UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
July 2,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number
001-33278
AVIAT NETWORKS, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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20-5961564
(I.R.S. Employer
Identification No.)
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5200 Great American Parkway
Santa Clara, CA 95054
(Address of principal
executive offices)
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95054
(Zip
Code)
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Registrants telephone number, including area code:
(408) 567-7000
HARRIS STRATEX NETWORKS, INC.
637 Davis Drive
Morrisville, North Carolina 27560
(Former name, former
address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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The NASDAQ Global Market
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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 o No þ
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 o No þ
Indicate by check mark whether the registrant (l) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
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 registrants knowledge, in definitive proxy statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of December 31, 2009 (the last business day of the
registrants most recently completed second fiscal
quarter), the aggregate market value of the registrants
Common Stock held by non-affiliates was approximately
$403,167,000 based upon the closing price per share on The
NASDAQ Global Market. For purposes of this calculation, the
registrant has assumed that its directors and executive officers
as of December 31, 2009 are affiliates.
The number of shares outstanding of the registrants Common
Stock as of August 27, 2010 was 59,400,021 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
the Annual Meeting of Shareholders scheduled to be held on or
about November 9, 2010, which will be filed with the
Securities and Exchange Commission within 120 days after
the end of the registrants fiscal year ended July 2,
2010, are incorporated by reference into Part III of this
Annual Report on
Form 10-K.
AVIAT
NETWORKS, INC.
ANNUAL
REPORT ON
FORM 10-K
For the
Fiscal Year Ended July 2, 2010
Table of
Contents
2
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K,
including Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations,
contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they do not
materialize or prove correct, could cause our results to differ
materially from those expressed or implied by such
forward-looking statements. All statements other than statements
of historical fact are statements that could be deemed
forward-looking statements, including statements of, about,
concerning or regarding: our plans, strategies and objectives
for future operations; our research and development efforts and
new product releases and services; trends in revenue; drivers of
our business and the markets in which we operate; future
economic conditions, performance or outlook and changes in our
industry and the markets we serve; the outcome of contingencies;
the value of our contract awards; beliefs or expectations; the
sufficiency of our cash and our capital needs and expenditures;
our intellectual property protection; our compliance with
regulatory requirements and the associated expenses;
expectations regarding litigation; our intention not to pay cash
dividends; seasonality of our business; the impact of foreign
exchange and inflation; taxes; and assumptions underlying any of
the foregoing. Forward-looking statements may be identified by
the use of forward-looking terminology, such as
anticipates, believes,
expects, may, should,
would, will, intends,
plans, estimates, strategy,
anticipates, projects,
targets, goals, seeing,
delivering, continues,
forecasts, future, predict,
might, could, potential, or
the negative of these terms, and similar words or expressions.
These forward-looking statements are based on estimates
reflecting the current beliefs of the senior management of Aviat
Networks. These forward-looking statements involve a number of
risks and uncertainties that could cause actual results to
differ materially from those suggested by the forward-looking
statements. Forward-looking statements should therefore be
considered in light of various important factors, including
those set forth in this document. Important factors that could
cause actual results to differ materially from estimates or
projections contained in the forward-looking statements include
the following:
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continued weakness in the global economy affecting customer
spending;
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continued price erosion as a result of increased competition
in the microwave transmission industry;
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the impact of the volume, timing and customer, product and
geographic mix of our product orders may have an impact on our
operating results;
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our ability to maintain projected product rollouts, product
functionality, anticipated cost reductions or market acceptance
of planned products;
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retention of our key personnel;
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our ability to achieve business plans for Aviat Networks;
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our ability to manage and maintain key customer
relationships;
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uncertain economic conditions in the telecommunications
sector combined with operator and supplier consolidation;
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our future litigation costs and expenses;
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the ability of our subcontractors to perform or our key
suppliers to manufacture or deliver material;
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the timing of our receipt of payment for products or services
from our customers;
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our failure to protect our intellectual property rights or
defend against intellectual property infringement claims by
others;
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the effects of currency and interest rate risks; and
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the impact of political, economic and geographic risks on
international sales.
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Other factors besides those listed here also could adversely
affect us. See Item 1A. Risk Factors in this
Annual Report on
Form 10-K
for more information regarding factors that may cause our
results to differ materially from those expressed or implied by
the forward-looking statements contained in this Annual Report
on
Form 10-K.
You should not place undue reliance on these forward-looking
statements, which reflect our managements opinions only as
of the date of the filing of this Annual Report on
Form 10-K.
Forward-looking statements are made in reliance upon the safe
harbor provisions of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, along with provisions of the
Private Securities Litigation Reform Act of 1995, and we
undertake no obligation, other than as imposed by law, to update
forward-looking statements to reflect further developments or
information obtained after the date of filing of this Annual
Report on
Form 10-K
or, in the case of any document incorporated by reference, the
date of that document.
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PART I
Aviat Networks, Inc., together with its subsidiaries, is a
leading global supplier of turnkey wireless network solutions
and comprehensive network management software, backed by an
extensive suite of professional services and support. Aviat
Networks, Inc. may be referred to as the Company,
AVNW, Aviat Networks, we,
us and our in this Annual Report on
Form 10-K.
We were incorporated in Delaware in 2006 to combine the
businesses of Harris Corporations Microwave Communications
Division (MCD) and Stratex Networks, Inc.
(Stratex).
Our principal executive offices are located at 5200 Great
America Parkway, Santa Clara, CA 95054, and our telephone
number is
(408) 567-7000.
Our common stock is listed on the NASDAQ Global Market under the
symbol AVNW. As of July 2, 2010, we employed approximately
1,380 people.
Recent
Developments
We relocated our corporate headquarters in June 2010 from
Morrisville, North Carolina to a 129,000-square foot
environmentally sustainable facility in Santa Clara,
California. The relocation follows our global re-branding effort
as Aviat Networks, formerly Harris Stratex Networks, which we
announced on January 28, 2010. We selected this particular
facility because it fulfills our Green Initiative, a corporate
commitment to minimizing the impact on the environment in all
aspects of their business. The facility was completely renovated
to adhere to green building standards and is in the process of
qualifying for a Gold LEED (Leadership in Energy and
Environmental Design) certification from the U.S. Green
Building Council based on design and construction activities in
each of the five LEED credit categories.
On June 28, we also announced the resignation of Harald J.
Braun as president and chief executive officer and the
appointment of Chuck Kissner as Chairman and chief executive
officer. Mr. Kissner had previously been serving as our
Chairman of the Board of Directors and is based at our
headquarters in Santa Clara, California. We also appointed
Dr. James C. Stoffel as Lead Independent Director as of
June 28, 2010.
Overview
and Description of Business by Segment
We design, manufacture and sell a range of wireless networking
products, solutions and services to mobile and fixed telephone
service providers, private network operators, government
agencies, transportation and utility companies, public safety
agencies and broadcast system operators across the globe. Our
products include both
point-to-point
(PTP) and
point-to-multipoint
(PMP) digital microwave transmission systems designed for
first/last mile access, middle mile/backhaul, and long distance
trunking applications. Our PMP product portfolio includes base
stations and subscriber equipment based upon the IEEE
802.16d-2004
and 16e-2005
standards for fixed and mobile Worldwide Interoperability for
Microwave Access (WiMAX). We also provide network
management software solutions to enable operators to deploy,
monitor and manage our systems, third party equipment such as
antennas, routers, multiplexers, etc, necessary to build and
deploy a wireless transmission network, and a full suite of
turnkey support services. We offer a broad range of products and
services through two reportable business segments based on
geographical markets: North America and International. Revenue
and other financial information regarding our business segments
are set forth in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
North
America Segment
The North America segment delivers microwave radio products and
services to major national carriers and other cellular network
operators, public safety and other government agencies, systems
integrators, transportation and utility companies and other
private network operators within North America. Our North
American business is primarily to the cellular backhaul and
public safety markets.
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Our North America segment revenue represented approximately 37%,
34% and 34% of our total revenue for fiscal 2010, 2009 and 2008.
Although, generally we sell products and services directly to
our North American customers, we also use distributors to sell
some products and services.
International
Segment
The International segment delivers microwave radio products and
services to regional and national carriers and other cellular
network operators, public safety agencies, government and
defense agencies, and other private network operators in every
region outside of North America. Our wireless systems deliver
regional and country-wide backbone in developing nations, where
microwave radio installations provide
21st-century
communications rapidly and economically. Rural communities,
areas with rugged terrain and regions with extreme temperatures
benefit from the ability to build an advanced, affordable
communications infrastructure despite these challenges. A
significant part of our international business consists of
supplying wireless segments in small-pocket, remote, rural and
metropolitan areas. High-capacity backhaul is one of the fastest
growing wireless market segments and is a major opportunity for
us. We see the increase in subscriber density and the forecasted
growth and introduction of new bandwidth-hungry High Speed
Packet Access (HSPA)/WiMAX/Long Term Evolution
(LTE) mobile broadband services as major drivers for
growth in this market.
Our International segment represented approximately 63%, 66% and
66% of our revenue for fiscal 2010, 2009 and 2008. We sell
products and services directly to our international customers
and also use agents and distributors.
Industry
Background
Wireless transmission networks currently are constructed using
microwave radios and other equipment to interconnect cell sites,
switching systems, wireline transmission systems and other fixed
access facilities. Wireless transmission networks range in size
from a single transmission link connecting two buildings to
complex networks comprising of thousands of wireless links. The
architecture of a network is influenced by several factors,
including the available radio frequency spectrum, coordination
of frequencies with existing infrastructure, application
requirements, environmental factors and local geography.
In recent years, there has been an increase in capital spending
in the wireless telecommunications industry. The demand for
high-speed wireless transmission products has been growing at a
higher rate than the wireless industry as a whole. We believe
that this growth is directly related to a growing global
subscriber base for mobile wireless communications services,
increased demand for fixed wireless transmission solutions and
demand for new services delivered from next-generation networks
capable of delivering broadband services. Major driving factors
for such growth include the following:
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Global wireless subscriber growth and introduction of new
broadband mobile services. The number of global
wireless subscribers and minutes of use per subscriber are
expected by industry analysts to continue to increase. The
primary drivers include increased subscription and dramatic
growth in demand for mobile broadband data services facilitated
by the introduction of new data-driven smartphones like the
iPhone and the Droid. These third-generation, or 3G,
data applications are now widely available in developed
countries, which has fueled an acceleration of data usage. New
mobile standards now being deployed, including High Speed Packet
Access (HSPA) and mobile WiMAX, will further increase the demand
for mobile data. We believe that growth as a result of new data
services will continue for the next several years and persist
with the introduction of the next generation of radio
technologies, referred to as 4G or LTE for mobile
networks starting in 2011. These developments are driving many
operators to upgrade their backhaul networks to 100% Internet
Protocol, or
IP-based,
from the current traditional time-division multiplexing
(TDM) networks in order to provide higher network
capacity and increased flexibility at a lower overall operating
cost.
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Broadband Stimulus. The American Recovery and
Reinvestment Act (ARRA), widely known as the
stimulus bill, allocates $7.2 billion in grant and loan
funding for broadband/wireless initiatives for rural unserved
and underserved geographies across the country. This funding is
available to a wide variety of organizations to purchase and
implement network infrastructure and services to improve
broadband coverage. Aggressive stimulus timelines, combined with
the rural-focus of stimulus projects may drive
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increasing demand for wireless technologies including
point-to-point microwave systems and point-to-multipoint WiMax.
Other countries, such as Australia, are also implementing
broadband programs with government funding to simultaneously
develop rural broadband services and stimulate local economies.
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Smart Grid. In addition to the broadband
initiative, ARRA includes the Smart Grid Investment Grant
Program (SGIG) which makes close to $4 billion available to
utilities, rural electric cooperatives, distribution companies
and system operators, for smart grid technologies, monitoring
solutions and infrastructure, and viability analysis. Utility
companies across the board are planning heavy investments in new
private telecommunications network infrastructure to achieve
smart grid objectives. Like broadband stimulus, aggressive smart
grid timelines, combined with the rural nature of many utility
assets (including substations, distribution lines and power
generation facilities), may drive increasing demand for wireless
technologies.
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Increased establishment of mobile and fixed wireless
telecommunications infrastructures in developing
countries. In many places, telecommunications
services are inadequate or unreliable because of the lack of
existing infrastructure. To service providers in developing
countries seeking to increase the availability and quality of
telecommunications and Internet access services, wireless
solutions are an attractive alternative to the construction or
leasing of wireline networks, given their relatively low cost
and ease of deployment. As a result, there has been an increased
establishment of mobile and fixed wireless telecommunications
infrastructures in developing countries. Emerging
telecommunications markets in Africa, Asia, the Middle East,
Latin America and Eastern Europe are characterized by a need to
build out basic telecommunications systems. We believe that
WiMAX will play a key role in bringing broadband services to
these countries which lack sufficient existing telecom
infrastructure. Mobile operators are also looking at WiMAX
deployments to augment or leverage their existing national
networks to add new premium broadband residential and business
customers to increase subscriber base and boost their average
revenue per user.
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Global deregulation of telecommunications market and
allocation of radio frequencies for broadband wireless
access. Regulatory authorities typically allocate
different portions of the radio frequency spectrum for various
telecommunications services. Many countries have privatized the
state-owned telecommunications monopoly and have opened their
markets to competitive network service providers. Often these
providers choose a wireless transmission service, which causes
an increase in the demand for transmission solutions. Such
global deregulation of the telecommunications market and the
related allocation of radio frequencies for broadband wireless
access transmission have led to increased competition to supply
wireless-based transmission systems. Many governments and
regulatory agencies around the world also are examining or are
in the process of introducing new spectrum band licenses for the
deployment of broadband services using WiMAX.
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Recent
Trends and Developments in the Industry
Other global trends and developments in the microwave
communications markets include:
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continuing fixed-line to mobile-line substitution;
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the migration of existing telecommunications network
infrastructure from legacy TDM technologies such as Synchronous
Digital Hierarchy (SDH)/Synchronous Optical
Networking (SONET) to high speed packet-based
networks such as Ethernet/Internet Protocol
(IP)/Multiprotocol Label Switching
(MPLS), etc. This migration is moving faster in some
sectors, such as mobile networks, than others, but is a clear
trend for the future that will drive significant network
upgrades over the next three to five years;
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private networks and public telecommunications operators
building high-reliability, high-bandwidth networks that are more
secure and better protected against natural and man-made
disasters;
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increase in global wireless subscribers; and
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We believe that as broadband access and telecommunications
requirements grow, wireless systems will continue to be used as
transmission systems to support a variety of existing and
expanding communications networks and applications. We believe
that wireless systems will be used to address the connection
requirements of
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several markets and applications, including the broadband access
market, cellular applications and private networks.
Strategy
Over the past year, we have made significant strides in
transforming our business from a pure-play microwave backhaul
supplier to a more diverse company that not only strives to be a
leader in mobile backhaul but also one that supports a broad
range of wireless transmission products and services for many
applications. We offer and will continue to improve upon our
end-to-end transmission solutions that deliver the network
performance needed to support next generation services and
enable a smooth transition from legacy networks to all IP.
Newer generation 4G technologies such as packet-based, WiMAX,
and LTE require the need for high-speed packet infrastructures.
To address their requirements, we intend to enhance our core
product offering by continuing to build on the Eclipse platform
and its end-to-end value proposition by including new components
and technology. This includes adding new features to the Eclipse
platform and leveraging technology in third party products to
provide a complete IP network solution.
We look to retain our position as a wireless transmission
technology leader with Eclipse by ensuring our capabilities
anticipate the evolving needs of our customers and the
corresponding network technology use. The future roadmap for
Eclipse evolves the platform toward a full convergence solution
with embedded capabilities enabling a migration path to an all
IP network. We believe that the Eclipse solution for evolution
to IP is the lowest risk, lowest cost, and most flexible
solution available because it builds incrementally on the
customers existing investment, delivering a smooth
hybrid to full IP migration path for customers
globally. The IP evolution capabilities are specifically enabled
by the modular additions. This incremental plug-in approach
allows operators to move toward an all IP based system at their
own pace without the risk, downtime or expense associated with a
complete replacement or the forced migration to another platform.
Our strategy includes partnering with companies with technical
expertise in areas outside of our core competencies to meet our
customers demand for an end-to-end solution. Our partner
product strategy enables us to go beyond wireless transmission
to combat the vendor consolidation trend whereby customers are
buying more from fewer vendors and in doing so
providing expanding market share opportunity. A comprehensive
solutions portfolio comprised of our wireless product and
intelligent partner products can allow us to compete with
vendors that offer turnkey solution portfolios and serve to
focus our R&D efforts on core competency wireless
innovations. Having a broader portfolio will enable us to
further differentiate our offerings from other independent
microwave equipment suppliers.
We expect to continue to serve and expand upon our existing
customer base. We have sold more than 500,000 microwave radios
in over 150 countries and are present in more than 260 mobile
networks worldwide. We intend to leverage our customer base, our
longstanding presence in many countries, our distribution
channels, our comprehensive product line, our superior customer
service and our turnkey solution capability to continue to sell
existing and new products and services to current customers.
Products
and Solutions
We offer a comprehensive product and solutions portfolio that
addresses the needs of service providers and network operators
in every region of the world, addressing a broad range of
applications, frequencies, capacities and network topologies.
Product categories include point-to-point microwave radios that
are licensed (subject to local frequency regulatory
requirements) and license-exempt (operating in license-exempt
frequencies), element and network management software and
4G/WiMAX (fixed and mobile) broadband access. In addition, we
provide end-to-end turnkey broadband telecommunications systems,
including complete design, deployment, maintenance, and managed
network services, while being an attentive and adaptable partner
for our customers a key competitive differentiator
for Aviat Networks.
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Broad product and solution portfolio. We offer
a comprehensive suite of wireless systems for 4G/WiMAX broadband
access and microwave backhaul applications. Our solution
consists of tailored offerings of our own wireless products and
our own integrated ancillary equipment or that of other
manufacturers, element
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and network management systems and professional services. These
solutions address a wide range of transmission frequencies,
ranging from 400 MHz to 80 GHz, and a wide range of
transmission capacities, ranging up to 2.5 gigabits per second.
The major product families included in these solutions are
StarMAX, Eclipse Packet Node, and ProVision.
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Low total cost of ownership. Wireless-based
solutions offer a relatively low total cost of ownership,
including savings on the combined costs of initial acquisition,
installation and ongoing operation and maintenance. Our latest
generation system designs reduce rack space requirements,
require less power, are software-configurable to reduce spare
parts requirements, and are simple to install, operate, upgrade
and maintain. Our advanced wireless features can also enable
operators to save on related costs, including spectrum fees and
tower rental fees.
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Future-proof network. Our solutions are
designed to protect the network operators investment by
incorporating software-configurable capacity upgrades and
plug-in modules that provide a smooth migration path to emerging
technologies, such as carrier Ethernet and
IP-based
networking, without the need for costly equipment substitutions
and additions. Our products include key technologies we believe
will be needed by operators for their network evolution to
support new broadband services.
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Flexible, easily configurable products. We use
flexible architectures with a high level of software
configurable features. This design approach produces
high-performance products with the reusable components while at
the same time allowing for a manufacturing strategy with a high
degree of flexibility, improved cost and reduced time-to-market.
The software features of our products offer our customers a
greater degree of flexibility in installing, operating and
maintaining their networks.
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Comprehensive network management. We offer a
range of flexible network management solutions, from element
management to enterprise-wide network management and service
assurance that we optimize to work with our wireless systems.
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Complete professional services. In addition to
our product offerings, we provide network planning and design,
site surveys and builds, systems integration, installation,
maintenance, network monitoring, training, customer service and
many other professional services. Our services cover the entire
evaluation, purchase, deployment and operational cycle and
enable us to be one of the few complete turnkey solution
providers in the industry.
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Business
Operations
Sales
and Service
We believe that a direct and continuing relationship with
service providers is a competitive advantage in attracting new
customers and satisfying existing ones. As a result, we offer
our products and services through our own direct sales, service
and support organization, which allows us to closely monitor the
needs of our customers. We have offices in Canada and the United
States in North America; Brazil and Argentina in Central and
South America; Slovenia, France, Germany, Poland, Portugal
and the United Kingdom in Europe; Kenya, Nigeria, Ivory Coast
and South Africa in Africa; the United Arab Emirates in the
Middle East; and Australia, Bangladesh, India, Indonesia,
Malaysia, New Zealand, the Philippines, Singapore and Thailand
in the Asia-Pacific region. Our local offices provide us with a
better understanding of our customers needs and enable us
to respond to local issues and unique local requirements.
We also have informal, and in some cases formal, relationships
with original equipment manufacturers or OEMs and system
integrators. Such relationships increase our ability to pursue a
limited number of major contract awards each year. In addition,
such relationships provide our customers with easier access to
financing and integrated system providers with a variety of
equipment and service capabilities. In selected countries, we
also market our products through independent agents and
distributors, as well as through system integrators.
We have repair and service centers in India, Nigeria, the
Philippines, the United Kingdom and the United States. Our
international headquarters in Singapore provides sales and
customer support for the Asia-Pacific region from this facility.
We have customer service and support personnel who provide
customers with
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training, installation, technical support, maintenance and other
services on systems under contract. We install and maintain
customer equipment directly in some cases and contract with
third-party service providers in other cases, depending on the
equipment being installed and customer requirements.
The specific terms and conditions of our product warranties vary
depending upon the product sold and country in which we do
business. On direct sales, warranty periods generally start on
the delivery date and continue for two to three years.
Manufacturing
Historically, our manufacturing has involved a combination of
in-house and outsourced processes. In fiscal 2011, we will be
transitioning to an entirely outsourced manufacturing model
utilizing multiple locations of our existing contract
manufacturing partners both in the United States and
internationally.
In accordance with our global logistics requirements and
customer geographic distribution, we are engaged with contract
manufacturing partners in Asia and the United States. All
manufacturing operations have been certified to International
Standards Organization 9001, a recognized international quality
standard. We have also been certified to the TL 9000 standard, a
telecommunication industry-specific quality system standard.
Backlog
Our backlog by business segment is as follows:
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July 2, 2010
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July 3, 2009
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(In millions)
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North America
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$
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63.8
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$
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84.0
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International
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125.8
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126.9
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$
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189.6
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$
|
210.9
|
|
|
|
|
|
|
|
|
|
|
We expect to substantially fill the entire backlog during fiscal
2011, but we cannot be assured that this will occur. Product
orders in our current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser
without significant penalty. Accordingly, although useful for
scheduling production, backlog as of any particular date may not
be a reliable measure of sales for any future period because of
the timing of orders, delivery intervals, customer and product
mix and the possibility of changes in delivery schedules and
additions or cancellations of orders. The backlog figures
exclude advance payments and unearned income amounts. As of
July 2, 2010, no customers accounted for 10% or more of our
total backlog.
Customers
Principal customers for our products and services include
domestic and international wireless/mobile service providers,
OEMs, as well as private network users such as public safety
agencies, government institutions, and utility, pipeline,
railroad and other industrial enterprises that operate wireless
networks.
During fiscal 2010, 2009 and 2008, we had one International
segment customer in Africa (Mobile Telephone Networks or MTN)
that accounted for 17%, 17% and 13% of our total revenue. MTN is
an affiliated group of separate regional carriers and operators
located on the continent of Africa. As of July 2, 2010, MTN
as a whole accounted for approximately 7% of our accounts
receivable.
Although we have a large customer base, during any given fiscal
year or quarter, a small number of customers may account for a
significant portion of our revenue. In certain circumstances, we
sell our products to service providers through OEMs, which
provide the service providers with access to financing and in
some instances, protection from fluctuations in international
currency exchange rates.
10
International
Business
The following tables present measures of our revenue in
international markets as a percentage of total revenue and
international revenue:
|
|
|
|
|
|
|
Percentage of
|
Description
|
|
Total Revenue
|
|
Revenue from U.S. exports or manufactured abroad:
|
|
|
|
|
Fiscal 2010
|
|
|
67
|
%
|
Fiscal 2009
|
|
|
69
|
%
|
Fiscal 2008
|
|
|
73
|
%
|
|
|
|
|
|
|
|
Percentage of
|
Description
|
|
Non U.S. Revenue
|
|
Revenue from U.S. exports:
|
|
|
|
|
Fiscal 2010
|
|
|
7
|
%
|
Fiscal 2009
|
|
|
13
|
%
|
Fiscal 2008
|
|
|
22
|
%
|
|
|
|
|
|
|
|
Percentage of
|
Description
|
|
Total Revenue
|
|
Revenue from operations conducted in local international
currencies:
|
|
|
|
|
Fiscal 2010
|
|
|
16
|
%
|
Fiscal 2009
|
|
|
21
|
%
|
Fiscal 2008
|
|
|
22
|
%
|
|
|
|
|
|
|
|
Percentage of
|
Description
|
|
Total Revenue
|
|
Revenue from foreign countries representing more than 5% of
total revenue:
|
|
|
|
|
Fiscal 2010 Nigeria
|
|
|
18
|
%
|
Fiscal 2010 Saudi Arabia
|
|
|
7
|
%
|
Fiscal 2009 Nigeria
|
|
|
22
|
%
|
Fiscal 2009 Poland
|
|
|
5
|
%
|
Fiscal 2008 Nigeria
|
|
|
19
|
%
|
The functional currency of our subsidiaries located in the
United Kingdom, Singapore, Mexico, Algeria and New Zealand is
the U.S. dollar so the effect of foreign currency changes
have not had a significant effect on our revenue. Direct export
sales, as well as sales from international subsidiaries, are
primarily denominated in U.S. dollars. International
operations represented 55% and 63% of our long-lived assets as
of July 2, 2010 and as of July 3, 2009.
We conduct international marketing activities through
subsidiaries operating in Europe, Central and South America,
Africa and Asia. We also have established marketing
organizations and several regional sales offices in these same
geographic areas.
We use indirect sales channels, including dealers, distributors
and sales representatives, in the marketing and sale of some
lines of products and equipment internationally. These
independent representatives may buy for resale or, in some
cases, solicit orders from commercial or governmental customers
for direct sales by us. Prices to the ultimate customer in many
instances may be recommended or established by the independent
representative and may be above or below our list prices. These
independent representatives generally receive a discount from
our list prices and may mark up those prices in setting the
final sales prices paid by the customer.
A significant portion of our exports are paid for by letters of
credit, with the balance carried on an open account. In
addition, significant international government contracts
generally require us to provide performance guarantees.
11
The particular economic, social and political conditions for
business conducted outside the U.S. differ from those
encountered by domestic businesses. We believe that the overall
business risk for our international business as a whole is
somewhat greater than that faced by our domestic operations as a
whole. For a discussion of the risks we are subject to as a
result of our international operations, see Item 1A.
Risk Factors of this Annual Report on
Form 10-K.
Competition
The wireless access, backhaul and interconnection business is a
specialized segment of the wireless telecommunications industry
that is sensitive to technological advancements and is extremely
competitive. Some of our competitors have more extensive
engineering, manufacturing and marketing capabilities and
greater financial, technical and personnel resources than us.
Some of our competitors may have greater name recognition,
broader product lines (some including non-wireless
telecommunications equipment), a larger installed base of
products and longer-standing customer relationships. In
addition, some competitors offer seller financing which is a
competitive advantage in the current economic environment.
