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EX-31.2 - SECTION 302 CFO CERTIFICATION Q3 2010 - POWERWAVE TECHNOLOGIES INCq3_10ex31-2.htm
EX-32.1 - 32.1 CEO CERTIFICATION Q3 2010 - POWERWAVE TECHNOLOGIES INCq3_10ex32-1.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION Q3 2010 - POWERWAVE TECHNOLOGIES INCq3_10ex31-1.htm
EX-32.2 - 32.2 CFO CERTIFICATION Q3 2010 - POWERWAVE TECHNOLOGIES INCq3_10ex32-2.htm


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
 
Form 10-Q

 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 3, 2010
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission File Number 000-21507

 
 
 
POWERWAVE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

 
 
 

 
   
Delaware
11-2723423
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
1801 E. St. Andrew Place, Santa Ana, CA 92705
(Address of principal executive offices, zip code)
 
(714) 466-1000
(Registrant’s telephone number, including area code)

 
 
 
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
 
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨
 
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):
 
Large accelerated filer  ¨        Accelerated filer  þ         Non-accelerated filer  ¨         Smaller reporting company  ¨
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
 
As of October 28, 2010, the registrant had 133,128,494 shares of Common Stock outstanding.
 


 
1

 

POWERWAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 3, 2010
 
 
     
   
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This Quarterly Report on Form 10-Q includes forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, market, supply chain and economic conditions, demand and pricing trends, future expense levels, competition and growth prospects in our industry, trends in average selling prices and gross margins, product and infrastructure development, market demand and acceptance, the timing of and demand for next generation products, customer relationships, tax rates, employee relations, the timing of and cost savings from restructuring activities, restructuring charges, the level of expected future capital and research and development expenditures and the timing of conversion of the Company’s convertible subordinated notes. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to Powerwave Technologies, Inc.’s (“Powerwave” or the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect that Powerwave or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The actual results of Powerwave may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those discussed under Part I, Item 1A, Risk Factors. Because of these and other factors that may affect Powerwave’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that Powerwave files from time to time with the Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
 
 
All reports filed by Powerwave with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Powerwave also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy Statement Annual Report, and amendments thereto, at no charge to investors upon request and makes electronic copies of its most recently filed reports available through its website at www.powerwave.com as soon as reasonably practicable after filing such material with the SEC.
 


 
 
FINANCIAL STATEMENTS
 
POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(In thousands, except share data)

 
   
October 3,
2010
 
January 3,
2010
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
70,045
   
$
60,439
 
Restricted cash
   
941
     
2,600
 
Accounts receivable, net of allowance for sales returns and doubtful accounts of $7,398 and $8,349, respectively
   
156,264
     
142,949
 
Inventories
   
55,504
     
60,544
 
Prepaid expenses and other current assets
   
35,132
     
21,334
 
Deferred income taxes
   
6,449
     
6,449
 
Total current assets
   
324,335
     
294,315
 
Property, plant and equipment, net
   
78,935
     
89,883
 
Other assets
   
5,276
     
5,654
 
TOTAL ASSETS
 
$
408,546
   
$
389,852
 
                 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable
 
$
96,199
   
$
81,830
 
Accrued payroll and employee benefits
   
13,721
     
11,322
 
Accrued restructuring costs
   
792
     
1,803
 
Accrued expenses and other current liabilities
   
27,935
     
23,946
 
Total current liabilities
   
138,647
     
118,901
 
Long-term debt
   
274,085
     
268,983
 
Other liabilities
   
611
     
1,356
 
Total liabilities
   
413,343
     
389,240
 
Commitments and contingencies (Notes 8 and 9)
               
Shareholders’ equity (deficit):
               
Preferred Stock, $0.0001 par value, 5,000,000 shares authorized and no shares issued or outstanding
   
     
 
Common Stock, $0.0001 par value, 250,000,000 shares authorized, 133,121,463 and 132,357,287 shares issued and outstanding, respectively
   
822,725
     
825,354
 
Accumulated other comprehensive income
   
10,401
     
10,522
 
Accumulated deficit
   
(837,923
)
   
(835,264
)
Net shareholders’ equity (deficit)
   
(4,797
)
   
612
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
$
408,546
   
$
389,852
 





The accompanying notes are an integral part of these consolidated financial statements.
 


POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(In thousands, except per share data)
 

 
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2010
   
September 27,
2009
   
October 3,
2010
   
September 27,
2009
 
Net sales
  $ 156,813     $ 139,048     $ 415,866     $ 424,904  
Cost of sales:
                               
Cost of goods
    109,608       101,938       296,135       316,487  
Intangible asset amortization
          624             1,870  
Restructuring and impairment charges
    1,175       328       1,901       1,738  
Total cost of sales
    110,783       102,890       298,036       320,095  
Gross profit
    46,030       36,158       117,830       104,809  
Operating expenses:
                               
Sales and marketing
    7,315       8,069       25,073       26,665  
Research and development
    15,662       14,534       45,623       44,273  
General and administrative
    11,741       11,150       34,316       36,001  
Intangible asset amortization
          206             740  
Restructuring and impairment charges
    312       335       872       1,985  
Total operating expenses
    35,030       34,294       105,884       109,664  
Operating income (loss)
    11,000       1,864       11,946       (4,855 )
Other income (expense), net
    (1,025 )     (2,172 )     (9,163 )     3,486  
Income (loss) before income taxes
    9,975       (308 )     2,783       (1,369 )
Income tax provision
    2,041       803       5,442       1,555  
Net income (loss)
  $ 7,934     $ (1,111 )   $ (2,659 )   $ (2,924 )
Basic earnings (loss) per share:
  $ 0.06     $ (0.01 )   $ (0.02 )   $ (0.02 )
Diluted earnings (loss) per share:
  $ 0.05     $ (0.01 )   $ (0.02 )   $ (0.02 )
Shares used in the computation of earnings (loss) per share:
                               
Basic
    132,917       131,950       132,650       131,698  
Diluted
    171,299       131,950       132,650       131,698  


 
 
 
 
 
 
 
 

 

The accompanying notes are an integral part of these consolidated financial statements.
 


POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(In thousands)
 

 
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2010
   
September 27,
2009
   
October 3,
2010
   
September 27,
2009
 
Net income (loss)
  $ 7,934     $ (1,111 )   $ (2,659 )   $ (2,924 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustments, net of income taxes
    4,164       (1,046 )     (121 )     (2,762 )
Comprehensive income (loss)
  $ 12,098     $ (2,157 )   $ (2,780 )   $ (5,686 )

 













 






The accompanying notes are an integral part of these consolidated financial statements.
 


POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(In thousands)
   
Nine Months Ended
   
October 3,
2010
 
September 27,
2009
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
 
$
(2,659
)
 
$
(2,924
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation
   
13,428
     
14,558
 
Amortization
   
4,171
     
7,987
 
Non-cash restructuring and impairment charges
   
2,773
     
3,722
 
Provision for sales returns and doubtful accounts
   
1,080
     
1,830
 
Provision for excess and obsolete inventories
   
6,829
     
6,068
 
Compensation costs related to stock-based awards
   
2,406
     
3,394
 
Gain on repurchase of convertible debt
   
(85
)
   
(9,767
)
Gain on exchange of convertible debt
   
(483
)
   
 
Gain on disposal of property, plant and equipment
   
(6
)
   
(29
)
Gain on settlement of litigation
   
     
(645
)
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts receivable
   
(13,607
)
   
71,474
 
Inventories
   
(1,865
)
   
5,967
 
Prepaid expenses and other current assets
   
(13,803
)
   
(5,152
)
Accounts payable
   
11,483
     
(67,060
)
Accrued expenses and other current liabilities
   
3,133
     
(19,335
)
Other non-current assets
   
17
     
465
 
Other non-current liabilities
   
(85
)
   
283
 
Net cash provided by operating activities                                                                                                
   
12,727
     
10,836
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
   
(2,854
)
   
(4,243
)
Restricted cash
   
1,659
     
817
 
Proceeds from the sale of business
   
     
500
 
Proceeds from the sale of property, plant and equipment
   
266
     
323
 
Acquisitions, net of cash acquired
   
     
1,960
 
Net cash provided by (used in) investing activities                                                                                                
   
(929
)
   
(643
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Debt issuance costs
   
(1,263
)
   
(1,305
)
Proceeds from stock-based compensation arrangements
   
810
     
281
 
Repurchase of common stock
   
(18
)
   
(13
)
Retirement of long-term debt
   
(2,685
)
   
(12,445
)
Net cash used in financing activities                                                                                                
   
(3,156
)
   
(13,482
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
   
964
     
1,284
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
9,606
     
(2,005
)
CASH AND CASH EQUIVALENTS, beginning of period
   
60,439
     
46,906
 
CASH AND CASH EQUIVALENTS, end of period
 
$
70,045
   
$
44,901
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest expense
 
$
7,481
   
$
4,853
 
Income taxes, Net of Refunds Received
 
$
3,325
   
$
5,876
 
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
               
Unpaid purchases of property and equipment
 
$
203
   
$
859
 
Exchange of 1.875% Convertible Subordinated Notes due 2024 (see Note 4)
 
$
60,000
   
$
 

The accompanying notes are an integral part of these consolidated financial statements.
 

