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EXCEL - IDEA: XBRL DOCUMENT - POWERWAVE TECHNOLOGIES INCFinancial_Report.xls
EX-32.2 - CEO CERTIFICATION Q2 2011 - POWERWAVE TECHNOLOGIES INCq2_11ex32-2.htm
EX-31.2 - CEO CERTIFICATION OF PERIODIC REPORT - POWERWAVE TECHNOLOGIES INCq2_11ex31-2.htm
EX-31.1 - CEO CERTIFICATION OF PERIODIC REPORT - POWERWAVE TECHNOLOGIES INCq2_11ex31-1.htm
EX-32.1 - CEO CERTIFICATION Q2 2011 - POWERWAVE TECHNOLOGIES INCq2_11ex32-1.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 July 3, 2011
 
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  þ    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 August 3, 2011, the registrant had 158,343,298 shares of Common Stock outstanding.

 
 

 
 
POWERWAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JULY 3, 2011
 
 
     
   
PAGE
 
 
         3
   
         3
   
   
         4
     
Item 1.
         4
     
 
         4
     
 
         5
     
 
         6
     
 
         7
     
 
         8
     
Item 2.
         17
     
Item 3.
         29
     
Item 4.
         30
   
         31
     
Item 1.
         31
     
Item 1A.
         32
     
Item 2.
         45
     
Item 6.
         46
   
         47
 
 
 
    This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report, including, without limitation, statements regarding future events, our future financial performance, our business strategy and plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Actual results could differ materially from those projected in forward-looking statements as a result of the following factors, among others:
 
·  
our reliance upon a few customers to generate the majority of our revenues;
 
·  
the competitiveness of our industry, which is characterized by rapid technological change;
 
·  
our ability to enhance our existing products or develop new products that meet our customers’ needs and requirements;
 
·  
a reduction in our sales due to our strategic focus on growing sales of higher margin products;
 
·  
our dependence upon single sources or limited sources for key components and products;
 
·  
financial difficulties of our key customers or suppliers;
 
·  
potential unexpected cost increases in coverage systems projects;
 
·  
continuing declines in the sales prices of our products;
 
·  
potential direct competition from our suppliers, contract manufacturers and customers;
 
·  
the future growth, or lack of growth, in the wireless communications industry;
 
·  
inventory fluctuations due to our reliance on contract manufacturers,  components and supply chains with long lead times;
 
·  
our ability to hire and retain highly-qualified technical and managerial personnel;
 
·  
risks related to our international operations, including with respect to operations in Asia and Europe;
 
·  
our ability to protect our intellectual property and third party claims of intellectual property infringement;
 
·  
increasing commodity and energy costs;
 
·  
the nature and complexity of regulatory requirements that apply to us, and our ability to obtain or maintain any required regulatory approvals;
 
·  
continued or increased economic uncertainty resulting from the recent economic recession; and
 
·  
other risks set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q, entitled “Risk Factors.”
 
Readers are urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, operating results, financial condition and stock price, including without limitation the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and in the consolidated financial statements and notes thereto included elsewhere in this report, as well as the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011, and in other filings we make with the SEC. Because the risks and uncertainties discussed in this report and other important unanticipated factors may affect the Company’s operating results, past performance should not be considered as indicative of future performance, and investors should not use historical results to anticipate results or trends in future periods.  Furthermore, such forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations except as required by applicable law or the rules of the NASDAQ Stock Market.
 
 
 
All reports filed by the Company 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.  The Company also provides copies of its Forms 8-K, 10-K, 10-Q , Proxy Statement, 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)

   
July 3,
2011
 
January 2,
2011
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
48,763
   
$
61,601
 
Restricted cash
   
985
     
930
 
Accounts receivable, net of allowance for sales returns and doubtful accounts of $4,879 and $4,595, respectively
   
213,512
     
186,960
 
Inventories
   
69,664
     
50,417
 
Prepaid expenses and other current assets
   
49,466
     
39,236
 
Deferred income taxes
   
6,331
     
6,331
 
Total current assets
   
388,721
     
345,475
 
Property, plant and equipment, net
   
74,296
     
76,276
 
Other assets
   
3,562
     
3,833
 
TOTAL ASSETS
 
$
466,579
   
$
425,584
 
                 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
147,333
   
$
112,906
 
Accrued payroll and employee benefits
   
14,690
     
14,237
 
Accrued restructuring costs
   
268
     
749
 
Accrued expenses and other current liabilities
   
25,570
     
30,453
 
Current portion of long term debt
   
11,084
     
55,371
 
Total current liabilities
   
198,945
     
213,716
 
Long-term debt
   
195,722
     
150,000
 
Other liabilities
   
605
     
589
 
Total liabilities
   
395,272
     
364,305
 
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, 169,208,352 and 168,468,792 shares issued and outstanding, respectively
   
887,606
     
882,720
 
Accumulated other comprehensive income
   
15,206
     
10,110
 
Accumulated deficit
   
(831,505
)
   
(831,551
)
Net shareholders’ equity
   
71,307
     
61,279
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
466,579
   
$
425,584
 





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
   
Six Months Ended
 
   
July 3,
2011
   
July 4,
2010
   
July 3,
2011
   
July 4,
2010
 
Net sales
  $ 170,641     $ 144,580     $ 307,265     $ 259,053  
Cost of sales:
                               
Cost of goods
    122,849       101,886       223,613       186,527  
Restructuring and impairment charges
          705             726  
Total cost of sales
    122,849       102,591       223,613       187,253  
Gross profit
    47,792       41,989       83,652       71,800  
Operating expenses:
                               
Sales and marketing
    8,015       8,362       17,151       17,758  
Research and development
    15,748       15,685       32,351       29,961  
General and administrative
    11,332       11,302       23,323       22,576  
Restructuring and impairment charges
    41       214       42       560  
Total operating expenses
    35,136       35,563       72,867       70,855  
Operating income
    12,656       6,426       10,785       945  
Other (expense), net
    (4,155 )     (4,564 )     (6,836 )     (8,137 )
Income (loss) before income taxes
    8,501       1,862       3,949       (7,192 )
Income tax provision
    1,480       1,638       3,903       3,402  
Net income (loss)
  $ 7,021     $ 224     $ 46     $ (10,594 )
Basic earnings (loss) per share:
  $ 0.04     $ 0.00     $ 0.00     $ (0.08 )
Diluted earnings (loss) per share:
  $ 0.04     $ 0.00     $ 0.00     $ (0.08 )
Shares used in the computation of earnings (loss) per share:
                               
Basic
    169,152       132,609       168,979       132,516  
Diluted
    173,550       135,340       173,437       132,516  
















The accompanying notes are an integral part of these consolidated financial statements.
 
POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(In thousands)

   
Three Months Ended
   
Six Months Ended
 
   
July 3,
2011
   
July 4,
2010
   
July 3,
2011
   
July 4,
2010
 
Net income (loss)
  $ 7,021     $ 224     $ 46     $ (10,594 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustments, net of income taxes
    2,418       (1,898 )     5,096       (4,285 )
Comprehensive income (loss)
  $ 9,439     $ (1,674 )   $ 5,142     $ (14,879 )

 
































The accompanying notes are an integral part of these consolidated financial statements.
 
POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(In thousands)
   
Six Months Ended
   
July 3,
2011
 
July 4,
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
46
   
$
(10,594
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation
   
7,095
     
9,162
 
Amortization
   
1,999
     
2,925
 
Non-cash restructuring and impairment charges
   
42
     
1,286
 
Provision for sales returns and doubtful accounts
   
491
     
1,077
 
Provision for excess and obsolete inventories
   
549
     
4,857
 
Compensation costs related to stock-based awards
   
3,943
     
1,741
 
Gain on repurchase of convertible debt
   
     
(85
)
Gain on exchange of convertible debt
   
     
(483
)
Gain on disposal of property, plant and equipment
   
(325
)
   
(221
)
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts receivable
   
(25,894
)
   
334
 
Inventories
   
(18,191
)
   
(1,960
)
Prepaid expenses and other current assets
   
(8,487
)
   
(8,412
)
Accounts payable
   
33,295
     
3,674
 
Accrued expenses and other current liabilities
   
(5,395
)
   
1,515
 
Other non-current assets
   
23
     
7
 
Other non-current liabilities
   
(9
)
   
(43
)
Net cash provided by (used in) operating activities                                                                                                
   
(10,818
)
   
4,780
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
   
(3,529
)
   
(1,906
)
Restricted cash
   
(55
)
   
1,716
 
Proceeds from the sale of property, plant and equipment
   
357
     
266
 
Net cash provided by (used in) investing activities                                                                                                
   
(3,227
)
   
76
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Debt issuance costs
   
(297
)
   
(1,263
)
Proceeds from stock-based compensation arrangements
   
979
     
399
 
Repurchase of common stock
   
(36
)
   
(12
)
Retirement of long-term debt
   
     
(2,685
)
Net cash provided by (used) in financing activities                                                                                                
   
646
     
(3,561
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
   
561
     
(299
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(12,838
)
   
996
 
CASH AND CASH EQUIVALENTS, beginning of period
   
61,601
     
60,439
 
CASH AND CASH EQUIVALENTS, end of period
 
$
48,763
   
$
61,435
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest expense
 
$
3,709
   
$
4,425
 
Income taxes
 
$
4,761
   
$
6,419
 
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
               
Unpaid purchases of property and equipment
 
$
808
   
$
332
 
Exchange of 1.875% Convertible Subordinated Notes due 2024
 
$
   
$
60,000
 

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

 
7

POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
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 wireless 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 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 fiscal year ending January 1, 2012 (“fiscal 2011”). The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2011.
 
Newly Adopted 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 pronouncements were effective in the first quarter of 2011.  The adoption of these pronouncements did not have a material impact on the Company’s business, financial condition or 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:
 
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
2011
   
July 4,
2010
   
July 3,
2011
   
July 4,
2010
 
Cost of sales
  $ 199     $ 106     $ 409     $ 214  
Sales and marketing expenses
    159       48       284       86  
Research and development expenses
    403       126       849       317  
General and administrative expenses
    1,144       496       2,401       1,124  
Decrease to operating income before income taxes
    1,905       776       3,943       1,741  
Income tax benefit recognized
                       
Impact on net income (loss)
  $ 1,905     $ 776     $ 3,943     $ 1,741  
Impact to net income (loss) per share:
                               
Basic and diluted
  $ 0.01     $ 0.01     $ 0.02     $ 0.01  
 
As of July 3, 2011, unrecognized compensation expense related to the unvested portion of the Company’s stock-based awards and employee stock purchase plan was approximately $7.5 million, net of estimated forfeitures of $0.8 million, which is expected to be recognized over a weighted-average period of 1.4 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 second quarter and first half of fiscal year 2011 was $2.70 and $2.41, respectively, and for the second quarter and first half of 2010 was $0.99 per share and $0.67 per share, respectively.
 
The fair value of options granted under the Company’s stock incentive plans during the first half of 2011 and 2010 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
   
Six Months Ended
 
   
July 3,
2011
   
July 4,
2010
   
July 3,
2011
   
July 4,
2010
 
Weighted average risk-free interest rate 
    2.0 %     1.7 %     2.2 %     2.5 %
Weighted average expected life (in years)
    3.6       4.6       3.6       4.6  
Expected stock volatility
    72 %     74 %     77 %     68 %
Dividend yield
 
None
   
None
   
None
   
None
 

 
Note 3. Supplemental Balance Sheet Information
 
Prepaid Expense and Other Current Assets
 
   
July 3,
2011
 
January 2,
2011
Prepaid expense and other current assets
   
15,219
     
9,634
 
Costs and estimated earnings in excess of billings
   
34,247
     
29,602
 
Total prepaid expense and other current assets
 
$
49,466
   
$
39,236
 
 
In the first quarter of 2011, the Company adjusted its cost estimates on a coverage solutions project which reduced both costs and estimated earnings in excess of billings and gross margin by approximately $3.6 million.
 
