greater value to our stockholders relative to the terms and conditions of the merger. Our obligation to pay the termination fee may discourage a third party from pursuing a competing acquisition proposal that could result in greater value to our stockholders. In addition, payment of the termination fee could adversely affect our financial condition.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

Our primary facilities are manufacturing and distribution centers of which there are over forty locations worldwide. Additionally, we maintain over sixty sales, engineering, and operating offices worldwide. Our corporate headquarters is located in Westchester, Illinois. Our properties are in good condition and are suitable for the purposes for which they are used. All facilities are in operation, with the exception of the following: our Addison, Illinois facility, which we are subleasing; our Amesbury, Massachusetts facility is available for lease; our Nogales, Mexico facility whose lease concludes in December, 2007 was closed as production was transferred to a contract manufacturer or other company facilities; and the Orland Park, Illinois facility which is available for sale.

 

On August 29, 2005 we entered into a contract to sell our Orland Park, Illinois manufacturing facility and corporate headquarters. We sold a portion of land in Orland Park, Illinois in fiscal 2006. The remaining portion of the contract did not close and we are actively pursuing the sale of the remaining portion of land and building.

 

18


Table of Contents

The following table lists our significant facilities:

 

Location   Owned/Leased   

Approximate

Floor Area in

Square Feet

   Principal Segment

Joliet, Illinois

  Leased        690,000    Antenna and Cable Products

Orland Park, Illinois 1

  Owned        591,000    Antenna and Cable Products

Smithfield, North Carolina

  Leased        235,000    Satellite Communications

Addison, Illinois 2

  Leased        201,000    Base Station Subsystems

McAllen, Texas

  Leased        112,000    Antenna and Cable Products

College Park, Georgia

  Leased        103,000    Antenna and Cable Products

Norcross, Georgia

  Leased        102,000    Antenna and Cable Products

Richardson, Texas

  Owned        100,000    Antenna and Cable Products

Chesire, Connecticut

  Leased        95,000    Antenna and Cable Products

Warren, New Jersey

  Leased        93,000    Base Station Subsystems

Euless, Texas

  Leased        84,000    Antenna and Cable Products

Amesbury, Massachusetts 3

  Leased        78,000    Base Station Subsystems

Forest, Virginia

  Owned        75,000    Network Solutions

Ashburn, Virginia

  Leased        67,000    Network Solutions

U.S. subtotal

       2,626,000     

Suzhou, China

  Owned        290,000    Antenna and Cable Products

Goa, India

  Owned        236,000    Antenna and Cable Products

Shenzhen, China

  Leased        191,000    Base Station Subsystems

Reynosa, Mexico

  Owned        166,000    Antenna and Cable Products

Sorocaba, Brazil

  Owned        152,000    Antenna and Cable Products

Brno, Czech Republic

  Leased        150,000    Antenna and Cable Products

Campbellfield, Australia

  Leased        133,000    Antenna and Cable Products

Lochgelly, United Kingdom

  Owned        132,000    Antenna and Cable Products

Reynosa, Mexico

  Owned        113,000    Antenna and Cable Products

Stratford, United Kingdom

  Leased        110,000    Antenna and Cable Products

Buchdorf, Germany

  Owned        109,000    Wireless Innovations

Whitby, Canada

  Owned        94,000    Satellite Communications

Capriate, Italy

  Leased        75,000    Base Station Subsystems

Nogales, Mexico 4

  Leased        66,000    Antenna and Cable Products

Agrate, Italy

  Owned        64,000    Base Station Subsystems

Non-U.S. subtotal

       2,081,000     
               

TOTAL

       4,707,000     

 

1. Orland Park, Illinois facility currently held for sale as of September 30, 2007.
2. Addison, Illinois facility lease expired in October 2007; the facility is subleased as of September 30, 2007.
3. Amesbury, Massachusetts facility is available for sublease as of September 30, 2007.
4. Nogales, Mexico lease expires in December 2007; production relocated in fiscal 2007 to other facilities.

 

We own approximately 396 acres of land. Our owned manufacturing, distribution and test range facilities are located on this land. Of this total, approximately 200 acres are unimproved, including 98 acres in Ashburn, Canada, used for operations of the Whitby, Canada facility and 48 acres in Caddo Mills, Texas, used as a test range.

 

Item 3.  Legal Proceedings

 

On October 25, 2005, TruePosition, Inc. filed a complaint in the U.S. District Court for the District of Delaware, alleging that Andrew’s sale of certain mobile location products to a customer located in the Middle East infringed a TruePosition patent. Mobile location systems installed in wireless networks are used to determine the position of mobile devices. The complaint sought, among other things, injunctive relief and unspecified monetary damages.

 

19


Table of Contents

On September 14, 2007, a jury ruled in favor of TruePosition, finding that Andrew had willfully infringed a single TruePosition patent in providing a mobile location system to the customer, and the jury awarded $45 million in damages to TruePosition. We believe the verdict is in error and we will seek to have it reversed. The jury’s verdict, including the damage award, is subject to the outcome of various post-verdict motions that we are currently pursuing. In addition, the judge presiding over the case has not ruled on our equitable claims of equitable estoppel, unclean hands and implied license. We have presented those claims to the judge as part of the post-trial submissions. In the event that we are unsuccessful in having the verdict set aside by the trial court, we intend to appeal.

 

On October 1, 2007, TruePosition filed a motion seeking a permanent injunction. On the same day, TruePosition also filed a motion seeking to increase the damages awarded, up to trebling the amount as well as the fees and expenses of its counsel. TruePosition may also seek to recover interest on the judgment. However, we believe the damages awarded are inappropriate, as would be any increase, any award of interest, fees or expenses or the issuance of an injunction.

 

As a result of the jury verdict in the case, we recorded a $45 million pre-tax charge to earnings in the fourth quarter of fiscal 2007, which is our reasonable estimate of the probable loss, if the jury verdict is not reduced, set aside or overturned. The litigation with TruePosition may result in the loss of future revenue opportunities, including opportunities to manufacture and sell products using uplink time difference of arrival (U-TDOA) technology; however, we are not currently able to assess the likelihood or magnitude of such potential losses.

 

At issue in the litigation with TruePosition is a patent that TruePosition argued was infringed by an Andrew U-TDOA mobile location system that is being deployed under multiple phases with the customer. We were awarded the initial two phases with this customer for an expanded deployment of this strategic project which, when completed, will cover approximately a thousand cell sites. There are additional phases, not all of which have been awarded by the customer, for approximately two thousand additional cell sites. The jury verdict includes claims related to all such cell sites, including those already installed and those to be installed. The patent at issue relates only to certain implementations using U-TDOA technology. As a result, other Andrew Geometrix® customer installations that use different mobile location technologies are not impacted.

 

We are also a party to various other legal proceedings, lawsuits and other claims arising in the ordinary course of our business. We do not believe that such other litigation, if adversely determined, would have a material effect on our business, financial position, results of operations or cash flows.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

There were no matters that required a vote of security holders during the three months ended September 30, 2007.

 

20


Table of Contents

PART II

 

Item 5.  Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is traded on the NASDAQ Global Select Market under the symbol ANDW. As of the close of business on November 15, 2007, we had 3,842 holders of common stock of record.

 

Information concerning our stock price during fiscal 2007 and 2006 is included in Note 14, Selected Quarterly Financial Information (Unaudited), of the Notes to Consolidated Financial Statements. All prices represent high and low daily closing prices as reported by NASDAQ.

 

We have never paid a dividend on our common stock. It is the present practice of our Board of Directors to retain earnings in the business to finance our operations and investments, and we do not anticipate payment of cash dividends on common stock in the foreseeable future.

 

Since fiscal 1997, our Board of Directors has authorized us to repurchase up to 30.0 million common shares. As of September 30, 2007 we had repurchased approximately 24.6 million shares. These repurchases may be made on the open market or in negotiated transactions and the timing and amount of shares repurchased will be determined by our management. Included in the 24.6 million shares repurchased are 2.0 million shares repurchased in the first and second quarters of fiscal 2007 for $20.4 million. No shares were repurchased during the third or fourth quarters of fiscal 2007.

 

The table below lists our repurchases of shares of common stock during fiscal 2007:

 

Fiscal 2007   

Total Number
of Shares

Repurchased

   Average Price
Paid per Share
  

Total Number of

Shares Repurchased

as Part of Publicly
Announced Plans

  

Shares

Available for
Repurchase

December 1 to December 31

   1,000,000    $ 10.09    1,000,000    6,389,568

March 1 to March 31

   1,000,000    $ 10.34    1,000,000    5,389,568

Total

   2,000,000           2,000,000     

 

21


Table of Contents

Company Performance

 

This graph shows a five-year comparison of cumulative total returns for Andrew, the Standard & Poor’s (S&P) MidCap 400 Index, and the S&P Communications Equipment Index. The graph assumes an investment of $100 on September 30, 2002 and the reinvestment of dividends.

 

LOGO

 

     Cumulative Total Return
     9/02    9/03    9/04    9/05    9/06    9/07

Andrew Corporation

   $100    $184    $187    $170    $141    $211

S&P MidCap 400

   100    127    149    182    194    230

S&P Communications Equipment

   100    162    187    213    232    283

 

22


Table of Contents

Item 6.  Selected Financial Data

 

Andrew Corporation

Five-Year Financial Highlights Summary

(In thousands, except per share data)

 

     2007     2006     2005    20041    20031  

Sales

   $ 2,195,113     $ 2,146,093     $ 1,961,234    $ 1,828,362    $ 1,011,741  

Gross profit

     470,543       473,379       436,788      443,275      272,262  

Income (loss) from continuing operations before income taxes2

     (129,122 ) 4     69,108       63,179      42,302      20,633  

Income (loss) from continuing operations

     (162,822 )     (34,290 )3     38,858      28,897      17,041  

Net income (loss)

     (162,822 )     (34,290 )     38,858      28,897      13,857  

Preferred stock dividends

                 232      707      6,459  

Net income (loss) available to common shareholders

     (162,822 )     (34,290 )     38,626      28,190      7,398  

Basic and diluted income (loss) from continuing operations per share

   $ (1.04 )   $ (0.22 )   $ 0.24    $ 0.18    $ 0.10  

Basic and diluted loss from discontinued operations per share

   $     $     $    $    $ (0.03 )

Basic and diluted net income (loss) per share

   $ (1.04 )   $ (0.22 )   $ 0.24    $ 0.18    $ 0.07  

Current assets

   $ 1,250,488     $ 1,153,021     $ 1,076,940    $ 992,888    $ 894,389  

Goodwill and intangible assets, less amortization

     836,904       929,871       918,836      928,871      910,529  

Total assets

     2,350,533       2,408,921       2,313,679      2,239,715      2,074,235  

Current liabilities

     898,954 5     567,886       438,268      383,360      276,623  

Long-term obligations

     69,041 5     333,760       324,859      339,232      375,305  

Total equity

   $ 1,382,538     $ 1,507,275     $ 1,550,552    $ 1,517,123    $ 1,422,307  

 

1. The results for fiscal 2003 and subsequent years include the July 2003 acquisition of Allen Telecom, which also resulted in the increase in sales in fiscal 2004.
2. Pre-tax amortization expense of intangible assets included in fiscal 2007, 2006, 2005, 2004, and 2003 was $17.2 million, $19.0 million, $22.1 million, $37.6 million, and $19.0 million respectively.
3. Includes a non-cash valuation allowance for deferred tax assets of $83.4 million, a gain on the sale of land for the Orland Park, Illinois facility of $9.0 million, merger costs of $13.5 million and a pension termination gain of $14.2 million.
4. Includes non-cash asset impairment charges of $150.7 million and litigation accrual of $45.3 million for the TruePosition intellectual property litigation.
5. Increase in current liabilities and decrease in long-term obligations is primarily due to classification of the $240 million convertible notes as current, due to an option by the holders to redeem the notes in August 2008.

 

23


Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and related notes included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under Item 1A. (Risk Factors) in this annual report on form 10-K.

 

Overview

 

We are engaged in the design, manufacture, and supply of communications equipment, services, and systems for global communications infrastructure markets. Our products are used in the infrastructure for traditional wireless networks, third generation (3G) technologies, voice, data, video and internet services, as well as applications for microwave and satellite communications, and other specialized applications. We operate in two groups comprised of five reportable segments: our Antenna and Cable and Satellite Communications segments comprise our Antenna and Cable Products Group and our Base Station Subsystems, Network Solutions, and Wireless Innovations segments comprise our Wireless Network Solutions Group. With the exception of Satellite Communications, all of our operating segments sell products and services to the wireless infrastructure market.

 

Our financial results are influenced by factors in the markets in which we operate and by our ability to successfully execute our business strategy. Marketplace factors include competition for customers, raw material prices, product and price competition, economic conditions in various geographic regions, foreign currency exchange rates, interest rates, changes in technology, fluctuations in customer demand, patent and intellectual property issues, litigation results and legal and regulatory developments. We expect that the marketplace environment will remain highly competitive. Our ability to execute our business strategy successfully will require that we meet a number of challenges, including our ability to accurately forecast sales demand and calibrate our manufacturing to such demand, develop, manufacture and successfully market new and enhanced products and product lines, control overhead spending, successfully integrate acquired businesses, and attract, motivate and retain key personnel to manage our operational, financial and management information systems.

 

On November 6, 2007, we announced that we had entered into a definitive agreement for the sale of our Satellite Communications business to Resilience Capital Partners (“Resilience”). We expect the transaction to close by the end of calendar year 2007.

 

In fiscal 2007, we acquired EMS Wireless (“EMS”), a division of EMS Technologies, Inc., a major designer and manufacturer of base station antennas based in Norcross, Georgia. In fiscal 2006, we completed a number of acquisitions. We acquired Skyware Radio Systems GmbH (“Skyware”), a German manufacturer of electronic products for broadband satellite communications networks and Precision Antennas Ltd. (“Precision”), a Stratford, England-based designer and manufacturer of microwave antennas for use in carrying point-to-point radio signals, primarily for cellular network backhaul. We also acquired CellSite Industries (“CSI”), a provider of wireless equipment repair services. We believe the acquisition of CSI provides us with a lower cost platform for warranty and repair services.

 

On June 26, 2007, we entered into a definitive merger agreement with CommScope, Inc. (“CommScope”). Under the terms of the agreement, each share of Andrew common stock will be converted into the right to receive $15.00, comprised of $13.50 per share in cash and an additional $1.50 per share in either cash, CommScope common stock, or a combination of cash and CommScope common stock totaling $1.50 per share, at CommScope’s election. The merger agreement contains termination rights for both CommScope and Andrew. Under certain circumstances, including if our board of directors recommends a superior proposal to our stockholders and the merger agreement is terminated as a result thereof, we would be required to pay CommScope a termination fee of $75 million. Following the close of the transaction, Andrew will become an indirect wholly-owned subsidiary of CommScope. The merger is subject to regulatory and governmental reviews in the United States and elsewhere, as well as approval by Andrew’s shareholders.

 

24


Table of Contents

Results of Operations

 

Our sales for fiscal 2007 were $2,195 million, an increase of 2% from fiscal 2006. The sales increase resulted from incremental year-over-year sales from recent acquisitions of approximately $49 million, a favorable foreign exchange impact of approximately $57 million, and increased organic sales growth of microwave and base station antennas. These sales increases were offset by sales declines in Base Station Subsystems and Satellite Communications products. Wireless infrastructure capital investment continued to grow in fiscal 2007 across all major geographic regions except for North America, which was impacted by a reduction in spending by two key customers of over $200 million compared to fiscal 2006. The fundamental sources of wireless infrastructure and network growth include increased minutes of usage, increased use of data applications, and the global growth of wireless subscribers. Sales for fiscal 2006 were $2,146 million, an increase of 9% from fiscal 2005. The sales increase resulted from higher sales in Antenna and Cable Products and Base Station Subsystems offset by an expected sales decline in Network Solutions.

 

Our top 25 customers accounted for 71% of our sales in fiscal 2007 compared to 69% of sales in both fiscal 2006 and 2005. Major OEMs accounted for 44% of our sales in fiscal 2007 compared to 39% in fiscal 2006 and 2005. Ericsson and Nokia Siemens Networks accounted for 12% and 11% of our sales, respectively, in fiscal 2007. No single customer accounted for more than 10% of sales in fiscal 2006. In fiscal 2005, Cingular Wireless accounted for 11% of total sales.

 

Gross profit margin was 21.4% in fiscal 2007, a decrease of 70 basis points from our fiscal 2006 gross profit margin of 22.1%, due mainly to a geographic mix shift in sales and approximately $16 million of costs associated with our transition to new cable and antenna manufacturing facilities in Joliet, Illinois and Goa, India. Gross profit margins decreased slightly from 22.3% in fiscal 2005 to 22.1% in fiscal 2006 due primarily to higher commodity costs, especially copper, and a decrease in Network Solutions margin contribution resulting from the completion of United States (“U.S.”) E-911 upgrade installations.