 
 
POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(Tabular amounts in thousands, except per share data)

 
Note 1. Nature of Operations
 
Powerwave Technologies, Inc. (the “Company”) is a global supplier of end-to-end wireless solutions for wireless communications networks. The Company designs, manufactures and markets antennas, boosters, combiners, cabinets, shelters, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers, remote radio head transceivers and advanced coverage solutions for use in cellular, PCS, 3G and 4G networks throughout the world.
 
Note 2. Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial statements. The interim financial information is unaudited; however, it reflects all normal adjustments and accruals which are in the opinion of management considered necessary to provide a fair presentation for the interim periods presented. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.
 
The results of operations for the interim periods are not necessarily indicative of the results to be expected for the future quarters or full year ending January 2, 2011, (“fiscal 2010”). The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended January 3, 2010.
 
New Accounting Pronouncements

 
In October 2009, the Financial Accounting Standards Board (FASB) issued an update to Accounting Standards Codification (ASC) Topic 605, “Revenue Recognition.”  This Accounting Standards Update (ASU) No. 2009-13, “Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force,” provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. Previous accounting guidance required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. Under previous accounting guidance, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined.
 
In October 2009, the FASB issued an update to ASC Topic 985, ”Software.” This ASU No. 2009-14, “Software – Certain Revenue Arrangements that Include Software Elements,” modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that functions together to deliver a product’s essential functionality.
 
These new updates are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption is permitted. The Company is currently evaluating the potential impact of these standards on its business, financial condition and results of operations.
 
Stock-Based Compensation
 
The Company accounts for stock-based compensation in accordance with accounting guidance now codified as ASC Topic 718, “Compensation – Stock Compensation.”  Under the fair value recognition provision of ASC Topic 718, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option pricing model and a multiple option award approach. The fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant.  Stock-based compensation, adjusted for estimated forfeitures, is amortized on a straight-line basis over the requisite service period of the award, which is generally the vesting period.
 
 
8
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
Stock-based compensation expense was recognized as follows in the consolidated statement of operations (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2010
   
September 27,
2009
   
October 3,
2010
   
September 27,
2009
 
Cost of sales
  $ 89     $ 284     $ 303     $ 887  
Sales and marketing expenses
    34       96       121       308  
Research and development expenses
    134       231       451       775  
General and administrative expenses
    408       597       1,531       1,424  
Increase to operating loss before income taxes
    665       1,208       2,406       3,394  
Income tax benefit recognized
                       
Impact on net income (loss)
  $ 665     $ 1,208     $ 2,406     $ 3,394  
Increase to net income (loss) per share:
                               
Basic and diluted
  $ 0.00     $ 0.01     $ 0.02     $ 0.03  

 
As of October 3, 2010, unrecognized compensation expense related to the unvested portion of the Company’s stock-based awards and employee stock purchase plan was approximately $1.8 million, net of estimated forfeitures of $0.1 million, which is expected to be recognized over a weighted-average period of 1.2 years.
 
The Black-Scholes-Merton option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation methods require the input of highly subjective assumptions including the weighted average risk-free interest rate, the expected life, and the expected stock price volatility. The weighted average risk-free interest rate was determined based upon actual U.S. treasury rates over a one to ten year horizon and the actual life of options granted. The Company grants options with either a five year or ten year life. The expected life is based on the Company’s actual historical option exercise experience. For the employee stock purchase plan, the actual life of 6 months is utilized in this calculation. The expected life was determined based upon actual option grant lives over a 10 year period. The Company has utilized various market sources to calculate the implied volatility factor utilized in the Black-Scholes-Merton option valuation model. These included the implied volatility utilized in the pricing of options on the Company’s Common Stock as well as the implied volatility utilized in determining market prices of the Company’s outstanding convertible notes. Using the Black-Scholes-Merton option valuation model, the estimated weighted average fair value of options granted during the third quarter and first nine months of fiscal year 2010 was $1.03 and $0.68 respectively and the third quarter and first nine months of 2009 were $0.76 per share and $0.45 per share, respectively.
 
 
The fair value of options granted under the Company’s stock incentive plans during the first nine months of 2010 and 2009 was estimated on the date of grant according to the Black-Scholes-Merton option-pricing model utilizing the multiple option approach and the following weighted-average assumptions:
 
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2010
   
September 27,
2009
   
October 3,
2010
   
September 27,
2009
 
Weighted average risk-free interest rate 
    1.2 %     1.6 %     2.5 %     1.7 %
Weighted average expected life (in years)
    3.4       3.9       3.4       5.2  
Expected stock volatility
    62 %     89 %     68 %     139 %
Dividend yield
 
None
   
None
   
None
   
None
 
 


 
 
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)

 
Note 3. Supplemental Balance Sheet Information
 
Inventories
 
Net inventories are as follows:
 
   
October 3,
2010
 
January 3,
2010
Parts and components
 
$
24,029
   
$
27,937
 
Work-in-process
   
2,653
     
1,363
 
Finished goods
   
28,822
     
31,244
 
Total inventories
 
$
55,504
   
$
60,544
 
 
 
Inventories are net of an allowance for excess and obsolete inventory of approximately $23.7 million and $22.6 million as of October 3, 2010 and January 3, 2010, respectively.
 
Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities are as follows:
   
October 3,
 2010
 
January 3,
2010
Accrued warranty costs
 
$
7,414
   
$
7,038
 
Other accrued expenses and other current liabilities
   
20,521
     
16,908
 
Total accrued expenses and other current liabilities
 
$
27,935
   
$
23,946
 
 
 
Warranty
 
Accrued warranty costs are as follows:
 
   
Nine Months Ended
Description
 
October 3,
2010
 
September 27,
2009
Warranty reserve beginning balance
 
$
7,038
   
$
10,763
 
Reductions for warranty costs incurred
   
(5,201
)
   
(8,841
)
Warranty accrual related to current period sales
   
5,577
     
6,044
 
Effect of exchange rates
   
     
33
 
Warranty reserve ending balance
 
$
7,414
   
$
7,999
 
 
 
Note 4. Financing Arrangements and Long-Term Debt
 
Long-term debt
   
October 3,
 2010
 
January 3,
2010
3.875% Convertible Subordinated Notes due 2027
 
$
150,000
   
$
150,000
 
1.875% Convertible Subordinated Notes due 2024
   
67,887
     
130,887
 
1.875% Convertible Senior Subordinated Notes due 2024
   
60,000
     
 
Subtotal
   
277,887
     
280,887
 
Less unamortized discount
   
(3,802
)
   
(11,904
)
Total long-term debt
 
$
274,085
   
$
268,983
 
 
 
10
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
During the second quarter of 2010, the Company repurchased $3.0 million in aggregate principal amount of its outstanding 1.875% Convertible Subordinated Notes due 2024 (the “Existing Notes”), resulting in a net gain of $0.1 million on the purchase. After the purchase, the Company had $67.9 million remaining outstanding on the Existing Notes.
 
On March 15, 2010, the Company entered into separate privately negotiated exchange agreements under which $60.0 million in aggregate principal amount of the outstanding Existing Notes were exchanged for $60.0 million in aggregate principal amount of new 1.875% Convertible Senior Subordinated Notes due 2024 (the “New Notes”).  The New Notes were issued under an Indenture between the Company, as issuer, and Deutsche Bank Trust Company Americas, as trustee (the “Indenture”). The New Notes are convertible into the Company’s common stock at a conversion price of $1.70 per share and accrue interest at an annual rate of 1.875%, which is payable semi-annually on June 15 and December 15 of each year commencing on June 15, 2010.  Holders may convert the New Notes at any time prior to the maturity date, which is November 15, 2024.  The Company may redeem the notes beginning on November 21, 2012.  Holders of the New Notes may require the Company to repurchase all or a portion of their notes for cash on November 15, 2013, 2014 and 2019 at 100% of the principal amount of the notes, plus accrued and unpaid interest up to but not including the date of such repurchase.  The Company may elect to automatically convert the New Notes in whole or in part at any time on or prior to the maturity date if the closing price of the Company’s Common Stock has exceeded 125% of the conversion price then in effect for at least 20 trading days in any 30 day trading period.  However, if the Company elects to automatically convert the New Notes in this manner, it must make a cash payment to each holder in an amount equal to the aggregate interest payments that would have been payable on the New Notes from the last day through which interest was paid through November 15, 2011, discounted at the interest rate of US Treasury bonds with an equivalent remaining term to November 15, 2011. Holders of the New Notes may also require the Company to repurchase all or a portion of their New Notes in the case of a change in control, as defined in the Indenture.  In the event of a repurchase of the New Notes as a result of a change in control, under certain circumstances, the Company may be obligated to issue additional shares to holders as a “make-whole premium” on the New Notes, which share amounts are set forth in a table to the Indenture.  The Indenture was not qualified under the Trust Indenture Act and the Company does not expect to qualify the Indenture.
 