 
9

POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
Inventories
 
Net inventories are as follows:
 
   
July 3,
2011
 
January 2,
2011
Parts and components
 
$
22,358
   
$
22,165
 
Work-in-process
   
6,085
     
5,052
 
Finished goods
   
41,221
     
23,200
 
Total inventories
 
$
69,664
   
$
50,417
 
 
Inventories are net of an allowance for excess and obsolete inventory of approximately $15.4 million and $21.7 million as of July 3, 2011 and January 2, 2011, respectively.
 
Warranty
 
Accrued warranty costs are as follows:
 
   
Six Months Ended
Description
 
July 3,
2011
 
July 4,
2010
Warranty reserve beginning balance
 
$
7,029
   
$
7,038
 
Reductions for warranty costs incurred
   
(5,204
)
   
(3,749
)
Warranty accrual related to current period sales
   
4,592
     
3,565
 
Effect of exchange rates
   
     
 
Warranty reserve ending balance
 
$
6,417
   
$
6,854
 

 
Note 4. Financing Arrangements and Long-Term Debt
 
Long-term debt
 
   
July 3,
2011
 
January 2,
2011
3.875% Convertible Subordinated Notes due 2027
 
$
150,000
   
$
150,000
 
1.875% Convertible Subordinated Notes due 2024
   
57,916
     
57,916
 
Subtotal
   
207,916
     
207,916
 
Less unamortized discount
   
(1,110
)
   
(2,545
)
Subtotal
   
206,806
     
205,371
 
Less: current portion of long-term debt                                                                              
   
(11,084
)
   
(55,371
)
Total long-term debt
 
$
195,722
   
$
150,000
 
 
The Company accounts for its 1.875% Convertible Subordinated Notes due 2024 (the “1.875% Notes”) in accordance with FASB ASC Topic 470-20, Debt with Conversion and Other Options, which requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The following tables provide additional information about the 1.875% Notes:
 
   
July 3,
2011
   
January 2,
2011
 
Carrying amount of equity component
 
$
49,703
   
$
49,703
 
                 
Principal amount of the 1.875% Notes
   
57,916
     
57,916
 
Unamortized discount of liability component
   
(1,110
   
   (2,545
)
Net carrying amount of liability component
 
$
56,806
   
$
55,371
 
 
 
   
Three Months Ended
 
Six Months Ended
   
July 3,
2011
 
July 4,
2010
 
July 3,
2011
 
July 4,
2010
Effective interest rate on liability component
   
7.07
%
   
7.07
%
   
7.07
%
   
7.07
%
Contractual interest expense recognized
 
$
271
   
$
327
   
$
542
   
$
847
 
Amortization of the discount on liability component
 
$
724
   
$
814
   
$
1,435
   
$
2,082
 
 
 
10

POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
The unamortized discount will be recognized using the effective interest method through November 15, 2011.  As of July 3, 2011, the if-converted value of the 1.875% Notes did not exceed the principal amount.  On July 26, 2011 and August 8, 2011, the Company repurchased $42.6 million and $4.0 million, respectively, in aggregate principal amount of the outstanding 1.875% Notes, leaving approximately $11.3 million in principal amount of the 1.875% Notes outstanding.
 
Credit Agreement
 
The Company entered into a Credit Agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”) on April 3, 2009 (“the Credit Agreement”).  On January 31, 2011, the Company entered into Amendment Number Four to the Credit Agreement and Waiver, and Amendment Number Three to Security Agreement (collectively, the “Amendment”).  The Amendment extended the maturity date and the term of the Credit Agreement from August 15, 2011 to August 15, 2014.  The Amendment also reduced the interest rate under the Credit Agreement by reducing the Base Rate Margin by 1.50% and the LIBOR Base Rate Margin by 0.75%. The Credit Agreement carries an unused line fee of 0.5% per annum.  In connection with the Amendment, the Company incurred issue costs of $0.3 million.
 
  Pursuant to the Credit Agreement, the lenders thereunder have made available to the Company a senior secured credit facility in the form of a revolving line of credit 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, cash and cash equivalents and proceeds of the foregoing.  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 a financial covenant in the form of a minimum fixed charge coverage ratio that is applicable only if the availability under the Company’s line of credit falls below $15.0 million.  As of July 3, 2011, the Company is in compliance with all financial covenants.  As of July 3, 2011, the Company had approximately $39.8 million of availability under the Credit Agreement, of which approximately $6.5 million was utilized for an outstanding letter 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 2011 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 half of 2011 is as follows:
 
   
Workforce Reductions
 
Facility Closures
 & Equipment Write-downs
 
Total
Balance at January 2, 2011
 
$
596
   
$
   
$
596
 
Amounts accrued
   
162
     
(30
)
   
132
 
Amounts paid/incurred
   
(501
)
   
30
     
(471
)
Effects of exchange rates
   
11
     
     
11
 
Balance at July 3, 2011
 
$
268
     
     
268
 
 
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 first quarter of 2012.

 
11

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
   
Six Months Ended
 
   
July 3,
2011
   
July 4,
2010
   
July 3,
2011
   
July 4,
2010
 
Interest income
  $ 54     $ 46     $ 113     $ 90  
Interest expense
    (2,894 )     (3,486 )     (5,780 )     (7,343 )
Foreign currency gain (loss), net
    (1,475 )     (1,784 )     (2,061 )     (2,481 )
Gain on repurchase of convertible debt
          85             85  
Gain on exchange of convertible debt
                      483  
Other income, net
    160       575       892       1,029  
Total
  $ (4,155 )   $ (4,564 )   $ (6,836 )   $ (8,137 )
 
Other income (expense), net, for the three and six months ended July 3, 2011 includes interest expense related to the Company’s debt of $2.9 million and $5.8 million respectively and foreign exchange loss of $1.5 million and $2.0 million, respectively.
 