 

Operating expenses were $586 million in fiscal 2007. Included in operating expenses were $151 million of non-cash asset impairments to reduce goodwill and other long-lived assets to their fair value, including $108 million of goodwill and $7 million of capitalized software for Base Station Subsystems, $32 million for Satellite Communications goodwill, intangibles and long-lived assets, and $4 million of intangible assets and a product license for Network Solutions. Also included in fiscal 2007 operating expenses were $51 million of litigation expenses related to our intellectual property litigation with TruePosition, including a $45 million jury award and $6 million of external legal costs, and $2 million of expenses related to the merger agreement with CommScope. Sales and administrative expenses were $250 million or 11.4% of sales in fiscal 2007 compared to $255 million or 11.9% of sales in fiscal 2006 primarily due to decreased incentive compensation accruals. Research and development expense was $111 million compared to $113 million in fiscal 2006. Operating expenses were $390 million in fiscal 2006, or 18.2% of sales, compared with $359 million in fiscal 2005, or 18.3% of sales. Operating expenses increased $31 million compared to fiscal 2005 due primarily to higher sales and administrative costs, which increased from 11.4% of sales in fiscal 2005 to 11.9% of sales in fiscal 2006. Research and development expenses increased $5 million in fiscal 2006 versus fiscal 2005, but decreased as a percentage of sales from 5.5% in fiscal 2005 to 5.3% in fiscal 2006. We recorded a gain on the sale of assets of $6 million and $8 million in fiscal 2007 and 2006, respectively. We recorded a loss on the sale of assets of $1 million in 2005.

 

Income tax expense was $34 million in fiscal 2007, $103 million in fiscal 2006 and $24 million in fiscal 2005. The increase in income tax expense in fiscal 2006 was primarily due to the establishment of a valuation allowance against U.S. deferred tax assets. In fiscal 2007, we recorded tax expense in international jurisdictions where we are profitable, while we did not record a tax benefit for losses incurred in the U.S. and other jurisdictions where cumulative losses in recent years have resulted in a determination that it is more likely than not that we will not realize those benefits in future periods.

 

Diluted loss per share was $1.04 in fiscal 2007 and $0.22 in fiscal 2006, compared to earnings per share of $0.24 in fiscal 2005.

 

25


Table of Contents

Sales for our five operating segments for the last three fiscal years were as follows:

 

Dollars in millions    2007    % change     2006    % change     2005

Antenna and Cable Products

                          

Antenna and Cable

   $1,412    13 %   $1,248    19 %   $1,050

Satellite Communications

   104    (15 )%   122    (13 )%   140

Total Antenna and Cable Products

   1,516    11 %   1,370    15 %   1,190

Wireless Network Solutions

                          

Base Station Subsystems

   404    (20 )%   505    13 %   446

Network Solutions

   87    (4 )%   91    (42 )%   157

Wireless Innovations

   188    4 %   180    7 %   168

Total Wireless Network Solutions

   679    (13 )%   776    1 %   771

Total Sales

   $2,195    2 %   $2,146    9 %   $1,961

 

Sales by Segment

 

Antenna and Cable sales were $1,412 million in fiscal 2007, a 13% increase from fiscal 2006. Strong microwave antenna, base station antenna and coaxial cable sales, including incremental year-over-year sales increases of $15 million from the April 2006 acquisition of Precision and $25 million from the December 2007 EMS acquisition, were partially offset by lower sales of cable assemblies and accessories and a decrease in field services. In fiscal 2007, the Europe, Middle East and Africa (“EMEA”), Asia Pacific, and Latin America regions had strong sales growth, compared to fiscal 2006, partially offset by lower sales in North America. Sales were $1,248 million in fiscal 2006, an increase of 19% from fiscal 2005, due to growth in all geographic markets. The largest growth areas, in terms of sales dollars contributed, were the EMEA region followed by Asia-Pacific and North American regions. The largest product line sales increases were in the coaxial cable and microwave antenna product lines. The increase in EMEA sales was also the result of our acquisition of Precision Antenna, Ltd. in April 2006, which contributed $39 million of revenues in fiscal 2006.

 

Satellite Communications’ sales were $104 million in fiscal 2007, a decrease of 15% from fiscal 2006. The primary decrease was in direct-to-home products in the North America region. Sales were $122 million in fiscal 2006, a decrease of 13% compared to fiscal 2005. Sales gains in earth station electronics and very small aperture antennas were offset by sales decreases in consumer broadband, earth station antenna and mobile antenna products. The earth station electronics increase in sales was the result of the February 2006 Skyware acquisition. The decrease in mobile antenna products was the result of Andrew exiting that business in fiscal 2005.

 

Base Station Subsystems’ sales were $404 million in fiscal 2007, a decrease of 20% from fiscal 2006. Decreased sales of filters and power amplifiers, primarily in the U.S. from two key customers, were partially offset by approximately $9 million of incremental year-over-year sales from the acquisition of CSI in May 2006. Base station sales decreases in the North America and EMEA regions were partially offset by increased sales in the Asia Pacific region. Sales were $505 million in fiscal 2006, an increase of 13% from fiscal 2005, primarily due to higher filter and power amplifier sales in North America, which was offset by decreased sales in EMEA.

 

Network Solutions’ sales were $87 million in fiscal 2007, a decrease of 4% from fiscal 2006. The decline in sales was due to lower geolocation product sales and maintenance contract renewals, primarily in the North America market, partially offset by increased sales of geolocation products in the Middle East and increased service revenue. Sales decreased $67 million in fiscal 2006, or 42%, versus fiscal 2005 due primarily to a decline in North American geolocation installations, as major U.S. service providers completed their E-911 equipment upgrades that were mandated by the U.S. government. Additionally, if we are unsuccessful in our appeal of the TruePosition litigation ruling, our sales of geolocation products may be adversely affected.

 

Wireless Innovations’ sales were $188 million in fiscal 2007, an increase of 4% from fiscal 2006. Increased repeater product sales were partially offset by decreased project revenue. In fiscal 2007, higher Asia Pacific and North America sales were partially offset by sales decreases in the EMEA region, as compared to fiscal 2006. Sales were $180 million in fiscal 2006, up 7% from fiscal 2005, due to increased RADIAX® sales and repeater product sales primarily in North America and EMEA, both of which have experienced increased demand for greater wireless communication coverage in densely populated urban areas.

 

26


Table of Contents

Sales by Major Geographic Region

 

Dollars in millions    2007    % change     2006    % change     2005

Americas

   $ 954    (16 )%   $ 1,140    6 %   $ 1,077

Europe, Middle East, Africa (EMEA)

     814    20 %     681    8 %     631

Asia Pacific

     427    31 %     325    28 %     253

Total sales

   $ 2,195    2 %   $ 2,146    9 %   $ 1,961

 

Sales in the Americas decreased 16% in fiscal 2007 compared to fiscal 2006 due to decreases across all segments except Wireless Innovations. Sales to two key customers in North America decreased over $200 million year-over-year; this was partially offset by increases in sales in Latin America, increased repeater sales, and sales from the acquisition of EMS in December 2006. Sales in the Americas increased 6% in fiscal 2006 compared to fiscal 2005 due to strong growth in antenna and cable products, power amplifiers and filter sales which were offset by sales decreases in geolocation equipment and satellite products.

 

EMEA sales were $814 million in fiscal 2007, an increase of 20% from fiscal 2006, due to increased Antenna and Cable sales as well as the completion of the initial phase of a significant Middle East geolocation project, partially offset by decreased Base Station Subsystems and Wireless Innovation sales. EMEA sales increased 8% in fiscal 2006 compared to fiscal 2005 due to strong Antenna and Cable sales, primarily resulting from the acquisition of Precision, offset by lower sales of Base Station Subsystems sales.

 

Asia Pacific sales increased 31% in fiscal 2007 compared to fiscal 2006, primarily due to increased sales of Antenna and Cable and Base Station Subsystems products. Sales increased 28% in fiscal 2006 compared to fiscal 2005 due to increased Antenna and Cable sales, primarily in India, Indonesia and China.

 

Gross Profit

 

Gross profit as a percentage of sales was 21.4% in fiscal 2007, 22.1% in fiscal 2006, and 22.3% in fiscal 2005. Over the past three years, rising commodity costs, specifically copper, changing product mix and geographic sales mix were significant factors that have adversely impacted our gross profit. The price of copper has increased over 100% over the past two years. We have seen a decrease in higher-margin geolocation sales as U.S. service providers have implemented and completed E-911 upgrade installations, partially offset by lower-margin international geolocation sales. In addition, gross profit margin decreased in fiscal 2007, due to approximately $16 million of costs incurred to relocate to two new facilities in Joliet, Illinois and Goa, India. Other major factors that have contributed to the decline in gross margin over the past three years are continued price pressure, and higher prices of aluminum, petro chemicals and other commodities. In the last three years, we have experienced significant variability in new lower-margin products and services which have put downward pressure on our gross profit margin percentages.

 

Gross Profit By Segment

 

Gross profit margins vary across our operating segments. Generally, Network Solutions’ and Wireless Innovations’ gross profit margin percentages are above the corporate average.

 

Network Solutions’ fiscal 2007 gross margin decreased 1080 basis points from fiscal 2006. The lower margin was due to decreased volume and a change in the geographic mix of sales, as higher-margin U.S. geolocation sales were partially replaced with less-profitable international geolocation sales in fiscal 2007. Gross margin decreased by 680 basis points in fiscal 2006 versus 2005. Combined with lower fiscal 2006 revenues, Network Solution’s fiscal 2006 gross profit dollar contribution decreased 51% or $45 million versus fiscal 2005.

 

Wireless Innovations’ gross margin increased 330 basis points in fiscal 2007 compared to fiscal 2006, due to strong repeater product sales. Gross margin increased in fiscal 2006 by 160 basis points versus fiscal 2005, primarily due to higher sales of higher-margin RADIAX® cable and repeater products.

 

27


Table of Contents

Antenna and Cable’s gross margin was slightly below the corporate average at 20.9% for fiscal 2007, primarily due to increased commodity costs and approximately $16 million of costs to relocate to new manufacturing facilities in Joliet, Illinois and Goa, India. These increased costs were partially offset by increased production efficiencies in the new facilities. In fiscal 2006, gross margin was consistent with the corporate average rate of 22.0%, but declined slightly by 10 basis points versus fiscal 2005, due to higher raw material costs. We use commodities such as copper and petrochemicals in the manufacture of our cable products. The most significant of these commodities is copper. The market price of copper has increased from $1.79 per pound as of September 30, 2005 to $3.70 per pound as of September 30, 2007, an increase of 107% over the two year period. We took steps to mitigate the impact of rising copper prices by implementing a copper surcharge and price increase program in fiscal 2006 with all customers in all markets. Implementation of this copper surcharge and price increase program enabled us to partially offset the large increase in the cost of copper. To mitigate some of the fluctuation in copper prices, we buy copper on a forward purchase contract basis for a portion of our projected needs. Additionally, our cable sales in international markets, as a percentage of total sales, have increased in each of the last three years. This has negatively impacted our overall gross margins as certain international service providers generally use smaller-diameter, lower-margin cable in their networks.

 

Base Station Subsystems is comprised of active components such as filters and power amplifiers that carry a lower gross margin than the overall corporate average. Base Station Subsystems’ gross margins decreased 340 basis points in fiscal 2007 compared to fiscal 2006, due to decreased overall sales volumes, higher inventory reserves for slow moving products and a less favorable product mix. Margins increased in fiscal 2006 compared to fiscal 2005, primarily due to decreased warranty and product recall costs. Additionally, we transitioned considerable filter production to our China facility and, in fiscal 2006, we experienced positive results from this transition.

 

Satellite Communications is our lowest gross profit margin segment. In fiscal 2007, gross margin increased 260 basis points from fiscal 2006 due to a sales reduction in lower margin DTH products. In fiscal 2006, margins in this segment decreased 560 basis points versus fiscal 2005, primarily due to higher per-unit manufacturing costs of our DTH satellite products, additional costs related to a long-term customer contract and transition costs related to our acquisition of Skyware.

 

Research and development (“R&D”) expenses were $111 million in fiscal 2007, a decrease of approximately $2 million from fiscal 2006. Lower R&D spending for Base Station Subsystems and Network Solutions was partially offset by increased R&D costs in the other segments. R&D expenses were 5.1% of sales in fiscal 2007, 5.3% of sales in fiscal 2006, and 5.5% of sales in fiscal 2005. While research and development expenses decreased as a percentage of sales, they increased $5.1 million in fiscal 2006, or 4.8% from fiscal 2005. The majority of our research and development spending over the last three years has been focused on our active electronic components, especially amplifiers, filters and repeaters and related products. We have continued to invest heavily in the development of new products, specifically our base station antenna and repeater products.

 

Sales and administrative expenses as a percentage of sales were 11.4% in fiscal 2007, 11.9% in fiscal 2006, and 11.4% in fiscal 2005. Sales and administrative expense decreased $5 million in fiscal 2007 compared to fiscal 2006, primarily due to decreased incentive compensation expense. In fiscal 2006, sales and administrative costs increased $32 million, or 14.5%, from fiscal 2005. Factors causing this increase were higher sales expenses to support sales growth in emerging markets and the growing direct-to-carrier sales channels, higher administrative costs of recent acquisitions that had not been fully integrated, and $4 million of incremental stock option expense.

 

Intangible amortization was $17 million in fiscal 2007, $19 million in fiscal 2006 and $22 million in fiscal 2005. Intangible amortization is primarily related to identifiable intangible assets acquired in the Allen Telecom and Celiant acquisitions. The decrease in intangible amortization in fiscal 2007, 2006 and 2005 was due to the full amortization of certain intangible assets acquired in these acquisitions. Excluding any new acquisitions, we expect that intangible amortization will decrease to approximately $7 million in fiscal 2008 as more intangible assets become fully amortized.

 

Restructuring expenses were $10 million in fiscal 2007, $8 million in fiscal 2006, and $5 million in fiscal 2005. These costs are primarily severance and other costs associated with integrating our acquisitions, streamlining operations, and other cost-cutting initiatives. The expense during fiscal 2007 related to the following segments: Base Station Subsystems, $7 million; Antenna and Cable, $2 million; and unallocated sales and administrative and other segments, $1 million. The majority of the Base Station Subsystems expense resulted from the downsizing of our filter operations in Italy and Mexico. The other expenses were primarily due to cost cutting initiatives to reduce headcount in specific departments. We believe that the outsourcing of filter production and the shifting of production to our low-cost China facility, as well as reduced overhead costs associated with these headcount reductions, will increase the future profitability of Base Station Subsystems. We currently estimate the annual benefit from these cost savings to be approximately $2 million, which we began to realize in the third quarter of fiscal 2007. In fiscal 2006, we incurred $2 million of severance costs as part of a plan to reorganize our management and operating groups, in addition to other cost-cutting initiatives during the year.

 

28


Table of Contents

Merger costs were $2 million in fiscal 2007, consisting of legal and other external costs associated with our pending merger with CommScope. Merger costs were $13 million in fiscal 2006 due to a $10 million fee to terminate our proposed merger with ADC Telecommunications, Inc. and other legal and professional costs related to the merger agreement. .

 

Litigation expenses were $51 million in fiscal 2007. These costs relate to external legal expenses and a $45 million accrual of the unfavorable judgment in the intellectual property litigation with TruePosition.

 

Asset impairment charges were $151 million in fiscal 2007, consisting of non-cash asset impairments recorded to reduce goodwill and other long-lived assets to fair value, including $108 million of goodwill and $7 million of capitalized software costs for Base Station Subsystems, $32 million for Satellite Communications goodwill, intangible and long-lived assets, and $4 million of intangible assets and a product license for Network Solutions. In fiscal 2006, asset impairment charges were $4 million for impaired software costs that were capitalized in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. The capitalized software impairment charges are for products that we no longer emphasize and for which the future undiscounted cash flows no longer support the asset’s carrying value.

 

Pension termination gain was $14 million in fiscal 2006 as a result of eliminating pension obligations due to the termination of the frozen Allen Telecom defined benefit plan. In fiscal 2005, we initiated the process of terminating the frozen defined benefit plan assumed as part of the Allen Telecom acquisition. We fully funded and terminated the plan during fiscal 2006 when we purchased a non-participating group annuity contract from John Hancock Life Insurance Company for all participants of the Allen Telecom plan. In fiscal 2006, we made additional contributions of $9 million to fully fund the plan.

 

Gain (loss) on the sale of assets was a gain of $6 million in fiscal 2007, a gain of $8 million in fiscal 2006, and a loss of $1 million in fiscal 2005. The fiscal 2007 gain was primarily the result of the fee we received from the cancellation of the sale of land in Orland Park, Illinois, and the sale of our broadband cable product line. The gain in fiscal 2006 was primarily the result of the $9 million gain on the sale of a portion of land at our Orland Park, Illinois facility. In fiscal 2005, we recorded a loss of $1 million from the sale and disposition of certain manufacturing assets. See Note 4, Sale of Assets, in the Notes to Consolidated Financial Statements.

 

Operating income (loss) was a loss of $115 million in fiscal 2007, and income of $83 million and $78 million in fiscal 2006 and 2005, respectively. We use operating income as our internal measurement of segment profit and loss. Operating income (loss) by operating segment for the last three years is as follows:

 

Dollars in millions    2007     2006     2005  

Antenna and Cable Products

                        

Antenna and Cable

   $ 216     $ 194     $ 162  

Satellite Communications

     (50 )     (18 )     (6 )

Total Antenna and Cable Products

     166       176       156  

Wireless Network Solutions

                        

Base Station Subsystems

     (147 )     (7 )     (33 )

Network Solutions

     (46 )     10       61  

Wireless Innovations

     42       35       31  

Total Wireless Network Solutions

     (151 )     38       59  

Items not included in segments

                        

Unallocated sales and administrative costs

     (113 )     (121 )     (114 )

Intangible amortization

     (17 )     (19 )     (22 )

Merger costs

     (2 )     (13 )      

Pension termination

           14        

Gain (loss) on sale of assets

     2       8       (1 )

Total operating income (loss)

   $ (115 )   $ 83     $ 78  

 

For purposes of internal management reporting, we do not allocate costs that benefit more than one operating segment. Costs such as finance, accounting, human resources, information systems, legal and executive management are not allocated to operating segments. The only sales and administrative expense that is allocated to operating segments is the cost of our global sales force, which sells all of our products.