 
The exchange was accounted for as an extinguishment of the Existing Notes.  The difference between the fair value of the Existing Notes and the carrying amount of the Existing Notes, which included approximately $5.0 million in unamortized debt discount, was recorded as a gain on extinguishment of convertible debt of $0.5 million, net of unamortized debt issuance costs of $0.3 million in the accompanying Consolidated Statement of Operations. In addition, $5.8 million was allocated to the extinguishment of the equity component of the Existing Notes, and was recorded as a reduction to common stock in the accompanying Consolidated Balance Sheet.
 
 
In the second quarter of 2009, the Company repurchased $20.0 million in aggregate principal amount of the Existing Notes, resulting in a gain of approximately $6.4 million on the purchase.  In the first quarter of 2009, the Company repurchased approximately $5.4 million in aggregate principal amount of the Existing Notes, resulting in a gain of approximately $3.4 million on the purchase.
 
 
The following tables provide additional information about the Company’s Existing Notes that are subject to accounting guidance now codified as ASC Topic 470-20, “Debt with Conversion and Other Options”:

   
October 3,
2010
   
January 3,
2010
 
Carrying amount of equity component
 
$
49,703
   
$
55,529
 
                 
Liability component:
               
Principal amount
   
67,887
     
130,887
 
Unamortized discount
   
(3,802
   
   (11,904
)
Net carrying amount
 
$
64,085
   
$
118,983
 
 
 

   
Three Months Ended
 
Nine Months Ended
   
October 3,
2010
 
September 27,
2009
 
October 3,
2010
 
September 27,
2009
Effective interest rate on liability component
   
7.07
%
   
7.07
%
   
7.07
%
   
7.07
%
Contractual interest expense recognized on the Existing Notes
 
$
318
   
$
938
   
$
1,165
   
$
2,813
 
Amortization of the discount on liability component
 
$
805
   
$
1,446
   
$
2,887
   
$
4,678
 
 
 
The unamortized discount will be recognized using the effective interest method through November 15, 2011.  As of October 3, 2010, the if-converted value of the Existing Notes did not exceed the principal amount.
 
 
11
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
 
Credit Agreement
 
On April 3, 2009, the Company entered into a Credit Agreement (the “Credit Agreement”), with Wells Fargo Capital Finance, LLC (formerly Wells Fargo Foothill, LLC) (“Wells Fargo”), as arranger and administrative agent. Pursuant to the Credit Agreement, Wells Fargo made available to the Company a senior secured revolving credit facility up to a maximum of $50.0 million. Availability under the Credit Agreement is based on the calculation of the Company’s borrowing base as defined in the Credit Agreement.  The Credit Agreement is secured by a first priority security interest on a majority of the Company’s assets, including without limitation, all accounts, equipment, inventory, chattel paper, records, intangibles, deposit accounts and cash and cash equivalents. The Credit Agreement expires on August 15, 2011. The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Company with respect to indebtedness, liens, investments, distributions, mergers and acquisitions and dispositions of assets.  The Credit Agreement also includes financial covenants including minimum EBITDA and maximum capital expenditures that are applicable only if the availability under the Company’s line of credit falls below $20.0 million.
 
On March 11, 2010, the Company entered into Amendment Number Two to the Credit Agreement with Wells Fargo, which amendment updated the Credit Agreement to make appropriate references to and provisions for the New Notes.  
 
On April 1, 2010, the Company entered into a Waiver, Amendment Number Three to Credit Agreement and Amendment Number Two to Security Agreement with Wells Fargo.  This amendment amends certain provisions of the Credit Agreement and Security Agreement entered into on April 3, 2009, by and among the Company, the Lenders and Wells Fargo. The amendment waives certain technical defaults under the Credit Agreement relating to the Company’s obligation to deliver certain reports. In addition, the amendment makes minor changes to certain defined terms and modifies the thresholds for certain covenants.
 
As of October 3, 2010, the Company is in compliance with all financial covenants.  As of October 3, 2010, the Company had approximately $38.0 million of availability under the Credit Agreement, of which approximately $6.4 million was utilized by outstanding letters of credit.
 
Note 5. Restructuring and Impairment Charges
 
2009 Restructuring Plan
 
In January 2009, the Company formulated and began to implement a plan to further reduce manufacturing overhead costs and operating expenses. As part of this plan, the Company initiated personnel reductions in both its domestic and foreign locations, with primary reductions in the United States, Finland and Sweden. These reductions were undertaken in response to economic conditions and the global macro-economic slowdown that began in the fourth quarter of 2008. The Company finalized this plan in the fourth quarter of 2009; however, additional amounts are expected to be accrued in 2010 related to actions associated with this plan.
 
A summary of the activity affecting its accrued restructuring liability related to the 2009 Restructuring Plan for the first nine months of 2010 is as follows:
 
   
Workforce Reductions
 
Facility Closures
 & Equipment Write-downs
 
Total
Balance at January 3, 2010
 
$
501
   
$
   
$
501
 
Amounts accrued
   
1,535
     
177
     
1,712
 
Amounts paid/incurred
   
(1,773
)
   
(177
)
   
(1,950
)
Effects of exchange rates
   
(5
)
   
     
(5
)
Balance at October 3, 2010
 
$
258
     
     
258
 
 
 
The costs associated with these exit activities were recorded in accordance with the accounting guidance now codified as ASC Topic 420, “Exit or Disposal Obligations.”  Pursuant to this guidance, a liability for a cost associated with an exit or disposal activity shall be recognized in the period in which the liability is incurred, except for a liability for one-time employee termination benefits that is incurred over time.  In the unusual circumstance in which fair value cannot be reasonably estimated, the liability shall be recognized initially in the period in which fair value can be reasonably estimated. The restructuring and integration plan is subject to continued future refinement as additional information becomes available. The Company expects that the workforce reduction amounts will be paid through the second quarter of 2011.
 
 
12
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
2008 Restructuring Plan
 
In June 2008, the Company formulated and began to implement a plan to further consolidate operations and reduce manufacturing and operating expenses. As part of this plan, the Company closed its Salisbury, Maryland manufacturing facility and transferred most of the production to its other manufacturing operations. In addition, the Company closed its design and development center in Bristol, UK and discontinued manufacturing operations in Kempele, Finland. These actions were finalized in the first quarter of 2009.
 
A summary of the activity affecting its accrued restructuring liability related to the 2008 Restructuring Plan for the first nine months of 2010 is as follows:
 
   
Workforce Reductions
 
Facility Closures
 & Equipment Write-downs
 
Total
Balance at January 3, 2010
 
$
177
   
$
334
   
$
511
 
Amounts accrued
   
     
     
 
Amounts paid/incurred
   
(159
)
   
(191
)
   
(350
)
Effects of exchange rates
   
1
     
3
     
4
 
Balance at October 3, 2010
 
$
19
   
$
146
   
$
165
 
 
 
The costs associated with these exit activities were recorded in accordance with the accounting guidance in ASC Topic 420. The restructuring and integration plan is subject to continued future refinement as additional information becomes available. The Company expects that the facility closure amounts and the workforce reduction amounts will be paid out through the fourth quarter of 2010.
 
Integration of LGP Allgon and REMEC, Inc.’s Wireless Systems Business
 
The Company recorded liabilities in connection with the acquisitions for estimated restructuring and integration costs related to the consolidation of LGP Allgon’s operations and REMEC, Inc.’s wireless systems business, including severance and future lease obligations on excess facilities. These estimated costs were included in the allocation of the purchase consideration and resulted in additional goodwill pursuant to the accounting guidance now codified as ASC Topic 805, “Business Combinations.”  The costs associated with these exit activities were recorded in accordance with the accounting guidance in ASC Topic 420. The implementation of the restructuring and integration plan is complete.
 