Other income (expense), net, for the three and six months ended July 4, 2010 includes interest expense related to the Company’s debt of $3.5 million and $7.3 million respectively and foreign exchange loss of $1.8 million and $2.5 million, respectively. Also included in the three and six months ended July 4, 2010 is a gain of approximately $0.1 million on the repurchase of $3 million in par value of the Company’s 1.875% Notes and the six months ended July 4, 2010 also includes a gain of approximately $0.5 million related to the exchange of approximately $60 million in par value of the Company’s 1.875% 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 22,443,951 and 22,443,951 related to the Company’s stock option programs and convertible debt have been excluded from diluted weighted average common shares for the three and six months ended July 3, 2011, respectively, as the effect would be anti-dilutive.  In addition, potential common shares of 58,637,449 and 61,567,532 related to the Company’s stock option programs and convertible debt have been excluded from diluted weighted average common shares for the three and six months ended July 4, 2010, respectively, as the effect would be anti-dilutive.
 
The following details the calculation of basic and diluted loss per share:
 
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
2011
   
July 4,
2010
   
July 3,
2011
   
July 4,
2010
 
Basic:
                       
Net income (loss)
  $ 7,021     $ 224     $ 46     $ (10,594 )
Weighted average common shares
    169,152       132,609       168,979       132,516  
Basic earnings (loss) per share
  $ 0.04     $ 0.00     $ 0.00     $ (0.08 )
Diluted:
                               
Net income (loss)
  $ 7,021     $ 224     $ 46     $ (10,594 )
Interest expense of convertible debt, net of tax
                       
Net income (loss), as adjusted
  $ 7,021     $ 224     $ 46     $ (10,594 )
Weighted average common shares
    169,152       132,609       168,979       132,516  
Potential common shares
    4,398       2,731       4,458        
Weighted average common shares, as adjusted
    173,550       135,340       173,437       132,516  
Diluted income (loss) per share
  $ 0.04     $ 0.00     $ 0.00     $ (0.08 )
 
 
12

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 July 3, 2011 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.
 
 
13

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 2011 where the Company believes it is more likely than not that deferred tax assets will not be realized.
 
As of July 3, 2011, the liability for income taxes associated with uncertain tax positions was $21.7 million.  Of this amount, $4.0 million, if recognized, would affect tax expense and would require penalties and interest of $0.6 million, $0.6 million would result in an increase in prepaid assets, and $16.5 million would result in a decrease of deferred tax assets in jurisdictions where the deferred tax assets are currently offset by a full valuation allowance.  Further, the $16.5 million, if realized would result in a $0.5 million decrease of the state deferred tax assets, specifically state net operating losses.
 
The Company strives to resolve open matters with each tax authority at the examination level and could reach agreement with a tax authority at any time. While the Company has accrued for amounts it believes are the expected outcomes, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the financial statements. Furthermore, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The liability is reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations or case law. Management believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations of uncertain tax positions.
 
The Company’s income tax expense for 2011 was reduced by $1.5 million related to an adjustment to a liability for uncertain tax positions as well as expiration of the statutory audit period and was increased by a $1.0 million withholding tax on a dividend from a foreign subsidiary.
 
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 July 3, 2011, 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.
 
 
14

POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
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 would be traded.  The Company carries and values these instruments at their stated principal value, which represents the amount due at maturity less any unamortized discount.
 
The estimated fair values of the Company’s financial instruments were as follows:
 
   
July 3, 2011
 
January 2, 2011
   
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents                                                                                   
 
$
48,763
   
$
48,763
   
$
61,601
   
$
61,601
 
Restricted cash                                                                                   
   
985
     
985
     
930
     
930
 
Long-term debt                                                                                   
                               
3.875% Convertible Subordinated Notes due 2027
 
$
150,000
   
$
139,125
   
$
150,000
   
$
134,070
 
1.875% Convertible Subordinated Notes due 2024
   
56,806
     
58,495
     
55,371
     
57,626
 
 
 
Note 12. Customer Concentrations
 
The Company’s product sales have historically been concentrated in a small number of customers. For the first half of 2011 and 2010, sales to customers that accounted for 10% or more of revenues totaled $168.2 million and $68.2 million, respectively. For the first half of 2011, Team Alliance, one of our North American resellers, Nokia Siemens, and Raycom, one of our European resellers, accounted for approximately 22%, 20%, and 13% of total net sales respectively, and in the first half of 2010, Nokia Siemens represented 26% of sales.
 
As of July 3, 2011, approximately 57% of total accounts receivable related to customers that accounted for 10% or more of the Company’s total revenue during the first half of 2011. As of July 3, 2011, Team Alliance, one of our North American resellers, Nokia Siemens, and Raycom, one of our European resellers, accounted for approximately 27%, 15%, and 15% 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 13. 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 14. 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 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 and the Company also utilizes various resellers in the local regional markets.
 
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.
 
 
15

POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
Note 15. Subsequent Events
 
On July 26, 2011, the Company completed the private placement of $100 million in original principal amount of 2.75% Convertible Senior Subordinated Notes due 2041 (“2.75% Notes”).  The 2.75% Notes accrue interest at an annual rate of 2.75% payable semi-annually.  They are convertible into the Company’s common stock at an initial conversion price of approximately $3.12 per share, subject to adjustment in certain circumstances.  The 2.75% Notes accrete principal at a rate of 5.00% per year compounded semi-annually.  Accreted principal will not accrue interest, will not be eligible for conversion into common stock and will only be payable to holders upon reaching the mandatory repurchase date if the 2.75% Notes are not converted prior to such date.  The 2.75% Notes will mature on July 15, 2041, unless otherwise redeemed, repurchased or converted in accordance with the terms of the indenture governing the 2.75% Notes.
 