 

Antenna and Cable’s operating income has increased over the last three years due to sales growth partially offset by declining gross profit margins.

 

29


Table of Contents

Base Station Subsystems’ operating loss in fiscal 2007 was due to lower sales and gross profit margins, and the asset impairment charges of $108 million for goodwill and $7 million for capitalized software costs. Operating loss decreased in fiscal 2006 compared to fiscal 2005, primarily due to increased direct-to-carrier revenues, lower warranty costs and higher margins resulting from the transition of substantial filter manufacturing operations to China. In fiscal 2005, Base Station Subsystems’ operating loss was a result of higher warranty costs, a decrease in filter margins and costs associated with moving filter production to China.

 

Network Solutions’ operating loss in fiscal 2007 was primarily the result of a $45 million accrual for the TruePosition intellectual property litigation, $3 million of asset impairments and continued decreases in North American geolocation sales. Operating income decreased in fiscal 2006 compared to fiscal 2005, as geolocation sales decreased as a result of the anticipated decline in North American geolocation installations. Continuing a trend from fiscal 2005, most U.S. service providers have substantially completed their E-911 equipment upgrades in fiscal 2006 that were mandated by the U.S. government.

 

Wireless Innovations’ operating income has continued to grow as this segment’s sales have increased over the last three years. Profit resulting from higher sales volume was partially offset by increased R&D expenses.

 

Satellite Communications’ operating loss in fiscal 2007 included $32 million of asset impairment charges and an $18 million loss from operations. The fiscal 2007 $18 million loss from operations was consistent with fiscal 2006. Operating loss increased in fiscal 2006 compared to fiscal 2005, due to decreased sales and higher cost of sales due to higher per-unit manufacturing costs of DTH satellite products, additional costs related to a long-term customer contract and transition costs related to our acquisition of Skyware.

 

Unallocated sales and administrative costs were $113 million in fiscal 2007, a decrease of $8 million from fiscal 2006, primarily due to a decrease in incentive compensation expense. Unallocated sales and administrative costs increased in fiscal 2006 compared to fiscal 2005, due to higher administrative costs of recent acquisitions that had not been fully integrated and $4 million of incremental stock option expense. Unallocated sales and administrative costs have decreased as a percentage of sales from 5.7% in fiscal 2005 to 5.6% of sales in fiscal 2006, and 5.1% in fiscal 2007.

 

Other expenses primarily consist of interest expense, interest income and foreign exchange gains and losses. Other expenses were $14 million in fiscal 2007, 2006, and 2005. Interest expense was $18 million in fiscal 2007, $15 million in fiscal 2006 and $15 million in fiscal 2005. The largest portion of our interest expense was related to the $240 million of convertible notes issued in August 2003 and the long-term debt assumed from Allen Telecom. Interest income was $6 million in fiscal 2007, $6 million in fiscal 2006, and $5 million in fiscal 2005. Interest income in fiscal 2005 included $2 million of interest received from a favorable resolution of certain tax-related matters. Other expenses were $2 million in fiscal 2007, $5 million in fiscal 2006, and $4 million in fiscal 2005. The majority of other expenses were foreign exchange gains and losses. The foreign exchange losses in fiscal 2007, 2006, and 2005 were primarily due to movements in the British pound, Euro, and Indian rupee against the U.S. dollar.

 

Income tax expense was $34 million, $103 million and $24 million in fiscal 2007, 2006 and 2005, respectively, and as a percentage of pre-tax income (loss) from continuing operations was (26.1)% in fiscal 2007, 149.6% in fiscal 2006, and 38.5% in fiscal 2005. The negative income tax rate for fiscal 2007 results from the inability to book net tax benefits for losses in the U.S. and other jurisdictions to offset the tax expense recorded on income in jurisdictions where we have been historically profitable. Income tax expense for fiscal 2006 was higher than the statutory rate due to an $83.4 million charge to establish a full valuation allowance against our net U.S. deferred tax assets and the establishment of valuation allowances for the tax benefits associated with losses incurred in certain states and foreign jurisdictions which offset the favorable impact of foreign earnings taxed at lower statutory rates and a $5 million tax benefit from repatriation of foreign subsidiary earnings under the American Jobs Creation Act of 2004. The effective tax rate for fiscal 2005 was higher than the statutory rate due to an unfavorable geographic mix shift of earnings and the establishment of valuation allowances for tax benefits associated with state and foreign losses.

 

Our effective tax rate is materially affected by the level of pre-tax income or loss generated in the U.S., the earnings mix in foreign countries where the statutory rates are higher or lower than the federal statutory rate, and by changes in tax laws. To the extent we are able to generate taxable income in the U.S. or other jurisdictions in which we have recorded valuation allowances against our deferred taxes, our tax provision will be reduced due to reductions of the valuation allowance as our deferred tax assets are utilized. We are subject to examination of our tax filings by the Internal Revenue Service and other taxing authorities. We regularly review and assess the potential outcome of these examinations to determine the adequacy of our tax reserves.

 

30


Table of Contents

Net income (loss) available to common shareholders was a loss of $163 million and $34 million in fiscal 2007 and 2006, respectively. Net income available to common shareholders was $39 million in fiscal 2005 and includes preferred stock dividends of $0.2 million. As part of the Allen Telecom acquisition, we issued shares of convertible preferred stock, issuing one share for each share of Allen Telecom convertible preferred stock. In fiscal 2005, we converted all remaining convertible preferred shares into Andrew common shares.

 

Liquidity and Capital Resources

 

We generated $57 million of cash from operations in fiscal 2007, despite the significant loss from operations. Cash and cash equivalents were $155 million at September 30, 2007, a decrease of $15 million from September 30, 2006. Working capital was $351 million at September 30, 2007, compared to $585 million at September 30, 2006. The significant decrease in working capital is due to the classification of our $240 million convertible subordinated notes as current liabilities on the balance sheet as of September 30, 2007, as the holders of the notes may require us to repurchase the notes in August 2008. However, we anticipate that these notes will be converted to equity or repurchased in connection with the CommScope acquisition. We believe that our working capital position, ability to generate cash flow from operations, and ability to borrow under our revolving credit agreement will allow us to meet our normal operating cash flow needs for the foreseeable future.

 

In fiscal 2005, we entered into a new $250 million revolving credit agreement with a group of lenders that expires in September 2010 (discussed further in Note 7 of the Notes to Consolidated Financial Statements). Under the terms of this facility, we are subject to various quarterly covenant requirements, including maintaining a ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to total debt, including letters of credit, maintaining a ratio of EBITDA to senior debt, maintaining a fixed charge coverage ratio and limiting the amount of assets that we can dispose of in a fiscal year. These requirements may limit the amount of borrowing under this credit agreement. As of September 30, 2007, we were in violation of the fixed charge coverage ratio covenant, principally due to the $45 million liability recorded for the TruePosition intellectual property litigation, and the classification of convertible notes as current liabilities, as the holders of the notes may require us to repurchase the notes in August 2008. We obtained a waiver from the lenders that allows us to utilize the entire $250 million until the earlier of December 31, 2007 or the closing of the proposed CommScope transaction.

 

In fiscal 2004, we filed a universal shelf registration statement that allows us to publicly issue up to $750 million of debt or equity through December 2008. This shelf registration statement gives us the flexibility to take advantage of strategic initiatives and other favorable long-term opportunities to enhance liquidity.

 

Cash flows.    The following table sets forth certain information from our consolidated statements of cash flows:

 

Dollars in millions    2007     2006     2005  

Net income (loss)

   $ (163 )   $ (34 )   $ 39  

Non-cash charges for depreciation, amortization, asset sales (gains) losses, pension termination gain, stock-based compensation, asset impairments and deferred income taxes

     228       139       93  

Restructuring costs

     (3 )     (2 )     (7 )

Change in operating assets and liabilities

     (5 )     (11 )     (36 )

Net cash from operations

     57       92       89  

Net cash used for investing activities

     (88 )     (94 )     (76 )

Net cash from (used for) financing activities

     2       (19 )     (15 )

Effect of exchange rates on cash

     14       2       2  

Decrease in cash for the period

   $ (15 )   $ (19 )   $  

 

Net cash from operations was $57 million, $92 million, and $89 million in fiscal 2007, 2006, and 2005, respectively. In fiscal 2007, cash from operations decreased compared to the prior year due to a larger net loss for the year. In fiscal 2006, our net cash from operations was relatively flat compared to fiscal 2005 as increased sales and operating income was offset by higher inventory and accounts receivable amounts in EMEA and Asia Pacific to support our growing business in those geographic markets.

 

31


Table of Contents

In fiscal 2007, cash flow from operations was due to a net loss of $163 million, which included non-cash charges of $151 million for asset impairments and $79 million for depreciation and amortization and $11 million for stock-based compensation. Operating assets and liabilities decreased cash flow from operations by $5 million. During fiscal 2007, operating asset and liability cash inflows were $59 million due to a decrease in inventory caused by higher sales and $18 million due to higher accrued liabilities, which primarily resulted from the TruePosition litigation expense. These cash inflow amounts were offset by cash outflows of $47 million due to an increase in accounts receivable caused by higher sales and $35 million due to an increase in other assets caused by the timing of tax payments and receipts. Accounts receivable was $646 million as of September 30, 2007 compared to $558 million as of September 30, 2006. The fourth quarter of fiscal 2007 had record sales of $624 million. Days sales outstanding (“DSO”) was 91 days as of September 30, 2007 compared to 80 days and 76 days as of September 30, 2006 and 2005, respectively. The increase in DSO is primarily due to a higher percentage of fiscal 2007 sales from the Asia Pacific and EMEA regions where collection terms are longer than in the U.S. and consolidation of OEMs in the industry leading to longer payment cycles. Inventory decreased from $388 million as of September 30, 2006 to $364 million as of September 30, 2007. Inventory turns were 5.4x at September 30, 2007 compared to 4.6x and 4.8x at September 30, 2006 and 2005, respectively.

 

In fiscal 2006, cash flow from operations was the result of a net loss of $34 million, $79 million of non-cash charges for depreciation and amortization, a gain on the sale of assets of $9 million, a $14 million non-cash gain on the termination of the Allen Telecom pension plan, a net $74 million non-cash charge for deferred income taxes, $9 million stock-based compensation, cash restructuring costs of $2 million, and a net change in operating assets and liabilities that resulted in a $11 million decrease in cash flow.

 

In fiscal 2005, cash flow from operations was the result of net income of $39 million, $84 million of non-cash charges for depreciation and amortization, a $6 million non-cash charge for deferred income taxes, cash restructuring costs of $7 million, $2 million of stock-based compensation, a loss on the sale of assets of $1 million and a net change in operating assets and liabilities that resulted in a $36 million decrease in cash flow. To meet increased sales levels, we increased inventory resulting in a $6 million decrease in cash flow. Higher accounts payable and other liabilities increased cash flow by $46 million.

 

Recent legislation enacted in the United Kingdom (“U.K.”) has accelerated the rate of funding required for the U.K. Pension Plan. In March 2007, we proposed to the U.K. Pensions Regulator a plan to fund a pension deficit as of September 30, 2006, by March 31, 2010. In fiscal 2007, we made cash contributions of $9 million. The following schedule below shows the timing of the additional cash payments we currently intend to make. The schedule is subject to change based on future valuations of the pension plan.

 

Dollars in millions    March 2008    March 2009    March 2010

Contribution amount

   $ 10.1    $ 10.1    $ 2.1

 

Net cash used for investing activities was $88 million, $94 million and $76 million in fiscal 2007, 2006 and 2005, respectively. We spent $58 million on capital expenditures in fiscal 2007 compared to $71 million in fiscal 2006 and $66 million in fiscal 2005.

 

In fiscal 2007, we acquired EMS for $49 million and paid additional consideration of $5 million for CSI, which was originally acquired in fiscal 2006.

 

In fiscal 2006, we spent $45 million on the acquisition of businesses. In February 2006, we acquired Skyware for $10 million. In April 2006, Precision was acquired for $28 million and CSI for $6 million.

 

In fiscal 2005, we spent $23 million on acquisitions. In the first quarter of fiscal 2005, we acquired certain assets of ATC Tower Services, Inc., a provider of site installation services in North America, for $6 million in cash and the assumption of $2 million in capital leases. In the second quarter of fiscal 2005, we acquired Xenicom Ltd., a United Kingdom-based provider of software solutions that help wireless operators plan, launch and manage wireless networks for $11 million. In the fourth quarter of fiscal 2005, we expanded our market-leading Geometrix™ mobile location system product line with the acquisition of certain assets of Nortel’s mobile location business for $4 million. Also in fiscal 2005, we acquired the remaining 20% interest in a Czech Republic subsidiary that was acquired in the Allen Telecom acquisition for $1 million. Finally, we paid $1 million for a Yantai Fine Cable earn-out payment.

 

In fiscal 2007, we received $5 million from the maturity of our note receivable with Cambridge Positioning Systems Ltd.

 

32


Table of Contents

Proceeds from the sale of product lines were $2 million in fiscal 2007 and $9 million in fiscal 2005. In fiscal 2007, we sold our Yantai, China facility and inventory and equipment related to our broadband cable product line (the “Yantai sale”) to Andes Industries, Inc. (“Andes”) for $2 million in cash and $14 million of notes receivable, payable over a two year period. Concurrent with the sale, we exercised the conversion feature of a note receivable from Andes, obtained in a previous transaction, for a 30% equity ownership interest in Andes. The Yantai sale resulted in a gain of $3 million, of which $2 million was recorded in the statement of operations and the remaining $1 million (30% of the gain) was recorded as a reduction of our investment in Andes. In fiscal 2005, we received net cash proceeds of $9 million from the sale of selected assets of our mobile antenna product line to PCTEL Inc.

 

Proceeds from the sale of property, plant, and equipment were $16 million in fiscal 2007, $25 million in fiscal 2006, and $6 million in fiscal 2005. In fiscal 2007 we received $9 million in a sale lease-back transaction of our Joliet, Illinois facility and $3 million for the sale cancellation and return of escrow funds for the second parcel of land in Orland Park, Illinois, and $4 million from the sale of other fixed assets. In fiscal 2006, we sold a portion of land at our Orland Park, Illinois facility for $9 million, net of transaction costs, and sold certain filter manufacturing assets and inventory to a contract manufacturer for $11 million. The most significant transactions in fiscal 2005 were the sale of a facility in Reynosa, Mexico acquired from Allen Telecom, the sale of unimproved land in Suzhou, China and the sale of a facility in Livonia, Michigan that was acquired from Allen Telecom.

 

We paid $1 million in fiscal 2006 and $2 million in fiscal 2005 to settle patent infringement litigation with TruePosition Inc. as part of litigation brought against Allen Telecom prior to the acquisition by us. This settlement was accounted for as an increase in liabilities assumed from Allen Telecom.

 

Net cash from financing activities was $2 million in fiscal 2007 compared to a use of cash of $19 million and $15 million in fiscal 2006 and 2005 respectively. We made payments on our long-term debt of $27 million, $9 million, and $15 million in fiscal 2007, 2006, and 2005, respectively. We periodically borrow under our various credit agreements to meet our short-term cash needs. Net borrowings under these credit agreements were $47 million, $26 million and $16 million in fiscal 2007, 2006 and 2005, respectively.

 

Payments to acquire treasury shares were $20 million for 2 million shares in fiscal 2007, $39 million for 4 million shares in fiscal 2006, and $18 million for 1.6 million shares in fiscal 2005. We received cash from the sale of stock under employee and director option plans. Under these plans, we received $4 million, $3 million, and $2 million in fiscal 2007, 2006, and 2005, respectively. Payments for preferred stock dividends and conversion premium payments were $0.2 million in fiscal 2005.

 

Dividend policy.    Although we have 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 our 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, revenue recognition, 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:

 

Revenue recognition

During fiscal 2007, approximately 91% of our total revenue was recognized when products were shipped and title passed, 3% based on Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, 2% based on EITF No. 00-21, Revenue Arrangements with Multiple Deliverables, 2% based on SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and 2% based on when services were performed.

 

33


Table of Contents

Revenue for software products is recognized pursuant to the provisions of SOP No. 97-2, Software Revenue Recognition, and related interpretations. The fair value of each revenue element is determined based on vendor-specific objective evidence of fair value determined by stand-alone pricing of each element. These contracts typically contain post-contract support (“PCS”) services which are sold both as part of a bundled product offering and as a separate contract. Revenue for PCS services is recognized ratably over the term of the PCS contract. Revenue for certain of our products relates to multiple-element contracts. The fair value of these revenue elements is based on negotiated contracts and stand-alone pricing for each element.

 

Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on our assessment of the collectibility of accounts receivable. Although we believe 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 results of operations.

 

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out method. Inventory obsolescence reserves are maintained based on management’s estimates, historical experience and forecasted demand for our products. A material change in these estimates could adversely impact gross profit.

 

Warranty Costs

We offer warranties on most of our products. The specific terms and conditions of these warranties vary depending upon the products sold. We accrue for warranty costs based on the number of units sold, the type of products sold, historical and anticipated rates of warranty claims and cost per claim. We regularly review these forecasts and makes adjustments as needed. If we were to experience an increase in warranty claims compared with our historical experience, gross profit could be adversely affected.