Although successful product and systems development is not
necessarily dependent on substantial financial resources, many
of our competitors are significantly larger than us and can
maintain higher levels of expenditures for research and
development. In addition, a portion of our overall market is
addressed by large mobile infrastructure providers who bundle
microwave radios with other mobile network equipment, such as
cellular base stations or switching systems, and offer a full
range of services. This part of the market is generally not open
to independent microwave suppliers like us.
We also compete with a number of smaller independent private and
public specialist companies, who typically leverage new
technologies and low-cost models, but usually are not able to
offer a complete solution including turnkey services in all
regions of the world.
Our principal microwave competitors include large mobile
infrastructure manufacturers such as Alcatel-Lucent, Ericsson,
NEC, Huawei and Nokia Siemens Networks, as well as a number of
other smaller public and private microwave specialists companies
such as Ceragon and DragonWave in selected markets. Some of our
competitors are OEMs or systems integrators through which we
sometimes distribute and sell products and services to end users.
We concentrate on market opportunities that we believe are
compatible with our resources, overall technological
capabilities and objectives. Principal competitive factors are
cost-effectiveness, product quality and reliability,
technological capabilities, service, ability to meet delivery
schedules and the effectiveness of dealers in international
areas. We believe that the combination of our network and
systems engineering support and service, global reach,
technological innovation, agility and close collaborative
relationships with our customers, are the key competitive
strengths for us. However, customers may still make decisions
based primarily on factors such as price, financing terms
and/or past
or existing relationships, where it may be difficult for us to
compete effectively.
Research,
Development and Engineering
We believe that our ability to enhance our current products,
develop and introduce new products on a timely basis, maintain
technological competitiveness and meet customer requirements is
essential to our success. Accordingly, we allocate, and intend
to continue to allocate, a significant portion of our resources
to research and development efforts in four major areas:
Backhaul, Radio Access Networks, Core Networks and Network
Management Systems. The majority of such research and
development resources will be used for point-to-point digital
microwave radio systems for access, backhaul, trunking and
license-exempt applications.
Our research, development and engineering expenditures totaled
$41.1 million, or 8.6% of revenue, in fiscal 2010,
$40.4 million, or 5.9% of revenue, in fiscal 2009, and
$46.1 million, or 6.4% of revenue in fiscal 2008.
Research, development and engineering are primarily directed to
the development of new products and to building technological
capability. We are, and historically have been, an industry
innovator. Consistent with our history and strategy of
introducing innovative products, we intend to continue to focus
significant resources on product development in an effort to
maintain our competitiveness and support our entry into new
markets. We
12
maintain new product development programs that could result in
new products and expansion of the Eclipse Packet Node,
and the new StarMAX platform which we acquired
February 27, 2009 as a result of our acquisition of Telsima
Corporation.
We maintain an engineering and new product development
department, with scientific assistance provided by
advanced-technology departments. As of July 2, 2010, we
employed a total of 272 people in our research and
development organizations in Morrisville, North Carolina;
Santa Clara, California; Wellington, New Zealand;
Singapore; Slovenia and India.
Raw
Materials and Supplies
Because of the diversity of our products and services, as well
as the wide geographic dispersion of our facilities, we use
numerous sources for the wide array of raw materials needed for
our operations and for our products, such as electronic
components, printed circuit boards, metals and plastics. We are
dependent upon suppliers and subcontractors for a large number
of components and subsystems and upon the ability of our
suppliers and subcontractors to adhere to customer or regulatory
materials restrictions and meet performance and quality
specifications and delivery schedules.
Our strategy for procuring raw material and supplies includes
dual sourcing on strategic assemblies and components. In
general, we believe this reduces our risk with regards to the
potential financial difficulties in our supply base. In some
instances, we are dependent upon one or a few sources, either
because of the specialized nature of a particular item or
because of local content preference requirements pursuant to
which we operate on a given project. Examples of sole or limited
sourcing categories include metal fabrications and castings, for
which we own the tooling and therefore limit our supplier
relationships, and MMICs (a type of integrated circuit used in
manufacturing microwave radios), which we procure at volume
discount from a single source. Our supply chain plan includes
mitigation plans for alternative manufacturing sources and
identified alternate suppliers.
While we have been affected by performance issues of some of our
suppliers and subcontractors, we have not been materially
adversely affected by the inability to obtain raw materials or
products. In general, any performance issues causing short-term
material shortages are within the normal frequency and impact
range experienced by high-tech manufacturing companies. They are
due primarily to the highly technical nature of many of our
purchased components. Looking ahead, there is an increasing
level of global shortages for some common electronic components
used by numerous manufacturers across the industry. During the
global economic downturn, many component suppliers reduced their
manufacturing capacity commensurate with declining global
demand. Recently, global demand has outpaced manufacturing
capacity for some electronic components resulting in extended
lead times and in some cases allocation to our contract
manufacturers.
Patents
and Other Intellectual Property
We consider our patents and other intellectual property rights,
in the aggregate, to constitute an important asset. We own a
portfolio of patents, trade secrets, know-how, confidential
information, trademarks, copyrights and other intellectual
property. We also license intellectual property to and from
third parties. As of August 18, 2010, we held 119
U.S. patents and 93 international patents and had 35
U.S. patent applications pending and 70 international
patent applications pending. We do not consider our business to
be materially dependent upon any single patent, license or other
intellectual property right, or any group of related patents,
licenses or other intellectual property rights. From time to
time, we might engage in litigation to enforce our patents and
other intellectual property or defend against claims of alleged
infringement. Any of our patents, trade secrets, trademarks,
copyrights and other proprietary rights could be challenged,
invalidated or circumvented, or may not provide competitive
advantages. Numerous trademarks used on or in connection with
our products are also considered to be valuable assets.
In addition, to protect confidential information, including our
trade secrets, we require our employees and contractors to sign
confidentiality and invention assignment agreements. We also
enter into non-disclosure agreements with our suppliers and
appropriate customers to limit access to and disclosure of our
proprietary information.
13
While our ability to compete may be affected by our ability to
protect our intellectual property, we believe that, because of
the rapid pace of technological change in the wireless
telecommunications industry, our innovative skills, technical
expertise and ability to introduce new products on a timely
basis will be more important in maintaining our competitive
position than protection of our intellectual property. Trade
secret, trademark, copyright and patent protections are
important but must be supported by other factors such as the
expanding knowledge, ability and experience of our personnel,
new product introductions and product enhancements. Although we
continue to implement protective measures and intend to
vigorously defend our intellectual property rights, there can be
no assurance that these measures will be successful.
Environmental
and Other Regulations
Our facilities and operations, in common with those of our
industry in general, are subject to numerous domestic and
international laws and regulations designed to protect the
environment, particularly with regard to wastes and emissions.
We believe that we have complied with these requirements and
that such compliance has not had a material adverse effect on
our results of operations, financial condition or cash flows.
Based upon currently available information, we do not expect
expenditures to protect the environment and to comply with
current environmental laws and regulations over the next several
years to have a material impact on our competitive or financial
position, but can give no assurance that such expenditures will
not exceed current expectations. From time to time, we receive
notices from the U.S. Environmental Protection Agency or
equivalent state or international environmental agencies that we
are a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act, which is
commonly known as the Superfund Act,
and/or
equivalent laws. Such notices may assert potential liability for
cleanup costs at various sites, which include sites owned by us,
sites we previously owned and treatment or disposal sites not
owned by us, allegedly containing hazardous substances
attributable to us from past operations. We are not presently
aware of any such liability that could be material to our
business, financial condition or operating results, but due to
the nature of our business and environmental risks, we cannot
provide assurance that any such material liability will not
arise in the future.
Electronic products are subject to environmental regulation in a
number of jurisdictions. Equipment produced by us is subject to
domestic and international requirements requiring end-of-life
management
and/or
restricting materials in products delivered to customers. We
believe that we have complied with such rules and regulations,
where applicable, with respect to our existing products sold
into such jurisdictions.
Radio communications are also subject to governmental
regulation. Equipment produced by us is subject to domestic and
international requirements to avoid interference among users of
radio frequencies and to permit interconnection of
telecommunications equipment. We believe that we have complied
with such rules and regulations with respect to our existing
products, and we intend to comply with such rules and
regulations with respect to our future products. Reallocation of
the frequency spectrum also could impact our business, financial
condition and results of operations.
Employees
As of July 2, 2010, we employed 1,380 people, compared
with 1,521 as of the end of fiscal 2009 and 1,410 as of the end
of fiscal 2008. In February 2009, we added 146 employees
through the acquisition of Telsima. Approximately 700 of our
employees are located in the U.S. We also utilized
approximately 100 independent contractors as of July 2,
2010. None of our employees in the U.S. are represented by
a labor union. In certain international subsidiaries, our
employees are represented by workers councils or statutory
labor unions. In general, we believe that our relations with our
employees are good.
Web
site Access to Aviat Networks Reports; Available
Information
General. We maintain an Internet Web site at
http://www.aviatnetworks.com.
Our annual reports on
Form 10-K,
proxy statement, quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to such reports, filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, are available free of charge on our Web site as soon as
reasonably practicable after these reports are electronically
filed with, or furnished to, the Securities and Exchange
Commission (SEC). Our website and the information
posted
14
thereon are not incorporated into this Annual Report on
Form 10-K
or any current or other periodic report that we file or furnish
to the SEC.
We will also provide the reports in electronic or paper form,
free of charge upon request. All reports we file with or furnish
to the SEC are also available free of charge via EDGAR through
the SECs website at
http://www.sec.gov.
The public may read and copy any materials filed by us with the
SEC at the SECs Public Reference Room, 100 F. Street,
N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
Additional information relating to our businesses, including our
operating segments, is set forth in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
In addition to the risks described elsewhere in this Annual
Report on
Form 10-K
and in certain of our other filings with the SEC, the following
risks and uncertainties, among others, could cause our actual
results to differ materially from those contemplated by us or by
any forward-looking statement contained herein. Prospective and
existing investors are strongly urged to carefully consider the
various cautionary statements and risks set forth in this Annual
Report on
Form 10-K
and our other public filings.
We have many business risks including those related to our
financial performance, investments in our common stock,
operating our business and legal matters. The risks and
uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we are not aware of or
focused on may also impair our business operations. If any of
these risks actually occur, our financial condition and results
of operations could be materially and adversely affected.
We
have not been profitable and must increase our revenues and
reduce costs if we hope to achieve sustainable
profitability.
As measured under U.S. generally accepted accounting
principles (U.S. GAAP), we have incurred a net
loss in each of the last 8 fiscal quarters. We incurred net
losses of $130.2 million in fiscal 2010,
$355.0 million in fiscal 2009 and $11.9 million in
fiscal 2008 and have been unprofitable since we became a public
company in January 2007. We also have consistently sustained
reported losses from operations, although we have generated cash
from operations in each of the last three fiscal years.
Our revenue in fiscal year 2010 was $478.9 million, a
decrease of $201.0 million or 29.6%, compared with fiscal
year 2009. This decrease in revenue resulted from significant
declines in all regions, most acutely in Africa and Europe,
Middle East and Russia. Declines resulted primarily from reduced
customer demand due to the global economic recession and the
effects of the continuing credit crisis on our customers
ability to finance expansion, as well as increased competition
from our competitors. Increased competition has affected product
pricing and the ability to combine microwave equipment with
other product sales and services. Furthermore, revenue has been
negatively affected by anticipated or planned consolidation of
our customers and foreign government-based subsidized financing,
particularly in Africa.
Our revenue in fiscal 2009 was $679.9 million, a decrease
of $38.5 million or 5.4%, compared with fiscal 2008. This
decrease in revenue resulted from declines in all regions
(except Africa) primarily due to the global economic recession
and the continuing credit crisis adversely affecting our
customers expansion, as well as increased competition from our
competitors. Compared with fiscal 2008, revenue in fiscal 2009
in Europe, Middle East and Russia declined by
$27.9 million, Latin America and Asia-Pacific declined
$16.6 million, and North America was down
$10.5 million. These decreases were partially offset by
growth in Africa ($16.5 million increase) as customers in
this region continued to expand their network infrastructures
prior to the slowdown in the third quarter of fiscal 2009.
We recently announced additional restructuring steps and
facilities closures with a view to reducing further our annual
operating expenses. These steps will result in additional costs
that we must recognize in fiscal 2011, and we cannot be certain
that these actions or others that we may take in the future will
result in operating profitability or net income as determined
under U.S. GAAP.
15
We
have announced major restructuring activities which may
adversely impact our operations, and we may not realize all of
the anticipated benefits of these activities or any future
restructurings.
We continue to restructure and transform our business to realign
resources and achieve desired cost savings in an increasingly
competitive market. Following approval of our annual operating
plan, we began to implement certain cost reduction initiatives
in the range of $30 to $35 million for fiscal 2011. These
initiatives primarily affect operations in the Americas, Asia
and Europe. These actions are intended to bring our operational
cost structure in line with the changing dynamics of the
microwave radio and telecommunications markets.
We expect to record approximately $11 million to
$13 million of charges related to severance and
employee-related costs and impairment of facilities during the
first, second and third quarters of fiscal 2011. The severance
and employee-related cash charges are expected to be
approximately $9 million to $10 million. Additionally,
we expect to record approximately $2 million of non-cash
asset impairments and $1 million of lease impairment
charges requiring cash payments. The impairment charges will
consist primarily of costs to close facilities in the Americas
(primarily our Morrisville, North Carolina office), Asia and
Europe.
If we consolidate additional facilities in the future, we may
incur additional restructuring and related expenses, which could
have a material adverse effect on our business, financial
condition or results of operations.
We have based our restructuring efforts on assumptions and plans
regarding the appropriate cost structure of our businesses based
on our product mix and projected sales among other factors.
These assumptions may not be correct and we may not be able to
operate in accordance with our plans. Should this occur we may
determine that we must incur additional restructuring charges in
the future. Moreover, we cannot assure you that we will realize
all of the anticipated benefits of the restructurings or that we
will not further reduce or otherwise adjust our workforce or
exit, or dispose of, certain businesses and protect lines. Any
decision to further limit investment, exit, or dispose of
businesses may result in the recording of additional
restructuring charges. As a result, the costs actually incurred
in connection with the restructuring efforts may be higher than
originally planned and may not lead to the anticipated cost
savings
and/or
improved results.
Our
success will depend on new product introductions, product
transitioning and customer acceptance.
The market for our products is characterized by rapid
technological change, evolving industry standards and frequent
new product introductions. Our future success will depend, in
part, on continuous, timely development and introduction of new
products and enhancements that address evolving market
requirements and are attractive to customers. We believe that
successful new product introductions provide a significant
competitive advantage because of the significant resources
committed by customers in adopting new products and their
reluctance to change products after these resources have been
expended. We have spent, and expect to continue to spend,
significant resources on internal research and development to
support our effort to develop and introduce new products and
enhancements. As we transition to common product platforms, we
may face significant risk that current customers may not accept
these new products. To the extent that we fail to introduce new
and innovative products that are adopted by customers, we could
fail to obtain an adequate return on these investments and could
lose market share to our competitors, which could be difficult
or impossible to regain. In addition, we could incur significant
costs in completing the transition.
The
effects of the recession in the United States and general
downturn in the global economy, including financial market
disruptions, could have an adverse impact on our business,
operating results or financial condition.
The United States economy is in recession and there has been a
general downturn in the global economy. A continuation or
worsening of these conditions, including the ongoing credit and
capital markets disruptions, could have an adverse impact on our
business, operating results or financial condition in a number
of ways. For example:
|
|
|
|
|
We may experience declines in revenues and cash flows and
increased losses as a result of reduced orders, payment delays
or other factors caused by the economic problems of our
customers and prospective customers.
|
16
|
|
|
|
|
During the last quarter, some customers advised us of their
intention to slow deployments to conserve cash. Such customer
attitudes could continue to affect out business, financial
condition and cash flows adversely.
|
|
|
|
|
|
We may experience supply chain delays, disruptions or other
problems associated with financial constraints faced by our
suppliers and subcontractors.
|
|
|
|
We may incur increased costs or experience difficulty either in
making future borrowings under our credit facility or otherwise
in obtaining financing for our operating activities, investing
activities (including the financing of any future acquisitions)
or financing activities.
|
Part
of our inventory may be written off, which would increase our
cost of revenues. In addition, we may be exposed to
inventory-related losses on inventories purchased by our
contract manufacturers.
During fiscal 2010, 2009 and 2008, we recorded charges to reduce
the carrying value of our inventory to the lower of cost or
market totaling $30.9 million, $23.1 million and
$24.6 million. Such charges equaled 6.5%, 3.4%, and 3.4% of
our revenue for fiscal 2010, 2009 and 2008. These charges were
primarily due to excess and obsolete inventory resulting from
product transitioning and discontinuance.
Inventory of raw materials, work in-process or finished products
may accumulate in the future, and we may encounter losses due to
a variety of factors, including:
|
|
|
|
|
rapid technological change in the wireless telecommunications
industry resulting in frequent product changes;
|
|
|
|
the need of our contract manufacturers to order raw materials
that have long lead times and our inability to estimate exact
amounts and types of items thus needed, especially with regard
to the frequencies in which the final products ordered will
operate; and
|
|
|
|
cost reduction initiatives resulting in component changes within
the products.
|
Further, our inventory of finished products may accumulate as
the result of cancellation of customer orders or our
customers refusal to confirm the acceptance of our
products. Our contract manufacturers are required to purchase
inventory based on manufacturing projections we provide to them.
If actual orders from our customers are lower than these
manufacturing projections, our contract manufacturers will have
excess inventory of raw materials or finished products which we
would be required to purchase. In addition, we require our
contract manufacturers from time to time to purchase more
inventory than is immediately required, and to partially
assemble components, in order to shorten our delivery time in
case of an increase in demand for our products. In the absence
of such increase in demand, we may need to compensate our
contract manufacturers. If we are required to purchase excess
inventory from our contract manufacturers or otherwise
compensate our contract manufacturers for purchasing excess
inventory, our business, financial condition and results of
operations could be materially adversely affected. We also may
purchase components or raw materials from time to time for use
by our contract manufacturers in the manufacturing of our
products. These purchases are based on our own manufacturing
projections. If our actual orders are lower than these
manufacturing projections, we may accumulate excess inventory
which we may be required to write-off. If we are forced to
write-off this inventory other than in the normal course of
business, our business, financial condition, results of
operations could be materially adversely affected .
If we
fail to accurately forecast our manufacturing requirements or
customer demand, we could incur additional costs which would
adversely affect our business and results of
operations.
If we fail to accurately predict our manufacturing requirements
or forecast customer demand, we may incur additional costs of
manufacturing and our gross margins and financial results could
be adversely affected. If we overestimate our requirements, our
contract manufacturers may experience an oversupply of
components and assess us charges for excess or obsolete
components that could adversely affect our gross margins. If we
underestimate our requirements, our contract manufacturers may
have inadequate inventory or components, which could interrupt
manufacturing and result in higher manufacturing costs, shipment
delays, damage to customer relationships
and/or our
payment of penalties to our customers. Our contract
manufacturers may also have other
17
customers and may not have sufficient capacity to meet all of
their customers needs, including ours, during periods of
excess demand.
Our
sales cycle may be lengthy, and the time for installation and
implementation of our products within our customers
networks may extend over more than one period, which can make
our operating results difficult to predict.
We anticipate difficulty in accurately predicting the timing and
amounts of revenue generated from sales of our products. The
establishment of a business relationship with a potential
customer is a lengthy process, generally taking several months
and sometimes longer. Following the establishment of the
relationship, the negotiation of purchase terms can be
time-consuming, and a potential customer may require an extended
evaluation and testing period.
We expect that our product sales cycle, which results in our
products being designed into our customers networks, could
take 12 to 24 months. A number of factors can contribute to
the length of the sales cycle, including technical evaluations
of our products, the design process required to integrate our
products into our customers networks. In anticipation of
product orders, we may incur substantial costs before the sales
cycle is complete and before we receive any customer payments.
As a result, in the event that a sale is not completed or is
cancelled or delayed, we may have incurred substantial expenses,
making it more difficult for us to become profitable or
otherwise negatively impacting our financial results.
Furthermore, because of our lengthy sales cycle, our receipt of
revenue from our selling efforts may be substantially delayed,
our ability to forecast our future revenue may be more limited
and our revenue may fluctuate significantly from quarter to
quarter.
Once a purchase agreement has been executed, the timing and
amount of revenue, if applicable, may remain difficult to
predict. The completion of the installation and testing of the
customers networks and the completion of all other
suppliers network elements are subject to the customers
timing and efforts, and other factors outside our control which
may prevent us from making predictions of revenue with any
certainty and could cause us to experience substantial
period-to-period
fluctuations in our operating results.
If we
fail to effectively manage our contract manufacturer
relationships, we could incur additional costs or be unable to
timely fulfill our customer commitments, which would adversely
affect our business and results of operations and, in the event
of an inability to fulfill commitments, would harm our customer
relationships.
We outsource a substantial portion of our manufacturing and
repair service operations to independent contract manufacturers
and other third parties. Our contract manufacturers typically
manufacture our products based on rolling forecasts of our
product needs that we provide to them on a regular basis. The
contract manufacturers are responsible for procuring components
necessary to build our products based on our rolling forecasts,
building and assembling the products, testing the products in
accordance with our specifications and then shipping the
products to us. We configure the products to our customer
requirements, conduct final testing and then ship the products
to our customers. Although we currently partner with multiple
major contract manufacturers, there can be no assurance that we
will not encounter problems as we become increasingly dependent
on contract manufacturers to provide these manufacturing
services or that we will be able to replace a contract
manufacturer that is not able to meet our demand.
In addition, if we fail to effectively manage our relationships
with our contract manufacturers or other service providers, or
if one or more of them should not fully comply with their
contractual obligations or should experience delays,
disruptions, component procurement problems or quality control
problems, then our ability to ship products to our customers or
otherwise fulfill our contractual obligations to our customers
could be delayed or impaired which would adversely affect our
business, financial results and customer relationships.
We
depend on sole or limited sources for some key components and
failure to receive timely delivery of any of these components
could result in deferred or lost sales.
In some instances, we are dependent upon one or a few sources,
either because of the specialized nature of a particular item or
because of local content preference requirements pursuant to
which we operate on a given project. Examples of sole or limited
sourcing categories include metal fabrications and castings, for
which we own the tooling and therefore limit our supplier
relationships, and MMICs (a type of integrated circuit used in
manufacturing microwave radios), which we procure at volume
discount from a single source. Our supply chain plan includes
mitigation plans for alternative manufacturing sources and
identified alternate suppliers. However, if these
18
alternatives cannot address our requirements when our existing
sources of these components fail to deliver them on time, we
could suffer delayed shipments, canceled orders, and lost or
deferred revenues, as well as material damage to our customer
relationships. Should this occur, our operating results, cash
flows and financial condition could be adversely affected to a
material degree.
We
have a history of substantial impairment charges for our
goodwill, intangible assets and property, plant and equipment
and may continue to experience such charges in the
future.
As of July 2, 2010, the net carrying value of our goodwill,
definite-lived intangible assets and property, plant and
equipment totaled $6.2 million, $7.5 million and
$37.6 million.
During fiscal 2010, we recorded impairment charges of
$63.2 million for identifiable intangible assets and
$8.7 million for property, plant and equipment. During
fiscal 2009, we recorded impairment charges of
$279.0 million for goodwill and $32.6 million for the
Stratex trade name. We did not record impairment losses for
goodwill or identifiable intangible assets in fiscal 2008.
Additionally, during fiscal 2010 we recorded an impairment
charge of $5.5 million on our manufacturing facility and
idle equipment in San Antonio, Texas. This charge resulted
from our plan to converge our products onto a single platform by
the end of fiscal year 2010 and is included in Charges for
product transition within Cost of products sales and
services on our Consolidated Statement of Operations.
During fiscal 2009, we recorded a $3.2 million charge for
the write-down of software developed for internal use and a
$7.2 million charge for the write-down of machinery and
equipment related to our product transitioning activities. We
also recorded a $2.4 million charge for the impairment of a
building used in manufacturing.
During fiscal 2008, we recorded impairment losses on property,
plant and equipment totaling $1.3 million.
Our intangible assets and property, plant and equipment are
subject to impairment testing in accordance with Accounting
Standard Codification 360 (ASC 360), Property,
Plant and Equipment and our goodwill is subject to an
impairment test in accordance with ASC 350 Intangibles,
Goodwill and Other. We review the carrying value of our
long-lived assets for impairment whenever events or
circumstances indicate that their carrying amount may not be
recoverable. Significant negative industry or economic trends,
including a lack of recovery in the market price of our common
stock or the fair value of our debt, disruptions to our
business, unexpected significant changes or planned changes in
the use of the long-lived assets, and mergers and acquisitions
could result in the need to reassess the fair value of our
assets and liabilities which could lead to an impairment charge
for any of our long-lived assets. An impairment charge related
to our long-lived assets could have a significant adverse effect
on our financial position and results of operations in the
period in which it is incurred.
Credit
and commercial risks and exposures could increase if the
financial condition of our customers declines.
A substantial portion of our sales are to customers in the
telecommunications industry. These customers may require their
suppliers to provide extended payment terms, direct loans or
other forms of financial support as a condition to obtaining
commercial contracts. We expect that we may provide or commit to
financing where appropriate for our business. Our ability to
arrange or provide financing for our customers will depend on a
number of factors, including our credit rating, our level of
available credit and our ability to sell off commitments on
acceptable terms. More generally, we expect to routinely enter
into long-term contracts involving significant amounts to be
paid by our customers over time. Pursuant to these contracts, we
may deliver products and services representing an important
portion of the contract price before receiving any significant
payment from the customer. As a result of the financing that may
be provided to customers and our commercial risk exposure under
long-term contracts, our business could be adversely affected if
the financial condition of our customers erodes. Over the past
few years, certain of our customers have filed with the courts
seeking protection under the bankruptcy or reorganization laws
of the applicable jurisdiction, or have experienced financial
difficulties. As a result of the more challenging economic
environment, we saw some increase in the number of our customers
experiencing such difficulties in 2009, and we expect that trend
to intensify if the global economy deteriorates further in 2010
and 2011. That trend may be exacerbated in many emerging
markets, where our customers are being affected not only by
recession, but by deteriorating local currencies and a lack of
credit. Upon the financial failure of a customer, we may
experience losses on credit extended and loans made to such
customer, losses relating to our commercial risk exposure and
the loss of the customers ongoing business. If customers
fail to meet their obligations to us, we may
19
experience reduced cash flows and losses in excess of reserves,
which could materially adversely impact our results of
operations and financial position.
Our
customers may not pay for products and services in a timely
manner, or at all, which would decrease our cash flows and
adversely affect our working capital.
Our business requires extensive credit risk management that may
not be adequate to protect against customer nonpayment. A risk
of non-payment by customers is a significant focus of our
business. We expect a significant amount of future revenue to
come from international customers, many of whom will be startup
telecom operators in developing countries. We do not generally
expect to obtain collateral for sales, although we require
letters of credit or credit insurance as appropriate for
international customers. For information regarding the
percentage of revenue attributable to certain key customers, see
the risks discussed in the factor below titled Because
a significant amount of our revenue may come from a limited
number of customers, the termination of any of these customer
relationships may adversely affect our business. Our
historical accounts receivable balances have been concentrated
in a small number of significant customers. Unexpected adverse
events impacting the financial condition of our customers, bank
failures or other unfavorable regulatory, economic or political
events in the countries in which we do business may impact
collections and adversely impact our business, require increased
bad debt expense or receivable write-offs and adversely impact
our cash flows, financial condition and operating results.
Our
average sales prices may decline in the future.