The Company may elect to mandatorily convert all or a portion of the 2.75% Notes on or prior to July 15, 2015 if the closing price of the Company’s common stock equals or exceeds 130% of the then applicable conversion price for at least 20 trading days within a 30 consecutive trading day period.
 
Holders of the 2.75% Notes may convert some or all of their notes into shares of the Company common stock at any time prior to the maturity date at an initial conversion rate of approximately 320.3075 shares of common stock per $1,000 of notes.  Holders of the 2.75% Notes may also require the Company to repurchase all or a portion of their notes on July 15, 2018, July 15, 2025 and July 15, 2032 for a repurchase price equal to 100% of the accreted principal amount of the notes, plus accrued and unpaid interest on the outstanding original principal amount of the notes.
 
In conjunction with the private placement of the 2.75% Notes, the Company repurchased $42.6 million in aggregate principal amount of the 1.875% Notes.  In addition, on August 8, 2011, the Company repurchased $4.0 million in aggregate principal amount of the 1.875% Notes outstanding.  After these repurchases, the Company has approximately $11.3 million in principal amount of the 1.875% Notes outstanding.  In accordance with Accounting Standards Codification (“ASC”) 470-10-45, the carrying amount of the notes repurchased was reclassified from current portion of long-term debt to long-term debt in the accompanying consolidated balance sheet as of July 3, 2011.
 
Additionally, the Company utilized approximately $25 million of the net proceeds from the offering to repurchase 11.2 million shares of its common stock.
 
On July 19, 2011, the Company entered into Amendment Number Five to Credit Agreement, Consent and Waiver with Wells Fargo to, among other things obtain the consent of Wells Fargo to the issuance of the 2.75% Notes and the repurchase of the 1.875% Notes.

 
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) of this Quarterly Report on Form 10-Q. 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. Please see “Cautionary Statement Regarding Forward Looking Statements” at the beginning of this report.
 
 
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 of our products.
 
Looking back over the last seven 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, 2009, and 2010 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 eight 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 the Company 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 are 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 Annual Report on Form 10-K for the fiscal year ended January 2, 2011.
 
Accruals for Restructuring and Impairment Charges
 
In the first half of 2011 and 2010, we recorded restructuring and impairment charges of less than $0.1 million and $1.3 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, of this Quarterly Report on Form 10-Q.
 
 
Subsequent Events
 
On July 26, 2011 we completed the private placement of $100 million in original principal amount of 2.75% Convertible Senior Subordinated Notes due 2041 (“2.75% Notes).  The 2.75% Notes accrue interest at an annual rate of 2.75% payable semi-annually.  They are convertible into common stock at an initial conversion price of approximately $3.12 per share, subject to adjustment in certain circumstances.  The 2.75% Notes accrete principal at a rate of 5.00% per year compounded semi-annually.  Accreted principal will not accrue interest, will not be eligible for conversion into common stock and will only be payable to holders upon reaching the mandatory repurchase date if the 2.75% Notes are not converted prior to such date.  The 2.75% Notes will mature on July 15, 2041, unless otherwise redeemed, repurchased or converted in accordance with the terms of the indenture governing the 2.75% Notes.
 
 
We may elect to mandatorily convert all or a portion of the 2.75% Notes on or prior to July 15, 2015 if the closing price of our common stock equals or exceeds 130% of the then applicable conversion price for at least 20 trading days within a 30 consecutive trading day period.
 
Holders of the 2.75% Notes may convert some or all of their notes into shares of our common stock at any time prior to the maturity date at an initial conversion rate of approximately 320.3075 shares of common stock per $1,000 of notes.  Holders of the 2.75% Notes may also require that we repurchase all or a portion of their notes on July 15, 2018, July 15, 2025 and July 15, 2032 for a repurchase price equal to 100% of the accreted principal amount of the notes, plus accrued and unpaid interest on the outstanding original principal amount of the notes.
 
In conjunction with the private placement of the 2.75% Notes, we repurchased $42.6 million in aggregate principal amount of the 1.875% Notes.  In addition, on August 8, 2011, we repurchased $4.0 million in aggregate principal amount of the 1.875% Notes outstanding.  After these repurchases, we have approximately $11.3 million in principal amount of the 1.875% Notes outstanding.  In accordance with Accounting Standards Codification (“ASC”) 470-10-45, the carrying amount of the notes repurchased was reclassified from current portion of long-term debt to long-term debt in the accompanying consolidated balance sheet as of July 3, 2011.
 
Additionally, we utilized approximately $25 million of the net proceeds from the offering to repurchase 11.2 million shares of its common stock.
 
On July 19, 2011, we entered into Amendment Number Five to Credit Agreement, Consent and Waiver with Wells Fargo to, among other things obtain the consent of Wells Fargo to the issuance of the 2.75% Notes and the repurchase of the 1.875% Notes.
 
 
Results of Operations
 
The following table summarizes the Company’s results of operations as a percentage of net sales for the three and six months ended July 3, 2011 and July 4, 2010:
 
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
2011
   
July 4,
2010
   
July 3,
2011
   
July 4,
2010
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales:
                               
Cost of goods
    72.0       70.5       72.8       72.0  
Restructuring and impairment charges
          0.5             0.3  
Total cost of sales
    72.0       71.0       72.8       72.3  
Gross profit
    28.0       29.0       27.2       27.7  
Operating expenses:
                               
Sales and marketing
    4.7       5.8       5.6       6.9  
Research and development
    9.2       10.8       10.5       11.6  
General and administrative
    6.7       7.8       7.6       8.7  
Restructuring and impairment charges
    0.0       0.2       0.0       0.1  
Total operating expenses
    20.6       24.6       23.7       27.3  
Operating income (loss)
    7.4       4.4       3.5       0.4  
Other income (expense), net
    (2.4 )     (3.1 )     (2.2 )     (3.2 )
Income (loss) before income taxes
    5.0       1.3       1.3       (2.8 )
Income tax provision (benefit)
    0.9       1.1       1.3       1.3  
Net income (loss)
    4.1 %     0.2 %     0.0 %     (4.1 )%
 
 
Three Months ended July 3, 2011 and July 4, 2010
 
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  
July 3, 2011
 
July 4, 2010
Wireless network operators and other
  $ 120,780       71 %   $ 80,627       56 %
Original equipment manufacturers
    49,861       29 %     63,953       44 %
Total
  $ 170,641       100 %   $ 144,580       100 %
 
Sales increased by 18% to $170.6 million for the second quarter of 2011, from $144.6 million, for the second quarter of 2010. This increase was due to several factors, including increased demand from our direct operator customers, which increased by approximately 50% for the second quarter of 2011 from the second quarter of 2010. The increase in our direct operators and other direct customer’s business helped to offset the decrease in demand from our original equipment manufacturer customers, which decreased by 22% over the same period. This is consistent with our strategic focus on direct customers.
 
