Boring Buying
ANDW
January 20, 1998
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Andrew Corp. (Nasdaq : ANDW)
10500 W. 153rd St.
Orland Park, IL 60462
(708) 349-3300
http://www.andrew.com
WHY ANDREW?
Founded in 1937, Andrew Corp. is a multinational supplier of communications products and systems to worldwide commercial, industrial, governmental, and military customers. Its principal products are coaxial cables, special-purpose antennas, antennas and earth stations for satellite communication systems, radar and communication reconnaissance systems, and connectivity devices.
We're investing in Andrew Corp. because we believe the company is well-positioned to benefit from trends in deregulation, privatization, and competition that continue to fuel growth in the global telecommunications industry. A recent survey (Merrill Lynch) projects revenues for wireline telecommunications equipment vendors to increase 17% to $125.5 billion worldwide in 1998 and revenues for wireless telecom equipment vendors to increase 24% to $27.0 billion. Industry analysts project the worldwide wireless subscriber base to grow at a compound annual rate of 34% between 1996 and 2001, to reach a total of 457 million subscribers. Andrew participates in both wireline and wireless telecommunications segments.
Global is Good
Although economic conditions in certain developing regions of the world are currently in flux, the long-term development of those economies -- and those of advanced industrial nations, as well -- depends critically upon continued investments in their telecommunications infrastructures. International operations represent a substantial portion of Andrew's overall operating results and asset base, and we regard that as a good thing. In fiscal 1997 (ended Sept. 30), the company sold products to customers in over 170 different countries, with 52% of sales in the U.S., 19% in Europe, Africa and the Middle East, 17% in Asia Pacific and 12% in Other Americas. When it reported results for its fiscal 1998 first quarter a few days ago, Andrew reported strong order growth in Asia Pacific and Latin America.
A Great Investment through 1996...
Historically, Andrew Corp. has provided an outstanding return to shareholders. One thousand dollars invested in the company at the beginning of its 1993 fiscal year swelled to $9620 four years later. A similar investment in the S&P 500 would have grown to $1830 over the same time period.
But a Rough Fiscal 1997.
Fiscal year 1997, which ended Sept. 30, was a somewhat disappointing one for Andrew, however. Earnings per share increased a respectable 19% to $1.21, excluding one-time charges. That paled in comparison to the company's compound annual growth rate in EPS of 34% over the preceding five years, however.
More significantly, top-line growth of 14%, to $869.5 million, was well below initial expectations. The muted percentage increase in sales was due partly to a tough comparison with a very strong fiscal 1996 (thanks to a major personal communications systems, or PCS, infrastructure roll-out that year) and partly to slow orders from U.S. broadcasters awaiting clarification of HDTV standards, a flat domestic cellular market, competitive pricing pressures on coaxial cable, and sluggish sales of wireless telephone accessories in Europe.
Not surprisingly, the stock took a substantial hit, ending calendar year 1997 at roughly half the $42 5/8 price it commanded at the beginning of the year (adjusted for a 3-for-2 split effected in March).
Steps to Improve Profitability...
During the last half of fiscal 1997, Andrew took a number of steps to improve long-run profitability and enhance shareholder value. In June, the company decided to exit certain businesses whose performance had not met growth expectations. Andrew discontinued its network products business, significantly restructured its European wireless products business, and phased out of its fiber optic sensors and global messaging development activities. These actions took a $22.8 million (after-tax) bite out of net income -- or $0.25 per share; they enhanced the company's long-term profitability, however, and focused Andrew on the fast-growing wireless markets.
Andrew's board also authorized a stock buy-back program in May, permitting the company to repurchase up to five million shares of stock. As of Sept. 30, Andrew had repurchased 1.545 million shares at a total cost of $41,600,000. In the fiscal 1998 first quarter, ending Dec. 31, 1997, the company repurchased an additional 1.305 million shares at a cost of approximately $32 million (out of a total of $36 million in cash generated from operations in the quarter).
Are Beginning to Bear Fruit...
On Jan. 16, 1998, Andrew reported results for its fiscal first quarter. Sales were up only 2%, to $231.1 million, but income from continuing operations grew 11%, and earnings per share from continuing operations was up 14% to $0.32 -- four cents ahead of analysts' consensus estimate. More importantly, orders reversed their earlier declines, increasing 7% to $236.8 million. Asia Pacific and Latin America led the orders growth, with particular strength stemming from the wireless infrastructure and common carrier markets in China, Hong Kong and Brazil.