 

Goodwill

We perform an annual impairment test of goodwill on the first day of our fiscal fourth quarter, July 1, or at an interim date if circumstances dictate. We manage our business as five operating segments. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we determined these operating segments were our reporting units. We test each reporting unit for possible goodwill impairment by comparing each reporting unit’s net book value to fair value. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment. In estimating the fair value of the reporting units for the purpose of our annual or periodic analyses, we make estimates and judgments about the future cash flows of these businesses as well as fair value on a comparable business basis.

 

We use both the Discounted Cash Flow (“DCF”) method and the Comparable Business (“CB”) method for determining fair value of our reporting units. The CB method is a valuation technique by which the fair value of the equity of a business is estimated by comparing it to publicly-traded companies in similar lines of business. The multiples of key metrics of other similar companies (revenue and/or EBITDA) are generally applied to the historical or projected results of the business being valued to determine its fair market value. The DCF method considers the future cash flow projections of the business and the value of those projections discounted to the present day. While the use of historical results and future projections can result in different valuations for a company, it is a generally accepted valuation practice to apply more than one valuation technique to establish a range of values for a business. Since each technique relies on different inputs and assumptions, it is unlikely that each technique would yield the same results. However, it is expected that the different techniques would establish a reasonable range.

 

On at least an annual basis, we assess the current business environment, changes in the operations of each reporting unit, deviations from projected results, and the results of the prior year goodwill impairment test. We then determine if the DCF method, the CB method or both will be used in performing the current year goodwill impairment test. When both methods are used for a reporting unit, we consider the similarities of each valuation to the underlying business to determine the weight given to each method. In 2007 and 2006, we weighted the two methods equally in determining the value of the reporting units that used both methods because we believe both methods have an equal probability of providing an appropriate fair value. In fiscal 2007, we used both the DCF and the CB method for all five of our reporting units. In fiscal 2006, we used the DCF method for all reporting units and the CB method for Base Station Subsystems, Wireless Innovations and Satellite Communications as these represented management’s best estimate of the fair value of each reporting unit.

 

34


Table of Contents

When using the CB method, we select comparable companies that operate in the same market place as the reporting unit. Because of the limited number of companies that operate in the same market and are of the same size as the reporting unit, we focus on companies that closely match the reporting unit from a product offering and customer base standpoint, regardless of size. When considering the multiples of the comparable companies, we factor in the size of the comparable companies when selecting the appropriate multiple to use in the valuation. Generally, the CB method has resulted in a higher valuation of our reporting units than the DCF method. This is indicative of the future prospects and higher values that the market places on companies that operate in our industry.

 

Although our cash flow forecasts used in the DCF method are based on assumptions that are consistent with plans and estimates we are using to manage the underlying businesses, there is significant judgment in determining the cash flows attributable to these businesses over their estimated remaining useful lives. If actual results are different from our forecasts, future tests may indicate an impairment of goodwill, which could result in non-cash charges, adversely affecting our results of operations.

 

In fiscal 2007, we recorded asset impairment charges related to goodwill for two of our reporting units. We recorded an impairment charge for Base Stations Subsystems due to an interim test of goodwill and we recorded an impairment of Satellite Communications goodwill based on our annual impairment test.

 

As a result of the losses generated by the Base Station Subsystems reporting unit in the first six months of fiscal 2007 in excess of our plan, we determined that a potential indicator of impairment had occurred and an interim test for goodwill impairment was required. We performed a “step one” impairment test, in accordance with paragraph 19 of SFAS 142, on this reporting unit as of March 31, 2007. Based on the test, we determined that a potential indicator of impairment existed and a “step two” test, in accordance with SFAS 142, was required. In the third quarter of fiscal 2007, we completed the “step two” test of the Base Station Subsystems reporting unit and recorded an impairment charge of $108 million.

 

In fiscal 2007, decreased spending levels from two major customers caused us to reevaluate our projected level of sales, earnings and cash flows for the Base Station Subsystems reporting unit. This review resulted in a reduction in projected sales, operating earnings and cash flows, as compared to the July 1, 2006 valuation. The July 1, 2006, valuation included higher sales volumes and a projected sales mix that was more dependent on historically lower-margin high-volume products. The sales and operating earning projections in the March 31, 2007 valuation include a more focused rationalization of product lines which had the primary effect of decreasing projected sales levels over the next several years. The lower market multiples were based on Base Station Subsystems size and operating results compared to other market participants. The assumptions used in the valuation of Base Station Subsystems as of March 31, 2007 were also used for the July 1, 2007 valuation (listed below).

 

As a result of the announced plan to sell the Satellite Communications business in the third quarter of fiscal 2007, we determined a potential indicator of impairment had occurred and an interim test of goodwill was required. We determined at the time that the fair value of the reporting unit exceeded the carrying value and no impairment existed. In the fourth quarter of fiscal 2007, we reevaluated the Satellite Communications business and determined that, as a result of continuing operating losses and lower short-term business prospects as compared to previous forecasts, and, despite significant numbers of initial indications of interest, the low number of then remaining substantive bids that had resulted from our effort to sell the Satellite Communications business, the fair value of the Satellite Communications reporting unit was less than its carrying value and an indicator of impairment existed. We performed “step two” of the goodwill impairment test and recorded an impairment charge of $13 million in the fourth quarter of fiscal 2007, reducing the balance of the Satellite Communications goodwill to zero.

 

The following tables summarize the significant assumptions in the 2007 DCF fair value calculations:

 

REVENUE GROWTH RATE        PROJECTED (as of July 1, 2007 valuation date)  
             2008              2009              2010              2011          Terminal  

Antenna and Cable

       2.6 %        0.9 %        1.7 %        2.0 %        3.0 %

Satellite Communications

       23.2 %        20.5 %        10.0 %        4.0 %        4.0 %

Base Station Subsystems

       (8.8 )%        19.4 %        9.8 %        8.4 %        5.0 %

Network Solutions

       12.8 %        24.9 %        5.1 %        5.0 %        5.0 %

Wireless Innovations

       7.8 %        5.8 %        8.3 %        7.5 %        4.0 %

 

35


Table of Contents
EBIT MARGIN        PROJECTED (as of July 1, 2007 valuation date)  
             2008              2009              2010              2011          Terminal  

Antenna and Cable

       13.8 %        13.8 %        14.2 %        14.1 %        12.7 %

Satellite Communications

       (3.0 )%        3.2 %        4.3 %        4.3 %        4.3 %

Base Station Subsystems

       5.9 %        9.2 %        10.6 %        11.7 %        11.7 %

Network Solutions

       2.9 %        11.5 %        13.3 %        16.6 %        20.0 %

Wireless Innovations

       15.3 %        13.8 %        13.5 %        13.5 %        13.5 %

 

The following tables summarize the significant assumptions in the 2006 DCF fair value calculations:

 

REVENUE GROWTH RATE        PROJECTED (as of July 1, 2006 valuation date)  
             2007              2008              2009              2010          Terminal  

Antenna and Cable

       5.6 %        4.8 %        3.6 %        2.0 %        1.0 %

Satellite Communications

       23.6 %        20.4 %        8.7 %        8.5 %        4.0 %

Base Station Subsystems

       0.0 %        25.4 %        9.7 %        8.5 %        5.0 %

Network Solutions

       5.6 %        7.1 %        5.2 %        3.0 %        2.0 %

Wireless Innovations

       11.4 %        10.0 %        10.0 %        7.5 %        4.0 %
EBIT MARGIN        PROJECTED (as of July 1, 2006 valuation date)  
             2007              2008              2009              2010          Terminal  

Antenna and Cable

       11.9 %        11.2 %        11.3 %        11.3 %        10.4 %

Satellite Communications

       (0.9 )%        3.2 %        4.9 %        5.1 %        5.1 %

Base Station Subsystems

       2.3 %        7.6 %        11.5 %        12.3 %        12.5 %

Network Solutions

       14.1 %        19.9 %        22.7 %        22.7 %        22.7 %

Wireless Innovations

       15.6 %        17.3 %        18.9 %        19.0 %        19.0 %

 

The following table summarizes the discount rates used in the 2007 and 2006 DCF fair value calculations:

 

     Discount Rate  
     2007     2006  

Antenna and Cable

   10 %   13 %

Satellite Communications

   13 %   13 %

Base Station Subsystems

   14 %   14 %

Network Solutions

   13 %   14 %

Wireless Innovations

   14 %   14 %

 

36


Table of Contents

The following table summarizes the significant assumptions used in the 2007 and 2006 CB fair value calculations:

 

     2007          2006  
     CB Multiples Used         

Control    

Premium    

         CB Multiples Used         

Control    

Premium    

 
     Revenue             EBITDA                     Revenue              EBITDA             

Antenna and Cable

   1.4x         7.0x          20 %        (a )        (a )        (a )

Satellite Communications (b)

   0.3x         7.0x          20 %        0.5x          8.0x          20 %

Base Station Subsystems (b)

   1.1x         9.5x          20 %        1.2x          10.0x          20 %

Network Solutions (b)

   2.5x         22.0x          20 %        (a )        (a )        (a )

Wireless Innovations

   1.1x         (c )        20 %        1.5x          9.0x          20 %

 

(a) The Comparable Business method was not used for Antenna and Cable Products and Network Solutions for the 2006 valuation because these reporting units had continued positive results in fiscal 2006, had large amounts of headroom in fiscal 2005 and had fiscal 2006 projected results that indicated continued revenue and EBIT margin growth.
(b) For the 2005 Satellite Communications and Network Solutions valuations, the 2006 valuation of Base Station Subsystems valuation, and the 2007 Satellite Communications and Base Station Subsystems valuations we applied the multiples to projected revenue and EBITDA margins from our DCF model, instead of historical amounts. Historical amounts did not accurately reflect changes in the business and the projected amounts were considered a more accurate view of the reporting unit’s long term performance.
(c) EBITDA was not used for the CB method in 2007 as the comparable companies for Wireless Innovations provided an inconsistent range of multiples.

 

The following table illustrates the goodwill allocated to each reporting unit as of September 30, 2007 and 2006, and the amount of headroom, (which represents the percentage difference between each reporting unit’s fair value and carrying value) as of our annual impairment test, July 1, 2007 and 2006, as follows:

 

         Goodwill         Headroom (a)  
         September 30,         July 1,  
(In thousands)            2007                  2006                 2007              2006      

Antenna and Cable

       $233,894          $196,299         154 %        24 %

Satellite Communications

       (b)        14,207         (26 )%(c)        43 %

Base Station Subsystems

       308,255          411,782         13 %        6 %

Network Solutions

       117,000          117,178         50 %        7 %

Wireless Innovations

       141,866          143,200         13 %        45 %

 

(a) Headroom = (fair value - carrying value)/carrying value
(b) Satellite Communications goodwill was written off as of September 30, 2007
(c) As a result of the negative headroom, we had an indicator of impairment and ultimately recorded an impairment charge for Satellite Communications goodwill

 

The increase in Antenna and Cable headroom is due primarily to the use of a lower discount rate and higher long-term growth projections. The conservative nature of the projections in comparison to the historical operating results of the reporting unit, as well as market conditions surrounding the industry in which the Antenna and Cable reporting unit operates indicated a need to reduce the discount rate. Satellite Communications, as discussed above, had lower than expected results and thus lower future projections, resulting in an impairment of all of the reporting unit’s goodwill. The decrease in Wireless Innovations headroom was the result of lower projected long-term operating margins, as continued increases in revenue growth were more than offset by increased costs to achieve that growth rate. Network Solutions has continued to produce positive results; however, because of the sensitivity of the valuation to changes in the cash flow projections, there is a greater risk of potential future impairment, especially if the business is adversely impacted by the resolution of the TruePosition intellectual property matter.

 

37


Table of Contents

If one or more of these assumptions differ from our forecasts, future tests may indicate an impairment of goodwill. The following table illustrates the impact on the amount of headroom of a change to each of the critical assumptions used in the goodwill valuation for 2007:

 

     HEADROOM ANALYSIS AS OF JULY 1, 2007  
    

Antenna and

Cable

         Satellite
Communications (a)
         Base Station
Subsystems
         Network
Solutions
         Wireless
Innovations
 

Headroom

   154 %        (26 )%        13 %        50 %        13 %

METHOD USED

                                                  

TEN PERCENTAGE POINT:

                                                  

Decrease in Comparable Business (CB) Weighting

   148 %        (27 )%        12 %        46 %        11 %

Increase in Comparable Business (CB) Weighting

   160 %        (25 )%        15 %        53 %        15 %

DCF METHOD

                                                  

ONE PERCENTAGE POINT:

                                                  

Decrease in Revenue Growth Rate

   150 %        (27 )%        11 %        47 %        11 %

Increase in Revenue Growth Rate

   158 %        (24 )%        15 %        53 %        15 %

Decrease in EBIT Margin

   145 %        (38 )%        8 %        45 %        8 %

Increase in EBIT Margin

   163 %        (13 )%        18 %        55 %        17 %

Decrease in Terminal Growth Rate

   143 %        (29 )%        9 %        41 %        9 %

Increase in Terminal Growth Rate

   169 %        (21 )%        19 %        61 %        18 %

Decrease in Discount Rate

   172 %        (20 )%        20 %        63 %        19 %

Increase in Discount Rate

   141 %        (30 )%        8 %        40 %        8 %

CB METHOD

                                                  

TEN PERCENT:

                                                  

Decrease in Revenue Multiple

   147 %        (28 )%        10 %        44 %        6 %

Increase in Revenue Multiple

   162 %        (23 )%        17 %        56 %        20 %

Decrease in EBITDA Multiple

   147 %        (28 )%        10 %        44 %        NA  

Increase in EBITDA Multiple

   161 %        (23 )%        17 %        55 %        NA  

FIVE PERCENTAGE POINT:

                                                  

Decrease in Control Premium

   148 %        (27 )%        11 %        46 %        11 %

Increase in Control Premium

   160 %        (24 )%        15 %        53 %        15 %

 

(a) As a result of the negative headroom, we had an indicator of impairment and ultimately recorded an impairment charge for Satellite Communications goodwill

 

Income Taxes

Our balance sheet reflects significant deferred tax assets, primarily related to net operating losses and tax credits carried forward. To the extent management believes it is more likely than not that we will not be able to utilize some or all of our deferred tax assets prior to their expiration, we are required to establish valuation allowances against that portion of the deferred tax assets. The determination of required valuation allowances involves significant management judgment and is based upon our best estimate of anticipated taxable profits in the various jurisdictions with which the deferred tax assets are associated. Changes in expectations could result in significant adjustments to the valuation allowances and material changes to our provision for income taxes.

 

Valuation allowances have been established for the portion of deferred tax assets representing net U.S. and Italian deferred tax assets (including book and tax asset basis differences, federal and state loss carryforwards, and federal and state tax credit carryforwards) and certain foreign loss carryforwards and book and tax asset basis differences in jurisdictions where management feels future realization is sufficiently uncertain (see Note 9, Income Taxes, in the Notes to Consolidated Financial Statements). No valuation allowances have been established for the remaining net deferred tax assets in foreign jurisdictions, as management expects future taxable income based on a recent history of taxable income and the reversal of deferred tax liabilities will make the realization of such deferred tax assets more likely than not. We currently anticipate that we will be required to earn taxable profits of approximately $91 million in various foreign jurisdictions in order to fully utilize our remaining net deferred tax assets. These deferred tax assets are primarily related to book and tax asset basis differences.

 

38


Table of Contents

Restructuring

At September 30, 2007, we had a restructuring reserve of $4 million for restructuring and integration activities. These accruals are based on our best estimate of the costs associated with merger integration and restructuring plans, including employee termination costs, lease cancellations, and other costs. If actual costs of these activities differ significantly from these estimates, results of operations could be impacted.

 

Defined Benefit Plans

Some of our employees are covered by defined benefit plans. Approximately 700 current and former employees of our United Kingdom subsidiary, Andrew Ltd., participate in a defined benefit plan. The costs and obligations recorded for these plans are dependent upon 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.

 

The discount rate enables management to state expected future cash flows as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension expense. We estimate that a one percentage point decrease in the assumed discount rate would have increased benefit expense in fiscal 2007 by $2 million. A one percentage point increase in the assumed discount rate would have decreased benefit expense in fiscal 2007 by $1 million.

 

To determine the expected return on plan assets, management considers the current and expected asset allocation, as well as historical returns on plan assets. A lower expected rate of return on pension plan assets would increase pension expense. A one percentage point increase or decrease in the expected return on pension plan assets would have decreased or increased pension expense in fiscal 2007 by $1 million.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2007, we do not have material exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally is any contractual arrangement involving an unconsolidated entity under which we have (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) any obligation under certain derivative instruments or (iv) any obligation under a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to a company, or engages in leasing, hedging, or research and development services within a company.