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
 
July 3, 2011
 
July 4, 2010
Antenna systems
 
$
76,046
     
45 
%
 
$
56,713
     
39 
%
Base station systems
   
77,573
     
45 
%
   
77,533
     
54 
%
Coverage systems
   
17,022
     
10 
%
   
10,334
     
%
Total
 
$
170,641
     
100 
%
 
$
144,580
     
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. The increase in antenna systems sales during the second quarter of 2011 as compared with the second quarter of 2010 is due to the growth in demand we experienced from our wireless network operator and other direct customers. The increase in coverage systems business was due to increased project activity during the second quarter of 2011 versus the second quarter of 2010.
 
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
 
July 3, 2011
 
July 4, 2010
Americas
 
$
80,207
     
47 
%
 
$
52,445
     
36 
%
Asia Pacific
   
41,823
     
25 
%
   
48,517
     
34 
%
Europe
   
46,859
     
27 
%
   
34,801
     
24 
%
Other International
   
1,752
     
%
   
8,817
     
%
Total
 
$
170,641
     
100 
%
 
$
144,580
     
100 
 
Revenues increased in the Americas and Europe regions in the second quarter of 2011 as compared to the second quarter of 2010. The increase in both regions is attributable to increases in demand with our wireless network operator customers and other direct customers in both regions. In particular, North American operators have commenced the build out of new 4G networks and Eastern European markets have shown increased demand. The reduction in the Other International region is largely due to reduced sales in the Middle East, which has been impacted by civil unrest in many countries. 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 second quarter of 2010 to those in effect for the second quarter of 2011, 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 second quarter of 2011, sales to Team Alliance, one of our North American resellers, accounted for approximately 28% of our total sales, Nokia Siemens accounted for approximately 16% of our total sales, and sales to Raycom, one of our European resellers, accounted for approximately 15% of our total sales.  For the second quarter of 2010, total sales to Nokia Siemens accounted for approximately 25% of sales and sales to Raycom, one of our European resellers, accounted for approximately 10% 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)
   
July 3, 2011
 
July 4, 2010
Net sales
 
$
170,641
     
100.0
%
 
$
144,580
     
100.0
%
Cost of sales:
                               
Cost of sales
   
122,849
     
72.0
%
   
101,886
     
70.5
%
Restructuring and impairment charges
   
     
%
   
705
     
0.5
%
Total cost of sales
   
122,849
     
72.0
%
   
102,591
     
71.0
%
Gross profit
 
$
47,792
     
28.0
%
 
$
41,989
     
29.0
%
 
Our actual gross profit increased during the second quarter of fiscal 2011, compared to the second quarter of fiscal 2010, primarily as a result of our increased revenues. As a percentage of revenue, our gross profit margin decreased slightly during the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010 primarily from a combination of higher warranty costs and higher manufacturing costs when compared to the prior year period. We did not incur any restructuring and impairment charges during the second quarter of 2011. We incurred $0.7 million of restructuring charges during the second quarter of fiscal 2010 related to severance charges and facility closure charges.
 
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.
 
 
A portion of our coverage solution sales include design, customization, installation and implementation services and the supply of coverage solutions products. The Company recognizes revenue using the percentage-of-completion method for these coverage solution projects.  Due to the nature of these types of projects, cost estimates can vary significantly, and the actual cost of such projects can fluctuate significantly during the life of a project. Such fluctuations can have a negative impact on our gross profit margins and profitability, decreasing revenues and adversely impacting our business, financial condition and results of operations, which occurred in the first quarter of 2011.
 
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, 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)
Operating Expenses  
July 3, 2011
 
July 4, 2010
Sales and marketing
 
$
8,015
     
4.7 
%
 
$
8,362
     
5.8 
%
Research and development
   
15,748
     
9.2 
%
   
15,685
     
10.8 
%
General and administrative
   
11,332
     
6.7 
%
   
11,302
     
7.8 
%
Restructuring and impairment charges
   
41
     
0.0 
%
   
214
     
0.2 
%
Total operating expenses
 
$
35,136
     
20.6 
%
 
$
35,563
     
24.6 
%
 
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 $0.3 million, or 4.1%, during the second quarter of 2011 as compared to the second quarter of 2010, primarily due to lower bad debt expense.
 
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. Total research and development expenses remained consistent during the second quarter of 2011 as compared to the second quarter of 2010. In addition, non-cash equity based compensation expense pursuant to ASC Topic 718 increased by $0.3 million in the second quarter of 2011 as compared to the second quarter of 2010. The increase in equity based compensation expense is due primarily to options granted in the fourth quarter of 2010, at prices significantly higher than prior period grants.
 
General and administrative expenses consist primarily of salaries and other expenses for management, finance, information systems, legal fees, facilities and human resources. Total general and administrative expenses remained consistent during the second quarter of 2011 as compared to the second quarter of 2010.
 
Restructuring charges of less than $0.1 million were recorded in the second quarter of fiscal 2011, primarily for severance costs in the U.S., Europe and Asia Pacific regions. Restructuring charges of $0.2 million were recorded in the second quarter of fiscal 2010, primarily for severance costs in the Europe and Asia Pacific regions.
 