The wireless infrastructure market contributed the largest sales increases, led by strength in South America and Europe. The land mobile market grew as a result of the buildout of enhanced special mobile radio (ESMR) networks in the U.S. Growth in those markets was partially offset by relative weakness in Andrew's wireless accessories and government businesses as compared with an unusually strong first quarter last year.
SG&A expense in the quarter fell 0.6 percentage points as compared with a year ago, and operating margin increased 1.5 percentage points, to 19.1% of sales. The company continued to pay down debt used to finance some recent acquisitions, and overall financial management improved: days sales outstanding declined to 68 days from 73 in the preceding quarter, and inventory turns increased to 3.5 from 2.9 sequentially.
And Longer-Term Prospects are Bright.
Management intends to move toward 15% sales growth in fiscal '98. Gross margins are expected to decline by one-half to one percentage point over the balance of the year, but that should be offset by lower operating expenses and a one-point decline in the company's effective tax rate to 34% (due to certain foreign tax credits). The growth rate in per-share earnings may be expected to exceed that of sales as a result of the share buyback.
Pricing pressure continues in Andrew's important coaxial cable segment, but the company has been cutting production costs to offset that. Andrew's management said they see strength in South American markets, not only in Brazil but in a number of other nations, as well. Although the company watches the economic situation in Asia with concern, order strength remains good, and business in China (roughly half of all Asian sales for Andrew) continues to grow well. European sales are also improving. The U.S. cellular market is generally flat, but the domestic PCS buildout is increasing at a rate of perhaps 15-20%. Over all, management has not seen any significant change in the geographic breakdown of sales relative to last year.
VALUATION AND PRICE TARGETS
After reporting its first quarter results on Jan. 16, shares of Andrew Corp. rose $2 to $23 7/8. The most recent estimates from First Call show the consensus forecast of analysts to be $1.40 for Andrew's FY98 and $1.62 for FY99.
Should Andrew continue to make good progress in recovering from a disappointing 1997, it's not unreasonable to believe that the stock's multiple might revert to the low 20s, in line with analysts' consensus estimate of long-term earnings growth (21%) yet still be well below ANDW's average multiple over the previous three years. On that basis, a price target of $30 would appear achievable in the near term. Over the longer haul, continued growth of the global telecommunications industry coupled with Andrew's reputation for quality products and service offer reasonable prospects for above-average returns.
RISKS
No equities investment is without risk. In Andrew's case, one of its important competitive advantages for the long term -- namely its global reach -- could become a disadvantage in the short run should global economies continue to deteriorate. Large-scale government and private-sector infrastructure investment could be one of the first casualties in deflated economies, even if such investment offered one of the most important keys to sustainable recovery. Also, although a number of signs suggest that last year's slow growth was an anomaly for Andrew, this is by no means assured.
ADDITIONAL INFORMATION
The remainder of this report provides some additional information about Andrew Corp. -- its products, management, and financial history. Much more information is available at Andrew's Website and from the company's 10-Q quarterly statements, 10-K annual statements, and Def. 14a Annual Proxy Statements, all of which are available through the Security & Exchange Commissions EDGAR site.
Summaries of analysts' earnings estimates are available through First Call (available free to AOL subscribers) or at the Zack's site on the Web. Historical charts of the stock are also available on AOL and on the Web. Hoovers on the Web and on AOL is another useful site for information on Andrew, as is WSRN.com.
Of course, helpful commentary and opinions from far and wide about Andrew Corp. may be found at The Motley Fool's locations on AOL and on the Web.
The Stock
52-Week Low $20 1/8 Recent Price $23 7/8 52-Week High $42 5/8 Beta 0.98 Shares Outstanding: 88.5 million Float: 77.8 million Average daily volume: 664,000 Annual Dividend: none
As of September 30, 1997, company officers and directors owned 1.8% of Andrew's stock, and the Andrew employees stock ownership program controlled roughly 5.5%. Approximately 435 financial institutions hold 40.3% of the stock.
