AVNW

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 30, 2007, for Harris Stratex Networks, Inc. (formerly Harris Stratex Networks, Inc. prior to the merger). The reporting period is significantly impacted by the completion of the Stratex Acquisition on January 26, 2007, where Harris Stratex merged with Stratex Networks, Inc. and Harris Corporation contributed its Microwave Communications Division (MCD). The financial statements reflect the combined entity for the period following the acquisition and the MCD division for the period prior.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 88.9% for the quarter and 35.1% for the three quarters compared to the prior year periods. This growth is primarily driven by the inclusion of Stratex Networks revenue ($48.8 million in the quarter) and organic growth in the North America microwave segment.
• Profitability Impact: Despite revenue growth, the company reported a Net Loss of $23.2 million for the quarter, compared to $6.9 million in the prior year quarter. This deterioration is largely due to acquisition-related charges, including a $15.3 million write-off of in-process research and development (IPR&D), $5.9 million in fair value adjustments to inventory and fixed assets, and $4.1 million in amortization of intangible assets.
• Balance Sheet Expansion: Total assets increased from $352.6 million (June 30, 2006) to $975.4 million (March 30, 2007), driven by the acquisition of Stratex assets, including $274.6 million in Goodwill and $150.6 million in Identifiable Intangible Assets.
• Debt Assumption: The company assumed $22.4 million in debt related to the Stratex acquisition, compared to negligible debt levels prior to the transaction.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the net loss to one-time acquisition costs and integration activities. Excluding these charges, operating income would have been higher due to revenue growth. The company expects to incur up to an additional $3.4 million to complete the development of acquired IPR&D by late 2007.
• Restructuring: A restructuring plan was adopted in February 2007 to consolidate facilities in Montreal and the U.S., with estimated total costs ranging from $8.5 million to $10.0 million. Approximately $1.3 million was recognized in the quarter.
• Liquidity: The company holds $95.2 million in cash, cash equivalents, and short-term investments. It maintains a $50 million credit facility with $24.3 million available. Management believes these resources are sufficient for the next 12 months.
• Risks: Key risks include the successful integration of Stratex operations, market adoption of new products, currency exchange fluctuations, and the ability to fund debt service obligations. A legal proceeding in Brazil regarding a supplier agreement is ongoing but is not expected to have a material adverse effect.

Investor Verification Checklist

• Acquisition Accounting: Verify the preliminary purchase price allocation of the Stratex Acquisition, specifically the $15.3 million IPR&D write-off and the $16.4 million deferred tax liability recognized.
• Restructuring Costs: Monitor the execution of the Montreal and U.S. restructuring plans and the total cash outflows associated with the $14.7 million restructuring liability.
• Debt Covenants: Confirm continued compliance with the tangible net worth and liquidity ratio covenants under the $50 million credit facility.
• Segment Performance: Analyze the International Microwave segment, which reported an operating loss of $24.0 million for the quarter, heavily impacted by acquisition charges.
• Pro Forma Results: Review the pro forma financial data to understand the combined entity's performance as if the acquisition had occurred at the beginning of the period.