Other Income (Expense), net
 
The following table presents an analysis of other income (expense), net:
 
   
Three Months Ended
(in thousands)
   
July 3, 2011
 
July 4, 2010
Interest income
 
$
54
     
0.0
%
 
$
46
     
0.0
%
Interest expense
   
(2,894
)
   
(1.7
)%
   
(3,486
)
   
(2.4
)%
Foreign currency gain (loss), net
   
(1,475
)
   
(0.8
)%
   
(1,784
)
   
(1.2
)%
Gain on repurchase of convertible debt
   
     
%
   
85
     
0.0
%
Other income, net
   
160
     
0.1
%
   
575
     
0.5
%
Other income (expense), net
 
$
(4,155
)
   
(2.4
)%
 
$
(4,564
)
   
(3.1
)%
 
Interest income remained consistent during the second quarter of 2011 compared to the second quarter of 2010 due to the historically low interest rates on cash balances.  Interest expense decreased by $0.6 million during the second quarter of fiscal 2011 as compared to the second quarter of 2010 primarily due to the reduction of approximately $67 million of our 1.875% Notes from the second quarter of 2010 to the second quarter of 2011. Included in interest expense are non-cash charges related to the amortization of debt issuance costs and debt discount of $1.0 and $1.3 million for the second quarters of 2011 and 2010, respectively. Additionally, we recognized a net foreign currency translation loss of $1.5 million in the second quarter of 2011, primarily due to the fluctuations of the U.S. Dollar versus the Euro and Chinese RMB, and several other currencies, as compared to the second quarter of 2010 when we recognized a foreign currency translation loss of $1.8 million.
 
Income Tax Provision
 
Our effective tax rate for the second quarter of 2011 was an expense of approximately 17.4% of our pre-tax income of $8.5 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 or increase in the valuation allowance. Accordingly, the tax expense consisted primarily of taxes from operations in foreign jurisdictions, primarily China and India.  We expect our tax rate to continue to fluctuate based on the percentage of income earned in each jurisdiction. In addition, our income tax expense was reduced by $1.5 million related to an adjustment to a liability for uncertain tax positions as well as expiration of the statutory audit period.  This expense reduction was partially offset by a $1.0 million withholding tax on a dividend from a foreign subsidiary.
 
Net Income
 
The following table presents a reconciliation of operating income to net income:
 
   
Three Months Ended
(in thousands)
   
July 3, 2011
 
July 4, 2010
Operating income
 
$
12,656
   
$
6,426
 
Other income (expense), net
   
(4,155
)
   
(4,564
)
Income before income taxes
   
8,501
     
1,862
 
Income tax provision (benefit) 
   
1,480
     
1,638
 
Net income
 
$
7,021
   
$
224
 
 
Our net income for the second quarter of 2011 was $7.0 million, compared to net income of $0.2 million for the second quarter of 2010. The higher net income in the second quarter of 2011 was largely due to our increased revenue during that period.
 
Six Months ended July 3, 2011 and July 4, 2010
 
Net Sales
 
The following table presents a further analysis of our sales based upon our various customer groups:
 
   
Six Months Ended
(in thousands)
Customer Group
 
July 3, 2011
 
July 4, 2010
Wireless network operators and other
 
$
202,291
     
66 
%
 
$
132,013
     
51 
%
Original equipment manufacturers
   
104,974
     
34 
%
   
127,040
     
49 
%
Total
 
$
307,265
     
100 
%
 
$
259,053
     
100 
 
Sales increased by 19% to $307.3 million for the first half of 2011, from $259.1 million, for the first half of 2010.  This increase was due to an increase in our direct sales to wireless network operators and others to improve both the bandwidth and the technology of their networks. This was offset in part by lower demand from our original equipment manufacturer customers. The global recession and associated tight credit markets impacted our customers’ demand for products throughout the first half of 2010.
 
The following table presents a further analysis of our sales based upon our various product groups:
 
   
Six Months Ended
(in thousands)
Wireless Communications Product Group
 
July 3, 2011
 
July 4, 2010
Antenna systems
 
$
140,991
     
45 
%
 
$
96,134
     
37 
%
Base station systems
   
136,656
     
45 
%
   
142,750
     
55 
%
Coverage systems
   
29,618
     
10 
%
   
20,169
     
%
Total
 
$
307,265
     
100 
%
 
$
259,053
     
100 
 
The increase in antenna systems sales for the first six months of 2011 compared to the first six months of 2010 is primarily due to growth in demand we experienced from our wireless network operator and other direct customers, which is partially driven by initial developments of 4G networks, primarily in North America. This was partially offset by the decrease in base station systems sales during the same period and the corresponding increase in coverage solution sales during the same period.
 
The following table presents an analysis of our net sales based upon the geographic area to which a product was shipped:
 
   
Six Months Ended
(in thousands)
Geographic Area
 
July 3, 2011
 
July 4, 2010
Americas
 
$
134,468
     
44 
%
 
$
86,619
     
33 
%
Asia Pacific
   
85,956
     
28 
%
   
94,186
     
37 
%
Europe
   
76,871
     
25 
%
   
66,988
     
26 
%
Other International
   
9,970
     
%
   
11,260
     
%
Total
 
$
307,265
     
100 
%
 
$
259,053
     
100 
 
Revenues increased in the Americas region for the first half of 2011 due primarily to increased demand from wireless network operators embarking on increased infrastructure spending plans. 2010 spending levels were negatively impacted by global macroeconomic issues. The changes in the other regions largely offset each other for the year-to-year comparison. 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 half of 2010 to those in effect for the first half of 2011, 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 first half of 2011, total sales to Team Alliance, one of our North American resellers, accounted for approximately 22% of sales, total sales to Nokia Siemens accounted for approximately 20% of sales, and total sales to Raycom, one of our European resellers, accounted for approximately 13% of sales.  For the first half of 2010, total sales to Nokia Siemens accounted for approximately 26% of sales for the period.
 