Top Executive Officers
Dr. Floyd English, 63, was elected Chairman of Andrew Corp. in 1994, having served as president and CEO since 1983, and as president and COO since 1982. Dr. English joined Andrew in 1980 as vice president, corporate development and became vice president, U.S. operations in Feb. 1981. He holds a B.S. in physics from California State University at Chico and earned masters and Ph.D. degrees in physics at Arizona State University.
Charles R. Nicholas, 51, became executive vice president and CFO in Sept. 1995. He joined Andrew in 1980 as Treasurer.
External Board Members
Dr. John G. Bollinger, 62, has been Bascom Professor of Engineering and Dean of the College of Engineering at the University of Wisconsin at Madison since 1981. He is also a director of Kohler Corp. and Marquette Electronics, Inc.
Admiral John L. Boyes, Ph.D., 76, is an international telecommunications consultant and Chairman of SAMA Corp., a government and military consulting firm. He was president, Armed Forces Communications and Electronics Association, for over 10 years and had 34 years of experience in the Department of Defense and in submarines and destroyers before retiring in 1977.
Kenneth J. Douglas, 75, retired in 1992 as vice chairman of the board of Dean Foods Co., having served as Vice Chairman since Jan. 1988 and as chairman prior to that time since 1970. He is also a director of Richardson Electronics, Ltd.
Jere D. Fluno, 56, has been vice chairman of W. W. Grainger, Inc. since 1984. He is a governor of the Chicago Stock Exchange, a trustee of the Museum of Science and Industry, a member of the University of Wisconsin School of Business Dean's Advisory Board, and a director of the University of Wisconsin Foundation, as well as other not-for-profit boards.
Ormand J. Wade, 58, retired in 1992 as vice chairman of Ameritech Corp., a position he had held since 1989. He previously served as president of Ameritech Bell Group since 1987 and president and CEO of Illinois Bell from 1982-1987. Wade began his career with AT&T in 1961. He is currently a director of Illinois Tool Works Inc., Westell Technologies, Inc., and Northwestern Memorial Hospital. He is also a trustee of the University of Chicago.
Andrew's Products
Andrew's principal products include coaxial cables, microwave antennas for point-to-point communication systems, special purpose antennas for commercial, government and military end use, antennas and complete earth stations for satellite communication systems, cellular antenna products, cellular telephone accessories, electronic radar systems, communication reconnaissance systems, and related ancillary items and services. These products are frequently sold as integrated systems rather than as separate components.
Coaxial Cable Systems and Bulk Cables. Coaxial cable is principally used to carry radio frequency signals at frequencies up to 2 Ghz. Waveguides are tubular conductors that find greatest application at frequencies above 2 GHz, although they are also used in UHF-TV broadcasting at frequencies in hundreds of megahertz. Most of Andrew's waveguides are sold as part of its antenna systems. In addition to bulk cable, coaxial cable systems include cable connectors, accessories, and assemblies. Accessories include lightning surge protectors, hangers, adaptors and grounding kits. Andrew sells its semi-flexible cables, connectors, accessories, and waveguides under the trademark HELIAX. This product category accounted for 54% of total sales in FY97.
Other Products and Services. This group includes special application antennas, support products and various electronics. Applications include cellular systems, navigation, FM and television broadcasting, multipoint distribution services and instructional television. Support products include equipment buildings and towers. Earth station antenna systems manufactured by Andrew are used at earth terminals to receive signals from, and transmit signals to, communication satellites, to broadcast and transmit programs to CATV operators and to VHF or UHF broadcast stations, and for the long distance transmission of conventional telecommunications traffic. The company also designs and installs proprietary distributed communication systems that permit in-building and enclosed area access for all types of wireless communications. Andrew manufactures electronic scanning and communication receiver systems primarily for use in strategic surveillance operations. The company is also supplies electronic surveillance systems for military radar reconnaissance and non-military communications monitoring. This product category accounted for 21% of total sales in FY97.
Microwave Antenna Systems. A "microwave antenna system" may consist of one or more microwave antennas, waveguides or coaxial cables connecting antennas to transmitters or receivers, a tower to support the antennas, an equipment shelter to house transmitters and receivers, various ancillary items and field installation services. Land-based microwave radio networks are commonly used by telecommunications companies for intercity telephone, telex, video and data transmission. They are also used for more specialized purposes by pipeline companies, electric utilities and railroads. Sales of microwave antenna systems accounted for 18% of total sales in FY97.