Currently, we and other manufacturers of our telecommunications
equipment are experiencing, and are likely to continue to
experience, declining sales prices. This price pressure is
likely to result in downward pricing pressure on our products
and services. As a result, we are likely to experience declining
average sales prices for our products. Our future profitability
will depend upon our ability to improve manufacturing
efficiencies, reduce costs of materials used in our products,
and to continue to introduce new lower-cost products and product
enhancements. If we are unable to respond to increased price
competition, our business, financial condition and results of
operations will be harmed. Because customers frequently
negotiate supply arrangements far in advance of delivery dates,
we may be required to commit to price reductions for our
products before we are aware of how, or if, cost reductions can
be obtained. As a result, current or future price reduction
commitments and any inability on our part to respond to
increased price competition, could harm our business, financial
condition and results of operations.
Our
effective tax rate could be highly volatile and could adversely
affect our operating results.
Our future effective tax rate may be adversely affected by a
number of factors, many of which are outside of our control,
including:
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the jurisdictions in which profits are determined to be earned
and taxed;
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adjustments to estimated taxes upon finalization of various tax
returns;
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increases in expenses not deductible for tax purposes, including
write-offs of acquired in-process research and development and
impairment of goodwill in connection with acquisitions;
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changes in available tax credits;
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changes in share-based compensation expense;
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changes in the valuation of our deferred tax assets and
liabilities;
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changes in domestic or international tax laws or the
interpretation of such tax laws;
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the resolution of issues arising from tax audits with various
tax authorities; and
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the tax effects of purchase accounting for acquisitions and
restructuring charges that may cause fluctuations between
reporting periods.
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Any significant increase in our future effective tax rates could
impact our results of operations for future periods adversely.
Because
a significant amount of our revenue may come from a limited
number of customers, the termination of any of these customer
relationships may adversely affect our business.
Sales of our products and services historically have been
concentrated in a small number of customers. Principal customers
for our products and services include domestic and international
wireless/mobile service providers, OEMs, as well as private
network users such as public safety agencies; government
institutions; and utility, pipeline, railroad and other
industrial enterprises that operate broadband wireless networks.
We had revenue
20
from a single external customer that exceeded 10% of our total
revenue during fiscal 2010, 2009 and 2008. Although we have a
large customer base, during any given quarter, a small number of
customers may account for a significant portion of our revenue.
It is possible that a significant portion of our future product
sales also could be concentrated in a limited number of
customers. In addition, product sales to major customers have
varied widely from period to period. The loss of any existing
customer, a significant reduction in the level of sales to any
existing customer, or our inability to gain additional customers
could result in declines in our revenue or an inability to grow
revenue. In addition, consolidation of our potential customer
base could result in purchasing decision delays as consolidating
customers integrate their operations and could generally reduce
our opportunities to win new customers to the extent that the
number of potential customers decreases. Furthermore, as our
customers become larger, they may have more leverage to
negotiate better pricing which could adversely affect our
revenues and gross margins.
We
will face strong competition for maintaining and improving our
position in the market, which could adversely affect our revenue
growth and operating results.
The wireless interconnection and access business is a
specialized segment of the wireless telecommunications industry
and is extremely competitive. We expect competition in this
segment to increase. Some of our competitors have more extensive
engineering, manufacturing and marketing capabilities and
significantly greater financial, technical and personnel
resources than we have. In addition, some of our competitors
have greater name recognition, broader product lines, a larger
installed base of products and longer-standing customer
relationships. Our competitors include established companies,
such as Alcatel-Lucent, Eltek ASA, Ericsson, NEC and Nokia
Siemens Networks, as well as a number of other public and
private companies such as Ceragon and Huawei Technologies in
selected markets. Some of our competitors are OEMs or systems
integrators through whom we market and sell our products, which
means our business success may depend on these competitors to
some extent. One or more of our largest customers could
internally develop the capability to manufacture products
similar to those manufactured or outsourced by us and, as a
result, the demand for our products and services may decrease.
In addition, we compete for acquisition and expansion
opportunities with many entities that have substantially greater
resources than we have. Our competitors may enter into business
combinations in order to accelerate product development or to
compete more aggressively and we may lack the resources to meet
such enhanced competitions.
Our ability to compete successfully will depend on a number of
factors, including price, quality, availability, customer
service and support, breadth of product line, product
performance and features, rapid time-to-market delivery
capabilities, reliability, timing of new product introductions
by us, our customers and competitors, the ability of our
customers to obtain financing and the stability of regional
sociopolitical and geopolitical circumstances, and the ability
of large competitors to obtain business by providing more seller
financing especially for large transactions. We can give no
assurances that we will have the financial resources, technical
expertise, or marketing, sales, distribution, customer service
and support capabilities to compete successfully, or that
regional sociopolitical and geographic circumstances will be
favorable for our successful operation.
Consolidation
within the telecommunications industry could result in a
decrease in our revenue.
The telecommunications industry has experienced significant
consolidation among its participants, and we expect this trend
to continue. Some operators in this industry have experienced
financial difficulty and have filed, or may file, for bankruptcy
protection. Other operators may merge and one or more of our
competitors may supply products to the customers of the combined
company following those mergers. This consolidation could result
in purchasing decision delays and decreased opportunities for us
to supply products to companies following any consolidation.
This consolidation may also result in lost opportunities for
cost reduction and economies of scale. In addition, see the
risks discussed in the factor above titled Because a
significant amount of our revenue may come from a limited number
of customers, the termination of any of these customer
relationships may adversely affect our business.
If we
fail to develop and maintain distribution and licensing
relationships, our revenue may decrease.
Although a majority of our sales are made through our direct
sales force, we also will market our products through indirect
sales channels such as independent agents, distributors, OEMs
and systems integrators. These relationships enhance our ability
to pursue major contract awards and, in some cases, are intended
to provide our customers with easier access to financing and a
greater variety of equipment and service capabilities, which an
21
integrated system provider should be able to offer. We may not
be able to maintain and develop additional relationships or, if
additional relationships are developed, they may not be
successful. Our inability to establish or maintain these
distribution and licensing relationships could restrict our
ability to market our products and thereby result in significant
reductions in revenue. If these revenue reductions occur, our
business, financial condition and results of operations would be
harmed.
If
sufficient radio frequency spectrum is not allocated for use by
our products, and we fail to obtain regulatory approval for our
products, our ability to market our products may be
restricted.
Radio communications are subject to regulation by U.S. and
foreign laws and international treaties. Generally, our products
need to conform to a variety of United States and international
requirements established to avoid interference among users of
transmission frequencies and to permit interconnection of
telecommunications equipment. Any delays in compliance with
respect to our future products could delay the introduction of
such products.
In addition, we will be affected by the allocation and auction
of the radio frequency spectrum by governmental authorities both
in the U.S. and internationally. Such governmental
authorities may not allocate sufficient radio frequency spectrum
for use by our products or we may not be successful in obtaining
regulatory approval for our products from these authorities.
Historically, in many developed countries, the unavailability of
frequency spectrum has inhibited the growth of wireless
telecommunications networks. In addition, to operate in a
jurisdiction, we must obtain regulatory approval for our
products. Each jurisdiction in which we market our products has
its own regulations governing radio communications. Products
that support emerging wireless telecommunications services can
be marketed in a jurisdiction only if permitted by suitable
frequency allocations, auctions and regulations. The process of
establishing new regulations is complex and lengthy. If we are
unable to obtain sufficient allocation of radio frequency
spectrum by the appropriate governmental authority or obtain the
proper regulatory approval for our products, our business,
financial condition and results of operations may be harmed.
Due to
the significant volume of international sales we expect, we may
be susceptible to a number of political, economic and geographic
risks that could harm our business.
We are highly dependent on sales to customers outside the
U.S. In fiscal 2010, 2009 and 2008, our sales to
international customers accounted for 67%, 69% and 73% of total
revenue. Also, significant portions of our international sales
are in less developed countries. Our international sales are
likely to continue to account for a large percentage of our
products and services revenue for the foreseeable future. As a
result, the occurrence of any international, political, economic
or geographic event that adversely affects our business could
result in a significant decline in revenue.
Some of the risks and challenges of doing business
internationally include:
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unexpected changes in regulatory requirements;
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fluctuations in international currency exchange rates;
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imposition of tariffs and other barriers and restrictions;
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management and operation of an enterprise spread over various
countries;
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the burden of complying with a variety of laws and regulations
in various countries;
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application of the income tax laws and regulations of multiple
jurisdictions, including relatively low-rate and relatively
high-rate jurisdictions, to our sales and other transactions,
which results in additional complexity and uncertainty;
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general economic and geopolitical conditions, including
inflation and trade relationships;
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war and acts of terrorism;
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kidnapping and high crime rate;
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natural disasters;
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currency exchange controls; and
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changes in export regulations.
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While these factors and the impacts of these factors are
difficult to predict, any one or more of them could adversely
affect our business, financial condition and results of
operations in the future.
22
Our
products are used in critical communications networks which may
subject us to significant liability claims.
Because our products are used in critical communications
networks, we may be subject to significant liability claims if
our products do not work properly. The provisions in our
agreements with customers that are intended to limit our
exposure to liability claims may not preclude all potential
claims. In addition, any insurance policies we have may not
adequately limit our exposure with respect to such claims. We
warrant to our current customers that our products will operate
in accordance with our product specifications. If our products
fail to conform to these specifications, our customers could
require us to remedy the failure or could assert claims for
damages. Liability claims could require us to spend significant
time and money in litigation or to pay significant damages. Any
such claims, whether or not successful, would be costly and
time-consuming to defend, and could divert managements
attention and seriously damage our reputation and our business.
If we
are unable to adequately protect our intellectual property
rights, we may be deprived of legal recourse against those who
misappropriate our intellectual property.
Our ability to compete will depend, in part, on our ability to
obtain and enforce intellectual property protection for our
technology in the U.S. and internationally. We rely upon a
combination of trade secrets, trademarks, copyrights, patents
and contractual rights to protect our intellectual property. In
addition, we enter into confidentiality and invention assignment
agreements with our employees, and enter into non-disclosure
agreements with our suppliers and appropriate customers so as to
limit access to and disclosure of our proprietary information.
We cannot give assurances that any steps taken by us will be
adequate to deter misappropriation or impede independent
third-party development of similar technologies. In the event
that such intellectual property arrangements are insufficient,
our business, financial condition and results of operations
could be harmed. We have significant operations in the U.S.,
United Kingdom, Singapore and New Zealand, and outsourcing
arrangements in Asia. We cannot provide assurances that the
protection provided to our intellectual property by the laws and
courts of particular nations will be substantially similar to
the protection and remedies available under U.S. law.
Furthermore, we cannot provide assurances that third parties
will not assert infringement claims against us based on
intellectual property rights and laws in other nations that are
different from those established in the U.S.
We may
be subject to litigation regarding intellectual property
associated with our wireless business; this litigation could be
costly to defend and resolve, and could prevent us from using or
selling the challenged technology.
The wireless telecommunications industry is characterized by
vigorous protection and pursuit of intellectual property rights,
which has resulted in often protracted and expensive litigation.
Any litigation regarding patents or other intellectual property
could be costly and time-consuming and could divert our
management and key personnel from our business operations. The
complexity of the technology involved and the uncertainty of
intellectual property litigation increase these risks. Such
litigation or claims could result in substantial costs and
diversion of resources. In the event of an adverse result in any
such litigation, we could be required to pay substantial
damages, cease the use and transfer of allegedly infringing
technology or the sale of allegedly infringing products and
expend significant resources to develop non-infringing
technology or obtain licenses for the infringing technology. We
can give no assurances that we would be successful in developing
such non-infringing technology or that any license for the
infringing technology would be available to us on commercially
reasonable terms, if at all. This could have a materially
adverse effect on our business, results of operation, financial
condition, competitive position and prospects.
Our
stock price may be volatile, which may lead to losses by
investors.
Announcements of developments related to our business,
announcements by competitors, quarterly fluctuations in our
financial results and general conditions in the
telecommunications industry in which we compete, or the
economies of the countries in which we do business and other
factors could cause the price of our common stock to fluctuate,
perhaps substantially. In addition, in recent years the stock
market has experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected
companies. These factors and fluctuations could lower the market
price of our common stock. Our stock is currently listed on the
NASDAQ Global Market.
23
Our
quarterly results may be volatile, which can adversely affect
the trading price of our common stock.
Our quarterly operating results may vary significantly for a
variety of reasons, many of which are outside our control. These
factors could harm our business and include, among others:
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volume and timing of our product orders received and delivered
during the quarter;
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our ability and the ability of our key suppliers to respond to
changes on demand as needed;
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our suppliers inability to perform and deliver on time as
a result of their financial condition, component shortages or
other supply chain constraints;
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retention of key personnel;
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our sales cycles can be lengthy;
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litigation costs and expenses;
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continued timely rollout of new product functionality and
features;
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increased competition resulting in downward pressures on the
price of our products and services;
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unexpected delays in the schedule for shipments of existing
products and new generations of the existing platforms;
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failure to realize expected cost improvement throughout our
supply chain;
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order cancellations or postponements in product deliveries
resulting in delayed revenue recognition;
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seasonality in the purchasing habits of our customers;
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restructuring and organization of our operations;
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war and acts of terrorism;
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natural disasters;
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the ability of our customers to obtain financing to enable their
purchase of our products;
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fluctuations in international currency exchange rates;
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regulatory developments including denial of export and import
licenses; and
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general economic conditions worldwide that affect demand and
financing for microwave telecommunications networks.
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Our quarterly results are expected to be difficult to predict
and delays in product delivery or closing a sale can cause
revenue and net income or loss to fluctuate significantly from
anticipated levels. A substantial portion of our contracts are
completed in the latter part of a quarter and a significant
percentage of these are large orders. Because a significant
portion of our cost structure is largely fixed in the short
term, revenue shortfalls tend to have a disproportionately
negative impact on our profitability and increases our
inventory. The number of large new transactions also increases
the risk of fluctuations in our quarterly results because a
delay in even a small number of these transactions could cause
our quarterly revenues and profitability to fall significantly
short of our predictions. In addition, we may increase spending
in response to competition or in pursuit of new market
opportunities. Accordingly, we cannot provide assurances that we
will be able to achieve profitability in the future or that if
profitability is attained, that we will be able to sustain
profitability, particularly on a quarter-to-quarter basis.
Anti-takeover
provisions of Delaware law and provisions in our amended and
restated certificate of incorporation, amended and restated
bylaws could make a third-party acquisition of us
difficult.
Because we are a Delaware corporation, the anti-takeover
provisions of Delaware law could make it more difficult for a
third party to acquire control of us, even if the change in
control would be beneficial to stockholders. We are subject to
the provisions of Section 203 of the General Corporation
Law of Delaware, which prohibits us from engaging in certain
business combinations, unless the business combination is
approved in a prescribed manner. In addition, our amended and
restated certificate of incorporation and amended and restated
bylaws also contain certain provisions that may make a
third-party acquisition of us difficult, including the ability
of the board of directors to issue preferred stock and the
requirement that nominations for directors and other proposals
by stockholders must be made in advance of the meeting at which
directors are elected or the proposals are voted upon.
We may
face risks related to pending litigation over the restatement of
our financial statements.
In connection with our identification of the material weaknesses
in internal control described in our fiscal 2008 Annual Report
on
Form 10-K
filed with the Securities and Exchange Commission on
September 25, 2008, we have
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had to restate our interim consolidated financial statements for
the first three fiscal quarters of fiscal 2008 (the quarters
ended March 28, 2008, December 28, 2007 and
September 28, 2007) and our consolidated financial
statements for the fiscal years ended June 29, 2007,
June 30, 2006 and July 1, 2005 in order to correct
errors contained in those financial statements. We also
announced on July 30, 2008 that investors should no longer
rely on our previously issued financial statements for those
periods.
We and certain of our current and former executive officers and
directors were named in a federal securities class action
complaint filed on September 15, 2008 in the United States
District Court for the District of Delaware by plaintiff Norfolk
County Retirement System on behalf of an alleged class of
purchasers of our securities from January 29, 2007 to
July 30, 2008, including shareholders of Stratex Networks,
Inc. who exchanged shares of Stratex Networks, Inc. for our
shares as part of the merger between Stratex Networks and the
Microwave Communications Division of Harris Corporation. This
action relates to the restatement of our prior financial
statements as discussed in our fiscal 2008 Annual Report on
Form 10-K
filed with the Securities and Exchange Commission on
September 25, 2008. Similar complaints were filed in the
United States District Court of Delaware on October 6 and
October 30, 2008. Each complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and
Rule 10b-5
promulgated thereunder, as well as violations of
Sections 11 and 15 of the Securities Act of 1933 and seeks,
among other relief, determinations that the action is a proper
class action, unspecified compensatory damages and reasonable
attorneys fees and costs. The actions were consolidated on
June 5, 2009 and a consolidated class action complaint was
filed on July 29, 2009. We believe that we have meritorious
defenses and intend to defend ourselves vigorously.
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Item 1B.
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Unresolved
Staff Comments
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None.
As of July 2, 2010, we conducted operations using
facilities in the U.S., Canada, Europe, Central America, South
America, Africa and Asia. Our principal executive offices are
located at leased facilities in Santa Clara, California.
There are no material encumbrances on any of our facilities.
Remaining initial lease periods extend up to 2020.
As of July 2, 2010, the locations and approximate floor
space of our principal offices and facilities in productive use
were as follows:
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Location
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Major Activities
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Owned
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Leased
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(Square feet)
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(Square feet)
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Wellington, New Zealand
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Office, R&D center
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58,000
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Lanarkshire, Scotland
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Office, repair center
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52,000
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San Antonio, Texas
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Office, manufacturing
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130,000
|
|
Santa Clara, California
|
|
Headquarters, R&D center
|
|
|
|
|
|
|
129,000
|
|
Morrisville, North Carolina
|
|
Office, R&D center
|
|
|
|
|
|
|
60,000
|
|
India (three facilities)
|
|
Office, R&D center
|
|
|
|
|
|
|
50,000
|
|
Slovenia
|
|
Office, R&D center
|
|
|
|
|
|
|
20,000
|
|
Philippine Islands (two facilities)
|
|
Office
|
|
|
|
|
|
|
17,000
|
|
Republic of Singapore
|
|
Office
|
|
|
|
|
|
|
11,000
|
|
Republic of South Africa
|
|
Office
|
|
|
|
|
|
|
9,000
|
|
Peoples Republic of China
|
|
Office
|
|
|
|
|
|
|
8,000
|
|
Mexico City, Mexico
|
|
Office
|
|
|
|
|
|
|
8,000
|
|
Lagos, Nigeria
|
|
Office
|
|
|
|
|
|
|
7,000
|
|
Ivory Coast
|
|
Office
|
|
|
|
|
|
|
6,000
|
|
Warsaw, Poland
|
|
Office
|
|
|
|
|
|
|
5,000
|
|
Paris, France
|
|
Office
|
|
|
|
|
|
|
4,000
|
|
Other facilities
|
|
Offices
|
|
|
|
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
110,000
|
|
|
|
488,000
|
|
|
|
|
|
|
|
|
|
|
|
|
25
As part of the fiscal 2007 acquisition of Stratex, we acquired
vacated leased facilities in Seattle, Washington, and
San Jose and Milpitas, California. These three facilities
consist of approximately 139,000 square feet, of which
approximately 90,000 square feet have been subleased to
third parties. Additionally, we vacated two leased
60,000 square foot facilities in San Jose, California
during the fiscal 2010 move of our headquarters to
Santa Clara, California from Morrisville, North Carolina.
As the lessee, we have ongoing lease commitments for five of
these six facilities ending in fiscal 2011. The lease commitment
for the sixth location will end in fiscal 2012.
During the fourth quarter of fiscal 2010, we sold our
130,000 square foot office and manufacturing location in
San Antonio, Texas. Subsequent to the sale, we leased back
the entire office and manufacturing complex which we will occupy
for a portion of fiscal 2011.
We maintain our facilities in good operating condition, and
believe that they are suitable and adequate for our current and
projected needs. We continuously review our anticipated
requirements for facilities and may, from time to time, acquire
additional facilities, expand existing facilities, or dispose of
existing facilities or parts thereof, as we deem necessary.
For more information about our lease obligations, see
Note P Operating Lease Commitments
and Note K Restructuring Activities
of Notes to Consolidated Financial Statements, which are
included in Part II, Item 8 of this Annual Report on
Form 10-K.
|
|
Item 3.
|
Legal
Proceedings
|
We and certain of our current and former executive officers and
directors were named in a federal securities class action
complaint filed on September 15, 2008 in the United States
District Court for the District of Delaware by plaintiff Norfolk
County Retirement System on behalf of an alleged class of
purchasers of our securities from January 29, 2007 to
July 30, 2008, including shareholders of Stratex Networks,
Inc. who exchanged shares of Stratex Networks, Inc. for our
shares as part of the merger between Stratex Networks and the
Microwave Communications Division of Harris Corporation. This
action relates to the restatement of our prior financial
statements as discussed in our fiscal 2008 Annual Report on
Form 10-K
filed with the Securities and Exchange Commission on
September 25, 2008. Similar complaints were filed in the
United States District Court of Delaware on October 6 and
October 30, 2008. Each complaint alleges violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and
Rule 10b-5
promulgated thereunder, as well as violations of
Sections 11 and 15 of the Securities Act of 1933 and seeks,
among other relief, determinations that the action is a proper
class action, unspecified compensatory damages and reasonable
attorneys fees and costs. The actions were consolidated on
June 5, 2009 and a consolidated class action complaint was
filed on July 29, 2009. On July 27, 2010, the Court
denied the motions to dismiss that we and the officer and
director defendants had filed. We believe that we have
meritorious defenses and intend to defend ourselves vigorously.
On February 8, 2007, a court order was entered against
Stratex do Brasil, a subsidiary of Harris Stratex Networks
Operating Company, in Brazil, to enforce performance of an
alleged agreement between the former Stratex Networks, Inc.
entity and a supplier. We have not determined what, if any,
liability this may result in, as the court did not award any
damages. We have appealed the decision to enforce the alleged
agreement, and do not expect this litigation to have a material
adverse effect on our business, operating results or financial
condition.
From time to time, as a normal incident of the nature and kind
of businesses in which we are engaged, various claims or charges
are asserted and litigation commenced against us arising from or
related to: personal injury, patents, trademarks, trade secrets
or other intellectual property; labor and employee disputes;
commercial or contractual disputes; breach of warranty; the sale
or use of products containing restricted or hazardous materials;
or other environmental matters. Claimed amounts may be
substantial but may not bear any reasonable relationship to the
merits of the claim or the extent of any real risk of court or
arbitral awards. Any of such claims and litigation could entail
significant expenses and losses, which could adversely affect
our operating results, cash flows and financial condition.
26
EXECUTIVE
OFFICERS OF THE REGISTRANT
The name, age, position held with us, and principal occupation
and employment during at least the past 5 years for each of
our executive officers as of September 9, 2010, are as
follows:
|
|
|
Name and Age
|
|
Position Currently Held and Past Business Experience
|
|
Charles D. Kissner, 63
|
|
Mr. Charles D. Kissner, was appointed chief executive officer on
June 28, 2010. He is also Chairman of the Board, a position held
since January 2007. Mr. Kissner served as chief executive
officer of Stratex Networks, Inc. from July 1995 through May
2000 and again from October 2001 to May 2006. He was elected a
director of Stratex Networks in July 1995, and Chairman in
August 1996, a position which he held through January 2007.
|
Thomas L. Cronan III, 50
|
|
Mr. Cronan joined our company as senior vice president and chief
financial officer in May 2009. From 2008 to just prior to
joining Harris Stratex, he served as the chief financial officer
at AeroScout, Inc. From 2007 to 2008, he served as the chief
financial officer of Ooma, Inc. In 2003, Mr. Cronan became the
senior vice president of finance and chief financial officer at
Redback Networks, Inc.
|
Paul A. Kennard, 59
|
|
Mr. Kennard joined our company as chief technology officer in
January 2007 when Harris MCD and Stratex Networks merged. In
1996 he joined Stratex Networks as vice president, engineering.
|
Meena L. Elliott, 47
|
|
Ms. Elliott was appointed vice president, general counsel and
secretary of the company in July 2009. She joined our company as
associate general counsel and assistant secretary in January
2007 when Harris MCD and Stratex Networks merged. Ms. Elliott
joined Harris Corporations Microwave Communications
Division as division counsel in March 2006. Prior to joining
MCD, she was chief counsel at the Department of Commerce from
2002-2006.
|
Heinz H. Stumpe, 55
|
|
Mr. Stumpe was appointed chief operating officer and senior vice
president global operations on June 30, 2008. Previously, he was
vice president operations. He joined Stratex Networks as
director, marketing in 1996. He was promoted to vice president,
global accounts in 1999, vice president, strategic accounts in
2002 and vice president, global operations in April 2006.
|
Shaun McFall, 50
|
|
Mr. McFall was named chief marketing officer in July 2008.
Previously, from 2000-2008, he served as vice president,
marketing for Stratex Networks, Inc. He has been with the
company since 1989.
|
J. Russell Mincey, 49
|
|
Mr. Mincey joined our company in July 2008 as global corporate
controller. From mid-February through mid-May 2009, he served as
interim principal financial officer and interim principal
accounting officer. In September 2009, he was appointed vice
president, corporate controller and principal accounting
officer. From October 2005 to April 2008, Mr. Mincey was chief
financial officer at the Industrial Components Division of
Carlisle Companies. He served as vice president and chief
financial officer of Draka Comteq (previously known as Alcatel
Fiber Optic Cable Division) from July 2004 through October 2005.
|
Michael Pangia, 49
|
|
Mr. Pangia was named senior vice president and chief sales
officer in March 2009. Previously, Mr. Pangia served as senior
vice president, Global Sales Operations and Strategy at Nortel.
From 2006 through 2008, he was president of Nortels Asia
region, responsible for sales and overall business management
for all countries where Nortel did business in that region and
he was the chief operating officer of Nortels Asia region
from 2005 to 2006.
|
27
There is no family relationship between any of our executive
officers or directors, and there are no arrangements or
understandings between any of our executive officers or
directors and any other person pursuant to which any of them was
appointed or elected as an officer or director, other than
arrangements or understandings with our directors
|
|
Item 4.
|
Removed
and Reserved
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information and Price Range of Common Stock
On January 28, 2010, we changed our corporate name to Aviat
Networks, Inc. from Harris Stratex Networks, Inc. to more
effectively reflect our business and communicate our brand
identity to customers and to comply with the termination of the
Harris trademark licensing agreement resulting from the spin-off
by Harris of its interest in our stock to its shareholders in
May 2009.
As a result, our Common Stock, with a par value of $0.01 per
share, is listed and primarily traded on the NASDAQ Global
Market (NASDAQ), under the ticker symbol AVNW (prior
to January 28, 2010 our ticker symbol was HSTX). There was
no established trading market for shares of our Common Stock
prior to January 29, 2007.
From the time we acquired Stratex on January 26, 2007,
Harris owned 32,913,377 shares or 100% of our Class B
Common Stock which approximated 56% of the total shares of our
common stock. On May 27, 2009, Harris distributed all of
those shares to the Harris stockholders as a taxable pro rata
stock dividend. Upon the distribution, the Class B Common
Stock converted automatically into shares of Class A Common
Stock.
Effective November 19, 2009, under a change to our
certificate of incorporation approved by shareholders, all
shares of our Class A common stock were reclassified on a
one-to-one basis to shares of Common Stock without a class
designation; we no longer have Class A or Class B
common stock authorized, issued or outstanding.