 
Cost of Sales and Gross Profit
 
The following table presents an analysis of our gross profit:
 
   
Six Months Ended
(in thousands)
   
July 3, 2011
 
July 4, 2010
Net sales
 
$
307,265
     
100.0 
%
 
$
259,053
     
100 .0
%
Cost of sales:
                               
Cost of sales
   
223,613
     
72.8 
%
   
186,527
     
72.0 
%
Restructuring and impairment charges
   
     
— 
%
   
726
     
0.3 
%
Total cost of sales
   
223,613
     
72.8 
%
   
187,253
     
72.3 
%
Gross profit
 
$
83,652
     
27.2 
%
 
$
71,800
     
27.7 
%
 
Our actual total gross profit increased during the first half of fiscal 2011 compared with the first half of fiscal 2010, primarily as a result of our increased revenue. As a percentage of revenue, our gross profit margin decreased slightly for the first six months of 2011 compared to the first six months of 2010 due primarily to higher warranty costs and increased manufacturing costs. We did not incur restructuring and impairment charges during the first half of fiscal 2011. We incurred approximately $0.7 million of restructuring and impairment charges during the first half of fiscal 2010 related to severance and facility closure charges.
 
Operating Expenses
 
The following table presents a breakdown of our operating expenses by functional category and as a percentage of net sales:
 
   
Six Months Ended
(in thousands)
Operating Expenses  
July 3, 2011
 
July 4, 2010
Sales and marketing
 
$
17,151
     
5.6 
%
 
$
17,758
     
6.9 
%
Research and development
   
32,351
     
10.5 
%
   
29,961
     
11.6 
%
General and administrative
   
23,323
     
7.6 
%
   
22,576
     
8.7 
%
Restructuring and impairment charges
   
42
     
0.0 
%
   
560
     
0.1 
%
Total operating expenses
 
$
72,867
     
23.7 
%
 
$
70,855
     
27.3 
%
 
Sales and marketing expenses decreased by $0.6 million, or 3.4%, during the first half of 2011 as compared with the first half of 2010. The decrease resulted primarily from lower bad debt expense as well as decreased trade show expenditures.
 
Research and development expenses increased by $2.4 million, or 8.0%, during the first half of 2011 as compared with the first half of 2010, primarily due to higher materials costs used in research and development activities. In addition, non-cash equity based compensation expense pursuant to ASC Topic 718 increased by $0.5 million in the first half of 2011 compared to the first half of 2010.
 
General and administrative expenses increased by $0.7 million, or 3.3%, during the first half of 2011 as compared with the first half of 2010. This increase was due to the increase of $1.3 million of non-cash equity based compensation expense offset in part by lower personnel related costs.
 
The increase in equity based compensation expense is due primarily to options granted in the fourth quarter of 2010, at prices significantly higher than prior period grants.
 
Restructuring charges of less than $0.1 million were recorded in the first half of 2011, primarily for severance costs compared with charges of $0.6 million for the first half of 2010, primarily for severance costs.
 
 
Other Income (Expense), net
 
The following table presents an analysis of other income (expense), net:
 
   
Six Months Ended
(in thousands)
   
July 3, 2011
 
July 4, 2010
Interest income
 
$
113
     
0.0
%
 
$
90
     
0.0
%
Interest expense
   
(5,780
)
   
(1.9
)%
   
(7,343
)
   
(2.8
)%
Foreign currency gain (loss), net
   
(2,061
)
   
(0.6
)%
   
(2,481
)
   
(0.9
)%
Gain on repurchase of convertible debt
   
     
%
   
85
     
0.0
%
Gain on exchange of convertible debt
   
     
%
   
483
     
0.2
%
Other income, net
   
892
     
0.3
%
   
1,029
     
0.5
%
Other income (expense), net
 
$
(6,836
)
   
(2.2
)%
 
$
(8,137
)
   
(3.2
)%
 
Interest income remained consistent during the first half of 2011 compared to the first half of 2010 due to our cash balances remaining consistent and the interest rates on such balances remaining consistent.  Interest expense decreased by $1.6 million during the first half of fiscal 2011 as compared to the first half of 2010 primarily due to the reduction of approximately $67 million of our outstanding 1.875% Notes from the first half of 2010 to the first half of 2011. Included in interest expense are non-cash charges related to the amortization of debt issuance costs and debt discount of $2.0 and $2.9 million for the first halves of 2011 and 2010, respectively. Additionally, we recognized a net foreign currency loss of $2.1 million in the first half of 2011, primarily due to the fluctuations of the U.S. Dollar versus several other currencies, primarily the Chinese RMB, as compared to the first half of 2010 when we recognized a foreign currency loss of $2.5 million. The net gain on repurchase of convertible debt of $0.1 million was realized on the repurchase of $3.0 million aggregate par value long term convertible debt during the second quarter of 2010. The gain on exchange of convertible debt of $0.5 million was realized in the exchange of $60.0 million aggregate par value of long term convertible debt during the first quarter of 2010.
 
Income Tax Provision
 
Our effective tax rate for the first half of 2011 was an expense of approximately 98.8% of our pre-tax income of $3.9 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 or increase in the valuation allowance. For the first half of 2010, we recorded an income tax expense from operations in certain foreign jurisdictions, primarily China, and tax expense associated with uncertain tax positions.  We expect our effective tax rate to continue to fluctuate based on the percentage of income earned in each tax jurisdiction.  In addition, our income tax expense was reduced by $1.5 million related to an adjustment to a liability for uncertain tax positions as well as expiration of the statutory audit period.  This expense reduction was partially offset by a $1.0 million withholding tax on a dividend from a foreign subsidiary.
 
Net income (loss)
 
The folowing table presents a reconciliation of operating (loss) to net loss:
 
   
Six Months Ended
(in thousands)
   
July 3, 2011
 
July 4, 2010
Operating income
 
$
10,785
   
$
945
 
Other income (expense), net
   
(6,836
)
   
(8,137
)
Income (loss) before income taxes
   
3,949
     
(7,192
)
Income tax provision