A summary of the activity affecting the accrued restructuring liability related to the integration of LGP Allgon’s operations and REMEC, Inc.’s wireless systems business for the first nine months of 2010 is as follows:
   
Facility Closures
 & Equipment Write-downs
Balance at January 3, 2010
 
$
791
 
Amounts accrued
   
 
Amounts paid/incurred
   
(422
)
Effects of exchange rates
   
 
Balance at October 3, 2010
 
$
369
 
 
 
The Company expects that the facility closure amounts will be paid out over the remaining lease term which extends through January 2011.
 
Restructuring and Impairment Charges
 
In the first nine months of 2010, the Company recorded charges of approximately $1.5 million in severance costs, of which $0.7 million and $0.8 million was recorded in cost of sales and operating expenses, respectively.  These charges were primarily related to personnel reductions in Estonia, as the Company closed its manufacturing operations in the third quarter of 2010, as well as personnel reductions in the United States, France and Sweden.
 
 
In the first nine months of 2010, the Company recorded charges of approximately $0.9 million related to inventory that either has been or will be disposed of and is not expected to generate future revenue primarily due to the consolidation and facility closure of the Company’s manufacturing facility in Estonia.  In addition, the Company recorded facility closure charges of $0.2 million and a net impairment charge of $0.2 million related to fixed assets primarily related to the closure of its manufacturing facility in Estonia.  Of these amounts, approximately $1.2 million was recorded in cost of sales and $0.1 million was recorded in operating expenses.
 
 
13
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
Note 6. Other Income (Expense), Net
 
The components of other income (expense), net, are as follows:
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2010
   
September 27,
2009
   
October 3,
2010
   
September 27,
2009
 
Interest income
  $ 47     $ 62     $ 137     $ 531  
Interest expense
    (3,450 )     (4,064 )     (10,793 )     (12,937 )
Foreign currency gain (loss), net
    1,970       1,687       (510 )     4,751  
Gain on repurchase of convertible debt
                85       9,767  
Gain on exchange of convertible debt
                483        
Other income, net
    408       143       1,435       1,374  
Total other income (expense), net
  $ (1,025 )   $ (2,172 )   $ (9,163 )   $ 3,486  
 
 
Other income (expense), net, for the nine months ended October 3, 2010 includes a gain of approximately $0.1 million on the repurchase of $3.0 million in par value of the Company’s Existing Notes and also includes a gain of approximately $0.5 million related to the exchange of approximately $60 million in par value of the Company’s Existing Notes.
 
Other income (expense), net, for the nine months ended September 27, 2009 includes a gain of approximately $9.8 million related to the repurchase of approximately $25.4 million in aggregate principal amount of the Company’s Existing Notes.
 
Note 7. Earnings (Loss) Per Share
 
In accordance with ASC Topic 260,”Earnings per Share,” basic earnings (loss) per share is based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is based upon the weighted average number of common and potential common shares for each period presented and income available to common stockholders is adjusted to reflect any changes in income or loss that would result from the issuance of the dilutive common shares. The Company’s potential common shares include stock options under the treasury stock method and convertible subordinated debt under the if-converted method. Potential common shares of 23,343,049 and 61,620,046 related to the Company’s stock option programs and convertible debt have been excluded from diluted weighted average common shares for the three and nine months ended October 3, 2010 respectively, as the effect would be anti-dilutive.  In addition, potential common shares of 32,131,430 and 31,713,003 related to the Company’s stock option programs and convertible debt have been excluded from diluted weighted average common shares for the three and nine months ended September 27, 2009, as the effect would be anti-dilutive.
 
The following details the calculation of basic and diluted loss per share:
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2010
   
September 27,
2009
   
October 3,
2010
   
September 27,
2009
 
Basic:
                       
Net income (loss)
  $ 7,934     $ (1,111 )   $ (2,659 )   $ (2,924 )
Weighted average common shares
    132,917       131,950       132,650       131,698  
Basic earnings (loss) per share
  $ 0.06     $ (0.01 )   $ (0.02 )   $ (0.02 )
Diluted:
                               
Net income (loss)
  $ 7,934     $ (1,111 )   $ (2,659 )   $ (2,924 )
Interest expense of convertible debt, net of tax
    362                    
Net income (loss), as adjusted
  $ 8,296     $ (1,111 )   $ (2,659 )   $ (2,924 )
Weighted average common shares
    132,917       131,950       132,650       131,698  
Potential common shares
    38,382                    
Weighted average common shares, as adjusted
    171,299       131,950       132,650       131,698  
Diluted income (loss) per share
  $ 0.05     $ (0.01 )   $ (0.02 )   $ (0.02 )
 
 
 
14
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
Note 8. Commitments and Contingencies
 
The Company is subject to legal proceedings and claims in the normal course of business.  Although the outcome of legal proceedings is inherently uncertain, the Company anticipates that it will be able to resolve these matters in a manner that will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 
Note 9. Contractual Guarantees and Indemnities
 
During the normal course of its business, the Company makes certain contractual guarantees and indemnities pursuant to which the Company may be required to make future payments under specific circumstances. The Company has not recorded any liability for these contractual guarantees and indemnities in the accompanying consolidated financial statements. A description of significant contractual guarantees and indemnities existing as of October 3, 2010 is included below.
 
Intellectual Property Indemnities
 
The Company indemnifies certain customers and its contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to the Company’s products. These indemnities appear in development and supply agreements with the Company’s customers as well as manufacturing service agreements with the Company’s contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, the Company is unable to determine the maximum amount of losses that it could incur related to such indemnifications. Historically, any amounts payable pursuant to such intellectual property indemnifications have not had a material effect on the Company’s business, financial condition or results of operations.
 
Director and Officer Indemnities and Contractual Guarantees
 
The Company has entered into indemnification agreements with its directors and executive officers which require the Company to indemnify such individuals to the fullest extent permitted by Delaware law. The Company’s indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, the Company is unable to determine the maximum amount of losses that it could incur relating to such indemnifications. Historically, any amounts payable pursuant to such director and officer indemnifications have not had a material negative effect on the Company’s business, financial condition or results of operations.
 
The Company has also entered into severance agreements and change in control agreements with certain of its executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with the Company.
 
General Contractual Indemnities/Products Liability
 
During the normal course of business, the Company enters into contracts with customers where it has agreed to indemnify the other party for personal injury or property damage caused by the Company’s products and in certain cases for damages resulting from a breach of the Company’s product warranties. The Company’s indemnification obligations under such agreements are not limited in duration and are generally not limited in amount. Historically, any amounts payable pursuant to such contractual indemnities have not had a material negative effect on the Company’s business, financial condition or results of operations. The Company maintains product liability insurance as well as errors and omissions insurance which may provide a source of recovery to the Company in the event of an indemnification claim.
 
Other Guarantees and Indemnities
 
The Company occasionally issues guarantees for certain contingent liabilities under various contractual arrangements, including customer contracts, self-insured retentions under certain insurance policies, and governmental value-added tax compliance programs. These guarantees normally take the form of standby letters of credit issued by the Company’s banks, which may be secured by cash deposits or pledges, or performance bonds issued by an insurance company. Historically, any amounts payable pursuant to such guarantees have not had a material negative effect on the Company’s business, financial condition or results of operations. In addition, the Company, as part of the agreements to register the convertible notes it issued in March 2010, September 2007 and November 2004, agreed to indemnify the selling security holders against certain liabilities, including liabilities under the Securities Act of 1933. The Company’s indemnification obligations under such agreements are not limited in duration and generally not limited in amount.
 
 
15
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
Note 10. Income Taxes
 
The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. The income tax provision is computed on the pretax income of the consolidated entities located within each taxing jurisdiction based on current tax law. Deferred tax assets and liabilities are determined based on the future tax consequences associated with temporary differences between income and expenses reported for financial accounting and tax reporting purposes. A valuation allowance for deferred tax assets is recorded to the extent that the Company cannot determine that the ultimate realization of the net deferred tax assets is more likely than not.
 
Realization of deferred tax assets is principally dependent upon the achievement of future taxable income, the estimation of which requires significant management judgment. The Company’s judgment regarding future profitability may change due to many factors, including future market conditions and the Company’s ability to successfully execute its business plans and/or tax planning strategies. These changes, if any, may require material adjustments to these deferred tax asset balances. Due to uncertainties surrounding the realization of the Company’s cumulative federal and state net operating losses and other factors, the Company has recorded a valuation allowance against a portion of its gross deferred tax assets. For the foreseeable future, the Federal tax provision related to future earnings will be offset substantially by a reduction in the valuation allowance. Accordingly, current and future tax expense will consist primarily of certain required state income taxes and taxes in certain foreign jurisdictions.
 