According to the records of our transfer agent, as of
August 27, 2010, there were approximately 5,600 holders of
record of our Common Stock. The following table sets forth the
high and low reported sale prices for a share of our Common
Stock on NASDAQ Global Market system for the periods indicated
during our fiscal years 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
Fiscal 2009
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
First Quarter
|
|
|
7.79
|
|
|
|
5.65
|
|
|
|
11.45
|
|
|
|
6.85
|
|
Second Quarter
|
|
|
7.49
|
|
|
|
5.81
|
|
|
|
7.85
|
|
|
|
3.26
|
|
Third Quarter
|
|
|
8.25
|
|
|
|
5.85
|
|
|
|
7.24
|
|
|
|
3.00
|
|
Fourth Quarter
|
|
|
7.42
|
|
|
|
3.46
|
|
|
|
6.75
|
|
|
|
3.91
|
|
Dividend
Policy
We have not paid cash dividends on our common stock and do not
intend to pay cash dividends in the foreseeable future. We
intend to retain any earnings for use in our business. In
addition, the covenants of our $70 million credit facility
may restrict us from paying dividends or making other
distributions to our shareholders under certain circumstances.
Sales of
Unregistered Securities
During the fourth quarter of fiscal 2010, we did not issue or
sell any unregistered securities.
28
Issuer
Repurchases of Equity Securities
During the fourth quarter of fiscal 2010, we did not repurchase
any equity securities.
Performance
Graph
The following graph and accompanying data compares the
cumulative total return on our Common Stock with the cumulative
total return of the Total Return Index for The NASDAQ Composite
Market (U.S. Companies) and the NASDAQ Telecommunications
Index for the three-year, five month period commencing
January 29, 2007 and ending July 2, 2010. The stock
price performance shown on the graph below is not necessarily
indicative of future price performance. Note that this graph and
accompanying data is furnished, not
filed, with the Securities and Exchange Commission.
COMPARISON
OF 41 MONTH CUMULATIVE TOTAL RETURN*
Among
Aviat Networks, Inc., the NASDAQ Composite Index
and the NASDAQ Telecommunications Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/29/2007
|
|
|
6/29/2007
|
|
|
6/27/2008
|
|
|
7/3/2009
|
|
|
7/2/2010
|
Aviat Networks, Inc.
|
|
|
|
100.00
|
|
|
|
|
89.90
|
|
|
|
|
47.90
|
|
|
|
|
30.75
|
|
|
|
|
17.50
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
108.40
|
|
|
|
|
94.36
|
|
|
|
|
75.13
|
|
|
|
|
87.34
|
|
NASDAQ Telecommunications
|
|
|
|
100.00
|
|
|
|
|
113.06
|
|
|
|
|
98.90
|
|
|
|
|
77.29
|
|
|
|
|
80.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Assumes (i) $100 invested on January 29, 2007 in Aviat
Networks, Inc. Common Stock, the Total Return Index for The
NASDAQ Composite Market (U.S. companies) and the NASDAQ
Telecommunications Index; and (ii) immediate reinvestment
of all dividends. |
29
|
|
Item 6.
|
Selected
Financial Data
|
The following table summarizes our selected historical financial
information for each of the last five fiscal years. The selected
financial information as of and for the fiscal years ended
July 2, 2010, July 3, 2009, June 27, 2008,
June 29, 2007 and June 30, 2006 has been derived from
our audited consolidated financial statements, for which data
presented for fiscal years 2010, 2009 and 2008 are included
elsewhere in this Annual Report on
Form 10-K.
This table should be read in conjunction with our other
financial information, including Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial
Statements and Notes, included elsewhere in this Annual Report
on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
July 2, 2010
|
|
July 3, 2009
|
|
June 27, 2008
|
|
June 29, 2007
|
|
June 30, 2006
|
|
|
(In millions)
|
|
Revenue from product sales and services
|
|
$
|
478.9
|
|
|
$
|
679.9
|
|
|
$
|
718.4
|
|
|
$
|
507.9
|
|
|
$
|
357.5
|
|
Cost of product sales and services
|
|
|
(345.5
|
)
|
|
|
(505.5
|
)
|
|
|
(528.2
|
)
|
|
|
(361.2
|
)
|
|
|
(275.2
|
)
|
Net loss
|
|
|
(130.2
|
)
|
|
|
(355.0
|
)
|
|
|
(11.9
|
)
|
|
|
(21.8
|
)
|
|
|
(38.6
|
)
|
Basic and diluted net loss per common share
|
|
|
(2.19
|
)
|
|
|
(6.05
|
)
|
|
|
(0.20
|
)
|
|
|
(0.88
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
July 2, 2010
|
|
July 3, 2009
|
|
June 27, 2008
|
|
June 29, 2007
|
|
June 30, 2006
|
|
|
(In millions)
|
|
Total assets
|
|
$
|
447.0
|
|
|
$
|
600.2
|
|
|
$
|
977.3
|
|
|
$
|
1,025.5
|
|
|
$
|
344.9
|
|
Long-term liabilities
|
|
|
17.2
|
|
|
|
17.9
|
|
|
|
28.1
|
|
|
|
65.0
|
|
|
|
12.6
|
|
Total net assets
|
|
|
263.2
|
|
|
|
387.9
|
|
|
|
748.2
|
|
|
|
746.4
|
|
|
|
244.3
|
|
The following table summarizes certain charges, expenses and
gains included in our net losses for each of the fiscal years in
the five year period ended July 2, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
|
June 27, 2008
|
|
|
June 29, 2007
|
|
|
June 30, 2006
|
|
|
|
(In millions)
|
|
|
Goodwill impairment charges
|
|
$
|
|
|
|
$
|
279.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Intangible impairment charges
|
|
|
63.2
|
|
|
|
32.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment impairment charges
|
|
|
8.7
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other impairment charges and rebranding expenses
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges for product transition, product discontinuances and
inventory mark-downs
|
|
|
16.9
|
|
|
|
29.8
|
|
|
|
14.7
|
|
|
|
|
|
|
|
39.6
|
|
Amortization of purchased technology
|
|
|
8.2
|
|
|
|
7.5
|
|
|
|
7.1
|
|
|
|
3.0
|
|
|
|
|
|
Restructuring charges
|
|
|
7.1
|
|
|
|
8.2
|
|
|
|
9.3
|
|
|
|
9.3
|
|
|
|
|
|
Amortization of trade names, customer relationships,
non-competition agreements and contract backlog
|
|
|
5.6
|
|
|
|
5.7
|
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
|
|
Executive severance
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of the fair value adjustments related to fixed
assets and inventory
|
|
|
0.6
|
|
|
|
1.7
|
|
|
|
2.8
|
|
|
|
9.0
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
15.3
|
|
|
|
|
|
Cost of integration activities undertaken in connection with the
Stratex merger
|
|
|
|
|
|
|
|
|
|
|
11.1
|
|
|
|
5.4
|
|
|
|
|
|
Gains from sale of building and Telsima acquisition purchase
price settlement
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
7.8
|
|
|
|
5.7
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119.8
|
|
|
$
|
373.0
|
|
|
$
|
60.3
|
|
|
$
|
55.2
|
|
|
$
|
41.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
of Business; Operating Environment and Key Factors Impacting
Fiscal 2010 and 2011 Results
The following Managements Discussion and Analysis
(MD&A) is intended to help the reader
understand our results of operations and financial condition.
MD&A is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying
notes.
We generate revenue by designing, developing, manufacturing and
supporting a range of wireless networking products, solutions
and services for mobile and fixed communications service
providers, private network operators, government agencies,
transportation and utility companies, public safety agencies and
broadcast system operators across the globe. Our products
include both
point-to-point
(PTP) and
point-to-multipoint
(PMP) digital microwave transmission systems designed for
first/last mile access, middle mile/backhaul, and long distance
trunking applications. Our PMP product portfolio includes base
stations and subscriber equipment based upon the
IEEE 802.16d-2004
and 16e-2005
standards for fixed and mobile Worldwide Interoperability for
Microwave Access (WiMAX). We also provide network
management software solutions to enable operators to deploy,
monitor and manage our systems, third party equipment such as
antennas, routers, multiplexers, etc, necessary to build and
deploy a wireless transmission network, and a full suite of
turnkey support services.
We work continuously to improve our established brands and to
create new products that meet our customers evolving needs
and preferences. Our fundamental business goal is to generate
superior returns for our stockholders over the long term. We
believe that increases in revenue, segment operating profits,
earnings per share, and return on average total capital are the
key measures of financial performance for our business.
Fiscal Year 2010 was a challenging year. Over the past two
years, we focused on creating a business model that provided
end-to-end solutions for our customers networks including
IP mobile backhaul, WiMAX, energy and security solutions and
managed services. This helped us expand our reach into new
markets, but also required a large investment in resources. As
we were in the midst of this expansion, the world fell into
economic turmoil. Around the globe, access to capital, the
growing demand for mobile broadband and the need to reduce costs
and improve efficiency affected our customers decisions
regarding their network investments. To address this situation,
the Board of Directors and management team decided to
restructure our organization and refocus the strategic direction
of the business. These changes will help us to scale our
operations to meet the changing needs of our customers, markets
and industry with increased flexibility and speed.
While we faced a difficult business environment, we continued to
strengthen our balance sheet, reaching record cash levels. We
are now entering a period of restructuring and turnaround that
will require a strong balance sheet in order to successfully
execute. In fiscal 2011, we are taking aggressive steps to
restore profitability and accelerate innovation to maintain our
position as a leading independent wireless transmission
provider. Our strategic focus and the way we view our business
has changed in the face of an altered global landscape.
On August 12, 2010, we announced a new restructuring plan
as a first step in a comprehensive strategic plan to enable a
return to profitability, and continue building out a stable
platform to drive sustainable revenue growth. We expect to
complete all key actions associated with this restructuring in
fiscal 2011 in order to emerge in a stronger financial position
going forward.
Strategic
Focus
With fiscal 2010 behind us, we are focused on restructuring our
business to restore profitability and streamlining our
operations. We have a number of strategic and operational goals
to execute:
|
|
|
|
|
Align cost base with revenue generation levels
|
|
|
|
Optimize product portfolio,
|
|
|
|
Fixing business processes
|
|
|
|
Growing top line
|
31
|
|
|
|
|
Create a sustainable, profitable business model
|
To do this, we have examined our products, markets, facilities,
development programs, and operational flows to ensure were
focused on what we do well and what will differentiate us in the
future. We are working aggressively to streamline established
management processes to run with the speed required by the
markets in which we do business.
While we have been aggressive about our cost reduction plans, we
have sought to balance that with a renewed focus on innovation
to expand our position as a leading provider of wireless
solutions. We have examined each of the products and markets
where Aviat Networks does business and made strategic decisions
to refocus or adjust resources to the product, service or
geographic areas of the business that have the most promise.
In addition to taking steps to restructure the way we run the
business today, we have also crafted a strategic plan that
outlines our goals for the future. This strategic plan is
designed to establish a firm foundation on which we can resume
long-term profitable growth.
The first and most important step in this process is our
emphasis on the microwave backhaul area, where we have a long
history of leadership. We are seeing exciting opportunities in
our core microwave backhaul business as service providers invest
in IP technologies to meet the growing demand for broadband
access around the world. Second, we are realigning the WiMAX
business to be viewed as a technology, rather than as a market.
We will use that technology to focus our attention on the
wireless transmission business in a way that is complementary to
our microwave backhaul business.
Third, we will increase focus on our services business as a
strong differentiator. Our network operations and management
services deliver peace of mind for customers, while allowing us
to build a closer relationship to better understand their
business needs while our network design and installation
services enable us to provide customers with the expertise they
require.
Operations
Review
In the discussion below, our fiscal year ended July 2, 2010
is referred to as fiscal 2010 or 2010;
fiscal year ended July 3, 2009 as fiscal 2009
or 2009 and; fiscal year ended June 27, 2008 as
fiscal 2008 or 2008.
Revenue
and Net Loss
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|
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|
|
|
|
|
|
|
|
2010/2009
|
|
|
|
2009/2008
|
|
|
|
|
|
|
% Increase/
|
|
|
|
% Increase/
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2008
|
|
(Decrease)
|
|
|
(In millions, except percentages)
|
|
Revenue
|
|
$
|
478.9
|
|
|
$
|
679.9
|
|
|
|
(29.6
|
)%
|
|
$
|
718.4
|
|
|
|
(5.4
|
)%
|
Net loss
|
|
$
|
(130.2
|
)
|
|
$
|
(355.0
|
)
|
|
|
N/M
|
|
|
$
|
(11.9
|
)
|
|
|
N/M
|
|
% of revenue
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
|
|
|
|
(1.7
|
)%
|
|
|
|
|
N/M = Not meaningful, as used in tables throughout this
MD&A.
Revenue
Fiscal 2010 Compared with 2009
Our revenue in fiscal year 2010 was $478.9 million, a
decrease of $201.0 million or 29.6%, compared with fiscal
year 2009. This decrease in revenue resulted from significant
declines in all regions, most acutely in Africa and Europe,
Middle East and Russia. Declines resulted primarily from reduced
customer demand due to the global economic recession and the
effects of the continuing credit crisis on our customers
ability to finance expansion, as well as increased competition
from our competitors. Increased competition has affected product
pricing and the ability to combine microwave equipment with
other product sales and services. Furthermore, revenue has been
negatively affected by anticipated or planned consolidation of
our customers and foreign government-based subsidized financing,
particularly in Africa.
Revenue in fiscal 2010 benefited from our adoption during the
year of new revenue recognition accounting rules which resulted
in the recognition of $7.9 million of revenue that
otherwise would have been delayed under the
32
prior revenue recognition rules. For additional information
refer to the discussion under Critical
Accounting Estimates Revenue Recognition,
below.
Revenue
Fiscal 2009 Compared with 2008
Our revenue in fiscal 2009 was $679.9 million, a decrease
of $38.5 million or 5.4%, compared with fiscal 2008. This
decrease in revenue resulted from declines in all regions
(except Africa) primarily due to the global economic recession
and the continuing credit crisis adversely affecting our
customers expansion, as well as increased competition from our
competitors. Compared with fiscal 2008, revenue in fiscal 2009
in Europe, Middle East and Russia declined by
$27.9 million, Latin America and Asia-Pacific declined
$16.6 million, and North America was down
$10.5 million. These decreases were partially offset by
growth in Africa ($16.5 million increase) as customers in
this region continued to expand their network infrastructures
prior to the slowdown in the third quarter of fiscal 2009.
Major
Customer in Fiscal 2010, 2009 and 2008
During fiscal 2010, the MTN group in Africa accounted for 17% of
our total revenue compared with 17% in fiscal 2009 and 13% in
fiscal 2008. We have entered into separate and distinct
contracts with MTN as well as separate arrangements with MTN
group subsidiaries. None of such other contracts on an
individual basis are material to our operations. The loss of all
MTN group business could adversely affect our results of
operations, cash flows and financial position.
Revenue
by Region
Revenue by region comparing fiscal 2010 with 2009 and 2008 with
the related changes are shown in the tables below:
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|
|
|
|
|
|
Fiscal Year
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
|
(In millions, except percentages)
|
|
|
North America
|
|
$
|
175.1
|
|
|
$
|
232.0
|
|
|
$
|
(56.9
|
)
|
|
|
(24.5
|
)%
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
124.2
|
|
|
|
213.8
|
|
|
|
(89.6
|
)
|
|
|
(41.9
|
)%
|
Europe, Middle East, and Russia
|
|
|
88.4
|
|
|
|
139.7
|
|
|
|
(51.3
|
)
|
|
|
(36.7
|
)%
|
Latin America and AsiaPac
|
|
|
91.2
|
|
|
|
94.4
|
|
|
|
(3.2
|
)
|
|
|
(3.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
303.8
|
|
|
|
447.9
|
|
|
|
(144.1
|
)
|
|
|
(32.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
478.9
|
|
|
$
|
679.9
|
|
|
$
|
(201.0
|
)
|
|
|
(29.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
|
|
(In millions, except percentages)
|
|
|
North America
|
|
$
|
232.0
|
|
|
$
|
242.5
|
|
|
$
|
(10.5
|
)
|
|
|
(4.3
|
)%
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa
|
|
|
213.8
|
|
|
|
197.3
|
|
|
|
16.5
|
|
|
|
8.4
|
%
|
Europe, Middle East, and Russia
|
|
|
139.7
|
|
|
|
167.6
|
|
|
|
(27.9
|
)
|
|
|
(16.6
|
)%
|
Latin America and AsiaPac
|
|
|
94.4
|
|
|
|
111.0
|
|
|
|
(16.6
|
)
|
|
|
(15.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
447.9
|
|
|
|
475.9
|
|
|
|
(28.0
|
)
|
|
|
(5.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
679.9
|
|
|
$
|
718.4
|
|
|
$
|
(38.5
|
)
|
|
|
(5.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Net
Loss Fiscal 2010 Compared with 2009
Our net loss in fiscal 2010 was $130.2 million compared
with a net loss of $355.0 million in fiscal 2009. The net
loss in fiscal 2010 included product transition charges to
converge our products onto a single platform by the end of
fiscal year 2010 and impairments for intangible assets,
property, plant and equipment and certain other assets.
Additionally, we incurred other charges and expenses including
restructuring costs, amortization of purchased intangibles,
executive severance and share compensation expense. Finally, we
recognized a $1.0 million gain on sale of our
San Antonio, Texas property and a $1.2 million gain
from settlement of a dispute related to the Telsima acquisition
that resulted in a reduction of the purchase price.
These charges, expenses and gains are set forth on a comparative
basis in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
|
|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
|
|
(In millions)
|
|
|
Goodwill impairment charges
|
|
$
|
|
|
|
$
|
279.0
|
|
|
$
|
|
|
Intangible assets impairment charges
|
|
|
63.2
|
|
|
|
32.6
|
|
|
|
|
|
Property, plant and equipment impairment charges
|
|
|
8.7
|
|
|
|
3.2
|
|
|
|
|
|
Other impairment charges and rebranding expenses
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
Charges for product transition, product discontinuances and
inventory mark-downs
|
|
|
16.9
|
|
|
|
29.8
|
|
|
|
14.7
|
|
Amortization of purchased technology
|
|
|
8.2
|
|
|
|
7.5
|
|
|
|
7.1
|
|
Restructuring charges
|
|
|
7.1
|
|
|
|
8.2
|
|
|
|
9.3
|
|
Amortization of trade names, customer relationships,
non-competition agreements
|
|
|
5.6
|
|
|
|
5.7
|
|
|
|
7.5
|
|
Executive severance
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Amortization of the fair value adjustments related to fixed
assets and inventory
|
|
|
0.6
|
|
|
|
1.7
|
|
|
|
2.8
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
Cost of integration activities undertaken in connection with the
Stratex merger
|
|
|
|
|
|
|
|
|
|
|
11.1
|
|
Gains from sale of building and Telsima acquisition purchase
price settlement
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
3.2
|
|
|
|
2.9
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119.8
|
|
|
$
|
373.0
|
|
|
$
|
60.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Fiscal 2009 Compared with 2008
The net loss of $355.0 million in fiscal 2009 compared with
$11.9 million in fiscal 2009. The net loss in fiscal 2009
primarily resulted from impairment charges for goodwill and the
trade name Stratex, charges to accelerate our
product transition towards a common
IP-based
platform and increasing the valuation allowance on certain
deferred tax assets, as well as purchase accounting adjustments
and other expenses related to the acquisitions of Stratex and
Telsima.
Restructuring
Charges in Fiscal 2010, 2009 and 2008
During fiscal 2010, we completed restructuring activities that
commenced during fiscal 2009 to reduce our workforce in the
U.S., France, Canada and other locations throughout the world.
During fiscal 2010, our restructuring charges totaled
$7.1 million consisting of:
|
|
|
|
|
Severance, retention and related charges totaling
$4.6 million associated with reduction in force activities.
|
|
|
|
Charges totaling $0.5 million related to the relocation of
U.S. employees to North Carolina from Florida.
|
|
|
|
Charges totaling $2.0 million in facility lease obligation
impairments primarily for facilities occupied in San Jose,
California prior the relocation to our new corporate
headquarters in Santa Clara, California.
|
34
During the first quarter of fiscal 2009, we announced a new
restructuring plan (the Fiscal 2009 Plan) to reduce
our worldwide workforce. During fiscal 2008, we completed our
restructuring activities implemented within the merger
restructuring plans (the Fiscal 2007 Plans) approved
in connection with the January 26, 2007 merger between the
Microwave Communications Division of Harris Corporation and
Stratex. These restructuring plans included the consolidation of
facilities and operations of the predecessor entities in Canada,
France, the U.S., China, Brazil and, to a lesser extent, Mexico,
New Zealand and the United Kingdom.
During fiscal 2009, our net restructuring charges totaled
$8.2 million consisted of:
|
|
|
|
|
Severance, retention and related charges associated with
reduction in force activities totaling $8.0 million (Fiscal
2009 Plan).
|
|
|
|
Impairment of fixed assets (non-cash charges) totaling
$0.4 million and facility restoration costs of
$0.3 million at our Canadian location (Fiscal 2009 Plan).
|
|
|
|
Adjustments to the restructuring liability under the 2007
Restructuring Plans for changes in estimates related to
sub-tenant activity at our U.S.($0.1 million increase) and
Canadian locations ($0.3 million decrease).
|
|
|
|
Adjustments to the restructuring liability under the 2007
Restructuring Plans for changes in estimates to reduce the
severance liability in Canada ($0.3 million decrease).
|
During fiscal 2008, we recorded $9.3 million of
restructuring charges in connection with completion of the
Fiscal 2007 Plans. These fiscal 2008 restructuring charges
consisted of:
|
|
|
|
|
Severance, retention and related charges associated with
reduction in force activities totaling $3.4 million ($4.0
in fiscal 2008 charges, less $0.6 million for a reduction
in the restructuring liability recorded for Canada and France).
|
|
|
|
Lease impairment charges totaling $1.8 from implementation of
fiscal 2007 plans and changes in estimates related to sub-tenant
activity at our U.S. and Canadian locations.
|
|
|
|
Impairment of fixed assets and leasehold improvements totaling
$1.9 million at our Canadian location.
|
|
|
|
Impairment of a recoverable value-added type tax in Brazil
totaling $2.2 million resulting from our scaled down
operations and reduced activity which negatively affected the
fair value of this recoverable asset (included in Other
current assets on our Consolidated Balance Sheets).
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010/2009
|
|
|
|
2009/2008
|
|
|
|
|
|
|
% Increase/
|
|
|
|
% Increase/
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2008
|
|
(Decrease)
|
|
|
(In millions, except percentages)
|
|
Revenue
|
|
$
|
478.9
|
|
|
$
|
679.9
|
|
|
|
(29.6
|
)%
|
|
$
|
718.4
|
|
|
|
(5.4
|
)%
|
Cost of product sales and services
|
|
$
|
345.5
|
|
|
$
|
505.5
|
|
|
|
(31.7
|
)%
|
|
$
|
528.2
|
|
|
|
(4.3
|
)%
|
Gross margin
|
|
$
|
133.4
|
|
|
$
|
174.4
|
|
|
|
(23.5
|
)%
|
|
$
|
190.2
|
|
|
|
(8.3
|
)%
|
% of revenue
|
|
|
27.9
|
%
|
|
|
25.7
|
%
|
|
|
|
|
|
|
26.5
|
%
|
|
|
|
|
Fiscal
2010 Compared with 2009
Gross margin in fiscal 2010 was $133.4 million, or 27.9% of
revenue, compared with $174.4 million, or 25.7% of revenue
in fiscal 2009. Gross margin in fiscal 2010 was impacted by
$16.9 million of charges to converge our products onto a
single platform by the end of fiscal year 2010. These charges
included $7.9 million related to provisions for legacy
product excess and obsolete inventory, and $5.5 million for
impairment of a building and idle equipment. Additionally,
$3.5 million in charges were recorded for inventory
purchase commitments and $8.2 million for amortization of
purchased technology.
Our gross margin percentage improved during fiscal 2010 compared
with fiscal 2009 due to the benefit from the pricing and
structure of certain customer arrangements, primarily during the
first two quarters of fiscal 2010. Gross margin also benefited
from lower logistics expenses, lower manufacturing overhead and
improved supplier
35
pricing on select projects primarily during the first two
quarters of fiscal 2010. However, these improvements were
partially offset by a reduction in the volume of sales of our
legacy products during the second half of fiscal 2010 which,
combined with increased
start-up
production costs of new products and the items discussed above,
adversely affected our gross margin.
By comparison, gross margin in fiscal 2009 was impacted by
$37.9 million of write-offs consisting of
$29.8 million in charges related to product transition,
$7.5 million for amortization of purchased technology and
$0.6 million of amortization of the fair value of
adjustments for fixed assets acquired from Stratex.
Fiscal
2009 Compared with 2008
Gross margin in fiscal 2009 was $174.4 million, or 25.7% of
revenue, compared with $190.2 million, or 26.5% of revenue
in fiscal 2008. Gross margin in fiscal 2009 was reduced by
$29.8 million in charges related to product transition,
$7.5 million for amortization of purchased technology and
$0.6 million of amortization of the fair value of
adjustments for fixed assets acquired from Stratex.
By comparison, gross margin in fiscal 2008 was reduced by
$14.7 million for inventory markdowns and impairment
relating to product transitioning, $7.1 million of
amortization on purchased technology, $0.8 million for
amortization of the fair value of adjustments for fixed assets
acquired from Stratex, and $1.5 million of merger
integration costs.
Aside from the charges and expenses mentioned above, gross
margin and gross margin percentage benefited from a favorable
margin impact on some projects, gains on currency translations,
decreased warranty expenses, favorable purchase price variance
and product mix.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010/2009
|
|
|
|
2009/2008
|
|
|
|
|
|
|
% Increase/
|
|
|
|
% Increase/
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2008
|
|
(Decrease)
|
|
|
(In millions, except percentages)
|
|
Research and development expenses
|
|
$
|
41.1
|
|
|
$
|
40.4
|
|
|
|
1.7
|
%
|
|
$
|
46.1
|
|
|
|
(12.4
|
)%
|
% of revenue
|
|
|
8.6
|
%
|
|
|
5.9
|
%
|
|
|
|
|
|
|
6.4
|
%
|
|
|
|
|
Fiscal
2010 Compared with 2009
R&D expenses were $41.1 million in fiscal 2010
compared with $40.4 million in fiscal 2009. As a percentage
of revenue, these expenses increased to 8.6% in fiscal 2010 from
5.9% in fiscal 2009 due to 29.6% lower revenue and a 1.7%
increase in spending. The increase in R&D spending,
primarily labor costs, in fiscal 2010 compared with fiscal 2009
was primarily attributable to increases in the areas of WiMAX
and energy, security and surveillance product development, but
partially offset by a reduction in TRuepoint 6000 development
efforts.
Fiscal
2009 Compared with 2008
Research and development (R&D) expenses were
$40.4 million in fiscal 2009 compared with
$46.1 million in fiscal 2008. As a percentage of revenue,
these expenses decreased to 5.9% in fiscal 2009 from 6.4% in
fiscal 2008 due to a decrease in spending. The decrease in
spending in fiscal 2009 compared with fiscal 2008 was primarily
attributable to the reduction in engineering workforce
implemented in our restructuring plans during fiscal 2008.