Wireless Accessories. Andrew manufactures and distributes accessories for personal communication systems, cellular handsets and paging devices. Portable antennas, batteries, battery chargers, paging accessories, hands free kits and various other wireless accessories are included in this group. The acquisition of The Antenna Company increased Andrew's product offering and opened domestic distribution channels. Sales of wireless accessories accounted for 7% of total sales in FY97.
Manufacturing, Marketing, and Distribution
Andrew conducts manufacturing operations primarily from eight locations in the U.S. and from facilities located in Australia, Brazil, Canada, China, Russia, Scotland, and a new facility just opened in India. The company also participates in joint ventures that operate fiber optic telecommunication networks in Russia and Ukraine. Sales engineering functions, including product application assistance, are performed by a staff of highly trained applications engineers located at each manufacturing facility. In addition, field sales engineers are located at or near seven major U.S. cities and in Mexico, Brazil, England, France, Germany, Italy, Spain, Switzerland, Russia, China, Hong Kong, Japan and South Africa.
In fiscal 1997, aggregate sales to the ten largest customers accounted for 31% of total consolidated sales, compared to 27% in 1996 and 28% in 1995. No single customer has accounted for over 10% of consolidated annual sales in any of the last three years.
Approximately half of Andrew's products are sold directly to end users. Most of the remainder is sold to companies that install Andrew's products as part of a total system, with the balance being sold through dealers and distributors. The company has emphasized the compatibility of its antennas, transmission lines, and related components in order to optimize their performance as integrated subsystems.
Andrew also sells mobile cellular products, such as antennas and cellular telephone accessories, primarily through the retail distribution channels of cellular service providers. Mobile cellular products are also sold to distributors who then resell the products to dealers and cellular carriers.
Unlike most of its competitors, Andrew uses its own sales and sales engineering staffs to service its principal markets; the company follows the traditional practice of using commissioned sales agents in countries with modest sales potential. Small or medium-size orders are normally shipped from inventory. Delivery schedules on larger orders are negotiated, but seldom exceed five months.
Research and Development
In fiscal 1997, Andrew spent $41.1 million on R&D activities, up 39% from the year before. As a percentage of sales revenue, R&D expenses were 4.7%, 3.9% and 3.4% in 1997, 1996 and 1995, respectively. Andrew holds approximately 320 active patents expiring at various times between 1998 and 2015.
Balance Sheet Highlights
Sept. 30
Dollars in thousands 1997 1996
Cash and cash equivalents $ 93,823 $ 31,295
Total current assets 459,814 401,984
Total assets $691,154 $631,229
Total current liabilities 127,093 117,382
Deferred Liabilities 10,239 7,919
Long-term debt,
less current portion 35,693 40,423
Minority interest 9,006 9,291
Stockholders' equity 509,123 456,214
Return on Assets 16.02%
Return on Equity 21.93%
Statement of Cash Flows Highlights
Year Ended Sept. 30
Dollars in thousands 1997 1996 1995
Net cash from operations 151,680 66,796 55,816
Net cash used for
investing activities (61,427) (78,683) (55,367)
Net cash (used for)
from financing activities (25,499) (1,972) 4,570
Effect of exchange
rate changes on cash (2,226) (910) 331
Increase (decrease)
for the year 62,528 (14,769) 5,350
Cash and equivalents
at beginning of year 31,295 46,064 40,714
Cash and equivalents,
end of year $ 93,823 $ 31,295 $ 46,064
Income Statement Summary
Dollars in thousands, except per share amounts
1997 1996 1995
Sales $869,475 $766,007 $624,743
Gross profit 355,666 320,486 264,013
Operating income 163,793 151,304 116,803
Other (income) expense (1,989) 4,738 4,362
Income from continuing
ops before taxes 165,782 146,566 112,441
Income from continuing
operations 107,758 93,802 71,854
Discontinued Operations
Loss (income) from ops of network
business, net of taxes 3,330 3,405 1,899
Loss on disposal of network business,
net of taxes 16,086 - -
Net income 88,342 90,397 69,955
Income from continuing
ops per share 1.18 1.02 0.79
Net income per share 0.96 0.98 0.77
Average shares of stock
outst.(thousands) 91,607 91,782 90,728