In addition to unrecognized tax benefits, the Company has recorded valuation allowances against its net tax benefits in certain jurisdictions arising from net operating losses. On a quarterly basis, the Company reassesses the need for these valuation allowances based on operating results and its assessment of the likelihood of future taxable income and developments in the relevant tax jurisdictions. The Company continues to maintain a valuation allowance against its net deferred tax assets in the U.S. and various foreign jurisdictions in 2010 where the Company believes it is more likely than not that deferred tax assets will not be realized.
 
As of October 3, 2010, the liability for income taxes associated with uncertain tax positions was $15.1 million, including accrued penalties, interest, and foreign currency fluctuations of $0.5 million.  Of this amount, $6.3 million, if recognized, would affect the Company’s effective tax rate.  In the third quarter of 2010, only interest charges associated with all relevant uncertain tax positions were recorded for the period.
 
As a result of the ongoing tax audits, the total liability for unrecognized tax benefits may change within the next twelve months due to either settlement of audits or expiration of statutes of limitations.  As of October 3, 2010, the Company has concluded all United States federal income tax matters for years through 2006. All other material state, local and foreign income tax matters have been concluded for years through 2005.
 
Note 11. Fair Value of Financial Instruments
 
The estimated fair value of the Company’s financial instruments has been determined using available market information and valuation methodologies. Considerable judgment is required in estimating fair values. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange.
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value.
 
Cash and Cash Equivalents and Restricted Cash
 
The carrying amount approximates fair value because of the short maturity (less than 90 days) and high credit quality of these instruments.
 
Long-Term Debt
 
The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the debt.  The Company’s long-term debt consists of convertible subordinated notes, which are not actively traded as an investment instrument and therefore, the quoted market prices may not reflect actual sales prices at which these notes could be traded.
 
The estimated fair values of the Company’s financial instruments were as follows:
 
   
October 3, 2010
 
January 3, 2010
   
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
                         
Cash and cash equivalents                                                                                   
 
$
70,045
   
$
70,045
   
$
60,439
   
$
60,439
 
Restricted cash                                                                                   
   
941
     
941
     
2,600
     
2,600
 
Long-term debt:
                               
3.875% Convertible Subordinated Notes due 2027
 
$
150,000
   
$
116,250
   
$
150,000
   
$
99,000
 
1.875% Convertible Subordinated Notes due 2024
   
67,887
     
65,172
     
130,887
     
113,544
 
1.875% Convertible Senior Subordinated Notes due 2024
   
60,000
     
68,298
     
     
 
Subtotal
   
277,887
             
280,887
         
Less unamortized discount
   
(3,802
)
           
(11,904
)
       
Total long-term debt                                                                   
 
$
274,085
           
$
268,983
         
 
 
16
POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
 
Note 12. Gain on Settlement of Litigation
 
As part of the Company’s acquisition of REMEC, Inc’s wireless systems business, $15 million of the purchase price was held in escrow to cover any potential indemnification claims. In March 2009, the Company settled a dispute arising out of certain claims made against the escrow. As a result of this settlement, the Company received approximately $2 million in cash. This payment was accounted for as an adjustment to the total consideration paid for this acquisition. As a result, the remaining net book value of the intangible assets and fixed assets acquired in this acquisition was eliminated and the Company recorded a net gain of approximately $0.6 million. This amount is included in other income (expense), net in the accompanying consolidated statement of operations for the first quarter of 2009.
 
Note 13. Customer Concentrations
 
The Company’s product sales have historically been concentrated in a small number of customers. For the first nine months of 2010 and 2009, sales to customers that accounted for 10% or more of revenues totaled $142.8 million and $194.8 million, respectively. For the first nine months of 2010, Nokia Siemens and Raycom, one of the Company’s European direct resellers, accounted for approximately 24% and 10% of total net sales respectively. In the first nine months of 2009, Nokia Siemens and Alcatel-Lucent represented 35% and 11% of sales, respectively.
 
As of October 3, 2010, approximately 33% of total accounts receivable related to customers that accounted for 10% or more of the Company’s total revenue during the first nine months of 2010. As of October 3, 2010, Nokia Siemens and Raycom accounted for approximately 21% and 11% of total accounts receivable respectively. The inability to collect outstanding receivables from these customers or any other significant customers, the delay in collecting outstanding receivables within the contractual payment terms, or the loss of, or reduction in, sales to any of these customers could have a material adverse effect on the Company’s business, financial condition and results of operations.
 
Note 14. Supplier Concentrations
 
Certain of the Company’s products, as well as components utilized in such products, are available in the short-term only from a single or a limited number of sources. In addition, in order to take advantage of volume pricing discounts, the Company purchases certain customized components from single-source suppliers as well as finished products from single-source contract manufacturers. The inability to obtain single-source components or finished products in the amounts needed on a timely basis or at commercially reasonable prices has resulted in delays in product introductions, interruption in product shipments and increases in product costs, which have had a material adverse effect on the Company’s business, financial condition and results of operations and may continue to do so until alternative sources could be developed at a reasonable cost.
 
Note 15. Segments and Geographic Data
 
The Company operates in one reportable business segment: “Wireless Communications.” The Company’s revenues are derived from the sale of wireless communications network products and coverage solutions, including antennas, boosters, combiners, cabinets, shelters, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers and advanced coverage solutions for use in cellular, PCS, 3G and 4G wireless communications networks throughout the world.
 
The Company manufactures multiple product categories at its manufacturing locations and produces certain products at more than one location. With regards to sales, the Company sells its products through two major sales channels. One channel is the original equipment manufacturers channel, which consists of large global companies such as Alcatel-Lucent, Ericsson, Huawei, Motorola, Nokia Siemens and Samsung. The other channel is direct to wireless network operators, such as AT&T, Bouygues, Clearwire, Orange, Sprint, T-Mobile, Verizon Wireless and Vodafone. A majority of the Company’s products are sold to both sales channels. The Company maintains global relationships with most of the Company’s customers. The Company’s original equipment manufacturer customers normally purchase on a global basis and the sales to these customers, while recognized in various reporting regions, are managed on a global basis. For network operator customers, which have a global presence, the Company typically maintains a global purchasing agreement. Individual sales are made on a regional basis.
 
The Company measures its performance by monitoring its net sales by product and consolidated gross margins, with a short-term goal of maintaining a positive operating cash flow while striving to achieve long-term operating profits.


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included under Item 1, Financial Statements (Unaudited). This discussion contains forward-looking statements, the realization of which may be impacted by certain important factors including, but not limited to, those discussed in Risk Factors, in Part II, Item 1A included herein.
 
Introduction and Overview
 
We are a global supplier of end-to-end wireless solutions for wireless communications networks. Our business consists of the design, manufacture, marketing and sale of products to improve coverage, capacity and data speed in wireless communications networks, including antennas, boosters, combiners, cabinets, shelters, filters, radio frequency power amplifiers, remote radio head transceivers, repeaters, tower-mounted amplifiers and advanced coverage solutions. These products are utilized in major wireless networks throughout the world which support voice and data communications by use of cell phones and other wireless communication devices. We sell our products to both original equipment manufacturers, who incorporate our products into their proprietary base stations (which they then sell to wireless network operators), and directly to individual wireless network operators for deployment into their existing networks.
 
During the last ten years, demand for wireless communications infrastructure equipment has fluctuated dramatically. While demand for wireless infrastructure was strong during 2005, it weakened for us during 2006 and 2007 due to significant reductions at three major customers, as well as a general slowdown in overall demand within the wireless infrastructure industry. For most of 2008, demand once again increased, however, in the fourth quarter of 2008 demand for our products was negatively impacted by the global economic recession. The recession significantly impacted demand during 2009 and our revenues fell by 36% from 2008 levels, negatively impacting our financial results. During 2008 and 2009, we initiated several cost cutting measures aimed at lowering our operating expenses. These initiatives will continue, and we may be required to further reduce operating expenses if there is a significant or prolonged reduction in spending by our customers.
 
In the past there have been significant deferrals in capital spending by wireless network operators due to delays in the expected deployment of infrastructure equipment and financial difficulties on the part of the wireless network operators who were forced to consolidate and reduce spending to strengthen their balance sheets and improve their profitability. Economic conditions, such as the turmoil in the global equity and credit markets, the global recession, and the rise of inflationary pressures related to rising commodity prices, have also had a negative impact on capital spending by wireless network operators, and will likely have a negative impact going forward in the near term. All of these factors can have a significant negative impact on overall demand for wireless infrastructure products, and at various times, have directly reduced demand for our products and increased price competition within our industry which has in the past led to reductions in our revenues and contributed to our reported operating losses. In addition to the significant reduction in revenues during 2009, an example of prior reductions was during fiscal 2006 and 2007, when we experienced a significant slowdown in demand from one of our direct network operator customers, AT&T, as well as reduced demand from several of our original equipment manufacturing customers, including Nokia Siemens and Nortel Networks, all of which combined to result in directly reduced demand for our products and contributed to our operating losses for both fiscal 2006 and 2007.
 
