AVNW

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended June 29, 2007 for Harris Stratex Networks, Inc. (formerly Harris Stratex Networks, Inc., formed via the merger of Harris Corporation's Microwave Communications Division and Stratex Networks, Inc.). The company is a global supplier of turnkey wireless network solutions, including microwave radio systems and network management software. The reporting period is significantly impacted by the Stratex acquisition completed on January 26, 2007, which accounted for approximately 43% of the company's revenue for the fiscal year. The company operates through three segments: North America Microwave, International Microwave, and Network Operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 42.1% to $507.9 million, driven primarily by the inclusion of Stratex results ($123.7 million) and growth in the North America Microwave segment. International Microwave revenue declined organically due to project timing, despite the Stratex contribution.
• Profitability: The net loss improved to $17.9 million from $35.8 million. This improvement was offset by significant acquisition-related charges, including a $15.3 million write-off of acquired in-process R&D, $9.3 million in restructuring charges, and $10.5 million in amortization of intangible assets.
• Gross Margin: Gross margin percentage improved to 30.1% from 23.8%. The prior year was negatively impacted by a $34.9 million inventory write-down related to product discontinuances, which did not recur in 2007.
• Balance Sheet: Total assets increased to $1.038 billion from $352.6 million due to the acquisition. Goodwill increased to $323.6 million. Cash balances grew significantly to $69.2 million, bolstered by proceeds from the issuance of Class B common stock to Harris Corporation and cash acquired from Stratex.

Guidance, Outlook, and Risks

Management Commentary: Management expects to continue focusing on operating efficiencies and cost reductions to realize synergies from the Stratex merger. The company anticipates recording an additional $2.2 million in restructuring charges in fiscal 2008. Capital expenditures for fiscal 2008 are estimated between $8 million and $10 million.

Risks and Contingencies:

• Integration Risk: The company faces risks related to the integration of Stratex, including the diversion of management attention and the failure to realize expected synergies.
• Customer Concentration: While no single customer exceeded 10% of revenue in 2007, the company remains dependent on a limited number of large customers, particularly in international markets.
• International Exposure: Approximately 67% of revenue is derived from international operations, exposing the company to foreign currency fluctuations, political instability, and regulatory changes.
• Product Acceptance: Future profitability depends heavily on the market acceptance of the Eclipse and TRuepoint product platforms.
• Controlled Company Status: Harris Corporation owns approximately 57% of the voting stock, limiting the ability of other shareholders to influence corporate governance.

Investor Verification Checklist

• Acquisition Synergies: Verify the timeline and progress of cost-saving initiatives and integration plans following the Stratex merger.
• Restructuring Costs: Monitor the execution of the $2.2 million in anticipated restructuring charges for fiscal 2008 and the closure of facilities in Montreal, Paris, and Mexico City.
• Inventory Levels: Review inventory balances ($135.7 million) and reserves ($14.2 million) to ensure no further significant write-downs are required given the rapid technological changes in the industry.
• Debt Covenants: Confirm continued compliance with the tangible net worth and liquidity ratio covenants of the $50 million credit facility.
• Product Mix: Assess the revenue contribution and margin performance of the Eclipse and TRuepoint product lines, which are critical to future growth.