 

39


Table of Contents

Aggregate Contractual Obligations and Commitments

 

As of September 30, 2007, expected future cash payments under contractual obligations and commitments and the estimated timeframe in which such obligations are expected to be fulfilled were as follows:

 

     Payments Due by Period
Dollars in millions    Total   

Less than

1 Year

   1-3 Years    3-5 Years   

More Than

5 Years

Long-term debt (a)

   $300    $10    $20    $20    $250

Operating leases (b)

   148    26    40    27    55

Capital leases (b)

   2    1    1      

Purchase obligations (c)

   137    122       15   

Copper purchases (d)

   32    32         

Benefit plan obligations (e)

   34    2    3    3    26

Total

   $653    $193    $64    $65    $331

 

(a) Long-term debt includes maturities and interest obligations. Included in the long-term debt obligations are $240 million of 3.25% convertible subordinated notes due fiscal 2013. We may not redeem the notes prior to August 20, 2008, after which time we may redeem the notes at 100% of their principal amount plus accrued and unpaid interest, if any. Holders may require us to repurchase the notes at 100% of the principal amount of the notes plus accrued and unpaid interest on August 15, 2008. Therefore, the $240 million convertible notes are classified as current liabilities on the balance sheet. Refer to Note 7, Financing, in the Notes to Consolidated Financial Statements for a discussion of the use and availability of debt and revolving credit agreements.
(b) See Note 10, Commitments and Contingencies, in the Notes to Consolidated Financial Statements for a further discussion of leases.
(c) Purchase obligations of $137 million represent purchase orders or contracts for the purchase of inventory, as well as other goods and services, in the ordinary course of business, and exclude balances for purchases currently recognized as liabilities on the balance sheet.
(d) In order to reduce our exposure to copper price fluctuations, we have entered into contracts with various suppliers to purchase approximately 17% of our forecasted copper requirements for fiscal 2008, which represents contracts to purchase 9.7 million pounds of copper for $32 million.
(e) Benefit plan obligations of $34 million include estimated future contributions and benefit payments under our defined benefit and post-retirement medical and life insurance plans, to the extent the plans are not sufficiently funded. See Note 6, Benefit Plans, in the Notes to Consolidated Financial Statements, for further discussion of our benefit plan obligations.

 

The expected timing of payments of the obligations above is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.

 

We believe that our existing cash balances and funds expected to be generated from future operations will be sufficient to satisfy these contractual obligations and commitments and that the ultimate payments associated with these commitments will not have a material adverse effect on our liquidity position.

 

40


Table of Contents

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk from changes in interest rates, foreign exchange rates and commodities as follows:

 

Interest Rate Risk.    We had $345 million in debt outstanding at September 30, 2007 in the form of debt agreements and capital lease obligations at both fixed and variable rates. We are exposed to interest rate risk primarily through our variable rate debt, which totaled $96 million or 28% of our total debt. A 100 basis point increase in interest rates would not have a material effect on our financial position, results of operations or cash flows. We currently do not use derivative instruments to manage our interest rate risk.

 

Foreign Currency Risk.    Our international operations represent a substantial portion of our overall operating results and asset base. In many cases, our products are produced at manufacturing facilities in foreign countries to support sales in those markets. During fiscal 2007, sales of products exported from the United States or manufactured abroad were 67% of total sales. Our 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. We primarily manage our foreign currency risk by making use of naturally offsetting positions that include the establishment of local manufacturing facilities that conduct business in local currency. We also selectively utilize derivative instruments such as forward exchange contracts to manage the risk of exchange fluctuations. These instruments are not leveraged and are not held for trading or speculative purposes. These contracts are not designated as hedges for hedge accounting and are marked to market each period. We estimate that a hypothetical 10% increase or decrease in all non-U.S. dollar currencies would have decreased or increased, respectively, reported net loss by approximately $8 million in fiscal 2007.

 

Commodity Risk.    We use various metals in the production of our products. Copper, which is used to manufacture coaxial cable, is the most significant of these metals. As a result, we are exposed to fluctuations in the price of copper. In order to reduce this exposure, we have implemented price increases on our coaxial cable products, and have entered into forward purchase contracts with various copper suppliers. As of September 30, 2007, we entered into contracts to purchase approximately 17% of our forecasted copper requirements for fiscal 2008, which represents contracts to purchase 9.7 million pounds of copper for $32 million. We estimate that a 10% change in the price of copper could increase or decrease the cost of our forecasted fiscal 2008 copper purchases that are not under contract at September 30, 2007 by approximately $18 million. We also use certain petrochemicals for cable coatings, and a 10% change in the price of these petrochemicals would have an estimated $4 million impact on our forecasted cost of products sold in fiscal 2008.

 

41


Table of Contents

Item 8.  Financial Statements and Supplementary Data

 

Consolidated Statements of Operations

 

     Year Ended September 30,  
In thousands, except per share amounts    2007     2006     2005  

Sales

   $ 2,195,113     $ 2,146,093     $ 1,961,234  

Cost of products sold

     1,724,570       1,672,714       1,524,446  

Gross Profit

     470,543       473,379       436,788  

Operating Expenses

                        

Research and development

     111,174       112,985       107,850  

Sales and administrative

     250,047       255,210       222,830  

Merger costs

     1,752       13,476        

Pension termination gain

           (14,228 )      

Intangible amortization

     17,186       19,011       22,100  

Restructuring

     10,129       7,729       5,304  

Litigation

     50,553              

Asset impairments

     150,723       3,874        

(Gain) loss on sale of assets

     (5,591 )     (8,008 )     1,202  
       585,973       390,049       359,286  

Operating Income (Loss)

     (115,430 )     83,330       77,502  

Other

                        

Interest expense

     17,931       15,345       14,912  

Interest income

     (6,077 )     (5,720 )     (5,040 )

Other expense, net

     1,838       4,597       4,451  
       13,692       14,222       14,323  

Income (Loss) Before Income Taxes

     (129,122 )     69,108       63,179  

Income taxes

     33,700       103,398       24,321  

Net Income (Loss)

     (162,822 )     (34,290 )     38,858  

Preferred Stock Dividends

                 232  

Net Income (Loss) Available to Common Shareholders

   $ (162,822 )   $ (34,290 )   $ 38,626  

Basic Net Income (Loss) per Share

   $ (1.04 )   $ (0.22 )   $ 0.24  

Diluted Net Income (Loss) per Share

   $ (1.04 )   $ (0.22 )   $ 0.24  

Average Basic Shares Outstanding

     156,301       159,474       161,578  

Average Diluted Shares Outstanding

     156,301       159,474       161,953  

 

See Notes to Consolidated Financial Statements.

 

42


Table of Contents

Consolidated Balance Sheets

 

     September 30,  

Dollars in thousands

     2007       2006  

Assets

                

Current Assets

                

Cash and cash equivalents

   $ 154,992     $ 169,609  

Accounts receivable, less allowances (2007–$7,347; 2006–$7,112)

     646,360       557,834  

Inventory

     364,151       388,296  

Other current assets

     76,518       35,871  

Assets held for sale

     8,467       1,411  

Total Current Assets

     1,250,488       1,153,021  

Other Assets

                

Goodwill

     801,015       882,666  

Intangible assets, less amortization

     35,889       47,205  

Other assets

     47,581       62,018  

Property, Plant and Equipment

                

Land and land improvements

     18,051       22,578  

Buildings

     108,867       160,244  

Equipment

     583,872       566,482  

Allowance for depreciation

     (495,230 )     (485,293 )
       215,560       264,011  

Total Assets

   $ 2,350,533     $ 2,408,921  

Liabilities and Shareholders’ Equity

                

Current Liabilities

                

Accounts payable

   $ 339,661     $ 324,295  

Accrued expenses and other liabilities

     166,667       115,952  

Compensation and related expenses

     54,734       60,596  

Restructuring

     3,868       6,167  

Income tax payable

     342       5,433  

Notes payable and current portion of long-term debt

     333,682       55,443  

Total Current Liabilities

     898,954       567,886  

Deferred Liabilities

     57,708       43,382  

Long-Term Debt, less current portion

     11,333       290,378  

Shareholders’ Equity

                

Common stock (par value, $.01 per share: 400,000,000 shares authorized; 162,476,513
shares issued at September 30, 2007 and 2006, including treasury stock)

     1,625       1,625  

Additional paid-in capital

     691,610       684,868  

Accumulated other comprehensive income

     82,046       37,743  

Retained earnings

     673,476       836,298  

Treasury stock, common stock at cost (6,452,296 shares at September 30, 2007 and 5,215,977 shares at September 30, 2006)

     (66,219 )     (53,259 )

Total Shareholders’ Equity

     1,382,538       1,507,275  

Total Liabilities and Shareholders’ Equity

   $ 2,350,533     $ 2,408,921  

 

See Notes to Consolidated Financial Statements.

 

43


Table of Contents

Consolidated Statements of Cash Flows

 

     Year Ended September 30,  
Dollars in thousands    2007     2006     2005  

Cash Flows from Operations

                        

Net income (loss)

   $ (162,822 )     $(34,290 )     $38,858  

Adjustments to Net Income (Loss)

                        

Depreciation

     61,676       60,217       61,902  

Amortization

     17,186       19,011       22,100  

(Gain) loss on sale of assets

     (5,591 )     (9,497 )     1,202  

Pension termination gain

           (14,228 )      

Restructuring costs

     (3,258 )     (2,025 )     (6,455 )

Stock-based compensation

     10,940       9,381       2,488  

Asset impairments

     150,723              

Deferred income taxes

     (6,504 )     73,708       5,703  

Change in Operating Assets/Liabilities, net of effects of acquisitions

                        

Accounts receivable

     (47,018 )     (63,775 )     (46,397 )

Inventories

     58,641       (22,713 )     (5,826 )

Other assets

     (35,133 )     19,313       (29,878 )

Accounts payable and other liabilities

     18,270       56,684       45,679  

Net Cash From Operations

     57,110       91,786       89,376  

Investing Activities

                        

Capital expenditures

     (57,819 )     (71,033 )     (66,369 )

Acquisition of businesses

     (53,670 )     (44,742 )     (23,325 )

Settlement of pre-acquisition litigation

           (1,000 )     (2,000 )

Investments

     5,220       (1,722 )      

Proceeds from sale of product lines

     2,327             9,494  

Proceeds from sale of property, plant and equipment

     15,650       24,635       6,396  

Net Cash Used for Investing Activities

     (88,292 )     (93,862 )     (75,804 )

Financing Activities

                        

Long-term debt payments

     (27,471 )     (8,629 )     (14,801 )

Notes payable borrowings, net

     46,875       25,864       16,264  

Preferred stock dividends

                 (232 )

Payments to acquire common stock for treasury

     (20,425 )     (39,373 )     (18,140 )

Stock purchase and option plans

     3,618       3,327       1,760  

Net Cash From (Used for) Financing Activities

     2,597       (18,811 )     (15,149 )

Effect of exchange rate changes on cash

     13,968       1,716       1,309  

Decrease for the Year

     (14,617 )     (19,171 )     (268 )

Cash and equivalents at beginning of year

     169,609       188,780       189,048  

Cash and Equivalents at End of Year

   $ 154,992     $ 169,609     $ 188,780  

 

See Notes to Consolidated Financial Statements.

 

44


Table of Contents

Consolidated Statements of Change in Shareholders’ Equity

 

     Redeemable
Convertible
Preferred
Stock
    Common
Stock
   Additional
Paid-In
Capital
   Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
     Total  
Dollars in thousands                                          

Balance at September 30, 2004

   $ 6,021     $ 1,610    $ 666,746    $ 12,363     $ 831,962     $ (1,579 )    $ 1,517,123  

Repurchase of shares

                                           (18,140 )      (18,140 )

Stock purchase and option plans

             1      3,667                      1,918        5,586  

Preferred stock conversion

     (6,021 )     14      5,849                      158         

Preferred stock dividends

                                   (232 )              (232 )

Foreign currency translation adjustments

                           7,357                        7,357  

Net income

                                   38,858                38,858  

Comprehensive Income

                                                    46,215  

Balance at September 30, 2005

   $     $ 1,625    $ 676,262    $ 19,720     $ 870,588     $ (17,643 )    $ 1,550,552  

Repurchase of shares

                                           (39,373 )      (39,373 )

Stock purchase and option plans

                    8,606                      3,757        12,363  

Foreign currency translation adjustments

                           19,512                        19,512  

Realized foreign currency translation adjustments

                           (1,489 )                      (1,489 )

Net loss

                                   (34,290 )              (34,290 )

Comprehensive Loss

                                                    (16,267 )

Balance at September 30, 2006

   $     $ 1,625    $ 684,868    $ 37,743     $ 836,298     $ (53,259 )    $ 1,507,275  

Repurchases of shares

                                           (20,425 )      (20,425 )

Stock purchase and option plans

                    6,742                      7,465        14,207  

Foreign currency translation adjustments

                           63,434                        63,434  

Realized foreign currency translation adjustments

                           (340 )                      (340 )

Net loss

                                   (162,822 )              (162,822 )

Comprehensive Loss

                                                    (99,728 )

Adoption of Statement of Financial Accounting Standard 158

                           (18,791 )                      (18,791 )

Balance at September 30, 2007

   $     $ 1,625    $ 691,610    $ 82,046     $ 673,476     $ (66,219 )    $ 1,382,538  

 

See Notes to Consolidated Financial Statements

 

45


Table of Contents

Notes to Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies


 

Principles of consolidation

The consolidated financial statements include the accounts of the company and its subsidiaries. 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.

 

Allowance for doubtful accounts

The company maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. The allowance is based on the company’s assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability of accounts receivable. The company’s total allowance for doubtful accounts was $7.3 million and $7.1 million at September 30, 2007 and 2006, respectively. Accounts are written-off against the allowance when the company determines they are no longer collectible.

 

Inventories

At September 30, 2007, the company’s inventories were stated at the lower of cost or market using the first-in, first-out (“FIFO”) method.

 

Inventories consisted of the following at September 30, net of reserves:

 

Dollars in thousands       2007        2006

Raw materials

      $ 96,297        $ 110,431

Work in process

        111,130          110,936

Finished goods

        156,724          166,929

Total inventory

      $ 364,151        $ 388,296

 

These inventories are reported net of excess and obsolete reserves of $74.5 million and $57.6 million as of September 30, 2007 and 2006, respectively. Reserves for excess inventory are calculated based on the company’s estimate of inventory in excess of normal and planned usage. Obsolete reserves are based on the company’s identification of inventory having no realizable value.

 

Property, plant and equipment

Property, plant and equipment are recorded at cost. Depreciation expense for 65% of the company’s assets is recorded based on the straight–line depreciation method and the remaining assets are depreciated using accelerated depreciation methods. In fiscal 2005, the company began recording depreciation for all newly acquired assets based on the straight-line method and no longer uses accelerated depreciation methods for newly acquired assets. Assets that are currently in place that are being depreciated based on accelerated depreciation methods will continue using these methods until these assets become fully depreciated. The company believes that the straight-line method more accurately reflects the probable pattern of losses in the assets’ service lives. This change did not have a material impact on the company’s results of operations.

 

The company’s depreciation expense is based on assets’ estimated useful lives. Buildings are depreciated over ten to thirty years and equipment is depreciated over three to ten years. Depreciation of leasehold improvements is based on the term of the related lease or the improvements’ estimated useful life, whichever is shorter. Software developed for internal use is reported as equipment and depreciated over five years. Maintenance, repairs, and minor renewals and betterments are charged to expense as incurred. Depreciation expense was $61.7 million, $60.2 million and $61.9 million for fiscal 2007, 2006 and 2005, respectively.

 

46


Table of Contents

During fiscal 2006, the company entered into a lease agreement for its new Joliet, Illinois manufacturing facility, which was constructed by the landlord during fiscal 2006 and 2007. The company occupied the building during the second quarter of fiscal 2007, which is also when lease payments commenced. In 2006, the company executed a lease amendment with the landlord whereby the landlord built additional leasehold improvements in the Joliet facility for one-time cash payments that were excluded from the lease payment schedule. As such, in accordance with Emerging Issues Task Force (“EITF”) No. 97-10, The Effect of Lessee Involvement in Asset Construction, the company was considered the owner of the facility during the construction period. Therefore, the company capitalized, as construction in progress, $25.2 million, which was the construction project’s estimated cost incurred by the landlord as of September 30, 2006.

 

During the second quarter of fiscal 2007, the company executed a sale-leaseback transaction for certain leasehold improvements it had previously paid to the Joliet facility landlord. The company received $9.0 million of cash and reduced its debt obligation by $30.5 million in exchange for approximately $7.5 million of capitalized leasehold improvements and the $30.5 million value of the building on the company’s balance sheet prior to the sale. The $1.5 million of cash in excess of the value of leasehold improvements sold was recorded as deferred rent which will be amortized as a reduction in rent expense over the life of the lease. The company’s only continuing involvement is a normal leaseback, which qualifies as an operating lease.

 

As a result of continuing operating losses and lower short-term business prospects as compared to previous forecasts, in the fourth quarter of fiscal 2007, the company recorded impairment charges related to property, plant, and equipment of $13.9 million, primarily related to the Satellite Communications segment, as the projected cash flows of the segment no longer supported the carrying value of the assets.

 

Capitalized software

The company capitalizes software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed, under which certain software development costs incurred subsequent to the establishment of technological feasibility may be capitalized. Capitalization ceases when the software is available for release to customers and amortized over the estimated life of the related products. Capitalized software costs, net of accumulated amortization, were $6.8 million and $11.3 million at September 30, 2007 and 2006, respectively, and are included in other assets in the consolidated balance sheets. Software amortization costs included in cost of products sold were $2.7 million, $3.1 million and $2.0 million for fiscal 2007, 2006 and 2005, respectively. The company recorded impairment charges to operating expense of $6.6 million and $3.9 million, in fiscal 2007 and 2006, respectively, for products for which the future undiscounted cash flows no longer support the value of the asset.

 

Revenue recognition

During fiscal 2007, approximately 91% of the company’s total revenue was recognized when products were shipped and title passed, 3% based on Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition (“SOP 97-2”), 2% based on EITF No. 00-21, Revenue Arrangements with Multiple Deliverables, 2% based on SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts using the completed-contract method, and 2% based on when services were performed.