We believe that we have maintained our overall market share within the wireless communications infrastructure equipment market during this period of changing demand for wireless communications infrastructure equipment. We continue to invest in the research and development of wireless communications network technology and the diversification of our product offerings, and we believe that we have one of our industry’s leading product portfolios in terms of performance and features. We believe that our proprietary design technology is a further differentiator for our products.
 
Looking back over the last six years, beginning in fiscal 2004, we focused on cost savings while we expanded our market presence, as evidenced by our acquisition of LGP Allgon. This acquisition involved the integration of two companies based in different countries that previously operated independently, and was a complex, costly and time-consuming process. During fiscal 2005, we continued to focus on cost savings while we expanded our market presence, as evidenced by our acquisition of selected assets and liabilities of REMEC, Inc.’s wireless systems business (the “REMEC Wireless Acquisition.”) We believe that this acquisition further strengthened our position in the global wireless infrastructure market. In October 2006, we completed the Filtronic plc wireless acquisition. We believe that this strategic acquisition provided us with the leading position in transmit and receive filter products, as well as broadened our RF conditioning and base station solutions product portfolio and added significant additional technology to our intellectual property portfolio. For fiscal years 2007, 2008 and 2009, we completed the integration of these acquisitions, as well as focused on consolidating operations and reducing our overall cost structure. During this same time, we encountered a significant unanticipated reduction in revenues, which caused us to revise our integration and consolidation plans with a goal of further reducing our operating costs and significantly lowering our breakeven operating structure. As has been demonstrated during the last six years, these acquisitions do not provide any guarantee that our revenues will increase. We currently have a small number of ongoing restructuring activities which are aimed at further reducing our overall operating cost structure.

 
We measure our success by monitoring our net sales by product and consolidated gross margins, with a short-term goal of maintaining a positive operating cash flow while striving to achieve long-term operating profits. We believe that there continues to be long-term growth opportunities within the wireless communications infrastructure marketplace, and we are focused on positioning Powerwave to benefit from these long-term opportunities.
 
Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition, allowances for doubtful accounts, inventory reserves, warranty obligations, restructuring reserves, asset impairment, income taxes and stock-based compensation expense. We base these estimates on our historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions is inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
 
For a summary of our critical accounting policies and estimates, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Part II of our Amendment No. 1 to Annual Report on Form 10-K for the year ended January 3, 2010.
 
Accruals for Restructuring and Impairment Charges
 
In the first nine months of 2010 and 2009, the Company recorded restructuring and impairment charges of approximately $2.8 million and $3.7 million, respectively. Such charges relate to our Restructuring Plans. See further discussion of these plans in Note 5 of the Notes to Consolidated Financial Statements under Part I, Item I, Financial Information.
 
Restructuring and impairment accruals related primarily to workforce reductions, consolidation of facilities, and the discontinuation of certain product lines, including the associated write-downs of inventory, manufacturing and test equipment. Such accruals were based on estimates and assumptions made by management about matters which were uncertain at the time, including the timing and amount of sublease income that will be recovered on vacated property and the net realizable value of used equipment that is no longer needed in our continuing operations. While we used our best current estimates based on facts and circumstances available at the time to quantify these charges, different estimates could reasonably be used in the relevant periods to arrive at different accruals and/or the actual amounts incurred or recovered may be substantially different from the assumptions utilized, either of which could have a material impact on the presentation of our financial condition or results of operations for a given period. As a result, we periodically review the estimates and assumptions used and reflect the effects of those revisions in the period that they become known.
 
New Accounting Pronouncements
 
For a summary of our New Accounting Pronouncements, see Note 2 of the Notes to Consolidated Financial Statements under Part I, Item I, Financial Information.
 


Results of Operations
 
The following table summarizes Powerwave’s results of operations as a percentage of net sales for the three and nine months ended October 3, 2010 and September 27, 2009:
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
October 3,
2010
   
September 27,
2009
   
October 3,
2010
   
September 27,
2009
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales:
                               
Cost of goods
    69.9       73.3       71.2       74.5  
Intangible asset amortization
          0.5             0.4  
Restructuring and impairment charges
    0.7       0.2       0.5       0.4  
Total cost of sales
    70.6       74.0       71.7       75.3  
Gross profit
    29.4       26.0       28.3       24.7  
Operating expenses:
                               
Sales and marketing
    4.7       5.8       6.0       6.3  
Research and development
    10.0       10.5       11.0       10.4  
General and administrative
    7.5       8.0       8.2       8.5  
Intangible asset amortization
          0.2             0.2  
Restructuring and impairment charges
    0.2       0.2       0.2       0.4  
Total operating expenses
    22.4       24.7       25.4       25.8  
Operating income (loss)
    7.0       1.3       2.9       (1.1 )
Other income (expense), net
    (0.6 )     (1.5 )     (2.2 )     0.7  
Income (loss) before income taxes
    6.4       (0.2 )     0.7       (0.4 )
Income tax provision
    1.3       0.6       1.3       0.3  
Net income (loss)
    5.1 %     (0.8 )%     (0.6 )%     (0.7 )%
 
 
Three Months ended October 3, 2010 and September 27, 2009
 
Net Sales
 
Our sales are derived from the sale of wireless communications network products and coverage solutions, including antennas, boosters, combiners, cabinets, shelters, filters, radio frequency power amplifiers, remote radio head transceivers, repeaters, tower-mounted amplifiers and advanced coverage solutions for use in cellular, PCS, 3G and 4G wireless communications networks throughout the world.
 
The following table presents a further analysis of our sales based upon our various customer groups:
 
   
Three Months Ended
(in thousands)
 
Customer Group
 
October 3, 2010
   
September 27, 2009
 
Wireless network operators and other
  $ 107,004       68 %   $ 57,892       42 %
Original equipment manufacturers
    49,809       32 %     81,156       58 %
Total
  $ 156,813       100 %   $ 139,048       100 %
 

 
Sales increased by 12.8% to $156.8 million for the third quarter of 2010, from $139.0 million, for the third quarter of 2009. This increase was due to several factors, including increased demand from our direct operator customers which offset the decrease in demand from our original equipment manufacturer customers. While sales increased compared to the prior year, we are still experiencing reduced global demand related to the global macro-economic crisis and associated global credit crisis and economic recession that began in the fall of 2008. In addition, we continued to experience component supply constraints that have resulted in longer than anticipated supply order lead times that negatively impact our revenues.  While we have taken actions to adjust our procurement activities, we expect to encounter supply constraints for the remainder of this fiscal year.


The following table presents a further analysis of our sales based upon our various product groups:
 
   
Three Months Ended
(in thousands)
Wireless Communications Product Group
 
October 3, 2010
 
September 27, 2009
Antenna systems
 
$
75,995
     
48 
%
 
$
37,423
     
27 
%
Base station systems
   
63,997
     
41 
%
   
79,673
     
57 
%
Coverage systems
   
16,821
     
11 
%
   
21,952
     
16 
%
Total
 
$
156,813
     
100 
%
 
$
139,048
     
100 
 
 
 Antenna systems consist of base station antennas and tower-mounted amplifiers. Base station systems consist of products that are installed into or around the base station of wireless networks and include products such as boosters, combiners, filters, radio frequency power amplifiers and VersaFlex cabinets. Coverage systems consist primarily of repeaters and advanced coverage solutions. Antenna systems increased in the third quarter of 2010 versus 2009 as network operators increased the capacity and technology of their networks. The decrease in base station systems sales during the third quarter of 2010 as compared with the third quarter of 2009 is due to the significantly reduced demand from our original equipment manufacturing customers related to several factors, including the global economic crisis and component supply constraints, as well as our strategic initiative to not pursue low margin commodity-type business.
 
We track the geographic location of our sales based upon the location of our customers to which we ship our products. Since many of our original equipment manufacturer customers purchase products from us at central locations and then re-ship the product with other base station equipment to locations throughout the world, we are unable to identify the final installation location of many of our products.
 