Selling
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010/2009
|
|
|
|
2009/2008
|
|
|
|
|
|
|
% Increase/
|
|
|
|
% Increase/
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2008
|
|
(Decrease)
|
|
|
(In millions, except percentages)
|
|
Selling and administrative expenses
|
|
$
|
141.0
|
|
|
$
|
138.3
|
|
|
|
2.0
|
%
|
|
$
|
141.4
|
|
|
|
(2.2
|
)%
|
% of revenue
|
|
|
29.4
|
%
|
|
|
20.3
|
%
|
|
|
|
|
|
|
19.7
|
%
|
|
|
|
|
36
Fiscal
2010 Compared with Fiscal 2009
The following table summarizes the significant increases and
decreases to our selling and administrative expenses comparing
fiscal 2010 with fiscal 2009:
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
(In millions)
|
|
|
Increase in commissions paid to sales agents
|
|
$
|
4.5
|
|
Increase in software amortization
|
|
|
2.5
|
|
Increase in selling expenses for new business initiatives (WiMAX
and Network Security)
|
|
|
1.9
|
|
Increase in executive severance for former CEO
|
|
|
1.8
|
|
Increase due to rebranding and transitional costs due to
corporate name change and costs to phase-out transitional
services agreement with Harris
|
|
|
1.3
|
|
Reduction in bad debt expense
|
|
|
(7.3
|
)
|
Reduction in software impairments included in selling and
administrative expenses
|
|
|
(2.9
|
)
|
Reduction in costs charged by Harris for administrative services
|
|
|
(2.5
|
)
|
Other, net
|
|
|
3.4
|
|
|
|
|
|
|
|
|
$
|
2.7
|
|
|
|
|
|
|
The increase in selling and administrative expenses from
commissions paid to sales agents resulted from a large contract
with a customer in the Europe, Middle East and Russia region
during fiscal 2010.
Fiscal
2009 Compared with Fiscal 2008
The following table summarizes the significant increases and
decreases to our selling and administrative expenses comparing
fiscal 2009 with fiscal 2008:
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
(In millions)
|
|
|
Decrease in selling expenses and sales commissions due to lower
order levels
|
|
$
|
(13.0
|
)
|
Decrease in integration costs related to acquisition of Stratex
in fiscal 2007
|
|
|
(10.2
|
)
|
Decrease in amounts accrued under bonus plans and share-based
compensation due to lower profitability
|
|
|
(5.1
|
)
|
Increase due to formation of chief operations officer group
during fiscal 2009
|
|
|
6.3
|
|
Increase in administrative costs due to 4G and product
unification and transition initiatives
|
|
|
5.8
|
|
Increase in allowance for uncollectible accounts
|
|
|
5.5
|
|
Increase in software costs, external audit, restatement and SOX
consulting fees
|
|
|
3.3
|
|
Increase in marketing costs for channel marketing and tradeshows
|
|
|
1.7
|
|
Increase due to change in fair value of warrants
|
|
|
(0.6
|
)
|
Other, net
|
|
|
3.2
|
|
|
|
|
|
|
|
|
$
|
(3.1
|
)
|
|
|
|
|
|
The chief operations officer group was formed in fiscal 2009 to
centrally manage activities that provide support to all
functions of our company. The costs related to this group
include the development of a program manager group that drives
our internal project execution and the business process
engineering team that enhances system integration and
facilitates process improvements throughout the company.
37
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010/2009
|
|
|
|
2009/2008
|
|
|
|
|
|
|
% Increase/
|
|
|
|
% Increase/
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2008
|
|
(Decrease)
|
|
|
|
|
(In millions, except percentages)
|
|
|
|
Loss before income taxes
|
|
$
|
(134.0
|
)
|
|
$
|
(337.2
|
)
|
|
|
N/M
|
|
|
$
|
(13.9
|
)
|
|
|
N/M
|
|
Income tax benefit (expense)
|
|
$
|
3.8
|
|
|
$
|
(17.8
|
)
|
|
|
N/M
|
|
|
$
|
2.0
|
|
|
|
N/M
|
|
% of loss before income taxes
|
|
|
(2.8
|
)%
|
|
|
(5.3
|
)%
|
|
|
|
|
|
|
14.4
|
%
|
|
|
|
|
The income tax benefit for fiscal 2010 was $3.8 million.
The variation between our income tax benefit and income tax
benefit at the statutory rate of 35% on our pre-tax loss of
$134.0 million was primarily due to a $4.4 million
one-time benefit recognized for U.S. federal income tax
loss carryback under the Worker, Homeownership and Business
Assistance Act of 2009. This benefit was partially offset by a
full valuation allowance on all domestic deferred tax assets
created in fiscal 2010. The effective tax rate for fiscal 2010
primarily reflected the benefits of earnings and losses of
foreign subsidiaries taxed at lower rates and a dividend from a
foreign subsidiary.
The income tax expense for fiscal 2009 was $17.8 million.
The variation between our income tax expense of
$17.8 million and income tax benefit at the statutory rate
of 35% on our pre-tax loss of $337.2 million was primarily
due to our evaluation of the ability to realize certain deferred
tax assets in future periods. We increased our valuation
allowance on these deferred tax assets resulting from our
assessment of positive and negative evidence. We concluded that
additional valuation allowance was required, resulting in income
tax expense of $25.1 million. The effective tax rate for
fiscal 2009 otherwise reflects the benefits of lower taxed
foreign earnings and losses.
Our fiscal 2008 tax benefit was the result of a pre-tax loss
primarily due to the consolidation of our foreign operations,
which are subject to income taxes at lower statutory rates.
Discussion
of Business Segments
North
America Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010/2009
|
|
|
|
2009/2008
|
|
|
|
|
|
|
% Increase/
|
|
|
|
% Increase/
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2008
|
|
(Decrease)
|
|
|
|
|
(In millions, except percentages)
|
|
|
|
Revenue
|
|
$
|
175.1
|
|
|
$
|
232.0
|
|
|
|
(24.5
|
)%
|
|
$
|
242.5
|
|
|
|
(4.3
|
)%
|
Segment operating (loss) income
|
|
$
|
(64.2
|
)
|
|
$
|
(63.4
|
)
|
|
|
N/M
|
|
|
$
|
(8.0
|
)
|
|
|
N/M
|
|
% of revenue
|
|
|
N/M
|
|
|
|
N/M
|
|
|
|
|
|
|
|
(3.3
|
)%
|
|
|
|
|
North America segment revenue decreased by $56.9 million,
or 24.5%, in fiscal 2010 compared with fiscal 2009. This
decrease in revenue resulted primarily from the economic
recession and the continuing credit crisis adversely affecting
our North America customers expansion.
North America segment revenue decreased by $10.5 million,
or 4.3%, in fiscal 2009 compared with fiscal 2008. This decrease
in revenue resulted primarily from the economic recession and
the continuing credit crisis adversely affecting our
customers expansion.
Our North America segment operating loss in fiscal 2010 was
$64.2 million compared with a segment operating loss of
$63.4 million in fiscal 2009. The loss in fiscal 2010
included charges to converge our products onto a single platform
by the end of fiscal year 2010 and impairments for intangible
assets, property, plant and equipment and certain other assets.
Additionally, we incurred other charges and expenses including
restructuring costs, amortization of purchased intangibles,
executive severance and share compensation expense. Finally, we
recognized a $1.0 million gain on sale of our
San Antonio, Texas property.
Our North America segment had an operating loss of
$63.4 million in fiscal 2009 primarily due to goodwill
impairment and charges for the accelerated transition towards a
common
IP-based
platform. The charges for this accelerated product transition
included provisions for legacy product excess and obsolete
inventory, and write-downs of property, plant, manufacturing and
test equipment, and charges recorded for inventory purchase
commitments. This compares with an operating loss of
$8.0 million in fiscal 2008.
38
These charges, expenses and gains are set forth on a comparative
basis in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Goodwill impairment charges
|
|
$
|
|
|
|
$
|
31.8
|
|
|
$
|
|
|
Intangible assets impairment charges
|
|
|
5.1
|
|
|
|
10.7
|
|
|
|
|
|
Property, plant and equipment impairment charges
|
|
|
7.0
|
|
|
|
3.2
|
|
|
|
|
|
Other impairment charges and rebranding expenses
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
Charges for product transition and inventory mark-downs
|
|
|
16.9
|
|
|
|
25.3
|
|
|
|
12.9
|
|
Amortization of purchased technology
|
|
|
7.1
|
|
|
|
0.3
|
|
|
|
|
|
Restructuring charges
|
|
|
5.6
|
|
|
|
5.1
|
|
|
|
9.0
|
|
Amortization of trade names, customer relationships and
non-compete agreements
|
|
|
4.6
|
|
|
|
2.7
|
|
|
|
2.7
|
|
Executive severance
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Amortization of the fair value adjustments related to fixed
assets
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
1.1
|
|
Cost of integration activities undertaken in connection with the
merger
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Gain on sale of building
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
2.9
|
|
|
|
1.8
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55.1
|
|
|
$
|
81.5
|
|
|
$
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010/2009
|
|
|
|
2009/2008
|
|
|
|
|
|
|
% Increase/
|
|
|
|
% Increase/
|
|
|
2010
|
|
2009
|
|
(Decrease)
|
|
2008
|
|
(Decrease)
|
|
|
|
|
(In millions, except percentages)
|
|
|
|
Revenue
|
|
$
|
303.8
|
|
|
$
|
447.9
|
|
|
|
(32.2
|
)%
|
|
$
|
475.9
|
|
|
|
(5.9
|
)%
|
Segment operating loss
|
|
$
|
(69.1
|
)
|
|
$
|
(271.9
|
)
|
|
|
N/M
|
|
|
$
|
(5.7
|
)
|
|
|
N/M
|
|
% of revenue
|
|
|
(22.7
|
)%
|
|
|
N/M
|
|
|
|
|
|
|
|
(1.2
|
)%
|
|
|
|
|
International segment revenue decreased by $144.1 million
or 32.2% in fiscal 2010 compared with fiscal 2009. This decrease
in revenue resulted from significant declines in all regions,
most acutely in Africa and Europe, Middle East and Russia. These
declines in revenue were primarily due to the global economic
recession and the continuing credit crisis adversely affecting
our customers ability to finance expansion, as well as
increased competition from our competitors.
International segment revenue decreased by $28.0 million or
5.9% in fiscal 2009 compared with fiscal 2008. This decrease in
revenue resulted from declines in all regions (except Africa)
primarily due to the global economic recession and the
continuing credit crisis adversely affecting our customers
expansion. Compared with fiscal 2008, revenue in fiscal 2009 in
Europe, Middle East and Russia declined by $27.9 million
and Latin America and Asia-Pacific declined $16.6 million.
These decreases were partially offset by growth in Africa
($16.5 million increase) as customers in this region
continued to expand their network infrastructures prior to the
slowdown in the third quarter of fiscal 2009.
The International segment operating loss of $69.1 million
in fiscal 2010 resulted primarily from the decline in revenue
when compared with fiscal 2009 and impairments for intangible
assets and property, plant and equipment.
The International segment operating loss of $271.9 million
in fiscal 2009 primarily resulted from impairment charges for
goodwill and the trade name Stratex, as well as
charges related to the accelerated transition towards a common
IP-based
product platform. This compares with an operating loss of
$5.7 million in fiscal 2008.
39
These charges, expenses and gains are set forth on a comparative
basis in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Goodwill impairment charges
|
|
$
|
|
|
|
$
|
247.2
|
|
|
$
|
|
|
Intangible assets impairment charges
|
|
|
58.1
|
|
|
|
21.9
|
|
|
|
|
|
Property, plant and equipment impairment charges
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
Other impairment charges and rebranding expenses
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Charges for product transition and inventory mark-downs
|
|
|
|
|
|
|
4.5
|
|
|
|
1.8
|
|
Amortization of purchased technology
|
|
|
1.1
|
|
|
|
7.2
|
|
|
|
7.1
|
|
Restructuring charges
|
|
|
1.5
|
|
|
|
3.1
|
|
|
|
0.3
|
|
Amortization of trade names, customer relationships and
non-compete agreements
|
|
|
1.1
|
|
|
|
3.0
|
|
|
|
4.8
|
|
Amortization of the fair value adjustments related to fixed
assets
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
1.7
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
Cost of integration activities undertaken in connection with the
merger
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
Gain on Telsima acquisition purchase price settlement
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64.7
|
|
|
$
|
291.5
|
|
|
$
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY,
CAPITAL RESOURCES AND FINANCIAL STRATEGIES
Sources
of Cash
As of July 2, 2010, our principal sources of liquidity
consisted of $141.7 million in cash and cash equivalents
and $56.0 million of available credit under our current
$70 million credit facility.
As of July 2, 2010, approximately $82.0 million or 58%
of our total cash and cash equivalents was held by entities
domiciled in the United States. The remaining balance of
$59.7 million or 42% was held by entities outside the
United States, primarily in Singapore, and could be subject to
additional taxation if it were to be repatriated to the United
States.
Available
Credit Facility and Repayment of Debt
Our debt consisted of short-term debt of $5.0 million as of
July 2, 2010 and $10.0 million as of July 3,
2009. We have a credit facility which provides for an initial
committed amount of $70 million with an uncommitted option
for an additional $50 million available with the same or
additional banks. The initial term of our credit facility is
three years expiring June 30, 2011 and provides for
(1) demand borrowings (with no stated maturity date)
(2) fixed term Eurodollar loans for up to six months or
more as agreed with the banks, and (3) the issuance of
standby or commercial letters of credit.
Demand borrowings carry an interest rate of the greater of Bank
of Americas prime rate or the Federal Funds rate plus
0.5%. Eurodollar loans were initially offered at LIBOR plus a
spread of between 1.25% to 2.00% based on our current leverage
ratio. Effective August 23, 2010, the terms of the facility
were amended to change the spread on Eurodollar loans to 1.00%
and to eliminate the leverage ratio covenant commencing with the
fiscal quarter ended July 2, 2010 in exchange for cash
collateralization of the borrowings and outstanding letters of
credit. In addition, the liquidity ratio covenant was replaced
with a minimum quick ratio covenant commencing with the fiscal
quarter ended July 2, 2010. As of July 2, 2010, we
were in compliance with these amended financial covenants.
The credit facility allows for borrowings of up to
$70 million with available credit defined as
$70 million less the outstanding balance of short-term
borrowings ($5.0 million as of July 2, 2010) and
letters of credit ($9.0 million as of July 2, 2010).
Therefore, available credit as of July 2, 2010 was
$56.0 million. The weighted average interest rate on our
short-term borrowings was 2.48% as of July 2, 2010.
40
As of July 2, 2010, the amount under standby letters of
credit outstanding totaled $1.2 million under a previous
credit facility in effect as of the end of fiscal year 2008.
Based on covenants included as part of the credit facility as of
June 30, 2008, and as amended effective July 2, 2010,
we must maintain, as measured as of the last day of each fiscal
quarter, a minimum quick ratio of 1.25 to 1 (defined as the
ratio of (1) the sum of total unrestricted cash and
equivalents, short-term marketable securities and 100% of total
monetary receivables to (2) total current liabilities,
excluding any collateralized loans and other liabilities). As of
July 2, 2010, we were in compliance with these financial
covenants and expect to remain in compliance through fiscal 2011.
We also have an uncommitted short-term line of credit of
$0.2 million from a bank in New Zealand to support the
operations of our subsidiary located there, all of which was
available on July 2, 2010. This line of credit provides for
short-term advances at various interest rates, may be terminated
upon notice, is reviewed annually for renewal or modification,
and is supported by a corporate guarantee.
Restructuring
and Severance Payments
We have a liability for restructuring and other long-term
liabilities from severance activities totaling $8.7 million
as of July 2, 2010, of which $6.0 million is
classified as a current liability and expected to be paid out in
cash over the next year.
We continue to restructure and transform our business to realign
resources and achieve desired cost savings in an increasingly
competitive market. Following approval of our annual operating
plan, on August 12, 2010 we announced that we will
implement certain cost reduction initiatives in the range of
$30.0 to $35.0 million for fiscal 2011. These initiatives
primarily affect operations in the Americas, Asia and Europe.
These actions are intended to bring the Companys
operational cost structure in line with the changing dynamics of
the microwave radio and telecommunications markets.
We expect to record approximately $11.0 million to
$13.0 million of charges related to severance and
employee-related costs and impairment of facilities during the
first, second and third quarters of fiscal 2011. The severance
and employee-related cash charges are expected to be
approximately $9.0 million to $10.0 million.
Additionally, we expect to record approximately
$2.0 million of non-cash asset impairments and
$1.0 million of lease impairment charges requiring cash
payments. The impairment charges consist primarily of costs to
close facilities in the Americas, Asia and Europe.
We expect to fund these future payments with available funds and
cash flow provided by operations.
Contractual
Obligations
As of July 2, 2010, we had contractual cash obligations for
repayment of short-term debt and related interest, purchase
obligations to acquire goods and services, payments for
operating lease commitments, payments on our restructuring and
severance liabilities, redemption of our preference shares and
payment of the related required dividend payments and other
current liabilities on our balance sheet in the normal course of
business.
41
Cash payments due under these contractual obligations are
estimated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations Due by Fiscal Year
|
|
|
|
Total
|
|
|
2011
|
|
|
2012 and 2013
|
|
|
2014 and 2015
|
|
|
After 2015
|
|
|
|
(In millions)
|
|
|
Short-term debt
|
|
$
|
5.0
|
|
|
$
|
5.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest on short-term debt
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(1)
|
|
|
57.0
|
|
|
|
57.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease commitments
|
|
|
40.0
|
|
|
|
10.5
|
|
|
|
10.3
|
|
|
|
6.0
|
|
|
|
13.2
|
|
Restructuring and other long-term liabilities
|
|
|
8.7
|
|
|
|
6.0
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Redeemable preference shares(2)
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.3
|
|
Dividend requirements on redeemable preference shares(3)
|
|
|
6.6
|
|
|
|
1.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
1.6
|
|
Other current liabilities on the balance sheet
|
|
|
155.6
|
|
|
|
155.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
281.3
|
|
|
$
|
235.2
|
|
|
$
|
15.0
|
|
|
$
|
8.0
|
|
|
$
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
From time to time in the normal course of business we may enter
into purchasing agreements with our suppliers that require us to
accept delivery of, and remit full payment for, finished
products that we have ordered, finished products that we
requested be held as safety stock, and work in process started
on our behalf in the event we cancel or terminate the purchasing
agreement. It is not our intent, nor is it reasonably likely,
that we would cancel a purchase order that we have executed.
Because these agreements do not specify fixed or minimum
quantities, do not specify minimum or variable price provisions,
and do not specify the approximate timing of the transaction, we
have no basis to estimate any future liability under these
agreements. |
|
(2) |
|
Assumes the mandatory redemption will occur more than five years
from July 2, 2010. |
|
(3) |
|
The dividend rate is 12% and assumes no redemptions for five
years from July 2, 2010. |
Commercial
Commitments
We have entered into commercial commitments in the normal course
of business including surety bonds, standby letters of credit
and other arrangements with financial institutions and insurers
primarily relating to the guarantee of future performance on
certain tenders and contracts to provide products and services
to customers. As of July 2, 2010, we had commercial
commitments on outstanding surety bonds, standby letters of
credit, guarantees and other arrangements, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of Commitments by Fiscal Year
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
After 2013
|
|
|
|
(In millions)
|
|
|
Standby letters of credit used for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bids
|
|
$
|
1.0
|
|
|
$
|
1.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Down payments
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Performance
|
|
|
9.4
|
|
|
|
4.2
|
|
|
|
5.1
|
|
|
|
0.1
|
|
|
|
|
|
Warranty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.8
|
|
|
|
6.5
|
|
|
|
5.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Surety bonds used for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bids
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
Payment guarantees
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
66.6
|
|
|
|
66.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.5
|
|
|
|
67.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
79.3
|
|
|
$
|
73.8
|
|
|
$
|
5.2
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
During fiscal year 2011, we expect to spend approximately
$12.0 million to $13.0 million for capital
expenditures.
We currently believe that existing cash and cash equivalents,
funds generated from operations and access to our credit
facility will be sufficient to provide for our anticipated
requirements for working capital and capital expenditures for
the next 12 months and the foreseeable future.
There can be no assurance, however, that our business will
generate cash flow, or that anticipated operational improvements
will be achieved. If we are unable to maintain cash balances or
generate sufficient cash flow from operations to service our
obligations, we may be required to sell assets, reduce capital
expenditures, or obtain financing. If we need to obtain
additional financing, we cannot be assured that it will be
available on favorable terms, or at all. Our ability to make
scheduled principal payments or pay interest on or refinance any
future indebtedness depends on our future performance and
financial results, which, to a certain extent, are subject to
general conditions in or affecting the microwave communications
market and to general economic, political, financial,
competitive, legislative and regulatory factors beyond our
control.
Off-Balance
Sheet Arrangements
In accordance with the definition under SEC rules
(Item 303(a) (4) (ii) of
Regulation S-K),
any of the following qualify as off-balance sheet arrangements:
|
|
|
|
|
Any obligation under certain guarantee contracts;
|
|
|
|
A retained or contingent interest in assets transferred to an
unconsolidated entity or similar entity or similar arrangement
that serves as credit, liquidity or market risk support to that
entity for such assets;
|
|
|
|
Any obligation, including a contingent obligation, under certain
derivative instruments; and
|
|
|
|
Any obligation, including a contingent obligation, under a
material variable interest held by the registrant in an
unconsolidated entity that provides financing, liquidity, market
risk or credit risk support to the registrant, or engages in
leasing, hedging or research and development services with the
registrant.
|
Currently we are not participating in transactions that generate
relationships with unconsolidated entities or financial
partnerships, including variable interest entities, and we do
not have any material retained or contingent interest in assets
as defined above. As of July 2, 2010, we did not have
material financial guarantees or other contractual commitments
that are reasonably likely to adversely affect liquidity. In
addition, we are not currently a party to any related party
transactions that materially affect our results of operations,
cash flows or financial condition.
Due to our downsizing of certain operations pursuant to
acquisitions, restructuring plans or otherwise, certain
properties leased by us have been sublet to third parties. In
the event any of these third parties vacate any of these
premises, we would be legally obligated under master lease
arrangements. We believe that the financial risk of default by
such sublessors is individually and in the aggregate not
material to our financial position, results of operations or
cash flows.
Financial
Risk Management
In the normal course of doing business, we are exposed to the
risks associated with foreign currency exchange rates and
changes in interest rates. We employ established policies and
procedures governing the use of financial instruments to manage
our exposure to such risks.
Exchange
Rate Risk
We are exposed to global market risks, including the effect of
changes in foreign currency exchange rates, and use derivatives
to manage financial exposures that occur in the normal course of
business. We do not hold nor issue derivatives for trading
purposes or make speculative investments in foreign currencies.
We formally document all relationships between hedging
instruments and hedged items, as well as the risk-management
objective and strategy for undertaking hedge transactions. This
process includes linking all derivatives to either specific firm
commitments or forecasted transactions. We also enter into
foreign exchange forward
43
contracts to mitigate the change in fair value of specific
assets and liabilities on the balance sheet; these are not
designated as hedging instruments. Accordingly, changes in the
fair value of hedges of recorded balance sheet positions are
recognized immediately in cost of product sales on the
consolidated statements of operations together with the
transaction gain or loss from the hedged balance sheet position.
Substantially all derivatives outstanding as of July 2,
2010 are designated as cash flow hedges or non-designated hedges
of recorded balance sheet positions. All derivatives are
recognized on the balance sheet at their fair value. The total
notional amount of outstanding derivatives as of July 2,
2010 was $41.9 million, of which $10.2 million were
designated as cash flow hedges and $31.7 million were not
designated as cash flow hedging instruments.
A 10% adverse change in currency exchange rates for our foreign
currency derivatives held as of July 2, 2010 would have an
impact of approximately $2.8 million on the fair value of
such instruments. This quantification of exposure to the market
risk associated with foreign exchange financial instruments does
not take into account the offsetting impact of changes in the
fair value of our foreign denominated assets, liabilities and
firm commitments.
As of July 2, 2010, we had 41 foreign currency forward
contracts outstanding with a total net notional amount of
$14.1 million consisting of 13 different currencies,
primarily the Canadian dollar, Euro, Philippine peso, Polish
zloty, Singapore dollar and Republic of South Africa rand.
Following is a summary by currency of the contract net notional
amounts grouped by the underlying foreign currency as of
July 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
(Local
|
|
|
Contract
|
|
|
|
Currency)
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(USD)
|
|
|
|
(In millions)
|
|
|
Canadian dollar (CAD) net contracts to receive (pay)
USD
|
|
|
(CAD
|
)
|
|
|
3.4
|
|
|
$
|
3.2
|
|
Euro (EUR) net contracts to receive (pay) USD
|
|
|
(EUR
|
)
|
|
|
(2.9
|
)
|
|
$
|
(3.5
|
)
|
Philippine peso (PHP) net contracts to receive (pay)
USD
|
|
|
(PHP
|
)
|
|
|
(136.3
|
)
|
|
$
|
(3.0
|
)
|
Polish zloty (PLN) net contracts to receive (pay) USD
|
|
|
(PLN
|
)
|
|
|
28.6
|
|
|
$
|
8.6
|
|
Singapore dollar (SGD) net contracts to receive
(pay) USD
|
|
|
(SGD
|
)
|
|
|
2.9
|
|
|
$
|
2.1
|
|
Republic of South Africa rand (ZAR) net contracts to
receive (pay) USD
|
|
|
(ZAR
|
)
|
|
|
31.2
|
|
|
$
|
4.1
|
|
All other currencies net contracts to receive (pay) USD
|
|
|
|
|
|
|
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of all currencies
|
|
|
|
|
|
|
|
|
|
$
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 3, 2009, we had 40 foreign currency forward
contracts outstanding with a total net notional amount of
$29.2 million consisting of 14 different currencies,
primarily the Australian dollar, Canadian dollar, Euro and
Polish zloty. Following is a summary by currency of the contract
net notional amounts grouped by the underlying foreign currency
as of July 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Amount
|
|
|
Contract
|
|
|
|
(Local Currency)
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(USD)
|
|
|
|
(In millions)
|
|
|
Australian dollar (AUD) net contracts to receive
(pay) USD
|
|
|
(AUD
|
)
|
|
|
10.8
|
|
|
$
|
8.6
|
|
Canadian dollar (CAD) net contracts to receive (pay)
USD
|
|
|
(CAD
|
)
|
|
|
(5.7
|
)
|
|
$
|
(5.0
|
)
|
Euro (EUR) net contracts to receive (pay) USD
|
|
|
(EUR
|
)
|
|
|
10.4
|
|
|
$
|
14.6
|
|
Polish zloty (PLN) net contracts to receive (pay) USD
|
|
|
(PLN
|
)
|
|
|
31.2
|
|
|
$
|
9.6
|
|
All other currencies net contracts to receive (pay) USD
|
|
|
|
|
|
|
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of all currencies
|
|
|
|
|
|
|
|
|
|
$
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The following table presents the fair value of derivative
instruments included within our Consolidated Balance Sheet as of
July 2, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
|
(In millions)
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
0.1
|
|
|
|
Other current liabilities
|
|
|
$
|
0.1
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
|
|
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the fair value of derivative
instruments included within our Consolidated Balance Sheet as of
July 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
|
(In millions)
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
Other current assets
|
|
|
$
|
0.2
|
|
|
|
Other current liabilities
|
|
|
$
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
|
Other current assets
|
|
|
$
|
0.9
|
|
|
|
Other current liabilities
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
|
|
$
|
1.1
|
|
|
|
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the amounts of gains (losses) from
cash flow hedges recorded in Other Comprehensive (Loss) Income,
the amounts transferred from Other Comprehensive (Loss) Income
and recorded in Revenue and Cost of Products Sold, and the
amounts associated with excluded time value and hedge
ineffectiveness during fiscal 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
Locations of Gains (Losses) Recorded from Derivatives
Designated as Cash Flow Hedges
|
|
2010
|
|
2009
|
|
|
(In millions)
|
|
Amount of gain (loss) of effective hedges recognized in Other
Comprehensive Income
|
|
$
|
0.6
|
|
|
$
|
2.6
|
|
Amount of gain (loss) of effective hedges reclassified from
Other Comprehensive Income into:
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
(0.2
|
)
|
|
$
|
2.6
|
|
Cost of Products Sold
|
|
$
|
0.2
|
|
|
$
|
|
|
Amount recorded into Cost of Products Sold associated with
excluded time value
|
|
$
|
0.2
|
|
|
$
|
|
|
Amount recorded into Cost of Products Sold due to hedge
ineffectiveness
|
|
$
|
0.1
|
|
|
$
|
|
|
Interest
Rate Risk
Our exposure to market risk for changes in interest rates
relates primarily to our cash equivalents and short-term debt
borrowings.
45
Exposure
on Cash Equivalents
We do not use derivative financial instruments in our short-term
investment portfolio. We invest in high-credit quality issues
and, by policy, limit the amount of credit exposure to any one
issuer and country. The portfolio includes only marketable
securities with active secondary or resale markets to ensure
portfolio liquidity. The portfolio is also designed to ensure
that funds are readily available as needed to meet our liquidity
needs. This policy reduces the potential need to sell securities
in order to meet liquidity needs and therefore the potential
effect of changing market rates on the value of securities sold.
We had $141.7 million in total cash and cash equivalents as
of July 2, 2010. Cash equivalents totaled
$81.3 million as of July 2, 2010.
The primary objective of our short-term investment activities is
to preserve principal while maximizing yields, without
significantly increasing risk. Our cash equivalents earn
interest at fixed rates; therefore, changes in interest rates
will not generate a gain or loss on these investments unless
they are sold prior to maturity. Actual gains and losses due to
the sale of our investments prior to maturity have been
immaterial. The weighted average days to maturity for cash
equivalents held as of July 2, 2010 was one day, and these
investments had an average yield of 0.23% per annum. A 10%
change in interest rates on our cash and cash equivalents is not
expected to have a material impact on our financial position,
results of operations or cash flows.
Cash equivalents have been recorded at fair value on our balance
sheet.
Exposure
on Borrowings
During fiscal 2010, borrowings under our $70 million
revolving credit facility incurred interest under the London
Interbank Offered Rate (LIBOR) plus 1.25% to 1.50%.
As of July 2, 2010, our weighted average interest rate was
2.48%. During fiscal 2010, we had between $5 million and
$15 million of short-term borrowings outstanding under the
credit facility. We recorded total interest expense on these
borrowings of $0.2 million during fiscal 2010. A 10% change
in interest rates on the current borrowings or on future
borrowings is not expected to have a material impact on our
financial position, results of operations or cash flows since
interest on our short-term debt is not material to our overall
financial position.
Impact
of Foreign Exchange
Approximately 16% of our international business was transacted
in non U.S. dollar currency environments in fiscal 2010
compared with 21% in fiscal 2009. The impact of translating the
assets and liabilities of foreign operations to
U.S. dollars is included as a component of
stockholders equity. As of July 2, 2010, the
cumulative translation adjustment decreased stockholders
equity by $2.9 million compared with a decrease of
$4.4 million as of July 3, 2009. As discussed above,
we utilize foreign currency hedging instruments to minimize the
currency risk of international transactions.
Seasonality
Our fiscal third quarter revenue and orders have historically
been lower than the revenue and orders in the immediately
preceding second quarter because many of our customers utilize a
significant portion of their capital budgets at the end of their
fiscal year, the majority of our customers begin a new fiscal
year on January 1, and capital expenditures tend to be
lower in an organizations first quarter than in its fourth
quarter. We anticipate that this seasonality will continue. The
seasonality between the second quarter and third quarter may be
affected by a variety of factors, including changes in the
global economy and other factors. Please refer to the section
entitled Risk Factors in Item 1A.
Critical
Accounting Estimates
Our consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles
(GAAP). These accounting principles require us to
make certain estimates, judgments and assumptions. We believe
that the estimates, judgments and assumptions upon which we rely
are reasonable based upon information available to us.
46
These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the
consolidated financial statements as well as the reported
amounts of revenues and expenses during the periods presented.
To the extent there are material differences between these
estimates, judgments or assumptions and actual results, our
financial statements will be affected.
The accounting policies that reflect our more significant
estimates, judgments and assumptions and which we believe are
the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
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Revenue Recognition
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Inventory Valuation and Provision for Excess and Obsolete
Inventory Losses
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Long-Lived Assets
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Income Taxes and Tax Valuation Allowances
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In some cases, the accounting treatment of a particular
transaction is specifically dictated by U.S. GAAP and does
not require managements judgment in its application. There
are also areas in which managements judgment in selecting
among available alternatives would not produce a materially
different result. Our senior management has reviewed these
critical accounting policies and related disclosures with the
Audit Committee of the Board of Directors.
The following is not intended to be a comprehensive list of all
of our accounting policies or estimates. Our significant
accounting policies are more fully described in
Note B Significant Accounting
Policies and New Accounting Pronouncements in the Notes to
Consolidated Financial Statements. In preparing our financial
statements and accounting for the underlying transactions and
balances, we apply those accounting policies. We consider the
estimates discussed below as critical to an understanding of our
financial statements because their application places the most
significant demands on our judgment, with financial reporting
results relying on estimates about the effect of matters that
are inherently uncertain.
Besides estimates that meet the critical accounting
estimate criteria, we make many other accounting estimates in
preparing our financial statements and related disclosures. All
estimates, whether or not deemed critical, affect reported
amounts of assets, liabilities, revenue and expenses as well as
disclosures of contingent assets and liabilities. Estimates are
based on experience and other information available prior to the
issuance of the financial statements. Materially different
results can occur as circumstances change and additional
information becomes known, including for estimates that we do
not deem critical.
Revenue
Recognition
We generate substantially all of our revenue from the sales or
licensing of our microwave radio and wireless access systems,
network management software, and professional services including
installation and commissioning and training. Principal customers
for our products and services include domestic and international
wireless/mobile service providers, original equipment
manufacturers, distributors, system integrators, as well as
private network users such as public safety agencies, government
institutions, and utility, pipeline, railroad and other
industrial enterprises that operate broadband wireless networks.
Our customers generally purchase a combination of our products
and services as part of a multiple element arrangement. Our
assessment of which revenue recognition guidance is appropriate
to account for each element in an arrangement can involve
significant judgment.
In October 2009, the FASB ratified ASC Update (ASU)
No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
2009-13).
ASU 2009-13
amends existing revenue recognition accounting standards that
are currently within the scope of FASB ASC, Subtopic
605-25,
which is the revenue recognition guidance for multiple-element
arrangements. ASU
2009-13
provides for three significant changes to the existing multiple
element revenue recognition guidance as follows:
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Deletes the requirement to have objective and reliable evidence
of fair value for undelivered elements in an arrangement. This
may result in more deliverables being treated as separate units
of accounting.
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Modifies the manner in which the arrangement consideration is
allocated to the separately identified deliverables. ASU
2009-13
requires an entity to allocate revenue in an arrangement using
its best estimate of selling prices (ESP) of deliverables if a
vendor does not have vendor-specific objective evidence of
selling price (VSOE) or third-party evidence of selling price
(TPE), if VSOE is not available. Each separate unit of
accounting must have a selling price, which can be based on
managements estimate when there is no other means (VSOE or
TPE) to determine the selling price of that deliverable. The
arrangement consideration is allocated based on the
elements relative selling prices.
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Eliminates use of the residual method and requires an entity to
allocate revenue using the relative selling price method, which
results in the discount in the transaction being evenly
allocated to the separate units of accounting.
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Concurrently with issuing ASU
2009-13, the
FASB also issued ASU
No. 2009-14,
Certain Revenue arrangements that Include Software Elements
(ASU
2009-14).
ASU 2009-14
excludes software that is contained on a tangible product from
the scope of software revenue guidance if the software component
and the non-software component function together to deliver the
tangible products essential functionality.
As permitted by ASU
2009-13 and
ASU 2009-14,
we elected to early adopt these new accounting standards at the
beginning of our first quarter of fiscal 2010 on a prospective
basis for transactions originating or materially modified on or
after July 4, 2009.
Under our revenue recognition policy before and after the
adoption of ASU
2009-13 and
ASU 2009-14,
revenue is recognized when all of the following criteria have
been met:
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Persuasive evidence of an arrangement exists. Contracts and
customer purchase orders are generally used to determine the
existence of an arrangement.
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Delivery has occurred. Shipping documents and customer
acceptance, when applicable, are used to verify delivery.
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The fee is fixed or determinable. We assess whether the fee is
fixed or determinable based on the payment terms associated with
the transaction and whether the sales price is subject to refund
or adjustment.
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Collectibility is reasonably assured. We assess collectibility
based primarily on the creditworthiness of the customer as
determined by credit checks and analysis, as well as the
customers payment history.
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We often enter into multiple contractual agreements with the
same customer. Such agreements are reviewed to determine whether
they should be evaluated as one arrangement. If an arrangement,
other than a long-term contract, requires the delivery or
performance of multiple deliverables or elements, we determine
whether the individual elements represent separate units
of accounting. In accordance with ASC
605-25 (as
amended by ASU
2009-13),
based on the terms and conditions of the product arrangements,
we believe that our products and services can be accounted for
separately as our products and services have value to our
customers on a stand-alone basis. Accordingly, services not yet
performed at the time of product shipment are deferred based on
their relative selling price and recognized as revenue as such
services are performed. The relative selling price of any
undelivered products is also deferred at the time of shipment
and recognized as revenue when these products are delivered.
There is generally no customer right of return in our sales
agreements. The sequence for typical multiple element
arrangements: we deliver our products, perform installation
services and then provide post-contract support services. The
new revenue recognition standards do not generally change the
units of accounting for our revenue transactions.
VSOE of fair value is based on the price charged when the
element is sold separately. Under the new accounting standards,
for multiple element arrangements, if VSOE cannot be
established, we establish, where available, the selling price
based on TPE. TPE is determined based on evidence of competitor
pricing for similar deliverables when sold separately. When we
cannot determine VSOE or TPE, we uses ESP in our allocation of
arrangement consideration. The objective of ESP is to determine
the price at which we would typically transact a stand-alone
sale of the product or service. ESP is determined by considering
a number of factors including our pricing policies, internal
costs and gross margin objectives, method of distribution,
information gathered from experience in customer negotiations,
market research and information, recent technological trends,
competitive
48
landscape and geographies. We regularly review VSOE, TPE and ESP
and maintain internal controls over the establishment and
updates of these estimates.
Prior to the adoption of ASU
2009-13 and
ASU 2009-14,
we recognized the revenue associated with each unit of
accounting separately. If sufficient evidence of fair value
could be established for all the elements of an arrangement, we
allocated revenue to each element in the arrangement based on
the relative fair value of each element and recognized that
allocated revenue when each element met the criteria discussed
above. However, we generally did not have sufficient evidence of
the fair value for all elements of our arrangements, but we
generally did have sufficient evidence of the fair value of the
undelivered elements in our arrangements. In these cases, we
allocated revenue using the residual method in which we deferred
the fair value of the undelivered elements and allocated the
remaining arrangement consideration to the delivered elements.
If an arrangement involved the delivery of multiple items of the
same elements that are only partially delivered at the end of a
reporting period, revenue was allocated proportionately between
the delivered and undelivered items.
Some of our products have both software and non-software
components that function together to deliver the products
essential functionality. We had previously determined that
except for our WiMAX products, the software element in its other
products was incidental in accordance with the software revenue
recognition rules. Accordingly, these other products were not
within the scope of the software revenue recognition rules, ASC
985-605,
Software Revenue Recognition (formerly
SOP 97-2).
We determined that given the significance of the software
components functionality to its WiMAX products, these
products were within the scope of the software revenue
recognition rules.
ASC 985-605
generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element
based on their relative VSOE of fair values of the elements. We
had not been able to establish VSOE for any of our WiMAX
products or services. Thus, in accordance with ASC
985-605, all
revenue was deferred until all elements of the arrangement have
been delivered for all arrangements entered into prior to fiscal
2010.
In connection with its adoption of ASU
2009-13 and
ASU 2009-14,
we re-evaluated the appropriate revenue recognition treatment of
our products and determined that the WiMAX products are scoped
out of ASC
985-605
because the software and non-software elements substantively
contribute to the tangible products essential
functionality and we would not sell the tangible products
without the embedded software.
The impact of adopting ASU
2009-13 and
ASU 2009-14
in fiscal 2010 was $7.9M, which was primarily related to the
WiMAX business. This difference is due to the fact that we have
not established VSOE for any WiMAX products under the previous
guidance and thus would not have been able to recognize any
revenue for any portion of these arrangements until all elements
had been delivered. We cannot reasonably estimate the effect of
adopting ASU
2009-13 and
ASU 2009-14
on future financial periods as the impact will vary depending on
the nature and volume of new or materially modified arrangements
in any given period.
Revenues related to long-term contracts for customized network
solutions are recognized using the percentage-of-completion
method. In using the percentage-of-completion method, we
generally apply the cost-to-cost method of accounting where
sales and profits are recorded based on the ratio of costs
incurred to estimated total costs at completion. Contracts are
combined when specific aggregation criteria are met including
when the contracts are in substance an arrangement to perform a
single project with a customer; the contracts are negotiated as
a package in the same economic environment with an overall
profit objective; the contracts require interrelated activities
with common costs that cannot be separately identified with, or
reasonably allocated to the elements, phases or units of output
and the contracts are performed concurrently or in a continuous
sequence under the same project management at the same location
or at different locations in the same general vicinity.
Recognition of profit on long-term contracts requires estimates
of the total contract value, the total cost at completion and
the measurement of progress towards completion. Significant
judgment is required when estimating total contract costs and
progress to completion on the arrangements as well as whether a
loss is expected to be incurred on the contract. Amounts
representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and
realization is probable. When adjustments in contract value or
estimated costs are determined, any changes from prior estimates
are reflected in earnings in the current period. Anticipated
losses on contracts or programs in progress are charged to
earnings when identified.
49
For revenue recognition from the sale of software or products
which have software which is more than incidental to the product
as a whole, the entire fee from the arrangement is allocated to
each of the elements based on the individual elements fair
value, which must be based on vendor specific objective evidence
of the fair value (VSOE). If VSOE can be established
for the undelivered elements of an arrangement, we recognize
revenue following the residual method. If VSOE cannot be
established for the undelivered elements of an arrangement, we
defer revenue until the earlier of delivery, or fair value of
the undelivered element exists, unless the undelivered element
is a service, in which the entire arrangement fee is recognized
ratably over the period during which the services are expected
to be performed.
Inventory
Valuation and Provisions for Excess and Obsolete
Losses
Our inventory has been valued at the lower of cost or market. We
balance the need to maintain prudent inventory levels to ensure
competitive delivery performance with the risk of excess or
obsolete inventory due to changing technology and customer
requirements. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory based
primarily on our estimated forecast of product demand,
anticipated end of product life and production requirements. The
review of excess and obsolete inventory primarily relates to the
microwave business segments. Several factors may influence the
sale and use of our inventories, including decisions to exit a
product line, technological change and new product development.
These factors could result in a change in the amount of obsolete
inventory quantities on hand. Additionally, our estimates of
future product demand may prove to be inaccurate, in which case
the provision required for excess and obsolete inventory may be
overstated or understated. In the future, if we determine that
our inventory is overvalued, we would be required to recognize
such costs in cost of product sales and services in our
Statement of Operations at the time of such determination. In
the case of goods which have been written down below cost at the
close of a fiscal year, such reduced amount is considered the
cost for subsequent accounting purposes. We did not make any
material changes in the valuation methodology during the past
three fiscal years.
Long-Lived
Assets
As of July 2, 2010, we have amounts on our Consolidated
Balance Sheets of $6.2 million, $7.5 million and
$37.6 million for Goodwill, Identifiable intangible assets
and Property, plant and equipment.
During fiscal 2010, we recorded impairment charges of
$63.2 million for identifiable intangible assets and
$14.2 million for property, plant and equipment. We also
reduced the remaining useful lives of our remaining
$7.5 million of identifiable intangible assets to one to
5 years. During fiscal 2009, we recorded impairment charges
of $279.0 million for goodwill and $32.6 million for
the Stratex trade name. We did not record impairment losses for
goodwill or identifiable intangible assets in fiscal 2008.
The fiscal 2010 impairment charges of our identifiable
intangible assets were indicated by a decline in our market
capitalization and recent and expected financial performance.
The results of our impairment test indicated impairment related
to certain amortizable intangible assets (developed technology
and customer relationships), since the estimated undiscounted
cash flows for these assets were less than their respective
carrying values. The undiscounted cash flow and fair value
calculations related to the developed technology were estimated
based on a relief-from-royalty method, and the calculations
related to the customer relationships were estimated based on an
excess earnings method considering future sales and operating
costs.
The property, plant and equipment impairment charges consisted
of $5.5 million on our manufacturing facility and idle
equipment in San Antonio, Texas, $7.9 million from an
impairment review process and $0.8 million for software.
The San Antonio impairment charge resulted from our plan to
converge our products onto a single platform by the end of
fiscal year 2010 and is included in Charges for product
transition within Cost of products sales and
services on our Consolidated Statement of Operations. The
impairments from our impairment review process and software are
included in Property, plant and equipment impairment
charges on our Consolidated Statement of Operations.
We account for business combinations using the purchase method
of accounting which means we record the assets acquired and
liabilities assumed at their respective fair values at the date
of acquisition, with any excess purchase price recorded as
goodwill.
50
Valuation of intangible assets and in-process research and
development requires significant estimates and assumptions
including, but not limited to, determining the timing and
expected costs to complete development projects, estimating
future cash flows from product sales, developing appropriate
discount rates, estimating probability rates for the successful
completion of development projects, continuation of customer
relationships and renewal of customer contracts.
We review the carrying value of our intangible assets and
goodwill for impairment whenever events or circumstances
indicate that their carrying amount may not be recoverable.
Significant negative industry or economic trends, including a
lack of recovery in the market price of our common stock,
disruptions to our business, unexpected significant changes or
planned changes in the use of the intangible assets, and mergers
and acquisitions could result in the need to reassess the fair
value of our assets and liabilities which could lead to an
impairment charge for any of our intangible assets or goodwill.
The value of our indefinite lived intangible assets and goodwill
could also be impacted by future adverse changes such as any
future declines in our operating results, a significant slowdown
in the worldwide economy and the microwave industry or any
failure to meet the performance projections included in our
forecasts of future operating results.
We have two reporting units, consisting of our North America
segment and International segment. Goodwill is tested for
impairment annually during the fourth quarter of our fiscal year
using a two-step process. First, we determine if the carrying
amount of any of our reporting units exceeds its fair value
(determined using an analysis of a combination of projected
discounted cash flows and market multiples based on revenue and
earnings before interest, taxes, depreciation and amortization),
which would indicate a potential impairment associated with that
reporting unit. If we determine that a potential impairment
exists, we then compare the implied fair value associated with
the respective reporting unit, to its carrying amount to
determine if there is an impairment loss.
Evaluations of impairment involve management estimates of asset
useful lives, future cash flows and discount rates. Significant
management judgment is required in the forecasts of future
operating results that are used in the evaluations. It is
possible, however, that the plans and estimates used may prove
to be inaccurate. If our actual results, or the plans and
estimates used in future impairment analysis, are lower than the
original estimates used to assess the recoverability of these
assets, we could incur additional impairment charges in a future
period.
We evaluate other long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. Impairment is
considered to exist if the total estimated future cash flows on
an undiscounted basis are less than the carrying amount of the
assets. If impairment exists, the impairment loss is measured
and recorded based on discounted estimated future cash flows. In
estimating future cash flows, assets are grouped at the lowest
levels for which there are identifiable cash flows that are
largely independent of cash flows from other asset groups.
Our estimate of future cash flows is based upon, among other
things, certain assumptions about expected future operating
performance, growth rates and other factors. The actual cash
flows realized from these assets may vary significantly from our
estimates due to increased competition, changes in technology,
fluctuations in demand, consolidation of our customers,
reductions in average selling prices and other factors.
Assumptions underlying future cash flow estimates are therefore
subject to significant risks and uncertainties.
Note C Goodwill and Identifiable Intangible
Assets and Note G Property, Plant and
Equipments provide additional information.
Income
Taxes and Tax Valuation Allowances
We record the estimated future tax effects of temporary
differences between the tax basis of assets and liabilities and
amounts reported in our Consolidated Balance Sheet, as well as
operating loss and tax credit carryforwards. We follow very
specific and detailed guidelines in each tax jurisdiction
regarding the recoverability of any tax assets recorded on the
balance sheet and provide necessary valuation allowances as
required.
Future realization of deferred tax assets ultimately depends on
the existence of sufficient taxable income of the appropriate
character (for example, ordinary income or capital gain) within
the carryback or carryforward periods available under the tax
law.
We regularly review our deferred tax assets for recoverability
based on historical taxable income, projected future taxable
income, the expected timing of the reversals of existing
temporary differences and tax planning
51
strategies. We have not made any material changes in the
methodologies used to determine our tax valuation allowances
during the past three fiscal years.
Impact of
Recently Issued Accounting Pronouncements
There are no accounting pronouncements that have recently been
issued but have not yet been implemented by us that would have a
material impact on our financial statements.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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In the normal course of doing business, we are exposed to the
risks associated with foreign currency exchange rates and
changes in interest rates. We employ established policies and
procedures governing the use of financial instruments to manage
our exposure to such risks. For a discussion of such policies
and procedures and the related risks, see Financial Risk
Management in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, which is incorporated by reference into this
Item 7A.
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Item 8.
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Financial
Statements and Supplementary Data
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Index
to Financial Statements
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54
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56
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57
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58
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59
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60
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109
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53
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Aviat Networks, Inc.
(formerly Harris Stratex Networks, Inc.)
We have audited the accompanying consolidated balance sheets of
Aviat Networks, Inc. as of July 2, 2010 and July 3,
2009, and the related consolidated statements of operations,
shareholders equity and comprehensive loss, and cash flows
for each of the three years in the period ended July 2,
2010. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)(2). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Aviat Networks, Inc. at July 2, 2010
and July 3, 2009, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended July 2, 2010, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note B to the consolidated financial
statements, in the year ended July 2, 2010, Aviat Networks,
Inc. changed its method of accounting for revenue recognition
for arrangements with multiple deliverables.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Aviat
Networks, Inc.s internal control over financial reporting
as of July 2, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated September 9, 2010 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Raleigh, North Carolina
September 9, 2010
54
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Aviat Networks, Inc.
(formerly Harris Stratex Networks, Inc.)
We have audited Aviat Networks, Inc.s internal control
over financial reporting as of July 2, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Aviat Networks,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Aviat Networks, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of July 2, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Aviat Networks, Inc. as of
July 2, 2010 and July 3, 2009, and the related
consolidated statements of operations, shareholders equity
and comprehensive loss, and cash flows for each of the three
years in the period ended July 2, 2010 of Aviat Networks,
Inc. and our report dated September 9, 2010 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Raleigh, North Carolina
September 9, 2010
55
AVIAT
NETWORKS, INC. (FORMERLY HARRIS STRATEX NETWORKS,
INC.)
CONSOLIDATED
STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions, except per share amounts)
|
|
|
Revenue from product sales and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from product sales
|
|
$
|
370.0
|
|
|
$
|
539.0
|
|
|
$
|
595.2
|
|
Revenue from services
|
|
|
108.9
|
|
|
|
140.9
|
|
|
|
123.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from product sales and services
|
|
|
478.9
|
|
|
|
679.9
|
|
|
|
718.4
|
|
Cost of product sales and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
(247.9
|
)
|
|
|
(362.0
|
)
|
|
|
(433.2
|
)
|
Cost of services
|
|
|
(72.5
|
)
|
|
|
(106.2
|
)
|
|
|
(87.9
|
)
|
Charges for product transition
|
|
|
(16.9
|
)
|
|
|
(29.8
|
)
|
|
|
|
|
Amortization of purchased technology
|
|
|
(8.2
|
)
|
|
|
(7.5
|
)
|
|
|
(7.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product sales and services
|
|
|
(345.5
|
)
|
|
|
(505.5
|
)
|
|
|
(528.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
133.4
|
|
|
|
174.4
|
|
|
|
190.2
|
|
Research and development expenses
|
|
|
(41.1
|
)
|
|
|
(40.4
|
)
|
|
|
(46.1
|
)
|
Selling and administrative expenses
|
|
|
(141.0
|
)
|
|
|
(138.3
|
)
|
|
|
(141.4
|
)
|
Acquired in-process research and development
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
|
|
Amortization of identifiable intangible assets
|
|
|
(5.6
|
)
|
|
|
(5.6
|
)
|
|
|
(7.1
|
)
|
Property, plant and equipment impairment charges
|
|
|
(8.7
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
Restructuring charges
|
|
|
(7.1
|
)
|
|
|
(8.2
|
)
|
|
|
(9.3
|
)
|
Goodwill impairment charges
|
|
|
|
|
|
|
(279.0
|
)
|
|
|
|
|
Intangible assets and trade name impairment charges
|
|
|
(63.2
|
)
|
|
|
(32.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(133.3
|
)
|
|
|
(335.3
|
)
|
|
|
(13.7
|
)
|
Other income
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.3
|
|
|
|
0.9
|
|
|
|
2.4
|
|
Interest expense
|
|
|
(2.2
|
)
|
|
|
(2.8
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for or benefit from income taxes
|
|
|
(134.0
|
)
|
|
|
(337.2
|
)
|
|
|
(13.9
|
)
|
(Provision for) benefit from income taxes
|
|
|
3.8
|
|
|
|
(17.8
|
)
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(130.2
|
)
|
|
$
|
(355.0
|
)
|
|
$
|
(11.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of Common Stock (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.19
|
)
|
|
$
|
(6.05
|
)
|
|
$
|
(0.20
|
)
|
Basic and diluted weighted average shares outstanding
|
|
|
59.4
|
|
|
|
58.7
|
|
|
|
58.4
|
|
|
|
|
(1) |
|
In fiscal years 2009 and 2008, we had Class A and
Class B shares of common stock outstanding. The net loss
per common share amounts were the same for Class A and
Class B during fiscal years 2009 and 2008 because the
holders of each class were legally entitled to equal per share
distributions whether through dividends or in liquidation. There
were no shares of Class B common stock outstanding during
fiscal year 2010. Effective November 19, 2009, under a
change to our certificate of incorporation approved by
shareholders, all shares of our Class A common stock were
reclassified on a one-to-one basis to shares of Common Stock
without a class designation; we no longer have Class A or
Class B common stock authorized, issued or outstanding. |
See accompanying Notes to Consolidated Financial Statements
56
AVIAT
NETWORKS, INC. (FORMERLY HARRIS STRATEX NETWORKS,
INC.)
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
|
|
(In millions, except share and par value amounts)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
141.7
|
|
|
$
|
136.8
|
|
Short-term investments
|
|
|
|
|
|
|
0.3
|
|
Receivables
|
|
|
104.8
|
|
|
|
142.9
|
|
Unbilled costs
|
|
|
30.2
|
|
|
|
27.8
|
|
Inventories
|
|
|
73.5
|
|
|
|
98.6
|
|
Other current assets
|
|
|
22.3
|
|
|
|
29.7
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
372.5
|
|
|
|
436.1
|
|
Long-Term Assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
37.6
|
|
|
|
57.4
|
|
Goodwill
|
|
|
6.2
|
|
|
|
3.2
|
|
Identifiable intangible assets
|
|
|
7.5
|
|
|
|
84.1
|
|
Capitalized software
|
|
|
8.4
|
|
|
|
9.3
|
|
Non-current portion of notes receivable
|
|
|
|
|
|
|
0.4
|
|
Non-current deferred income taxes
|
|
|
13.1
|
|
|
|
8.0
|
|
Other assets
|
|
|
1.7
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
74.5
|
|
|
|
164.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
447.0
|
|
|
$
|
600.2
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
5.0
|
|
|
$
|
10.0
|
|
Accounts payable
|
|
|
58.6
|
|
|
|
69.6
|
|
Accrued compensation and benefits
|
|
|
14.5
|
|
|
|
16.6
|
|
Other accrued expenses
|
|
|
45.3
|
|
|
|
54.9
|
|
Advance payments and unearned income
|
|
|
37.2
|
|
|
|
37.3
|
|
Restructuring liabilities
|
|
|
6.0
|
|
|
|
5.3
|
|
Current portion of long-term capital lease obligations
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
166.6
|
|
|
|
194.4
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
|
|
|
|
|
1.1
|
|
Restructuring and other long-term liabilities
|
|
|
2.7
|
|
|
|
3.2
|
|
Redeemable preference shares
|
|
|
8.3
|
|
|
|
8.3
|
|
Reserve for uncertain tax positions
|
|
|
5.6
|
|
|
|
4.4
|
|
Deferred income taxes
|
|
|
0.6
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
183.8
|
|
|
|
212.3
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 50,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 300,000,000 shares
authorized; issued and outstanding 59,400,059 shares as of
July 2, 2010 and 58,903,177 shares as of July 3,
2009
|
|
|
0.6
|
|
|
|
0.6
|
|
Additional
paid-in-capital
|
|
|
786.5
|
|
|
|
783.2
|
|
Accumulated deficit
|
|
|
(521.3
|
)
|
|
|
(391.1
|
)
|
Accumulated other comprehensive loss
|
|
|
(2.6
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
263.2
|
|
|
|
387.9
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
447.0
|
|
|
$
|
600.2
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
57
AVIAT
NETWORKS, INC. (FORMERLY HARRIS STRATEX NETWORKS,
INC.)
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 27,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(In millions)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(130.2
|
)
|
|
$
|
(355.0
|
)
|
|
$
|
(11.9
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of identifiable intangible assets acquired
|
|
|
13.8
|
|
|
|
13.8
|
|
|
|
13.9
|
|
Depreciation and amortization of property, plant and equipment
and capitalized software
|
|
|
21.9
|
|
|
|
24.3
|
|
|
|
19.8
|
|
Goodwill impairment charges
|
|
|
|
|
|
|
279.0
|
|
|
|
|
|
Trade name impairment charges
|
|
|
|
|
|
|
32.6
|
|
|
|
|
|
Intangible assets impairment charges
|
|
|
63.2
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment impairment charges
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
Non-cash share-based compensation expense
|
|
|
3.2
|
|
|
|
2.8
|
|
|
|
6.4
|
|
Charges for product transition and inventory mark-downs
|
|
|
13.5
|
|
|
|
29.3
|
|
|
|
14.7
|
|
Deferred income tax expense (benefit)
|
|
|
4.2
|
|
|
|
16.0
|
|
|
|
(7.5
|
)
|
Non-cash other income
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
Decrease in fair value of warrant liability
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
(3.3
|
)
|
Changes in operating assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
38.5
|
|
|
|
61.1
|
|
|
|
(13.7
|
)
|
Unbilled costs and inventories
|
|
|
14.6
|
|
|
|
(9.6
|
)
|
|
|
15.9
|
|
Accounts payable and accrued expenses
|
|
|
(20.1
|
)
|
|
|
(18.7
|
)
|
|
|
1.3
|
|
Advance payments and unearned income
|
|
|
(0.1
|
)
|
|
|
7.2
|
|
|
|
7.8
|
|
Other assets and liabilities, net
|
|
|
(0.9
|
)
|
|
|
(13.3
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
28.3
|
|
|
|
71.3
|
|
|
|
40.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for Telsima acquisition, net of $1.1 million
acquisition costs and cash acquired
|
|
|
(4.2
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
(9.2
|
)
|
Sales and maturities of short-term investments
|
|
|
0.3
|
|
|
|
4.0
|
|
|
|
26.6
|
|
Additions of property, plant and equipment
|
|
|
(17.9
|
)
|
|
|
(15.8
|
)
|
|
|
(9.2
|
)
|
Additions of capitalized software
|
|
|
(2.9
|
)
|
|
|
(5.8
|
)
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(19.3
|
)
|
|
|
(23.1
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
|
6.3
|
|
|
|
10.0
|
|
|
|
1.2
|
|
Payments on short-term debt
|
|
|
(11.3
|
)
|
|
|
|
|
|
|
(2.4
|
)
|
Payments on long-term debt
|
|
|
|
|
|
|
(9.8
|
)
|
|
|
(10.7
|
)
|
Payments on long-term capital lease obligations
|
|
|
(0.4
|
)
|
|
|
(1.3
|
)
|
|
|
(3.7
|
)
|
Proceeds from exercise of stock options
|
|
|
0.1
|
|
|
|
|
|
|
|
1.5
|
|
Excess tax benefits from share-based compensation
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5.3
|
)
|
|
|
(1.1
|
)
|
|
|
(13.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1.2
|
|
|
|
(5.3
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
4.9
|
|
|
|
41.8
|
|
|
|
25.8
|
|
Cash and cash equivalents, beginning of year
|
|
|
136.8
|
|
|
|
95.0
|
|
|
|
69.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
141.7
|
|
|
$
|
136.8
|
|
|
$
|
95.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2.2
|
|
|
$
|
2.8
|
|
|
$
|
2.7
|
|
Income taxes
|
|
$
|
(3.6
|
)
|
|
$
|
2.6
|
|
|
$
|
2.2
|
|
See accompanying Notes to Consolidated Financial Statements
58
AVIAT
NETWORKS, INC. (FORMERLY HARRIS STRATEX NETWORKS,
INC.)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Stock
|
|
|
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Class A
|
|
|
Class B
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
|
(In millions)
|
|
|
Balance as of June 29, 2007
|
|
$
|
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
770.0
|
|
|
$
|
(24.2
|
)
|
|
$
|
|
|
|
$
|
746.4
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.9
|
)
|
|
|
|
|
|
|
(11.9
|
)
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
|
|
4.1
|
|
Net unrealized loss on hedging activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.1
|
)
|
Adjustment to capital from Harris Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
1.3
|
|
Proceeds from employee stock option exercises
(129,038 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
Stock option tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
Compensatory stock awards (73,740 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 27, 2008
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
779.9
|
|
|
|
(36.1
|
)
|
|
|
3.8
|
|
|
|
748.2
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(355.0
|
)
|
|
|
|
|
|
|
(355.0
|
)
|
Foreign currency translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.5
|
)
|
|
|
(8.5
|
)
|
Net unrealized loss on hedging activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363.6
|
)
|
Adjustment to capital from Harris Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Proceeds from employee stock option exercises (688 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 32,913,377 Class B shares to Class A
shares
|
|
|
|
|
|
|
0.3
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensatory stock awards (432,978 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 3, 2009
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
783.2
|
|
|
|
(391.1
|
)
|
|
|
(4.8
|
)
|
|
|
387.9
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130.2
|
)
|
|
|
|
|
|
|
(130.2
|
)
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
1.5
|
|
Net unrealized gain on hedging activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128.0
|
)
|
Reclassification of Class A shares to Common Stock
|
|
|
0.6
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from employee stock option exercises
(17,399 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Compensatory stock awards (479,483 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 2, 2010
|
|
$
|
0.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
786.5
|
|
|
$
|
(521.3
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
263.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
59
AVIAT
NETWORKS, INC. (FORMERLY HARRIS STRATEX NETWORKS,
INC.)
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
AS OF
JULY 2, 2010 AND JULY 3, 2009 AND
FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED JULY 2,
2010
|
|
Note A
|
Basis of
Presentation and Nature of Operations
|
On January 28, 2010, Harris Stratex Networks, Inc. changed
its name to Aviat Networks, Inc. (we,
us, and our) to more effectively reflect
our business and communicate our brand identity to customers.
Additionally, we changed our corporate name to comply with the
termination of the Harris Corporation (Harris)
trademark licensing agreement resulting from the spin-off by
Harris of its interest in our stock to its shareholders in May
2009.
Aviat Networks, Inc. may be referred to as the
Company, AVNW, Aviat
Networks, we, us and
our in these Notes to Consolidated Financial
Statements.
Basis of Presentation The consolidated
financial statements include the accounts of Aviat Networks and
its wholly-owned and majority owned subsidiaries. Significant
intercompany transactions and accounts have been eliminated.
Our fiscal year ends on the Friday nearest calendar
June 30. This was July 2 for fiscal 2010, July 3 for fiscal
2009 and June 27 for fiscal 2008. Fiscal year 2009 included
53 weeks and fiscal years 2010 and 2008 each included
52 weeks. In these Notes to Consolidated Financial
Statements, we refer to our fiscal years as fiscal
2010, fiscal 2009 and fiscal 2008.
Reclassification Prior to May 27, 2009,
Harris owned approximately 56% of our outstanding common stock.
As such, Harris was our majority stockholder and a related party
for financial reporting purposes. Effective May 27, 2009,
Harris distributed its entire ownership of our common stock to
its shareholders. Accordingly, effective with the first quarter
of fiscal 2010, Harris ceased to be considered a related party
for financial reporting purposes. We have reclassified all
amounts previously disclosed as related party transactions with
Harris on our Statements of Operations, Balance Sheets and
Statements of Cash Flows to the appropriate line items in the
current presentation.
For fiscal 2009 and 2008 and as of July 3, 2009, these
reclassifications from the previously disclosed line item to the
current presentation included:
Consolidated Statement of Operations (fiscal 2009 and 2008):
|
|
|
|
|
Revenue from product sales with Harris to Revenue from product
sales ($6.0 million and $3.5 million); Cost of product
sales with Harris to Cost of product sales ($2.4 million
and $1.3 million); Cost of sales billed from Harris to Cost
of product sales ($0.9 million and $4.8 million);
Selling and administrative expenses with Harris to Selling and
administrative expenses ($5.5 million and $7.0 million)
|
Consolidated Balance Sheet as of July 3, 2009:
|
|
|
|
|
Current portion of long-term capital lease obligation to Harris
of $0.5 million to Other accrued expenses; Due from Harris
Corporation of $3.0 million to Other current assets;
Long-term portion of capital lease obligation to Harris of
$0.8 million to Other assets and liabilities, net
|
Consolidated Statement of Cash Flows (fiscal 2009 and 2008):
|
|
|
|
|
Changes in operating assets and liabilities, Due to Harris to
changes in Restructuring liabilities and other
($19.9 million and $0.4 million).
|
Out of Period Adjustment During the closing
of our books for the first quarter of fiscal 2010, we determined
the need for an
out-of-period
adjustment in the classification of revenue on our fiscal 2009
Consolidated Statement of Operations between the line items of
Revenue from services and Revenue from product
sales and in the classification of cost of sales between
Cost of services and Cost of product
sales. This reclassification had no impact on gross
margin. For fiscal 2009, the impact of this reclassification
increased Revenue from services by
60
$26.5 million, decreased Revenue from product
sales by $26.5 million, increased Cost of
services by $24.8 million and decreased Cost of
product sales by $24.8 million.
Nature of Operations We design, manufacture
and sell a range of wireless networking products, solutions and
services to mobile and fixed telephone service providers,
private network operators, government agencies, transportation
and utility companies, public safety agencies and broadcast
system operators across the globe. Our products include
broadband wireless access base stations and customer premises
equipment based upon the IEEE
802.16d-2004
and 16e-2005
standards for fixed and mobile WiMAX,
point-to-point
digital microwave radio systems for access, backhaul, trunking
and license-exempt applications, supporting new network
deployments, network expansion, and capacity upgrades.
|
|
Note B
|
Significant
Accounting Policies and New Accounting Pronouncements
|
Use of
Estimates
Our Consolidated Financial Statements and the accompanying Notes
to Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the
United States (U.S. GAAP) which require us to
make estimates, assumptions and judgments affecting the amounts
reported and related disclosures.
Estimates are based upon historical factors, current
circumstances and the experience and judgment of our management.
We evaluate our estimates and assumptions on an ongoing basis
and may employ outside experts to assist us in making these
evaluations. Changes in such estimates, based on more accurate
information, or different assumptions or conditions, may affect
amounts reported in future periods.
Estimates affect significant items, including the following:
|
|
|
|
|
Revenue recognition
|
|
|
|
Provision for doubtful accounts
|
|
|
|
Inventory valuation
|
|
|
|
Fair value of goodwill and intangible assets
|
|
|
|
Valuation allowances for deferred tax assets
|
|
|
|
Uncertainties in income taxes
|
|
|
|
Software development costs
|
|
|
|
Restructuring obligations
|
|
|
|
Product warranty obligations
|
|
|
|
Share-based awards
|
|
|
|
Contingencies
|
|
|
|
Useful lives of intangible assets, property, plant and equipment
|
Cash,
Cash Equivalents and Short-Term Investments
We consider all highly liquid investments with an original
maturity of three months or less at the date of purchase to be
cash equivalents. Cash and cash equivalents are carried at
amortized cost, which approximates fair value due to the
short-term nature of these investments. Amortization or
accretion of premium or discount is included in interest income
on the Consolidated Statements of Operations. We hold cash and
cash equivalents at several major financial institutions, which
often significantly exceed Federal Deposit Insurance Corporation
insured limits. However, a substantial portion of the cash
equivalents is invested in prime money market funds which are
backed by the securities in the fund. Historically, we have not
experienced any losses due to such concentration of credit risk.
61
We invest our excess cash in high-quality marketable debt
securities to ensure that cash is readily available for use in
our current operations. Investments with original maturities
greater than three months but less than one year are accounted
for as short-term and are classified as such at the time of
purchase. All of our marketable securities are classified as
available-for-sale
because we view our entire portfolio as available for use in our
current operations. Accordingly, we have classified all
investments in marketable securities as short-term.
As of July 2, 2010, all of our high-quality marketable debt
securities were classified as cash equivalents. Short-term
investments as of July 3, 2009 consisted of one corporate
note and its fair value of $0.3 million approximated cost.
This short-term investment had a maturity date of July 15,
2009. Realized gains and losses on short-term investments are
recorded in selling and administrative expenses and were not
significant during fiscal 2010, 2009 and 2008.
See Note D Fair Value Measurements of Assets
and Liabilities for additional information.
Accounts
Receivable, Major Customers and Other Significant
Concentrations
We typically invoice our customers for the sales order (or
contract) value of the related products delivered at various
milestones, including order receipt, shipment, installation and
acceptance and for services when rendered. Our trade receivables
are derived from sales to customers located in North America,
Africa, Europe, the Middle East, Russia, Asia-Pacific and Latin
America. Generally, we do not require collateral; however, in
certain circumstances, we may require letters of credit,
additional guarantees or advance payments.
We record accounts receivable at net realizable value, which
includes an allowance for estimated uncollectible accounts to
reflect any loss anticipated on the collection of accounts
receivable balances. We calculate the allowance based on our
history of write-offs, level of past due accounts and economic
status of the customers. The fair value of our accounts
receivable approximates their net realizable value. See
Note E Receivables for additional
information.
To comply with requests from our customers for payment terms, we
often accept letters of credit with payment terms of up to one
year or more, which we then discount with various financial
institutions. Under these arrangements, collection risk is fully
transferred to the financial institutions. We record the cost of
discounting these letters of credit as interest expense. During
fiscal 2010, 2009 and 2008 we discounted customer letters of
credit totaling $91.1 million, $84.7 million and
$65.1 million and recorded related interest expense of
$0.7 million, $1.0 million and $0.2 million.
During fiscal 2010, 2009 and 2008, we had one International
segment customer in Africa (Mobile Telephone Networks or MTN)
that accounted for 17%, 17% and 13% of our total revenue. As of
July 2, 2010 and July 3, 2009, MTN accounted for
approximately 7% and 6% of our accounts receivable.
Financial instruments that potentially subject us to a
concentration of credit risk consist principally of cash
equivalents, marketable debt securities, trade accounts
receivable and financial instruments used in foreign currency
hedging activities. We invest our excess cash primarily in prime
money market funds, certificates of deposit, commercial paper
and corporate notes. We are exposed to credit risks related to
such investments in the event of default or decrease in
credit-worthiness of the issuers of the investments. We perform
ongoing credit evaluations of our customers and generally do not
require collateral on accounts receivable, as the majority of
our customers are large, well-established companies. We maintain
reserves for potential credit losses, but historically have not
experienced any significant losses related to any particular
geographic area since our business is not concentrated within
any particular geographic region. Our customers are primarily in
the telecommunications industry, so our accounts receivable are
concentrated within one industry and exposed to concentrations
of credit risk within that industry.
We rely on sole providers for certain components of our products
and rely on a limited number of contract manufacturers and
suppliers to provide manufacturing services for our products.
The inability of a contract manufacturer or supplier to fulfill
our supply requirements could materially impact future operating
results.
We have entered into agreements relating to our foreign currency
contracts with large, multinational financial institutions. The
amounts subject to credit risk arising from the possible
inability of any such parties to meet the
62
terms of their contracts are generally limited to the amounts,
if any, by which such partys obligations exceed our
obligations to that party.
Inventories
Inventories are valued at the lower of cost (determined by
average cost and
first-in,
first-out methods) or market. We regularly review inventory
quantities on hand and record adjustments to reduce the cost of
inventory for excess and obsolete inventory based primarily on
our estimated forecast of product demand and production
requirements. Inventory adjustments are measured as the
difference between the cost of the inventory and estimated
market value based upon assumptions about future demand and
charged to the provision for inventory, which is a component of
cost of sales. At the point of the loss recognition, a new,
lower-cost basis for that inventory is established, and any
subsequent improvements in facts and circumstances do not result
in the restoration or increase in that newly established cost
basis. See Note F Inventories for
additional information.
Income
Taxes and Related Uncertainties
We account for income taxes under the asset and liability
method. Deferred tax assets and liabilities are determined based
on the estimated future tax effects of temporary differences
between the financial statement and tax basis of assets and
liabilities, as measured by tax rates at which temporary
differences are expected to reverse. Deferred tax expense
(benefit) is the result of changes in deferred tax assets and
liabilities. A valuation allowance is established to offset any
deferred tax assets if, based upon the available information, it
is more likely than not that some or all of the deferred tax
assets will not be realized.
We are required to compute our income taxes in each federal,
state, and international jurisdiction in which we operate. This
process requires that we estimate the current tax exposure as
well as assess temporary differences between the accounting and
tax treatment of assets and liabilities, including items such as
accruals and allowances not currently deductible for tax
purposes. The income tax effects of the differences we identify
are classified as current or long-term deferred tax assets and
liabilities in our Consolidated Balance Sheets. Our judgments,
assumptions, and estimates relative to the current provision for
income tax take into account current tax laws, our
interpretation of current tax laws, and possible outcomes of
current and future audits conducted by foreign and domestic tax
authorities. Changes in tax laws or our interpretation of tax
laws and the resolution of current and future tax audits could
significantly impact the amounts provided for income taxes in
our Consolidated Balance Sheets and Consolidated Statements of
Operations. We must also assess the likelihood that deferred tax
assets will be realized from future taxable income and, based on
this assessment, establish a valuation allowance, if required.
Our determination of our valuation allowance is based upon a
number of assumptions, judgments, and estimates, including
forecasted earnings, future taxable income, and the relative
proportions of revenue and income before taxes in the various
domestic and international jurisdictions in which we operate. To
the extent we establish a valuation allowance or change the
valuation allowance in a period, we reflect the change with a
corresponding increase or decrease to our tax provision in our
Consolidated Statements of Operations or to goodwill or
intangible assets to the extent that the valuation allowance
related to tax attributes of the acquired entities.
We use minimum recognition thresholds to establish tax positions
to be recognized in the financial statements. We use a two-step
process to determine the amount of tax benefit to be recognized.
The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates
that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step requires us to
estimate and measure the tax benefit as the largest amount that
is more than 50% likely of being realized upon ultimate
settlement. It is inherently difficult and subjective to
estimate such amounts, as this requires us to determine the
probability of various possible outcomes. We reevaluate these
uncertain tax positions on a quarterly basis. This evaluation is
based on factors including, but not limited to, changes in facts
or circumstances, changes in tax law, effectively settled issues
under audit, and new audit activity. Such a change in
recognition or measurement would result in the recognition of a
tax benefit or an additional charge to the tax provision in the
period. See Note O Income Taxes, for
additional information.
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Property,
Plant and Equipment
Property, plant and equipment are stated on the basis of cost
less accumulated depreciation and amortization. We capitalize
costs of software, consulting services, hardware and other
related costs incurred to purchase or develop internal-use
software. We expense costs incurred during preliminary project
assessment, research and development, re-engineering, training
and application maintenance. Leasehold improvements made either
at the inception of the lease or during the lease term are
amortized over the remaining current lease term, or estimated
life, if shorter.
Depreciation and amortization are calculated using the
straight-line method over the shorter of the estimated useful
lives of the respective assets or any applicable lease term. The
useful lives of the assets are generally as follows:
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Buildings and leasehold improvements
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2 to 45 years
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Software developed for internal use
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3 to 5 years
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Machinery and equipment
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2 to 10 years
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Expenditures for maintenance and repairs are charged to expense
as incurred. Cost and accumulated depreciation of assets sold or
retired are removed from the respective property accounts, and
the gain or loss is reflected in the Consolidated Statements of
Operations. Note G Property, Plant and
Equipment provides additional information.
Goodwill,
Identifiable Intangible Assets and Impairment of Long-Lived
Assets
We account for business combinations using the purchase method
of accounting which means we record the assets acquired and
liabilities assumed at their respective fair values at the date
of acquisition, with any excess purchase price recorded as
goodwill.
Valuation of intangible assets and in-process research and
development requires significant estimates and assumptions
including, but not limited to, determining the timing and
expected costs to complete development projects, estimating
future cash flows from product sales, developing appropriate
discount rates, estimating probability rates for the successful
completion of development projects, continuation of customer
relationships and renewal of customer contracts.
Intangible assets with an indefinite life are not amortized
until their life is determined to be finite, and all other
intangible assets must be amortized over their estimated useful
lives.
Goodwill and intangible assets deemed to have indefinite lives
are not amortized but instead are tested for impairment at the
reporting unit level at least annually in the fourth quarter of
our fiscal year. However, we review the carrying value of our
intangible assets and goodwill for impairment whenever events or
circumstances indicate that their carrying amount may not be
recoverable. Significant negative industry or economic trends,
including a lack of recovery in the market price of our common
stock, disruptions to our business, unexpected significant
changes or planned changes in the use of the intangible assets,
and mergers and acquisitions could result in the need to
reassess the fair value of our assets and liabilities which
could lead to an impairment charge for any of our intangible
assets or goodwill. The value of our indefinite lived intangible
assets and goodwill could also be impacted by future adverse
changes such as any future declines in our operating results, a
significant slowdown in the worldwide economy and the microwave
industry or any failure to meet the performance projections
included in our forecasts of future operating results.
We have two reporting units, consisting of our North America
segment and International segment. Goodwill is tested for
impairment annually during the fourth quarter of our fiscal year
using a two-step process. First, we determine if the carrying
amount of any of our reporting units exceeds its fair value
(determined using an analysis of a combination of projected
discounted cash flows and market multiples based on revenue and
earnings before interest, taxes, depreciation and amortization),
which would indicate a potential impairment associated with that
reporting unit. If we determine that a potential impairment
exists, we then compare the implied fair value associated with
the respective reporting unit, to its carrying amount to
determine if there is an impairment loss.
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Evaluations of impairment involve management estimates of asset
useful lives and future cash flows. Significant management
judgment is required in the forecasts of future operating
results that are used in the evaluations. It is possible,
however, that the plans and estimates used may prove to be
inaccurate. If our actual results, or the plans and estimates
used in future impairment analysis, are lower than the original
estimates used to assess the recoverability of these assets, we
could incur additional impairment charges in a future period
which could result in charges that are material to our results
of operations.
We evaluate other long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. Impairment is
considered to exist if the total estimated future cash flows on
an undiscounted basis are less than the carrying amount of the
assets. If impairment exists, the impairment loss is measured
and recorded based on discounted estimated future cash flows. In
estimating future cash flows, assets are grouped at the lowest
levels for which there are identifiable cash flows that are
largely independent of cash flows from other asset groups.
Our estimate of future cash flows is based upon, among other
things, certain assumptions about expected future operating
performance, growth rates and other factors. The actual cash
flows realized from these assets may vary significantly from our
estimates due to increased competition, changes in technology,
fluctuations in demand, consolidation of our customers,
reductions in average selling prices and other factors.
Assumptions underlying future cash flow estimates are therefore
subject to significant risks and uncertainties.
Note C Goodwill and Identifiable Intangible
Assets and Note G Property, Plant and
Equipments provide additional information.
Capitalized
Software
Costs for the conceptual formulation and design of new software
products are expensed as incurred until technological
feasibility has been established (when we have a working model).
Once technological feasibility has been established, we
capitalize costs to produce the finished software products.
Capitalization ceases when the product is available for general
release to customers. Costs associated with product enhancements
that extend the original products life or significantly
improve the original products marketability are also
capitalized once technological feasibility has been established.
Amortization is calculated on a
product-by-product
basis as the greater of the amount computed using (i) the
ratio that current gross revenue for a product bear to the total
of current and anticipated future gross revenue for that
product; or (ii) the straight-line method over the
remaining economic life of the product. At each balance sheet
date, the unamortized capitalized cost of each computer software
product is compared to the net realizable value of that product.
If an amount of unamortized capitalized costs of a computer
software product is found to exceed the net realizable value of
that asset, such amount will be written off. The net realizable
value is the estimated future gross revenue from that product
reduced by the estimated future costs of completing and
deploying that product, including the costs of performing
maintenance and customer support required to satisfy our
responsibility set forth at the time of sale.
Total amortization expense related to capitalized software was
$2.8 million, $3.4 million and $2.9 million in
fiscal 2010, 2009 and 2008.
Other
Accrued Expenses and Other Assets
No accrued liabilities or expenses within the caption
Other accrued expenses on our Consolidated Balance
Sheets exceed 5% of our total current liabilities as of
July 2, 2010 or as of July 3, 2009. Other
accrued expenses on our Consolidated Balance Sheets
primarily includes accruals for sales commissions, warranties
and severance. No current assets other than those already
disclosed on the Consolidated Balance Sheets exceed 5% of our
total current assets as of July 2, 2010 or as of
July 3, 2009. No assets within the caption Other
assets on the Consolidated Balance Sheets exceed 5% of
total assets as of July 2, 2010 or as of July 3, 2009.
Warranties
On product sales we provide for future warranty costs upon
product delivery. The specific terms and conditions of those
warranties vary depending upon the product sold and country in
which we do business. In the case of
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products sold by us, our warranties generally start from the
delivery date and continue for two to three years, depending on
the terms.
Our products are manufactured to customer specifications and
their acceptance is based on meeting those specifications.
Factors that affect our warranty liability include the number of
installed units, historical experience and managements
judgment regarding anticipated rates of warranty claims and cost
per claim. We assess the adequacy of our recorded warranty
liabilities every quarter and make adjustments to the liability
as necessary.
Network management software products generally carry a
30-day to
90-day
warranty from the date of acceptance. Our liability under these
warranties is to provide a corrected copy of any portion of the
software found not to be in substantial compliance with the
agreed-upon
specifications.
Our software license agreements generally include certain
provisions for indemnifying customers against liabilities should
our software products infringe a third partys intellectual
property rights. As of July 2, 2010, we had not incurred
any material costs as a result of such indemnification and have
not accrued any liabilities related to such obligations in our
consolidated financial statements. See
Note I Accrued Warranties for additional
information.
Operating
Leases
We lease facilities and equipment under various operating
leases. These lease agreements generally include rent escalation
clauses, and many include renewal periods at our option. We
recognize expense for scheduled rent increases on a
straight-line basis over the lease term beginning with the date
we take possession of the leased space. Leasehold improvements
made either at the inception of the lease or during the lease
term are amortized over the current lease term, or estimated
life, if shorter.
Contingent
Liabilities
We have unresolved legal and tax matters, as discussed further
in Note O Income Taxes and
Note R Legal Proceedings. We record a
loss contingency as a charge to operations when (i) it is
probable that an asset has been impaired or a liability has been
incurred at the date of the financial statements; and
(ii) the amount of the loss can be reasonably estimated.
Disclosure in the notes to the financial statements is required
for loss contingencies that do not meet both those conditions if
there is a reasonable possibility that a loss may have been
incurred. Gain contingencies are not recorded until realized. We
expense all legal costs incurred to resolve regulatory, legal
and tax matters as incurred.
Periodically, we review the status of each significant matter to
assess the potential financial exposure. If a potential loss is
considered probable and the amount can be reasonably estimated,
we reflect the estimated loss in our results of operations.
Significant judgment is required to determine the probability
that a liability has been incurred or an asset impaired and
whether such loss is reasonably estimable. Further, estimates of
this nature are highly subjective, and the final outcome of
these matters could vary significantly from the amounts that
have been included in our consolidated financial statements. As
additional information becomes available, we reassess the
potential liability related to our pending claims and litigation
and may revise estimates accordingly. Such revisions in the
estimates of the potential liabilities could have a material
impact on our results of operations and financial position.
Foreign
Currency Translation
The functional currency of our subsidiaries located in the
United Kingdom, Singapore, Mexico, Algeria and New Zealand is
the U.S. dollar. Determination of the functional currency
is dependent upon the economic environment in which an entity
operates as well as the customers and suppliers the entity
conducts business with. Changes in facts and circumstances may
occur which could lead to a change in the functional currency of
that entity. Accordingly, all of the monetary assets and
liabilities of these subsidiaries are re-measured into
U.S. dollars at the current exchange rate as of the
applicable balance sheet date, and all non-monetary assets and
liabilities are re-measured at historical rates. Income and
expenses are re-measured at the average exchange rate prevailing
during
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the period. Gains and losses resulting from the re-measurement
of these subsidiaries financial statements are included in
the Consolidated Statements of Operations.
Our other international subsidiaries use their respective local
currency as their functional currency. Assets and liabilities of
these subsidiaries are translated at the local current exchange
rates in effect at the balance sheet date, and income and
expense accounts are translated at the average exchange rates
during the period. The resulting translation adjustments are
included in accumulated other comprehensive income.
Gains and losses resulting from foreign exchange transactions
and translation of monetary assets and liabilities in
non-functional currencies are included in Cost of product
sales and services in the accompanying Consolidated
Statements of Operations. Net foreign exchange (losses) gains
recorded in our Consolidated Statements of Operations during
fiscal 2010, 2009 and 2008 totaled $0.3 million,
$(7.4) million and $(1.3) million.
Retirement
Benefits
As of July 2, 2010, we provided retirement benefits to
substantially all employees primarily through our defined
contribution retirement plans. These plans have matching and
savings elements. Contributions by us to these retirement plans
are based on profits and employees savings with no other
funding requirements. We may make additional contributions to
the plan at our discretion.
Contributions to retirement plans are expensed as incurred.
Retirement plan expense amounted to $2.8 million,
$2.7 million and $3.8 million in fiscal 2010, 2009 and
2008.
Financial
Guarantees, Commercial Commitments and
Indemnifications
Guarantees issued by banks, insurance companies or other
financial institutions are contingent commitments issued to
guarantee our performance under borrowing arrangements, such as
bank overdraft facilities, tax and customs obligations and
similar transactions or to ensure our performance under customer
or vendor contracts. The terms of the guarantees are generally
equal to the remaining term of the related debt or other
obligations and are generally limited to two years or less. As
of July 2, 2010, we had no guarantees applicable to our
debt arrangements. We have entered into commercial commitments
in the normal course of business including surety bonds, standby
letters of credit agreements and other arrangements with
financial institutions primarily relating to the guarantee of
future performance on certain contracts to provide products and
services to customers. As of July 2, 2010, we had
commercial commitments of $79.3 million outstanding, none
of which are accrued for in our Consolidated Balance Sheets.
Under the terms of substantially all of our license agreements,
we have agreed to defend and pay any final judgment against our
customers arising from claims against such customers that our
software products infringe the intellectual property rights of a
third party. To date we have not received any notice that any
customer is subject to an infringement claim arising from the
use of our software products; we have not received any request
to defend any customers from infringement claims arising from
the use of our software products; and we have not paid any final
judgment on behalf of any customer related to an infringement
claim arising from the use of our software products. Because the
outcome of infringement disputes are related to the specific
facts in each case, and given the lack of previous or current
indemnification claims, we cannot estimate the maximum amount of
potential future payments, if any, related to our
indemnification provisions. As of July 2, 2010, we had not
recorded any liabilities related to these indemnifications.
Our standard license agreement includes a warranty provision for
software products. We generally warrant for the first
90 days after delivery that the software shall operate
substantially as stated in the then current documentation
provided that the software is used in a supported computer
system. We provide for the estimated cost of product warranties
based on specific warranty claims, provided that it is probable
that a liability exists and provided the amount can be
reasonably estimated. To date, we have not had any material
costs associated with these warranties.
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Revenue
Recognition
We generate substantially all of our revenue from the sales or
licensing of our microwave radio and wireless access systems,
network management software, and professional services including
installation and commissioning and training. Principal customers
for our products and services include domestic and international
wireless/mobile service providers, original equipment
manufacturers, distributors, system integrators, as well as
private network users such as public safety agencies, government
institutions, and utility, pipeline, railroad and other
industrial enterprises that operate broadband wireless networks.
Our customers generally purchase a combination of our products
and services as part of a multiple element arrangement. Our
assessment of which revenue recognition guidance is appropriate
to account for each element in an arrangement can involve
significant judgment.
Revenue from product sales is generated predominately from the
sales of products manufactured by us and by third party
manufacturers with whom we have outsourced our manufacturing
processes. In general, printed circuit assemblies, mechanical
housings, and packaged modules are manufactured by contract
manufacturing partners, with periodic business reviews of
material levels and obsolescence. Product assembly, product
test, complete system integration and system test may either be
performed within our own facilities or at partner locations.
Revenue from services includes certain installation, extended
warranty, customer support, consulting, training and education.
It also can include certain revenue generated from the resale of
equipment purchased on behalf of customers for installation
service contracts we perform for customers. Such equipment may
include towers, antennas, and other related materials.
In October 2009, the FASB ratified ASC Update (ASU)
No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
2009-13).
ASU 2009-13
amends existing revenue recognition accounting standards that
are currently within the scope of FASB ASC, Subtopic
605-25,
which is the revenue recognition guidance for multiple-element
arrangements. ASU
2009-13
provides for three significant changes to the existing multiple
element revenue recognition guidance as follows:
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Deletes the requirement to have objective and reliable evidence
of fair value for undelivered elements in an arrangement. This
may result in more deliverables being treated as separate units
of accounting.
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Modifies the manner in which the arrangement consideration is
allocated to the separately identified deliverables. ASU
2009-13
requires an entity to allocate revenue in an arrangement using
its best estimate of selling prices (ESP) of deliverables if a
vendor does not have vendor-specific objective evidence of
selling price (VSOE) or third-party evidence of selling price
(TPE), if VSOE is not available. Each separate unit of
accounting must have a selling price, which can be based on
managements estimate when there is no other means (VSOE or
TPE) to determine the selling price of that deliverable. The
arrangement consideration is allocated based on the
elements relative selling prices.
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Eliminates use of the residual method and requires an entity to
allocate revenue using the relative selling price method, which
results in the discount in the transaction being evenly
allocated to the separate units of accounting.
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Concurrently with issuing ASU
2009-13, the
FASB also issued ASU
No. 2009-14,
Certain Revenue arrangements that Include Software Elements
(ASU
2009-14).
ASU 2009-14
excludes software that is contained on a tangible product from
the scope of software revenue guidance if the software component
and the non-software component function together to deliver the
tangible products essential functionality.
As permitted by ASU
2009-13 and
ASU 2009-14,
we elected to early adopt these new accounting standards at the
beginning of its first quarter of fiscal 2010 on a prospective
basis for transactions originating or materially modified on or
after July 4, 2009.
Under our revenue recognition policy before and after the
adoption of ASU
2009-13 and
ASU 2009-14,
revenue is recognized when all of the following criteria have
been met:
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Persuasive evidence of an arrangement exists. Contracts and
customer purchase orders are generally used to determine the
existence of an arrangement.
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Delivery has occurred. Shipping documents and customer
acceptance, when applicable, are used to verify delivery.
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The fee is fixed or determinable. We assess whether the fee is
fixed or determinable based on the payment terms associated with
the transaction and whether the sales price is subject to refund
or adjustment.
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Collectibility is reasonably assured. We assess collectibility
based primarily on the creditworthiness of the customer as
determined by credit checks and analysis, as well as the
customers payment history.
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We often enter into multiple contractual agreements with the
same customer. Such agreements are reviewed to determine whether
they should be evaluated as one arrangement. If an arrangement,
other than a long-term contract, requires the delivery or
performance of multiple deliverables or elements, we determine
whether the individual elements represent separate units
of accounting. In accordance with
ASC 605-25
(as amended by ASU
2009-13),
based on the terms and conditions of the product arrangements,
we believe that our products and services can be accounted for
separately as our products and services have value to our
customers on a stand-alone basis. Accordingly, services not yet
performed at the time of product shipment are deferred based on
their relative selling price and recognized as revenue as such
services are performed. The relative selling price of any
undelivered products is also deferred at the time of shipment
and recognized as revenue when these products are delivered.
There is generally no customer right of return in our sales
agreements. The sequence for typical multiple element
arrangements: we deliver our products, performs installation
services and then provide post-contract support services. The
new revenue recognition standards do not generally change the
units of accounting for our revenue transactions.
VSOE of fair value is based on the price charged when the
element is sold separately. Under the new accounting standards,
for multiple element arrangements, if VSOE cannot be
established, we establish, where available, the selling price
based on TPE. TPE is determined based on evidence of competitor
pricing for similar deliverables when sold separately. When we
cannot determine VSOE or TPE, we use ESP in our allocation of
arrangement consideration. The objective of ESP is to determine
the price at which we would typically transact a stand-alone
sale of the product or service. ESP is determined by considering
a number of factors including our pricing policies, internal
costs and gross margin objectives, method of distribution,
information gathered from experience in customer negotiations,
market research and information, recent technological trends,
competitive landscape and geographies. We regularly review VSOE,
TPE and ESP and maintain internal controls over the
establishment and updates of these estimates.
Prior to the adoption of ASU
2009-13 and
ASU 2009-14,
we recognized the revenue associated with each unit of
accounting separately. If sufficient evidence of fair value
could be established for all the elements of an arrangement, we
allocated revenue to each element in the arrangement based on
the relative fair value of each element and recognized that
allocated revenue when each element met the criteria discussed
above. However, we generally did not have sufficient evidence of
the fair value for all elements of our arrangements, but we
generally did have sufficient evidence of the fair value of the
undelivered elements in our arrangements. In these cases, we
allocated revenue using the residual method in which we deferred
the fair value of the undelivered elements and allocated the
remaining arrangement consideration to the delivered elements.
If an arrangement involved the delivery of multiple items of the
same elements that are only partially delivered at the end of a
reporting period, revenue was allocated proportionately between
the delivered and undelivered items.
Some of our products have both software and non-software
components that function together to deliver the products
essential functionality. We previously determined that except
for our WiMAX products, the software element in our other
products was incidental in accordance with the software revenue
recognition rules. Accordingly, these other products were not
within the scope of the software revenue recognition rules,
ASC 985-605,
Software Revenue Recognition (formerly
SOP 97-2).
We had determined that given the significance of the software
components functionality to our WiMAX products, these
products were within the scope of the software revenue
recognition rules.
ASC 985-605
generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element
based on their relative VSOE of fair values of the elements. We
have not been able to establish VSOE for any of our WiMAX
products or services. Thus, in accordance with
ASC 985-605,
all revenue was deferred until all elements of the arrangement
have been delivered for all arrangements entered into prior to
fiscal 2010.
In connection with its adoption of ASU
2009-13 and
ASU 2009-14,
we re-evaluated the appropriate revenue recognition treatment of
our products and determined that the WiMAX products are scoped
out of
ASC 985-605
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because the software and non-software elements substantively
contribute to the tangible products essential
functionality and we would not sell the tangible products
without the embedded software.
The impact of adopting ASU
2009-13 and
ASU 2009-14
did not have a material impact on any amounts previously
reported for the first three quarters of fiscal 2010. The impact
to the fourth quarter was $7.9M, which was primarily related to
the WiMAX business. This difference is due to the fact that we
have not established VSOE for any WiMAX products under the
previous guidance and thus would not have been able to recognize
any revenue for any portion of these arrangements until all
elements had been delivered. We believe that the new guidance
significantly improves the reporting of these types of
transactions to more closely reflect the underlying economics of
the transactions. We cannot reasonably estimate the effect of
adopting ASU
2009-13 and
ASU 2009-14
on future financial periods as the impact will vary depending on
the nature and volume of new or materially modified arrangements
in any given period.
Revenues related to long-term contracts for customized network
solutions are recognized using the
percentage-of-completion
method. In using the
percentage-of-completion
method, we generally apply the
cost-to-cost
method of accounting where sales and profits are recorded based
on the ratio of costs incurred to estimated total costs at
completion. Contracts are combined when specific aggregation
criteria are met including when the contracts are in substance
an arrangement to perform a single project with a customer; the
contracts are negotiated as a package in the same economic
environment with an overall profit objective; the contracts
require interrelated activities with common costs that cannot be
separately identified with, or reasonably allocated to the
elements, phases or units of output and the contracts are
performed concurrently or in a continuous sequence under the
same project management at the same location or at different
locations in the same general vicinity. Recognition of profit on
long-term contracts requires estimates of the total contract
value, the total cost at completion and the measurement of
progress towards completion. Significant judgment is required
when estimating total contract costs and progress to completion
on the arrangements as well as whether a loss is expected to be
incurred on the contract. Amounts representing contract change
orders, claims or other items are included in sales only when
they can be reliably estimated and realization is probable. When
adjustments in contract value or estimated costs are determined,
any changes from prior estimates are reflected in earnings in
the current period. Anticipated losses on contracts or programs
in progress are charged to earnings when identified.
For revenue recognition from the sale of software or products
which have software which is more than incidental to the product
as a whole, the entire fee from the arrangement is allocated to
each of the elements based on the individual elements fair
value, which must be based on vendor specific objective evidence
of the fair value (VSOE). If VSOE can be established
for the undelivered elements of an arrangement, we recognize
revenue following the residual method. If VSOE cannot be
established for the undelivered elements of an arrangement, we
defer revenue until the earlier of delivery, or fair value of
the undelivered element exists, unless the undelivered element
is a service, in which the entire arrangement fee is recognized
ratably over the period during which the services are expected
to be performed.
Royalty income is recognized on the basis of terms specified in
the contractual agreements.
Cost
of Product Sales and Services
Cost of sales consists primarily of materials, labor and
overhead costs incurred internally and paid to contract
manufacturers to produce our products, personnel and other
implementation costs incurred to install our products and train
customer personnel, and customer service and third party
original equipment manufacturer costs to provide continuing
support to our customers. Also included in cost of sales is the
amortization of purchased technology intangible assets.
Shipping and handling costs are included as a component of costs
of product sales in our Consolidated Statements of Operations
because we include in revenue the related costs that we bill our
customers.
Presentation
of Taxes Collected from Customers and Remitted to Government
Authorities
We present taxes (e.g., sales tax) collected from customers and
remitted to governmental authorities on a net basis (i.e.,
excluded from revenue).
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Share-Based
Compensation
We have issued stock options, restricted stock and performance
shares under our 2007 Stock Equity Plan and assumed stock
options from the Stratex acquisition. We estimate the grant date
fair value of our share-based awards and amortize this fair
value to compensation expense over the requisite service period
or vesting term.
To estimate the fair value of our stock option awards, we use
the Black-Scholes-Merton option-pricing model. The determination
of the fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by our stock
price as well as assumptions regarding a number of complex and
subjective variables. These variables include our expected stock
price volatility over the expected term of the awards, actual
and projected employee stock option exercise behaviors,
risk-free interest rate and expected dividends. Due to the
inherent limitations of option-valuation models, including
consideration of future events that are unpredictable and the
estimation process utilized in determining the valuation of the
share-based awards, the ultimate value realized by our employees
may vary significantly from the amounts expensed in our
financial statements. For restricted stock and performance share
awards, we measure the grant date fair value based upon the
market price of our common stock on the date of the grant.
For stock options and restricted stock, we recognize
compensation cost on a straight-line basis over the awards
vesting periods for those awards which contain only a service
vesting feature. For awards with a performance condition vesting
feature, when achievement of the performance condition is deemed
probable we recognize compensation cost on a straight-line basis
over the awards expected vesting periods.
We estimate forfeitures at the time of grant and revise, if
necessary, in subsequent periods if actual forfeitures differ
significantly from initial estimates. Share-based compensation
expense was recorded net of estimated forfeitures such that
expense was recorded only for those share-based awards that are
expected to vest.
Cash flows, if any, resulting from the gross benefit of tax
deductions related to share-based compensation in excess of the
grant date fair value of the related share-based awards are
presented as part of cash flows from financing activities. This
amount is shown as a reduction to cash flows from operating
activities and an increase to cash flow from financing
activities. See Note M Share-Based
Compensation for additional information.
Net
Loss per Share of Common Stock and Description of
Shares Outstanding
We compute net loss per share of common stock using the
two-class method. Basic net loss per share is computed using the
weighted average number of common shares outstanding and
unvested share-based payment awards that contain rights to
receive nonforfeitable dividends or dividend equivalents
(whether paid or unpaid) during the period. Such unvested
share-based payment awards are considered to be participating
securities.
During fiscal 2010, 2009 and 2008, we recorded a net loss, so
the potential dilution from the assumed exercise of our stock
options is anti-dilutive. Accordingly, our basic and diluted net
loss per common share amounts are the same. Because the stock
options exercise prices were greater than the average
market price of our shares, the number of options excluded from
the diluted loss per share calculations determined by applying
the treasury stock method were not significant during fiscal
2010, 2009 and 2008.
From the time we acquired Stratex Networks, Inc.
(Stratex) on January 26, 2007, Harris owned
32,913,377 shares or 100% of our Class B Common Stock
which approximated 56% of the total shares of our common stock.
On May 27, 2009 Harris effected a spin-off, in the form of
a taxable pro rata stock dividend, to its shareholders of all
the shares of Harris Stratex owned by Harris. Harris
stockholders received approximately 0.24 of a share of Harris
Stratex Class A Common Stock for every share of Harris
common stock they owned on the record date. The Class B
Common Stock automatically converted to Class A Common
Stock upon the spin-off event. Following the distribution, only
Class A Common Stock was outstanding.
Effective November 19, 2009, under a change to our
certificate of incorporation approved by shareholders, all
shares of our Class A common stock were reclassified on a
one-to-one
basis to shares of Common Stock without a class designation; we
no longer have Class A or Class B common stock
authorized, issued or outstanding.
71
Restructuring
and Related Expenses
We record a liability for costs associated with an exit or
disposal activity when the liability is incurred. We also record
(i) liabilities associated with exit and disposal
activities measured at fair value; (ii) expenses for
one-time termination benefits at the date the entity notifies
the employee, unless the employee must provide future service,
in which case the benefits are expensed ratably over the future
service period; and (iii) liabilities related to an
operating lease/contract at fair value and measured when the
contract does not have any future economic benefit to the entity
(i.e., the entity ceases to utilize the rights conveyed by the
contract). We expense all other costs related to an exit or
disposal activity as incurred. We record severance benefits
provided as part of restructurings as part of an ongoing benefit
arrangement, and accrue a liability for expected severance
costs. Restructuring liabilities and the liability for expected
severance costs are shown as Restructuring
liabilities in current and long-term liabilities on our
Consolidated Balance Sheets and the related costs are reflected
as operating expenses in the Consolidated Statements of
Operations. See Note K Restructuring
Activities for additional information.
Research
and Development Costs
Our company-sponsored research and development costs, which
include costs in connection with new product development,
improvement of existing products, process improvement, and
product use technologies, are charged to operations in the
period in which they are incurred. We present research and
development expenses and acquired in-process research and
development costs as separate line items in our Consolidated
Statements of Operations.
Segment
Information
Through the end of fiscal year 2009, we reported three operating
segments in our public filings: North America Microwave,
International Microwave and Network Operations. During the first
quarter of fiscal 2010, we realigned the management structure of
our Network Operations segment to geographically integrate with
our North America Microwave and International Microwave segments
to gain cost efficiencies. As a result, we eliminated the
Network Operations segment as a separate reporting unit and
consolidated this segment into our remaining two segments that
are based on the geographical location where revenue is
recognized. Additionally, we have dropped the word
Microwave from the name of our North America and
International segments. Segment information for fiscal 2009 and
2008 have been adjusted to reflect this change.
Our Chief Executive Officer is the Chief Operating
Decision-Maker (the CODM). Resources are allocated
to each of these segments using information based primarily on
their operating income (loss). Operating income (loss) is
defined as revenue less cost of product sales and services,
engineering, selling and administrative expenses, restructuring
charges, acquired in-process research and development, and
amortization of identifiable intangible assets. General
corporate expenses are allocated to the North America and
International segments based on revenue. Information related to
assets, capital expenditures and depreciation and amortization
for the operating segments is not part of the discrete financial
information provided to and reviewed by the CODM. See
Note N Business Segments for additional
information.
Initial
Application of Accounting Standards
As discussed above in Revenue Recognition, we adopted the
accounting standards for arrangements with multiple deliverables
and arrangements associated with tangible products that contain
software elements.
During fiscal 2010, we also adopted the following accounting
standards, none of which had a material impact on our financial
position, results of operations or cash flows:
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The Financial Accounting Standards Board (FASB)
Accounting Standards
Codification(tm)
(Codification), which is now the source of
authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied for
financial statements issued for periods ending after September
2009. Additionally, we are using the new guidelines prescribed
by the Codification when referring to GAAP, including the
elimination of pre-Codification GAAP references unless
accompanied by Codification GAAP references.
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72
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The accounting standard previously deferring the effective date
of the fair value measurement standard for disclosures related
to nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. See
Note D Fair Value Measurements of Assets and
Liabilities in these Notes to Consolidated Financial
Statements for fair value disclosures required by this standard.
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The accounting standard requiring interim disclosures about fair
value of financial instruments, which extends the annual
disclosure requirements about fair value of financial
instruments to interim reporting periods. See
Note D Fair Value Measurements of Assets and
Liabilities in these Notes to Consolidated Financial
Statements for fair value disclosures required by this standard.
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The accounting standard for determining whether instruments
granted in share-based payment transactions are participating
securities. There was no material change to our calculations of
basic and diluted weighted average shares outstanding for prior
periods.
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The accounting standards for accounting for business
combinations, which significantly change the accounting and
reporting requirements related to business combinations,
including the recognition of acquisition-related transaction and
post-acquisition restructuring costs in our results of
operations as incurred. Additionally, these accounting standards
require the capitalization of in-process research and
development expenses. While the adoption of these standards did
not have a material impact on our financial position, results of
operations or cash flows directly in the first quarter of fiscal
2010, it is expected to have a significant effect on the
accounting for any future acquisitions we make.
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Note C
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Goodwill
and Identifiable Intangible Assets
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As a result of our annual impairment reviews, during fiscal
2010, we recorded impairment charges of $63.2 million for
identifiable intangible assets and during the second quarter of
fiscal 2009 we recorded impairment charges of
$279.0 million for goodwill and $32.6 million for the
Stratex trade name. We did not record impairment losses for
goodwill or identifiable intangible assets in fiscal 2008.
In the fourth quarter of fiscal 2010, we concluded that a
potential impairment of our identifiable intangible assets
existed due to a decline in our market capitalization and recent
and expected financial performance. The results of our
impairment test indicated impairment related to certain
amortizable intangible assets (developed technology and customer
relationships), since the estimated undiscounted cash flows for
these assets were less than their respective carrying values.
The undiscounted cash flow and fair value calculations related
to the developed technology were estimated based on a
relief-from-royalty method, and the calculations related to the
customer relationships were estimated based on an excess
earnings method considering future sales and operating costs.
Discount rates ranging from 28% to 30% were applied to the
cash flows used in the fair value calculations of intangible
assets.
Summary
of Goodwill
Changes in the carrying amount of goodwill during fiscal 2010 by
segment were as follows:
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Goodwill
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Accumulated Impairment Losses
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Net Carrying
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North America
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International
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Total
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North America
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International
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Total
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Value
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(In millions)
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Balance as of beginning of fiscal year
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$
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31.8
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$
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250.4
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$
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282.2
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$
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(31.8
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$
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(247.2
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$
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(279.0
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$
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3.2
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Purchase accounting adjustments
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3.0
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3.0
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3.0
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Balance as of end of fiscal year
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$
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31.8
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$
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253.4
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$
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285.2
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$
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(31.8
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$
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(247.2
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)
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$
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(279.0
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$
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6.2
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73
Changes in the carrying amount of goodwill during fiscal 2009 by
segment were as follows:
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Goodwill
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Accumulated Impairment Losses
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Net Carrying
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North America
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International
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Total
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North America
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International
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Total
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Value
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(In millions)
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Balance as of beginning of fiscal year
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$
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36.2
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$
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248.0
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$
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284.2
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$
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$
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$
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$
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284.2
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Goodwill from the Telsima acquisition
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3.2
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3.2
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3.2
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Impairment charges
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(31.8
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(247.2
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(279.0
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(279.0
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Translation adjustments related to acquisitions in prior years
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(4.4
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(0.8
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(5.2
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(5.2
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)
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Balance as of end of fiscal year
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