 

Revenue for software products and multiple element arrangements is recognized pursuant to the provisions of SOP 97-2, EITF 00-21, and related interpretations. The fair value of each revenue element is determined based on vendor-specific objective evidence of fair value determined by stand-alone pricing of each element or based on the residual method if vendor-specific objective evidence has not been established for one or more of the elements delivered, but has been established for the undelivered elements of the contract. These contracts typically contain post-contract support (“PCS”) services which are sold both as part of a bundled product offering and as a separate contract. Revenue for PCS services is recognized ratably over the term of the PCS contract. Revenue for certain of the company’s products relates to multiple element contracts. The fair value of these revenue elements is based on negotiated contracts and stand-alone pricing for each element.

 

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.

 

Advertising costs

Advertising costs are expensed in the period in which they are incurred. Advertising expense was $4.1 million in fiscal 2007, $4.8 million in fiscal 2006, and $3.1 million in fiscal 2005.

 

47


Table of Contents

Identifiable intangible assets

The company reports identifiable intangible assets net of accumulated amortization. Accumulated amortization for intangible assets was $75.5 million and $61.8 million at September 30, 2007 and 2006, respectively. The company amortizes intangible assets, excluding goodwill and indefinite life trademarks, over their estimated useful lives. The decrease in the carrying value of intangible assets from $47.2 million at September 30, 2006 to $35.9 million at September 30, 2007, is due to amortization expense of $17.2 million and impairments of $8.0 million, offset by an increase of $12.9 million for intangible assets acquired with EMS Wireless, and foreign currency translation of approximately $1.0 million. Of the $12.9 million of acquired intangible assets, $7.2 million were for customer relationships, $3.7 million for patents, $1.7 million for finite-lived trademarks, and $0.3 million for non-compete agreements. In fiscal 2007, the company retired $9.8 million of intangible assets that were fully amortized.

 

Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the company tests intangibles with an indefinite life for impairment on an annual basis. The impairment review performed for fiscal 2007 indicated an impairment existed for one of these intangibles. The company recorded an impairment of $0.3 million to adjust the carrying value to the current net realizable value. Intangible assets consisted of the following:

 

     September 30,
Dollars in thousands    2007    2006

Customer contracts and relationships, net of accumulated amortization of $9,490 in 2007 and $6,037 in 2006

   $ 21,197    $ 19,969

Patents and technology, net of accumulated amortization of $65,078 in 2007 and $55,381 in 2006

     7,655      21,374

Trademarks–finite life, net of accumulated amortization of $313 in 2007

     1,377      —  

Trademarks–indefinite life

     5,300      5,600

Other, net of accumulated amortization of $619 in 2007 and $399 in 2006

     360      262

Total Intangible Assets

   $ 35,889    $ 47,205

 

The company’s finite-lived intangible assets are amortized on a straight-line basis over their individual useful lives. The weighted-average amortization period for each category of intangible assets is as follows:

 

    

Weighted Average

Amortization Period

(in years)

Customer contracts and relationships

   7.6

Patents and technology

   4.8

Finite-lived trademarks

   4.5

Other

   4.4

 

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

 

Dollars in millions    2008    2009    2010    2011    2012
     $6.8    $6.6    $5.8    $4.4    $4.7

 

Goodwill

Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the company tests the goodwill of each reporting unit for impairment on an annual basis or more frequently if circumstances dictate. Goodwill is assigned to a reporting unit based on which reporting unit integrates an acquisition, or, if an acquisition relates to multiple reporting units, goodwill is assigned based on the difference between net assets acquired as allocated to the reporting units and purchase price as allocated to reporting units. The company has determined that its five operating segments are its reporting units. The company performs its annual impairment review on the first day of its fiscal fourth quarter or at an interim date if circumstances dictate.

 

48


Table of Contents

As a result of the losses generated by Base Station Subsystems in the first six months of fiscal 2007 in excess of projected amounts, the company determined that a potential indicator of impairment had occurred and an interim test for goodwill impairment was required. The company performed a “step one” impairment test, in accordance with paragraph 19 of SFAS 142, on this reporting unit as of March 31, 2007. Based on the test, a potential indicator of impairment existed and a “step two” test, in accordance with SFAS 142, was required. In the third quarter of fiscal 2007, the company completed the “step two” test of the Base Station Subsystems reporting unit and recorded an impairment charge of $107.9 million.

 

The company performed its annual goodwill impairment test as of July 1, 2007. The company determined that as a result of continuing operating losses and lower short-term business prospects as compared to previous forecasts, the fair value of the Satellite Communications reporting unit was less than its carrying value and an indicator of impairment existed. The company recorded an impairment charge of $13.3 million in the fourth quarter of fiscal 2007, reducing the balance of the Satellite Communications goodwill to zero.

 

The annual impairment review performed for fiscal 2006 indicated no impairment of goodwill. Due to uncertain market conditions, it is possible that future impairment reviews may indicate additional impairments 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 of 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 income (loss), a separate component of shareholders’ equity. Gains and losses resulting from foreign currency transactions are included in determining net income (loss). Net foreign exchange losses resulting from foreign currency transactions that are included in other expense, net were $1.6 million, $4.0 million, and $4.9 million for fiscal 2007, 2006, and 2005, respectively. Included in the foreign exchange loss in fiscal 2007 and 2006 were gains of $0.3 million and $1.5 million, respectively, for the liquidation of foreign subsidiaries for amounts previously carried in accumulated other comprehensive income. The unrealized gain on foreign exchange contracts was $1.4 million and $0.1 million as of September 30, 2007 and 2006, 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 2007, the company used forward exchange contracts to manage its foreign currency exposure. These contracts were not designated as hedges for hedge accounting, and were marked to market each period through earnings and as such, as of September 30, 2007, there were no unrecognized gains or losses on forward contracts.

 

The company enters into agreements with various suppliers to purchase copper at fixed prices. As of September 30, 2007, the company had entered into contracts to acquire 9.7 million pounds of copper for $31.8 million, which represents an estimated 17% of the company’s fiscal 2008 projected copper usage. The copper supply agreements are settled when the company purchases copper under the supply agreements for use in its manufactured products. Copper is capitalized as inventory when purchased. These forward commodity contracts are not marked to fair value because they meet the “normal purchase” election under applicable derivative accounting rules and the company has elected this position for all forward purchase contracts.

 

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.

 

Accumulated other comprehensive income (loss)

The components of accumulated other comprehensive income (loss) were as follows:

 

     September 30,
Dollars in thousands    2007     2006

Foreign currency translation adjustments

   $ 100,837     $ 37,743

Pension liability, net of tax of $5,498 and $0

     (18,791 )    

Total accumulated other comprehensive income

   $ 82,046     $ 37,743

 

49


Table of Contents

Stock-based compensation

In the first quarter of fiscal 2006, the company adopted SFAS No. 123(R), Share-Based Payments “SFAS 123(R)”, which revised SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123(R) requires the company to record compensation expense for all share-based payments, including employee stock options, at fair value. Prior to fiscal 2006, the company had accounted for its stock-based compensation awards pursuant to Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and its related interpretations, which allowed the use of the intrinsic value method. Under the intrinsic value method, compensation expense for stock option-based employee compensation was not recognized in the income statement as all stock options granted by the company had an exercise price equal to the market price of the underlying common stock on the option grant date.

 

The company elected to use the modified prospective transition method to adopt SFAS 123(R). Under this transition method, beginning in fiscal 2006, compensation expense recognized includes: (a) expense for all share-based payments granted prior to, but not vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) expense for all share-based payments granted subsequent to October 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As required under the modified prospective transition method, the company did not restate prior period results.

 

In the first quarter of fiscal 2005, the company granted 1.4 million stock options that vested immediately and included a restriction on the resale of the underlying shares of common stock. For pro forma disclosure purposes, these options were treated as if they were expensed in the first quarter of fiscal 2005, increasing pro forma expense, net of tax, by approximately $8.4 million. During the fourth quarter of fiscal 2005, the company accelerated the vesting of approximately 270,000 stock options with an exercise price of $12 or more per share, increasing pro forma stock-based compensation expense by approximately $1.6 million, net of tax. The company accelerated the vesting of these stock options in fiscal 2005 to avoid recording compensation expense for these stock options in the company’s results of operations in fiscal 2006 as required when the company adopted SFAS 123(R).

 

The following table illustrates the pro forma effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS 123 to stock options for the year ended September 30, 2005:

 

Dollars in thousands, except per share amounts   

Year Ended

September 30,

2005

 

Reported net income

   $ 38,858  

Preferred stock dividends

     (232 )

Reported income available to common shareholders

     38,626  

Add: RSU expense, net of tax

     1,555  

Less: Stock-based compensation, net of tax

     (15,231 )

Pro forma net income available to common shareholders

   $ 24,950  

Reported basic and diluted net income per share

   $ 0.24  

Pro forma basic net income per share

   $ 0.15  

Pro forma diluted net income per share

   $ 0.15  

 

Equity investment

On April 2, 2007, the company converted a note receivable from Andes Industries, Inc. (“Andes”) into a 30% ownership interest in Andes. The company accounts for the investment based on the equity method of accounting. The value of the company’s investment in Andes was $6.5 million as of September 30, 2007, and is recorded within other assets (long-term) on the consolidated balance sheet. For the year ended September 30, 2007, the company’s share of equity loss in Andes was not significant and is recorded within other expense, net on the consolidated statement of operations.

 

Litigation

For fiscal 2007, litigation expense on the consolidated statement of operations includes a $45.3 million accrual (see note 10, Commitments and Contingencies) and $5.3 million of legal fees for the TruePosition intellectual property litigation.

 

50


Table of Contents

Use of estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles 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.

 

Recently issued accounting policies

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of Financial Accounting Standards Board Statement No. 109 (“FIN 48”). FIN48 clarifies the accounting and disclosure for uncertain income tax positions, relating to the uncertainty about whether a tax return position will ultimately be sustained by the respective tax authorities. The company is required to adopt FIN 48 at the beginning of fiscal 2008. The company is in the process of determining any potential impact of FIN 48 to the financial statements, but does not expect FIN 48 to materially impact the opening balance of retained earnings for fiscal 2008. The adoption of FIN 48 will have no impact on the company’s consolidated cash flows.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. SFAS 157 will be effective for the company beginning in fiscal 2009, and the company is in the process of determining any potential impact to the financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS 159 will be effective for the company beginning in fiscal 2009, and the company is in the process of determining any potential impact to the financial statements.

 

Adoption of new accounting policies

In January 2005, the FASB issued revised SFAS No. 151, Inventory Costs, an amendment of ARB No. 43. The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The company adopted SFAS 151 beginning in fiscal 2006. The adoption of SFAS 151 did not have a material impact on the company’s results of operations.

 

In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143 (“FIN 47”). This Interpretation clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The company adopted FIN 47 beginning in fiscal 2006. The adoption of FIN 47 did not have a material impact on the company’s results of operations.

 

In October 2005, the FASB issued Staff Position (“FSP”) 13-1, Accounting for Rental Costs Incurred during a Construction Period. The guidance requires that the rental costs for ground or building operating leases during the construction period be recognized as rental expenses. The guidance permits either retroactive or prospective treatment for the first reporting period beginning after December 15, 2005. The company adopted FSP 13-1 in fiscal 2006, which did not have a material impact on the company’s results of operations.

 

In fiscal 2006, the company adopted SFAS 123(R), Share-Based Payments, as described in Note 12, Stock-Based Compensation.

 

In June 2006, the FASB ratified EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). The task force reached a conclusion that either method is acceptable; however, if taxes are reported on a gross basis (included as Sales) those amounts should be disclosed if significant. This pronouncement was effective for the first reporting period beginning after December 15, 2006. The company adopted EITF 06-3 in the second quarter of fiscal 2007. The company continues to exclude sales taxes and value added taxes from revenue. The adoption of EITF 06-3 did not have an impact on the company’s results of operations.

 

51


Table of Contents

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires an entity to (1) recognize in its statement of financial position an asset for a defined benefit postretirement plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a defined benefit postretirement plan’s assets and obligations that determine its funded status as of the end of the employer’s fiscal year, and (3) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the change occurs. SFAS 158 was effective for the company as of September 30, 2007. The impact on the consolidated financial statements is shown in Note 6, Benefit Plans.

 

Reclassifications

Certain previously reported amounts have been reclassified to conform to the current year’s presentation.

 

2. Proposed CommScope Merger


 

On June 26, 2007, Andrew entered into a definitive merger agreement with CommScope, Inc. (“CommScope”). Under the terms of the agreement, each share of Andrew common stock will be converted into the right to receive $15.00, comprised of $13.50 per share in cash and an additional $1.50 per share in either cash, CommScope common stock, or a combination of cash and CommScope common stock totaling $1.50 per share, at CommScope’s election. The merger agreement contains termination rights for both CommScope and Andrew. Under certain circumstances, including if the board of directors of Andrew recommends a superior proposal to its stockholders and the merger agreement is terminated as a result thereof, Andrew would be required to pay CommScope a termination fee of $75 million. Following the close of the transaction, Andrew will become an indirect wholly-owned subsidiary of CommScope. The merger is subject to regulatory and governmental reviews in the United States and elsewhere, as well as approval by Andrew’s shareholders.

 

3. Business Acquisitions


 

In December 2006, the company acquired EMS Wireless (“EMS”), a division of EMS Technologies, Inc., a major designer and manufacturer of base station antennas based in Norcross, Georgia, for approximately $48.7 million in cash. A preliminary allocation of the purchase price resulted in $12.9 million of intangible assets and $34.8 million of goodwill, which were assigned to the Antenna and Cable operating segment.

 

In fiscal 2006 the company made three acquisitions, Skyware Radio Systems GmbH (“Skyware”), in February 2006, Precision Antennas Ltd. (“Precision”) in April 2006, and CellSite Industries (“CSI”), also in April 2006.

 

Skyware, a German manufacturer of electronic products for broadband satellite communications networks, was acquired for approximately $9.5 million. The Skyware acquisition agreement includes an earn-out provision, which could result in additional purchase consideration of up to $6.0 million if certain financial targets are met over a two-year period. An allocation of the purchase price resulted in $5.0 million of goodwill and $2.4 million of intangible assets, which were assigned to the Satellite Communications operating segment.

 

Precision, a Stratford, England-based designer and manufacturer of microwave antennas for use in carrying point-to-point radio signals, primarily for cellular network backhaul, was acquired for approximately $28.4 million. An allocation of the purchase price resulted in $11.6 million of goodwill and $7.7 million of intangible assets, which were assigned to the Antenna and Cable operating segment.

 

CSI, a privately-held provider of wireless equipment repair services based in Milpitas, California, was acquired for approximately $6.4 million. An allocation of the purchase price resulted in $3.5 million of goodwill and $3.8 million of intangible assets, which were assigned to the Base Station Subsystems operating segment. The CSI acquisition agreement includes an earn-out provision under which the company paid $5.0 million of additional consideration in fiscal 2007 and could pay an additional $9.0 million over the next two years, if certain financial targets are met.

 

In fiscal 2005 the company made a number of acquisitions. In the first quarter the company acquired selected assets of ATC Tower Services, Inc. (“Towers”) and acquired the remaining 20% interest in its Czech Republic subsidiary; in the second quarter the company acquired Xenicom Ltd. (“Xenicom”); and in the fourth quarter the company acquired certain assets of Nortel’s mobile location business.

 

Towers, a division of American Tower Corporation that provides site installation services to wireless operators in North America, was acquired for $8.4 million, consisting of $6.2 million in cash and the assumption of $2.2 million of capital leases. An allocation of the purchase price resulted in $2.4 million of goodwill, which was assigned to the Antenna and Cable operating segment.

 

52


Table of Contents

The company paid $1.3 million to acquire the remaining 20% interest in a Czech Republic subsidiary that was acquired in the fiscal 2003 Allen Telecom acquisition.

 

Xenicom, a United Kingdom-based provider of software solutions that help telecommunications operators plan, launch and manage wireless networks was acquired for total consideration of $11.3 million. An allocation of the purchase price resulted in $5.5 million of goodwill, which was assigned to the Network Solutions operating segment, $7.9 million of intangible assets and $2.1 million of deferred tax liabilities.

 

The company expanded its market-leading Geometrix® mobile location system product line with the acquisition of certain assets of Nortel’s mobile location business for $4.2 million. An allocation of purchase price, which was assigned to the Network Solutions operating segment, resulted in $3.4 million of identifiable intangibles and $0.4 million of goodwill.

 

Pro forma results of operations, assuming the fiscal 2007, 2006 and 2005 acquisitions occurred at the beginning of the period, were not materially different from the reported results of operations.

 

4. Sale of Assets


 

The company has completed several asset sales over the last three years as part of the company’s ongoing efforts to rationalize its assets. The company recognized a (gain) loss on the sale of assets of $(5.6) million, $(8.0) million and $1.2 million in fiscal 2007, 2006 and 2005, respectively. Proceeds from the sale of assets and product lines were $18.0 million, $24.6 million and $15.9 million in fiscal 2007, 2006 and 2005, respectively.

 

The company had $8.5 million of assets held for sale as of September 30, 2007, consisting of $4.8 million of land and buildings in Orland Park, Illinois, $3.4 million of land in Stratford, England, and $0.3 million of equipment no longer in service as a result of outsourcing certain filter manufacturing to a contract manufacturer.

 

On May 3, 2007, the company announced its intention to sell the Satellite Communications business. On November 6, 2007, we announced the sale of our Satellite Communications business to Resilience Capital Partners (“Resilience”), a Cleveland, Ohio-based private equity firm. The company expects the transaction to close by the end of calendar year 2007. Satellite Communications sales were 5% of fiscal 2007 sales. The Satellite Communications business did not meet the held for sale criteria as of September 30, 2007, as all approvals to consummate the transaction had not been obtained. (see Note 15, Subsequent Events).