The following table presents an analysis of our net sales based upon the geographic area to which a product was shipped:
 
   
Three Months Ended
(in thousands)
Geographic Area
 
October 3, 2010
 
September 27, 2009
Americas
 
$
71,484
     
46 
%
 
$
48,414
     
35 
%
Asia Pacific
   
33,676
     
21 
%
   
53,477
     
38 
%
Europe
   
41,845
     
27 
%
   
31,128
     
23 
%
Other International
   
9,808
     
%
   
6,029
     
%
Total
 
$
156,813
     
100 
%
 
$
139,048
     
100 
 
 
Revenues increased in the Americas and Europe regions in the third quarter of 2010 as compared to the third quarter of 2009. The North American region is experiencing strong demand for infrastructure as certain wireless network operators are enhancing their networks and preparing for 4G deployments. Since wireless network infrastructure spending is dependent on individual network coverage and capacity demands, we do not believe that our revenue fluctuations for any geographic region are necessarily indicative of a trend for our future revenues by geographic area.
 
A large portion of our revenues are generated in currencies other than the U.S. Dollar. During the last year, the value of the U.S. Dollar has fluctuated significantly against many other currencies. We have calculated that when comparing exchange rates in effect for the third quarter of 2009 to those in effect for the third quarter of 2010, the change in the value of foreign currencies as compared with the U.S. Dollar did not have a material impact on our net sales.
 
For the third quarter of 2010, sales to Nokia Siemens accounted for approximately 20% of our total sales, sales to Raycom, one of our European direct resellers, accounted for approximately 13% of our total sales, and sales to Team Alliance, one of our North American resellers, accounted for 11% of our total sales.  For the third quarter of 2009, total sales to Nokia Siemens accounted for approximately 31% of sales and sales to Samsung accounted for approximately 11% of sales. Our business remains largely dependent upon a limited number of customers within the wireless communications market and we cannot guarantee that we will continue to be successful in attracting new customers or retaining or increasing business with our existing customers.
 
 
A number of factors have caused delays and may cause future delays in new wireless infrastructure and upgrade deployment schedules throughout the world, including deployments in the United States, Europe, Asia, South America and other areas. In addition, a number of factors may cause original equipment manufacturers to alter their outsourcing strategy concerning certain wireless communications network products, which could cause such original equipment manufacturers to reduce or eliminate their demand for external supplies of such products or shift their demand to alternative suppliers or internal suppliers. Such factors include lower perceived internal manufacturing costs and competitive reasons to remain vertically integrated. Due to the possible uncertainties associated with wireless infrastructure deployments and original equipment manufacturer demand, we have experienced and expect to continue to experience, significant fluctuations in demand from our original equipment manufacturer and network operator customers. Such fluctuations have caused and may continue to cause significant reductions in our revenues and/or operating results, which has adversely impacted and may continue to adversely impact our business, financial condition and results of operations.
 
Cost of Sales and Gross Profit
 
Our cost of sales includes both fixed and variable cost components and consists primarily of materials, assembly and test labor, overhead, which includes equipment and facility depreciation, transportation costs, warranty costs and amortization of product-related intangibles. Components of our fixed cost structure include test equipment and facility depreciation, purchasing and procurement expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our overhead costs into inventory decreases and the amount of overhead variances expensed to cost of sales increases as volumes decline since we have fewer units to absorb our overhead costs against. Conversely, the absorption of our overhead costs into inventory increases and the amount of overhead variances expensed to cost of sales decreases as volumes increase since we have more units to absorb our overhead costs against. As a result, our gross profit margins generally decrease as revenue and volumes decline due to lower sales volume and higher amounts of overhead variances expensed to cost of sales. Our gross profit margins generally increase as our revenue and volumes increase due to higher sales volume and lower amounts of overhead variances expensed to cost of sales.
 
The following table presents an analysis of our gross profit:
 
   
Three Months Ended
(in thousands)
   
October 3, 2010
 
September 27, 2009
Net sales
 
$
156,813
     
100.0
%
 
$
139,048
     
100.0
%
Cost of sales:
                               
Cost of sales
   
109,608
     
69.9
%
   
101,938
     
73.3
%
Intangible amortization
   
     
     
624
     
0.5
%
Restructuring and impairment charges
   
1,175
     
0.7
%
   
328
     
0.2
%
Total cost of sales
   
110,783
     
70.6
%
   
102,890
     
74.0
%
Gross profit
 
$
46,030
     
29.4
%
 
$
36,158
     
26.0
%
 
 
Our gross profit increased during the third quarter of fiscal 2010, compared to the third quarter of fiscal 2009, primarily as a result of our increased revenues and lower cost of sales as a percent of revenue. As a percentage of revenue, our gross profit margin increased during the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009 primarily resulting from favorable manufacturing costs and better overhead absorption due to our larger revenues. We incurred $1.2 million of restructuring charges during the third quarter of fiscal 2010 related to severance charges and facility closure charges related to the closure of our manufacturing operations in Estonia. We incurred $0.3 million restructuring and impairment charges during the third quarter of fiscal 2009, including severance charges and impairment charges on our Salisbury, Maryland facility. We incurred no intangible amortization charges in 2010, as our intangible assets were fully amortized in the fourth quarter of 2009.
 
The wireless communications infrastructure equipment industry is extremely competitive and is characterized by rapid technological change, new product development and product obsolescence, evolving industry standards and significant price erosion over the life of a product. Certain of our competitors have aggressively lowered prices in an attempt to gain market share. Due to these competitive pressures and the pressures of our customers to continually lower product costs, we expect that the average sales prices of our products will continue to decrease and negatively impact our gross margins. In addition, we have introduced new products at lower sales prices and these lower sales prices have impacted the average sales prices of our products. We have also reduced prices on our existing products in response to our competitors and customer demands. We currently expect that pricing pressures will remain strong in our industry. Future pricing actions by our competitors and us may adversely impact our gross profit margins and profitability, which could result in decreased liquidity and adversely affect our business, financial condition and results of operations.
 
 
We continue to strive for manufacturing and engineering cost reductions to offset pricing pressures on our products, as evidenced by our decisions to close or transfer our Salisbury, Estonia, Maryland, Finland, Hungary, Shanghai and Wuxi, China manufacturing operations as part of our restructuring plans to reduce our manufacturing costs. However, we cannot guarantee that these cost reductions, and our outsourcing or product redesign efforts will keep pace with price declines and cost increases. If we are unable to further reduce our costs through our manufacturing, outsourcing and/or engineering efforts, our gross margins and profitability will be adversely affected.

 
Operating Expenses
 
The following table presents a breakdown of our operating expenses by functional category and as a percentage of net sales:
 
   
Three Months Ended
(in thousands)
   
October 3, 2010
 
September 27, 2009
Operating Expenses
                               
Sales and marketing
 
$
7,315
     
4.7
%
 
$
8,069
     
5.8 
%
Research and development
   
15,662
     
10.0
%
   
14,534
     
10.5 
%
General and administrative
   
11,741
     
7.5
%
   
11,150
     
8.0 
%
Intangible amortization
   
     
     
206
     
0.2 
%
Restructuring and impairment charges
   
312
     
0.2
%
   
335
     
0.2 
%
Total operating expenses
 
$
35,030
     
22.4
%
 
$
34,294
     
24.7 
%
 
 
Sales and marketing expenses consist primarily of salaries and commissions, travel expenses, advertising and marketing expenses, selling expenses, charges for customer demonstration units and trade show expenses. Sales and marketing expenses decreased by $0.8 million, or 9.3%, during the third quarter of 2010 as compared to the third quarter of 2009. The decrease was primarily due to lower commissions.
 
Research and development expenses consist primarily of ongoing design and development expenses for new wireless communications network products, as well as for advanced coverage solutions. We also incur design expenses associated with reducing the cost and improving the manufacturability of our existing products. Research and development expenses can fluctuate dramatically from period to period depending on numerous factors including new product introduction schedules, prototype developments and hiring patterns. Research and development expenses increased by $1.1 million, or 7.8%, during the third quarter of 2010 as compared to the third quarter of 2009 primarily due to higher personnel and research and development materials costs which were offset in part by lower professional fees for outsourced research and development activities.
 
General and administrative expenses consist primarily of salaries and other expenses for management, finance, information systems, legal fees, facilities and human resources. General and administrative expenses increased $0.6 million, or 5.3%, during the third quarter of 2010 as compared to the third quarter of 2009. This increase was largely due to higher professional and legal fees, as well as higher incentive compensation.
 
Our intangible assets were fully amortized during the fourth quarter of 2009, and therefore, no expense was recorded in the third quarter of 2010.  Amortization of customer-related intangibles from our acquisitions amounted to $0.2 million for the third quarter of fiscal 2009.
 
Restructuring charges of $0.3 million were recorded in the third quarter of fiscal 2010, primarily for severance costs in the United Kingdom and United States. Restructuring charges of $0.3 million in the third quarter of fiscal 2009 primarily related to severance costs in North America and facility closing costs.
 