 

In fiscal 2007, the company recognized a gain of $5.6 million and cash proceeds of $18.0 million from the sale of assets and product lines. The two significant transactions (discussed below) that occurred in fiscal 2007 were the sale of the company’s Yantai, China facility in April 2007, and related broadband cable product line and the collection of a contract termination fee and environmental remediation refund related to the sale of the company’s Orland Park, Illinois property in May 2007.

 

The company sold its Yantai, China facility and inventory and equipment related to its broadband cable product line (the “Yantai sale”) to Andes for $2.3 million in cash and $13.5 million of notes receivable, due over a two year period. Concurrent with the sale, the company exercised the conversion feature of a note receivable from Andes, obtained in a previous transaction, for a 30% equity ownership interest in Andes. The Yantai sale resulted in a gain of $2.9 million. The company recognized a $2.0 million gain in fiscal 2007. The remaining $0.9 million (30% of the gain) was recorded as a reduction of the company’s investment in Andes.

 

In fiscal 2006, the company recognized a gain on the sale of assets of $8.0 million and cash proceeds of $24.6 million from the sale of assets. The two significant transactions (discussed below) that occurred in fiscal 2006 were the sale of a portion of the land at the company’s Orland Park, Illinois facility and the sale of certain filter manufacturing assets and inventory to a contract manufacturer. The remaining proceeds from the sale of assets in fiscal 2006 were for various small transactions, none of which were significant.

 

53


Table of Contents

In August 2005, the company entered into a contract to sell its Orland Park, Illinois manufacturing facility and corporate headquarters. The sale of the Orland Park, Illinois facility was to take place in two transactions. The first transaction took place in fiscal 2006 and the company recognized a gain of $9.0 million on the sale of a portion of the land and received cash proceeds, net of transaction costs, of $9.1 million. The second transaction was cancelled on May 31, 2007 by the buyer. The company recognized a gain of $3.0 million in fiscal 2007 for cash received from the cancellation of the sale and refund of unused proceeds for environmental remediation.

 

In fiscal 2006, the company received cash proceeds of $10.6 million from the sale of certain filter manufacturing inventory and assets including the company’s Arad, Romania facility to a contract manufacturer. The inventory and Arad, Romania facility were sold at book value. Included in the $10.6 million proceeds was $3.1 million from the sale of certain manufacturing fixed assets with a net book value of $1.4 million, which were not yet transferred to the contract manufacturer as of September 30, 2006. The $3.1 million of cash proceeds were classified as a customer deposit within other liabilities in the September 30, 2006 balance sheet. The balance of the assets not yet transferred as of September 30, 2007 is $0.3 million and is classified as held for sale on the balance sheet. The remaining cash proceeds related to these assets is $1.0 million and is classified as a customer deposit within other current liabilities as of September 30, 2007.

 

In fiscal 2005, the company recognized a loss on the sale of assets of $1.2 million and cash proceeds of $6.4 million from the sale of assets. The most significant transactions were the sale of a facility in Reynosa, Mexico acquired from Allen Telecom, the sale of unimproved land in Suzhou, China, and the sale of a facility in Livonia, Michigan that was acquired from Allen Telecom that was accounted for as an asset held for sale. Also in fiscal 2005, the company received net cash proceeds of $9.5 million from the sale of selected assets of its mobile antenna product line to PCTEL, Inc. The loss on sale of these assets was recognized in fiscal 2004.

 

5. Per Share Data


 

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

 

     Year Ended September 30,  
Dollars in thousands, except per share amounts    2007     2006     2005  

Basic Earnings per Share

                        

Net income (loss)

   $ (162,822 )   $ (34,290 )   $ 38,858  

Preferred stock dividends

                 (232 )

Income (loss) available to common shareholders

     (162,822 )     (34,290 )     38,626  

Average basic shares outstanding

     156,301       159,474       161,578  

Basic net income (loss) per share

   $ (1.04 )   $ (0.22 )   $ 0.24  

Diluted Earnings per Share

                        

Net income (loss)

   $ (162,822 )   $ (34,290 )   $ 38,858  

Preferred stock dividends

                 (232 )

Income (loss) available to common shareholders

     (162,822 )     (34,290 )     38,626  

Average basic shares outstanding

     156,301       159,474       161,578  

Effect of dilutive securities

                 375  

Average diluted shares outstanding

     156,301       159,474       161,953  

Diluted net income (loss) per share

   $ (1.04 )   $ (0.22 )   $ 0.24  

 

The company did not include the dilutive effect of stock options for the year ended September 30, 2007 and 2006. Including these shares would have decreased diluted loss per share. Options to purchase 7,117,921 shares of common stock in fiscal 2005 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.

 

In the second quarter of fiscal 2005, the company converted 120,414 shares of convertible preferred stock into 1,387,892 shares of common stock. Under the if-converted method, these convertible shares would have increased the diluted average shares outstanding by 621,081 for the twelve months ended September 30, 2005. These shares were not included in the calculation of diluted earnings per share at September 30, 2005. Including these shares and excluding the convertible preferred stock dividends would have increased reported diluted earnings per share.

 

54


Table of Contents

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 calculation of diluted earnings per share. Including these shares and excluding the interest expense on these notes would have increased reported diluted earnings per share in fiscal 2005 and decreased the diluted loss per share in fiscal 2007 and 2006.

 

The company also has outstanding warrants issued as part of a fiscal 2004 litigation settlement with TruePosition, Inc. that could result in the issuance of up to 1,000,000 shares of common stock. These warrants have an exercise price of $17.70 per share and expire on January 16, 2008. These shares were not included in the calculation of diluted earnings per share because the exercise price of these warrants was greater than the average market price of the common shares in all periods presented.

 

6. Benefit Plans


 

The company has a defined benefit plan, that covers approximately 700 current and former employees of the company’s United Kingdom subsidiary (the “U.K. Pension Plan”). In fiscal 2006, the company terminated the Allen Telecom Inc. Corporate Retirement Plan (the “Allen Pension Plan”), a plan that was acquired with Allen Telecom.

 

In addition to the defined benefit plan, other employees of Andrew Corporation and its subsidiaries participate in various retirement plans, principally defined contribution profit sharing plans. The amounts charged to earnings for these plans in fiscal 2007, 2006, and 2005 were $9.0 million, $9.0 million, and $8.6 million, respectively.

 

U.K. Pension Plan

Benefits payable under the U.K. Pension Plan are based on employees’ final pension-eligible salaries. As of September 30, 2007, the U.K. Pension Plan was frozen and employees under the U.K. Pension Plan will no longer accrue service benefits under this plan. The U.K. Pension Plan was supplemented by the inception of a defined contribution plan. The measurement date for the U.K. Pension plan is September 30. The company’s accumulated benefit obligation under this plan was $81.4 million and $72.4 million at September 30, 2007 and 2006, respectively. At September 30, 2007 and 2006 the fair value of plan assets exceeded the accumulated benefit obligation by $18.8 million and $3.8 million, respectively. Therefore, no minimum pension liability was recorded to deferred liabilities nor as comprehensive loss.

 

55


Table of Contents

A reconciliation of the U.K. Pension Plan’s projected benefit obligation, fair value of plan assets, and funded status is as follows:

 

     September 30,  
Dollars in thousands    2007     2006  

Change in projected benefit obligation

                

Projected benefit obligation at beginning of the year

   $ 105,411     $ 92,218  

Service costs

     2,494       1,892  

Interest costs

     5,503       4,905  

Contribution by plan participants

     1,173       1,045  

Amendments

     457        

Actuarial (gain) loss

     (5,980 )     1,331  

Disbursements

     (1,790 )     (1,883 )

Foreign currency translation adjustment

     8,438       5,903  

Projected benefit obligation at end of the year

     115,706       105,411  

Change in plan assets

                

Fair value of plan assets at beginning of the year

     76,229       65,096  

Actual return on plan assets

     8,638       7,818  

Company contribution

     9,381        

Contribution by plan participants

     1,173       1,045  

Disbursements

     (1,790 )     (1,883 )

Foreign currency translation adjustment

     6,543       4,153  

Fair value of plan assets at end of the year

     100,174       76,229  

Funded status of the plan

     (15,532 )     (29,182 )

Unrecognized prior service costs

     1     4,746  

Unrecognized actuarial loss

     1     22,785  

Net amount recognized

   $ (15,532 )   $ (1,651 )

 

1. Not applicable for fiscal 2007 as the amounts are recorded as part of accumulated other comprehensive income due to the adoption of SFAS 158.

 

     September 30,  
Dollars in thousands    2007     2006  

Amounts recognized on balance sheet consist of:

                

Deferred liabilities

     (15,532 )     (1,651 )

Net amount recognized

   $ (15,532 )   $ (1,651 )

 

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

 

Dollars in thousands    2007     2006     2005  

Service costs

   $ 2,494     $ 1,892     $ 1,659  

Interest costs

     5,503       4,905       4,186  

Expected return on plan assets

     (5,335 )     (4,094 )     (3,159 )

Amortization of unrecognized prior service costs

     312       346       327  

Amortization of net loss

     676       857       756  
     $ 3,650     $ 3,906     $ 3,769  

 

56


Table of Contents

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

 

     2007     2006     2005  

Discount rate

   5.00 %   5.00 %   5.50 %

Annual compensation increase

   4.00 %   3.90 %   3.70 %

Expected return on plan assets

   6.40 %   5.90 %   6.40 %

Post-retirement pension increase

   3.00 %   2.90 %   2.70 %

 

The weighted-average actuarial rate assumptions used to determine the benefit obligation were as follows:

 

     September 30,  
     2007     2006  

Discount rate

   5.60 %   5.00 %

Annual compensation increase

   4.00 %   4.00 %

 

The U.K Pension Plan’s assets are held by a trust, the Andrew Ltd. Pension and Life Assurance Plan. An independent third party manages the investments. The plan assets are invested in equity and debt securities and are not directly invested in the company’s common stock. The percentages of equity securities in total plan assets were 70% and 78% at September 30, 2007 and 2006, respectively. Debt securities were 20% and 22% of total plan assets at September 30, 2007 and 2006, respectively. The remaining 10% of plan assets in fiscal 2007 was cash.

 

The trustees of the Andrew Ltd. Pension and Life Assurance Plan have determined a long-term strategic benchmark mix of asset types and ranges within which the investment manager may operate with discretion. The target allocation percentage of equity securities was 75% at September 30, 2007 and 2006. The target allocation of debt securities was 25% at September 30, 2007 and 2006, and is split evenly between government bonds and corporate bonds.

 

The expected return on assets is calculated assuming the target asset allocation and equity returns of 2.5% in excess of an appropriate government bond index together with the gross redemption yields on an appropriate government bond index and corporate bond index.

 

The following benefit payments are expected to be paid by the plan over the next ten years:

 

Dollars in thousands   

Pension

Benefits

2008

   $ 1,611

2009

     1,781

2010

     2,054

2011

     2,206

2012

     2,482

2013 – 2017

     15,942

 

Recent legislation enacted in the U.K. has accelerated the rate of funding required for the U.K. Pension Plan. In March 2007, the company proposed to the U.K. Pensions Regulator a plan to fund a pension deficit, as of September 30, 2006, by March 31, 2010. The company made cash contributions of $9.4 million in 2007. The schedule below shows the timing of the additional cash payments the company currently intends to make; the schedule is subject to change based on future valuations of the pension plan.

 

Dollars in millions    March 2008    March 2009    March 2010

Contribution amount

   $ 10.1    $ 10.1    $ 2.1

 

Allen Telecom Plan and Other Plans

With the acquisition of Allen Telecom on July 15, 2003, the company assumed the Allen Pension Plan. This plan was frozen following the completion of the acquisition and covered the majority of the full-time domestic salaried and hourly employees of the former Allen Telecom. At the time the Allen Pension Plan was frozen, the pension benefit provided to salaried employees was based on years of service and compensation for up to a ten-year period prior to the date the plan was frozen, while the benefit provided to hourly employees was based on specified amounts for each year of service prior to the date the plan was frozen.

 

57


Table of Contents

In fiscal 2005 the company initiated the process of terminating the Allen Pension Plan. The company fully funded and terminated the plan during fiscal 2006 when the company purchased from John Hancock Life Insurance Company (“John Hancock”) a non-participating group annuity contract for all participants of the Allen Pension Plan and John Hancock assumed the full responsibility for all benefit obligations of the Allen Telecom Plan. In fiscal 2006, the company made additional contributions of $9.5 million to fully fund the Allen Pension Plan and recognized a gain of $14.2 million when the plan was terminated.

 

The remaining pension benefit obligations as of September 30, 2007 were related to the individual employment contracts for certain former executives of Allen Telecom (the “contract plans”). The contract plans are unfunded and are accrued as liabilities on the consolidated balance sheet. The measurement date for these contract plans is September 30.

 

The medical and life insurance plans provide post-retirement health care and life insurance benefits for approximately 400 employees that have either retired or who will reach retirement age while working with the company.

 

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

 

          Pension Benefits         

Medical Plans and

Other Benefits

 
Dollars in thousands         2007          2006          2007          2006  

Change in projected benefit obligation

                                                    

Projected benefit obligation at beginning of the year

        $ 3,306          $ 52,174          $ 17,178          $ 13,538  

Service costs

                     149            290            408  

Interest costs

          142            2,167            863            971  

Amendments

                                           (1,643 )

Settlements

                     (46,900 )                      

Actuarial (gain) loss

          84            (1,497 )          (2,164 )          4,832  

Disbursements

          (283 )          (2,787 )          (810 )          (928 )

Projected benefit obligation at end of the year

          3,249            3,306            15,357            17,178  

Change in plan assets

                                                    

Fair value of plan assets at beginning of the year

                     40,299                        

Actual return on plan assets

                     (358 )                      

Company contribution

          283            9,746            810            928  

Disbursements

          (283 )          (2,787 )          (810 )          (928 )

Settlements

                     (46,900 )                      

Fair value of plan assets at end of the year

                                            

Funded status of the plan

          (3,249 )          (3,306 )          (15,357 )          (17,178 )

Unrecognized actuarial (gain) loss

                     (491 )                     10,749  

Unrecognized prior service costs

                                           (3,430 )

Net accrued pension costs (recorded in deferred liabilities)

        $ (3,249 )        $ (3,797 )        $ (15,357 )        $ (9,859 )

 

The components of net periodic pension costs are as follows:

 

          Pension Benefits          Medical Plans and Other Benefits  
Dollars in thousands         2007          2006          2005          2007          2006          2005  

Service costs

        $          $ 149          $ 124          $ 290          $ 408          $ 199  

Interest costs

          142            2,167            1,885            863            971            691  

Expected return on plan assets

                     357            (2,635 )                                 

Amortization of prior service costs

                                           (916 )          (539 )          (539 )

Amortization of net (gain) loss

          (26 )          (2,673 )                     1,040            1,346            635  

Settlement gain

                     (14,228 )                                            
Total         $ 116          $ (14,228 )        $ (626 )        $ 1,277          $ 2,186          $ 986  

 

58


Table of Contents

The following actuarial rate assumptions were used in determining the net periodic pension costs recognized in income and the benefit obligation at September 30, 2007, 2006, and 2005:

 

     Pension Benefits          Medical Plans and
Other Benefits
 
     2007     2006     2005          2007     2006     2005  

Net Periodic Benefit Costs

                                         

Discount rate

   4.50 %   5.00 %   2.90 %        5.50 %   5.00 %   5.75 %

Return on plan assets

   na     4.60 %   7.00 %        na     na     na  

Benefit Obligation

                                         

Discount rate

   4.50 %   4.50 %   5.00 %        6.00 %   5.50 %   5.00 %

 

For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 2008. The rate was assumed to decrease gradually to 5% for fiscal 2011 and remain at that level thereafter. A one-percentage-point increase or decrease in the assumed health care cost trend rates would affect the aggregate of service and interest cost components by $0.1 million or ($0.1) million, respectively, and would affect the post-retirement benefit obligation by $0.7 million and ($0.7) million, respectively.

 

The company is not required to make contributions to the pension benefit plans nor its other plans in fiscal 2008. However, the company expects to make payments of $0.3 million to its contract plans and $1.3 million to its medical and other benefit plans in fiscal 2008. The following benefit payments are expected to be paid by the company over the next ten years:

 

Dollars in thousands    Pension
Benefits
   Medical Plans and
Other Benefits

2008

   $        283    $                1,269

2009

   283    1,298

2010

   283    1,343

2011

   283    1,436

2012

   283    1,375

2013 – 2017

   1,415    7,214

 

As a result of the implementation of SFAS 158 as of September 30, 2007, the consolidated balance sheet was affected as follows:

 

Dollars in thousands   

Before Application

of SFAS No. 158

   Adjustments    

After Application

of SFAS No. 158

Other assets (deferred taxes non-current)

   $ 42,083    $ 5,498     $ 47,581

Total assets

   $ 2,345,035    $ 5,498     $ 2,350,533

Accrued expenses and other liabilities

   $ 165,115    $ 1,552     $ 166,667

Deferred liabilities

     34,971      22,737       57,708

Total liabilities

   $ 943,706    $ 24,289     $ 967,995

Accumulated other comprehensive income

   $ 100,837    $ (18,791 )   $ 82,046

Total shareholders’ equity

   $ 1,401,329    $ (18,791 )   $ 1,382,538

 

The following items have not previously been recognized in net periodic benefit cost and are included in accumulated other comprehensive income for the year ended September 30, 2007 as a result of implementing SFAS 158:

 

Dollars in thousands   

Pension

Benefits

  

Other

Postretirement

Benefits

    Total

Unrecognized net loss

   $    13,985    $    7,546     $    21,531

Unrecognized prior service (credits) costs

   5,273    (2,515 )   2,758

Total

   $    19,258    $    5,031     $    24,289

 

59


Table of Contents

Amortization of amounts included in accumulated other comprehensive income as of September 30, 2007 is expected to increase (decrease) net periodic benefit cost during fiscal 2008 as follows:

 

Dollars in thousands   

Pension

Benefits

  

Other

Postretirement

Benefits

   Total

Unrecognized net loss

   $    129    $     828     $    957

Unrecognized prior service (credits) costs

   343    (915)    (572)

Total

   $    472    $      (87)    $    385

 

7. Financing


 

Lines of Credit and Short Term Borrowings

In fiscal 2005, the company entered into a $250 million revolving line of credit with a group of fourteen lenders led by Bank of America, NA as administrative agent and Citicorp North America, Inc. as the syndication agent. This agreement expires in September 2010. The maximum outstanding during fiscal 2007 under these lines of credit was $148.8 million compared to $85.1 million in fiscal 2006. The weighted average interest rate for these borrowings was 7.8% in fiscal 2007 compared to 7.2% in fiscal 2006. The company had $84.3 million in borrowings under this line of credit at September 30, 2007 compared to $35.2 million at September 30, 2006.

 

Under the terms of the revolving line of credit agreement, the company is subject to various requirements, including maintaining a minimum net worth, maintaining a ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to total debt, including letters of credit, maintaining a fixed charges coverage ratio, maintaining a minimum debt borrowing amount from its subsidiaries and maintaining limits on the amount of assets that the company can dispose of in a fiscal year. These requirements may limit borrowings under this credit agreement. As of September 30, 2007, the company was in violation of the fixed charge coverage ratio covenant, principally due to the $45.3 million liability recorded for the TruePosition intellectual property litigation, and the classification of convertible notes as current liabilities, as the holders of the notes may require the company to repurchase the notes in August 2008. The company obtained a waiver from the lenders that allows it to utilize the entire $250 million until the earlier of December 31, 2007 or the closing of the proposed CommScope transaction.

 

Several of the company’s foreign subsidiaries maintain credit agreements. In fiscal 2007, the company’s Brazilian subsidiary had the ability to borrow under a $20 million multi-currency line of credit with ABN-AMRO for which there were no borrowings or outstanding amounts during fiscal 2007. Also in fiscal 2007, the company’s Suzhou, China-based subsidiary renewed its $40 million line of credit agreement with the Agricultural Bank of China, through March of 2008. This credit line had maximum borrowings during fiscal 2007 of $9.3 million, at an average interest rate of 5.3%. As of September 30, 2007, there was $1.3 million outstanding on the Suzhou credit line.

 

During fiscal 2007, the company’s Indian subsidiary renewed its existing $25 million line of credit with Bank of America, New Delhi. The maximum borrowings under this agreement were $7.1 million at an average interest rate of 10.2%. At September 30, 2007, there were no borrowings outstanding under this agreement. In fiscal 2007, the company’s Shenzhen, China subsidiary renewed its existing $4.0 million credit agreement with the China Merchants Bank. This line of credit had no borrowings during fiscal 2007.

 

In fiscal 2007, the company’s Italian subsidiary had credit lines totaling $33 million with three banks. Banca Nazionale de Lavoro was the primary lender during fiscal 2007. The maximum borrowings, during fiscal 2007, by the Italian subsidiary amounted to approximately $7.9 million, none of which was outstanding at September 30, 2007. The average interest rate on this credit line was 4.3%. Finally, the company’s Japanese subsidiary maintains a month-to-month $5 million line of credit with the Bank of Tokyo-Mitsubishi UFJ, Ltd. This line of credit had maximum borrowings of $5 million, all of which was outstanding at September 30, 2007 with an average interest rate of 1.8%.

 

60


Table of Contents

Long-Term Debt

 

Long-term debt at September 30, 2007 consisted of the following:

 

     September 30  
Dollars in thousands    2007     2006  

Convertible subordinated notes

   $ 240,000     $ 240,000  

6.65% senior notes

           15,666  

6.74% senior notes

           9,000  

EURO loans from Italian Ministry of Industry at a weighted average rate of 2.39%

     5,399       5,209  

EURO loans from San Paolo Bank at a weighted average rate of 2.92%

     6,466       7,384  

Capital lease obligations (see Note 10)

     2,203       404  

Facility lease obligation (see Note 10)

           25,200  

Other

     233       583  

Total Debt

     254,301       303,446  

Less: Current portion

     (242,968 )     (13,068 )

Total Long-Term Debt

   $ 11,333     $ 290,378  

 

In August 2003, the company sold $240.0 million of 3.25% convertible subordinated notes due fiscal 2013. Holders may convert the notes into shares of common stock at a conversion price of $13.69 per share (73.0482 shares per $1,000 of principal), subject to adjustment, before the close of business on August 15, 2013 only under the following circumstances: (1) during any fiscal quarter commencing after September 30, 2003, if the closing sale price of common stock exceeds $16.43 (120% of the conversion price) for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the notes for each day of that period was less than 98% of the product of the closing sale price of common stock and the number of shares of common stock to be issued upon conversion of $1,000 principal amount of the notes; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain specified corporate transactions. The company may not redeem the notes prior to August 20, 2008, after which time it may redeem the notes at 100% of their principal amount plus accrued and unpaid interest, if any. Holders may require the company to repurchase the notes at 100% of the principal amount of the notes plus accrued and unpaid interest on August 15, 2008. Due to the holders’ ability to call the notes for payment within the next twelve months, the notes have been classified as current on the balance sheet as of September 30, 2007.

 

The amounts of long-term debt borrowings maturing after September 30, 2007 are as follows:

 

Dollars in millions    2008    2009    2010    2011    2012    Thereafter
     $ 3.0    $ 2.5    $ 2.1    $ 2.2    $ 2.1    $ 242.4

 

Cash payments for interest on all borrowings were $16.6 million, $13.9 million and $12.9 million in fiscal 2007, 2006 and 2005, respectively. The company had assets pledged of $2.9 million to support its Italian loans which are classified as long-term assets on the balance sheet.

 

At September 30, 2007, the company estimated the fair value of its long-term debt to be $255.7 million compared to its carrying value of $254.3 million. The difference between fair value and carrying value was predominantly due to the convertible subordinated notes, for which the company estimated the fair value based on current market price. The company estimated the fair value of its remaining long-term debt by discounting the future cash outflows of debt and interest payments using estimated current market rates for instruments with similar risk and terms to maturity.

 

Letters of Credit

The company utilizes letters of credit, bank guarantees, and surety bonds to support certain contracts, insurance policies and payment obligations. The letters of credit are issued from the $250 million credit facility and have terms of three years or less. The bank guarantees are primarily issued by local banks in foreign jurisdictions in which the company operates. The surety bonds are issued for business conducted with municipalities as part of the normal course of business. The letters of credit outstanding at September 30, 2007 and 2006 were $16.0 million and $15.3 million, respectively. The bank guarantees outstanding as of September 30, 2007 and 2006 were $2.9 million and $2.2 million, respectively. The surety bonds outstanding were $2.7 million, as of September 30, 2007 and 2006.

 

61


Table of Contents

8. Restructuring and Integration


 

During the fiscal year ended September 30, 2007, the company recorded $10.1 million of restructuring expense consisting of $9.7 million of employee-related severance costs and $0.4 million of lease cancellation and other costs; $4.6 million of these costs were paid in the period incurred during the fiscal year ended September 30, 2007 and $5.5 million of these costs were recorded as an increase to restructuring reserves. The expense during the fiscal year ended September 30, 2007 relates to the following segments: Base Station Subsystems, $6.6 million; Antenna and Cable, $1.9 million; unallocated sales and administrative, $1.0 million; Network Solutions, $0.2 million; Wireless Innovations, $0.3 million; and Satellite Communications, $0.1 million. The majority ($5.4 million) of the Base Station Subsystems expense was related to the reduction of headcount in Italy due to the company’s previously announced plans to outsource certain North American and European filter production. The remaining $4.7 million of expense was primarily due to cost cutting initiatives to reduce headcount in specific departments that were initiated and completed in the same quarter. In addition, the company established integration reserves for the Precision and EMS acquisitions of $0.6 million and $0.9 million, respectively. These reserves were recorded as an increase to goodwill.

 

At September 30, 2007, the company’s total restructuring reserve balance was $3.9 million, which was comprised of $2.3 million for the Allen Telecom acquisition integration plan, $0.2 million for the Channel Master integration plan, $0.1 million for the Skyware acquisition integration plan, $1.2 million for the European restructuring plans, and $0.1 million for the EMS Wireless integration plan.

 

Restructuring Reserve

In fiscal 2002, the company initiated a plan to restructure its operations. As part of this plan, the company consolidated its operations into fewer, more efficient facilities and opened two new manufacturing facilities in Mexico and the Czech Republic. In fiscal 2002, when the company initiated its restructuring efforts, it incurred pre-tax charges of $36.0 million. In fiscal 2003 and 2004, the company made additional accruals to operating expense of $7.9 million and $7.5 million, respectively, primarily for additional severance and lease cancellation costs. The company does not expect to incur any additional expense related to this plan.

 

Since the start of this restructuring initiative in fiscal 2002, the company has incurred $20.7 million of inventory and equipment write-downs, paid severance costs of $17.3 million to 1,226 employees, paid $12.3 million for lease cancellation and other costs, and reversed $1.2 million to income. During fiscal 2007, the company decreased the reserve $0.3 million as an adjustment to the lease reserve. Additionally, in fiscal 2007, the company incurred cash costs of $0.9 million for lease payments. The balance remaining at September 30, 2007, was less than $0.1 million.

 

A summary of the restructuring reserve activity for fiscal 2007 and 2006 is as follows (in thousands):

 

Restructuring Reserve Activity   

Reserve

Balance

Sept. 30, 2005

  

Utilization

of Reserve

   

Changes

to Reserve

   

Reserve

Balance

Sept. 30, 2006

Lease cancellation and other costs

   $ 3,966    $ (1,810 )   $ (920 )   $ 1,236
Restructuring Reserve Activity   

Reserve

Balance

Sept. 30, 2006

  

Utilization

of Reserve

    Changes
to Reserve
   

Reserve

Balance

Sept. 30, 2007

Lease cancellation and other costs

   $ 1,236    $ (940 )   $ (252 )   $ 44

 

Allen Telecom Integration Reserve

As part of the Allen Telecom acquisition in fiscal 2003, the company accrued an integration reserve for costs to integrate Allen’s operations with those of the company and to eliminate duplicate operations. The initial cost estimate of $29.9 million was comprised of a $16.2 million provision for inventory and fixed asset write-downs and a restructuring reserve of $13.7 million for employee termination, lease cancellation and other costs. During fiscal 2004, the company adjusted this initial estimate and recorded an additional $13.6 million of reserves consisting of $14.1 million of additional employee termination, lease cancellation and other costs, and a $0.5 million reduction in expected inventory provisions. Integration reserves established in purchase accounting were accounted for as a decrease in tangible assets acquired and an increase in liabilities assumed from Allen Telecom.

 

62


Table of Contents

Included in the fiscal 2004 Allen Telecom integration reserve were costs to close a facility in France. In fiscal 2005, the company determined that it would continue to operate in this facility. The company reversed $2.7 million in severance and $0.9 million of lease cancellation and other costs that had been accrued for the closing of this facility. The reversal of this accrual was treated as a decrease in liabilities acquired from Allen Telecom resulting in a $3.6 million decrease in goodwill.

 

The company increased the reserve and recorded expense of $0.5 million and $0.9 million in fiscal 2007 and 2006, respectively, for additional lease cancellation costs related to the Amesbury, Massachusetts facility and decreased the reserve and goodwill in fiscal 2007 and 2006 by $0.4 million and $1.1 million, respectively, for severance and other costs that will not be incurred. During the first quarter of fiscal 2007, the company completed the transfer of its North American and European filter production to a contract manufacturer. and ceased operations in its Amesbury facility. The company is attempting to sublease the facility, and has recorded a restructuring reserve for the currently expected rent cost associated with the unused facility. The lease for the Amesbury facility expires in 2010.

 

Since the start of these integration efforts in 2003, the company has incurred $15.7 million of inventory and fixed asset write-downs, paid severance costs of $12.0 million to 462 employees, and paid $10.0 million for lease cancellation and other costs. During fiscal 2007, the company paid cash costs of $0.4 million for severance payments to 55 employees and $1.2 million for lease payments. The company does not expect to incur any significant additional expense related to this plan. The reserve balance at September 30, 2007 of $2.3 million primarily relates to the Amesbury facility previously used by the Base Station Subsystems segment.

 

A summary of the Allen Telecom integration reserve activity for fiscal 2007 and 2006 is as follows (in thousands):

 

Allen Telecom Integration Reserve Activity   

Reserve

Balance

Sept. 30, 2005

  

Utilization

of Reserve

    Changes
to Reserve
   

Reserve

Balance

Sept. 30, 2006

Severance

   $ 1,426    $ (66 )   $ (630 )   $ 730

Lease cancellation and other costs

     2,868      (423 )     474       2,919

Total Allen Telecom Integration Reserve

   $ 4,294    $ (489 )   $ (156 )   $ 3,649

 

Allen Telecom Integration Reserve Activity   

Reserve

Balance

Sept. 30, 2006

   Utilization
of Reserve
    Changes
to Reserve
   

Reserve

Balance

Sept. 30, 2007

Severance

   $ 730    $ (362 )   $ (368 )   $

Lease cancellation and other costs

     2,919      (1,162 )     508       2,265

Total Allen Telecom Integration Reserve

   $ 3,649    $ (1,524 )   $ 140     $ 2,265

 

Channel Master Integration Reserve

As part of the Channel Master acquisition in fiscal 2004, the company accrued an integration reserve for costs to restructure Channel Master’s U.S. manufacturing operations. The initial cost estimate of $5.2 million was comprised of a $2.9 million provision for relocation and restructuring of manufacturing operations and a $2.3 million provision to pay severance benefits to approximately 245 manufacturing employees. The $5.2 million was treated as a purchase accounting adjustment and was recorded as an increase in the value of net assets acquired.

 

In fiscal 2006, $4.6 million of the previously established reserve was reversed as the company executed a lease agreement to retain a smaller, more cost-effective portion of its existing facility in Smithfield, North Carolina that eliminated the need for employee severance and the majority of facility-related costs. This resulted in a purchase accounting adjustment to decrease the net assets acquired (there was no goodwill acquired in this acquisition). In fiscal 2007, the company paid cash costs of $0.4 million for facility-related costs. The company does not expect to incur any significant additional expense related to this plan. Channel Master’s operations are included in the Satellite Communications segment.

 

63


Table of Contents

A summary of the Channel Master integration reserve activity for fiscal 2007 and 2006 is as follows (in thousands):

 

Channel Master Integration Reserve Activity   

Reserve

Balance

Sept. 30, 2005

   Utilization
of Reserve
   Changes
to Reserve
   

Reserve

Balance

Sept. 30, 2006

Severance

   $ 2,293    $    $ (2,293 )   $

Lease cancellation and other costs

     2,879           (2,272 )     607

Total Channel Master Integration Reserve

   $ 5,172    $    $ (4,565 )   $ 607

 

Channel Master Integration Reserve Activity   

Reserve

Balance

Sept. 30, 2006

   Utilization
of Reserve
    Changes
to Reserve
  

Reserve

Balance

Sept. 30, 2007

Lease cancellation and other costs

     607      (383 )          224

Total Channel Master Integration Reserve

   $ 607    $ (383 )   $    $ 224

 

Skyware Integration Reserve

As part of the Skyware acquisition in fiscal 2006, the company accrued an integration reserve for costs to integrate Skyware’s operations with those of Andrew. The initial cost estimate of $0.7 million was comprised of a $0.4 million provision for restructuring manufacturing operations and $0.3 million to pay severance benefits to a total of 15 people. The $0.7 million restructuring reserve was treated as a purchase accounting adjustment and recorded as an increase in the value of goodwill. In fiscal 2007, the company paid cash costs of $0.3 million for severance and $0.3 million for lease payments. Additionally, in fiscal 2007, the company adjusted the initial reserve estimate and reversed $0.1 million of lease cancellation costs. The lease for the unused facility expires in fiscal 2008. The reserve balance relates to the Satellite Communications segment. The company does not expect to incur any additional significant expense related to this integration plan.

 

A summary of the Skyware integration reserve activity for fiscal 2007 and 2006 is as follows (in thousands):

 

Skyware Integration Reserve Activity   

Reserve

Balance

Sept. 30, 2005

  

Establish

Reserve

  

Utilization

of Reserve

   Changes
to Reserve
  

Reserve

Balance

Sept. 30, 2006

Severance

   $    $ 337    $    $    $ 337

Lease cancellation and other costs

          338                338

Total Skyware Integration Reserve

   $    $ 675    $    $    $ 675

 

Skyware Integration Reserve Activity   

Reserve

Balance

Sept. 30, 2006

  

Utilization

of Reserve

    Changes
to Reserve
   

Reserve

Balance

Sept. 30, 2007

Severance

   $ 337    $ (324 )   $     $ 13

Lease cancellation and other costs

     338      (243 )     (66 )     29

Total Skyware Integration Reserve

   $ 675    $ (567 )