Other Income (Expense), net
 
The following table presents an analysis of other income (expense), net:
 
   
Three Months Ended
(in thousands)
   
October 3, 2010
 
September 27, 2009
Interest income
 
$
47
     
0
%
 
$
62
     
0.1
%
Interest expense
   
(3,450
)
   
(2.2
)%
   
(4,064
)
   
(2.9
)%
Foreign currency gain (loss), net
   
1,970
     
1.3
%
   
1,687
     
1.2
%
Other income, net
   
408
     
0.2
%
   
143
     
0.1
%
Other income (expense), net
 
$
(1,025
)
   
(0.7
)%
 
$
(2,172
)
   
(1.5
)%

 
Interest income during the third quarter of 2010 was lower than the third quarter of 2009 as interest rates on our cash balances have continued to decline. Interest expense decreased by $0.6 million during the third quarter of fiscal 2010 as compared to the third quarter of 2009 due in part to the retirement of approximately $5.4 million of our long-term debt during the first quarter of 2009 and the reduction in the debt discount amortization which is included in interest expense.  Included in interest expense are non-cash charges related to the amortization of debt issuance costs and debt discount of $1.2 and $1.4 million for the third quarters of 2010 and 2009, respectively. Additionally, we recognized a net foreign currency translation gain of $2.0 million in the third quarter of 2010, primarily due to the fluctuations of the U.S. Dollar versus the Euro and several other currencies, as compared to the third quarter of 2009 when we recognized a foreign currency translation gain of $1.7 million.
 
 
Income Tax Provision
 
Our effective tax rate for the third quarter of 2010 was an expense of approximately 20% of our pre-tax income of $10.0 million. We have recorded a valuation allowance against a portion of our deferred tax assets pursuant to Accounting Standards Codification (ASC) Topic 740, “Income Taxes,” due to the uncertainty as to the timing and ultimate realization of those assets. As such, for the foreseeable future, the tax provision or tax benefit related to future U.S. earnings or losses will be offset substantially by a reduction in the valuation allowance. Accordingly, the tax expense consisted primarily of taxes from operations in foreign jurisdictions, primarily China.  We expect our tax rate to continue to fluctuate based on the percentage of income earned in each jurisdiction.
 
Net Income (loss)
 
The following table presents a reconciliation of operating income (loss) to net income (loss):
 
   
Three Months Ended
(in thousands)
   
October 3, 2010
 
September 27, 2009
Operating income (loss)
 
$
11,000
   
$
1,864
 
Other income (expense), net
   
(1,025
)
   
(2,172
)
Income (loss) before income taxes
   
9,975
     
(308
)
Income tax provision 
   
2,041
     
803
 
Net income (loss)
 
$
7,934
   
$
(1,111
)
 
 
Our net income for the third quarter of 2010 was $7.9 million, compared to net losses of $1.1 million for the third quarter of 2009. The higher net income in the third quarter of 2010 was largely due to increased gross profit associated with higher revenues and an increased gross profit percentage.
 
Nine Months ended October 3, 2010 and September 27, 2009
 
Net Sales
 
The following table presents a further analysis of our sales based upon our various customer groups:
 
   
Nine Months Ended
(in thousands)
Customer Group
 
October 3, 2010
 
September 27, 2009
Wireless network operators and other
 
$
237,909
     
57 
%
 
$
154,274
     
36 
%
Original equipment manufacturers
   
177,957
     
43 
%
   
270,630
     
64 
%
Total
 
$
415,866
     
100 
%
 
$
424,904
     
100 
 
 
Sales decreased by 2.1% to $415.9 million for the first nine months of 2010, from $424.9 million, for the first nine months of 2009.  This decrease was due to lower demand from our original equipment manufacturer customers, offset in part by the increase in our direct sales to wireless network operators and others to improve both the bandwidth and the technology of their networks. While the global recession and associated tight credit markets have impacted both fiscal years’ sales, the first quarter of 2010 was our low point in terms of quarterly revenue, reaching only $114.5 million compared to $149.7 million for the first quarter of 2009.
 
The following table presents a further analysis of our sales based upon our various product groups:
 
   
Nine Months Ended
(in thousands)
Wireless Communications Product Group
 
October 3, 2010
 
September 27, 2009
Antenna systems
 
$
172,129
     
41 
%
 
$
104,932
     
25 
%
Base station systems
   
206,748
     
50 
%
   
278,466
     
65 
%
Coverage systems
   
36,989
     
%
   
41,506
     
10 
%
Total
 
$
415,866
     
100 
%
 
$
424,904
     
100 
 
 
The decrease in base station systems is due in part to the significantly reduced demand related to the global recession impacting our original equipment manufacturer’s customers during the first nine months of 2010, as compared with the first nine months of 2009. This was offset by the growth in antenna systems generated primarily from our direct network operator customers as they enhance their networks and certain operators prepare for 4G deployment.
 
 
The following table presents an analysis of our net sales based upon the geographic area to which a product was shipped:
 
   
Nine Months Ended
(in thousands)
Geographic Area
 
October 3, 2010
 
September 27, 2009
Americas
 
$
158,102
     
38 
%
 
$
125,896
     
29 
%
Asia Pacific
   
127,863
     
31 
%
   
160,749
     
38 
%
Europe
   
108,833
     
26 
%
   
108,990
     
26 
%
Other International
   
21,068
     
%
   
29,269
     
%
Total
 
$
415,866
     
100 
%
 
$
424,904
     
100 
 
 
Revenues increased in the Americas region for the first nine months of 2010 due to increased demand from wireless network operators embarking on increased infrastructure spending plans and preparation for 4G deployments. This was offset by a decrease in the Asia Pacific and other international regions in the first nine months of 2010 as compared with the first nine months of 2009. The decrease in these regions was largely due to contraction in both the operator direct channel as well as the original equipment manufacturer sales channel, resulting from the global recession. Since wireless network infrastructure spending is dependent on individual network coverage and capacity demands, we do not believe that our revenue fluctuations for any geographic region are necessarily indicative of a trend for our future revenues by geographic area. In addition, as previously noted, growth in one geographic location may not reflect actual demand growth in that location due to the centralized buying processes of our original equipment manufacturer customers.
 
A large portion of our revenues are generated in currencies other than the U.S. dollar.  During the last year, the value of the U.S. dollar has fluctuated significantly against most other currencies.  We have calculated that when comparing exchange rates in effect for the first nine months of 2009 to those in effect for the first nine months of 2010, the change in the value of foreign currencies as compared with the U.S. Dollar had a positive impact on our revenues for the first nine months of 2010 of less than 1%.  This impact did not have a material impact on our net sales.
 
For the first nine months of 2010, total sales to Nokia Siemens and Raycom accounted for approximately 24% and 10% of sales respectively.  For the first nine months of 2009, total sales to Nokia Siemens accounted for approximately 35% of sales, and sales to Alcatel-Lucent accounted for approximately 11% of sales for the period.
 
Cost of Sales and Gross Profit
 
The following table presents an analysis of our gross profit:
 
   
Nine Months Ended
(in thousands)
   
October 3, 2010
 
September 27, 2009
Net sales
 
$
415,866
     
100 
%
 
$
424,904
     
100.0 
%
Cost of sales:
                               
Cost of sales
   
296,135
     
71.2 
%
   
316,487
     
74.5
%
Intangible amortization
   
     
     
1,870
     
0.4 
%
Restructuring and impairment charges
   
1,901
     
0.5 
%
   
1,738
     
0.4 
%
Total cost of sales
   
298,036
     
71.7 
%
   
320,095
     
75.3
%
Gross profit
 
$
117,830
     
28.3 
%
 
$
104,809
     
24.7 
%

 
Our gross profit increased during the first nine months of fiscal 2010 compared with the first nine months of fiscal 2009, primarily as a result of our decreased cost of goods sold. This decrease in our cost of goods sold is due primarily to our cost reduction activities over the last several years and the mix of products sold which reflects a larger mix of direct and wireless network operator sales versus sales to our original manufacture customers. As a percentage of revenue, our gross profit margin increased during the first nine months of 2010 compared with the first nine months of 2009 due primarily to favorable manufacturing costs, but also due to lower amortization costs. The decrease in the intangible amortization costs is due to the intangible assets being fully amortized during 2009. We incurred approximately $1.9 million of restructuring and impairment charges during the first nine months of fiscal 2010 related to severance and facility closure charges primarily related to the closure of our manufacturing operations in Estonia. We incurred approximately $1.7 million of restructuring and impairment charges during the first nine months of fiscal 2009 primarily related to severance charges in the United States, Finland and the UK.
 
Operating Expenses
 
The following table presents a breakdown of our operating expenses by functional category and as a percentage of net sales: