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EXCEL - IDEA: XBRL DOCUMENT - POWERWAVE TECHNOLOGIES INCFinancial_Report.xls
EX-31.2 - CFO CERTIFICATION OF PERIODIC REPORT - POWERWAVE TECHNOLOGIES INCq3_11ex31-2.htm
EX-32.2 - CFO CERTIFICATION Q3 2011 - POWERWAVE TECHNOLOGIES INCq3_11ex32-2.htm
EX-31.1 - CEO CERTIFICATION OF PERIODIC REPORT - POWERWAVE TECHNOLOGIES INCq3_11ex31-1.htm
EX-32.1 - CEO CERTIFICATION Q3 2011 - POWERWAVE TECHNOLOGIES INCq3_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 October 2, 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 November 3, 2011, the registrant had 31,685,554 shares of Common Stock outstanding.

 
 

 
 
POWERWAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED OCTOBER 2, 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;
 
·  
a reduction in our sales due to our strategic focus on growing sales of higher margin products;
 
·  
significant fluctuations in sales and operating results from quarter to quarter;
 
·  
continued or increased economic uncertainty resulting from the recent economic recession and credit tightening;
 
·  
reductions in demand for our products by certain customers;
 
·  
our dependence upon single sources or limited sources for key components and products;
 
·  
our potential need for additional capital in the future and the possibility that additional financing may not be available on favorable terms or at all;
 
·  
our potential failure to develop products that are of adequate quality and reliability, which could negatively impact our ability to sell our products and could expose us to significant liabilities;
 
·  
potential unexpected cost increases in coverage systems projects;
 
·  
financial difficulties of our key customers or suppliers;
 
·  
unanticipated restructuring costs and the need to undertake restructuring actions;
 
·  
increases in commodity and energy costs;
 
·  
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;
 
·  
future additions to, or consolidations of manufacturing operations, which may present economic risks;
 
·  
risks related to future acquisitions or strategic alliances;
 
·  
our ability to enhance our existing products or develop new products that are sufficiently manufacturable and meet our customers’ needs and requirements;
 
·  
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;
 
·  
delays in forecasted sales as a result of our lengthy initial sales cycle;
 
·  
our ability to protect our intellectual property and third party claims of intellectual property infringement;
 
·  
the nature and complexity of regulatory requirements that apply to us, and our ability to obtain or maintain any required regulatory approvals;
 
·  
the competitiveness of our industry, which is characterized by rapid technological change;
 
·  
potential failures in our information management systems;
 
·  
variability in our quarterly and annual effective tax rate;
 
·  
potential delisting from the NASDAQ Global Select Market
 
·  
volatility with respect to the price of our Common Stock
 
·  
potential decreases in the price of our Common Stock due to the issuance of Common Stock upon conversion of our outstanding convertible instruments;
 
·  
defensive provisions contained in our charter and bylaws; 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)

   
October 2,
2011
 
January 2,
2011
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
45,619
   
$
61,601
 
Restricted cash
   
931
     
930
 
Accounts receivable, net of allowance for sales returns and doubtful accounts of $4,913 and $4,595, respectively
   
147,920
     
186,960
 
Inventories
   
84,484
     
50,417
 
Prepaid expenses and other current assets
   
48,728
     
39,236
 
Deferred income taxes
   
6,108
     
6,331
 
Total current assets
   
333,790
     
345,475
 
Property, plant and equipment, net
   
72,474
     
76,276
 
Other assets
   
6,451
     
3,833
 
TOTAL ASSETS
 
$
412,715
   
$
425,584
 
                 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
100,669
   
$
112,906
 
Accrued payroll and employee benefits
   
12,017
     
14,237
 
Accrued restructuring costs
   
300
     
749
 
Accrued expenses and other current liabilities
   
27,909
     
30,453
 
Current portion of long term debt
   
11,228
     
55,371
 
Total current liabilities
   
152,123
     
213,716
 
Long-term debt
   
250,890
     
150,000
 
Other liabilities
   
563
     
589
 
Total liabilities
   
403,576
     
364,305
 
Commitments and contingencies (Notes 8 and 9)
               
Shareholders’ equity:
               
Preferred Stock, $0.0001 par value, 5,000,000 shares authorized and no shares issued or outstanding
   
     
 
Common Stock, $0.0001 par value, 100,000,000 shares authorized, 31,682,265 and 33,693,758 shares issued and outstanding, respectively
   
865,103
     
882,720
 
Accumulated other comprehensive income
   
10,625
     
10,110
 
Accumulated deficit
   
(866,589
)
   
(831,551
)
Net shareholders’ equity
   
9,139
     
61,279
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
412,715
   
$
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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Net sales
  $ 77,078     $ 156,813     $ 384,343     $ 415,866  
Cost of sales:
                               
Cost of goods
    71,282       109,608       294,895       296,135  
Restructuring and impairment charges
          1,175             1,901  
Total cost of sales
    71,282       110,783       294,895       298,036  
Gross profit
    5,796       46,030       89,448       117,830  
Operating expenses:
                               
Sales and marketing
    7,544       7,315       24,695       25,073  
Research and development
    15,315       15,662       47,666       45,623  
General and administrative
    11,597       11,741       34,920       34,316  
Restructuring and impairment charges
    147       312       189       872  
Total operating expenses
    34,603       35,030       107,470       105,884  
Operating income (loss)
    (28,807 )     11,000       (18,022 )     11,946  
Other (expense), net
    (6,435 )     (1,025 )     (13,271 )     (9,163 )
Income (loss) before income taxes
    (35,242 )     9,975       (31,293 )     2,783  
Income tax provision (benefit)
    (158 )     2,041       3,745       5,442  
Net income (loss)
  $ (35,084 )   $ 7,934     $ (35,038 )   $ (2,659 )
Basic earnings (loss) per share:
  $ (1.09 )   $ 0.30     $ (1.05 )   $ (0.10 )
Diluted earnings (loss) per share:
  $ (1.09 )   $ 0.24     $ (1.05 )   $ (0.10 )
Shares used in the computation of earnings (loss) per share:
                               
Basic
    32,189       26,583       33,265       26,530  
Diluted
    32,189       34,260       33,265       26,530  
















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


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

                         
   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Net income (loss)
  $ (35,084 )   $ 7,934     $ (35,038 )   $ (2,659 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustments, net of income taxes
    (4,581 )     4,164       515       (121 )
Comprehensive income (loss)
  $ (39,665 )   $ 12,098     $ (34,523 )   $ (2,780 )


 
























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


POWERWAVE TECHNOLOGIES, INC.
 
(Unaudited)
(In thousands)
   
Nine Months Ended
   
October 2,
2011
 
October 3,
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
(35,038
)
 
$
(2,659
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation
   
10,649
     
13,428
 
Amortization
   
3,582
     
4,171
 
Non-cash restructuring and impairment charges
   
189
     
2,773
 
Provision for sales returns and doubtful accounts
   
908
     
1,080
 
Provision for excess and obsolete inventories
   
3,533
     
6,829
 
Deferred taxes
   
223
     
 
Compensation costs related to stock-based awards
   
5,768
     
2,406
 
Gain on repurchase of convertible debt
   
874
     
(85
)
Gain on exchange of convertible debt
   
     
(483
)
Gain on disposal of property, plant and equipment
   
(342
)
   
(6
)
Changes in operating assets and liabilities:
               
Accounts receivable
   
39,653
     
(13,607
)
Inventories
   
(37,825
)
   
(1,865
)
Prepaid expenses and other current assets
   
(10,244
)
   
(13,803
)
Accounts payable
   
(13,236
)
   
11,483
 
Accrued expenses and other current liabilities
   
(5,183
)
   
3,133
 
Other non-current assets
   
(8
)
   
17
 
Other non-current liabilities
   
(17
)
   
(85
)
Net cash provided by (used in) operating activities                                                                                                
   
(36,514
)
   
12,727
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
   
(5,804
)
   
(2,854
)
Restricted cash
   
(1
)
   
1,659
 
Proceeds from the sale of property, plant and equipment
   
357
     
266
 
Net cash used in investing activities                                                                                                
   
(5,448
)
   
(929
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuance of long-term debt
   
100,000
     
 
Debt issuance costs
   
(3,545
)
   
(1,263
)
Retirement of long-term debt
   
(46,780
)
   
(2,685
)
Proceeds from stock-based compensation arrangements
   
1,630
     
810
 
Repurchase of common stock
   
(25,015
)
   
(18
)
Net cash provided by (used) in financing activities                                                                                                
   
26,290
     
(3,156
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
   
(310
)
   
964
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
(15,982
)
   
9,606
 
CASH AND CASH EQUIVALENTS, beginning of period
   
61,601
     
60,439
 
CASH AND CASH EQUIVALENTS, end of period
 
$
45,619
   
$
70,045
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for:
               
Interest expense
 
$
3,960
   
$
7,481
 
Income taxes
 
$
8,195
   
$
3,325
 
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
               
Unpaid purchases of property and equipment
 
$
1,243
   
$
203
 
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” “we,” “us” or “our”) 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.
 
Reverse Stock Split and Authorized Share Reduction
 
On October 27, 2011, the Company’s shareholders approved an amendment to Powerwave’s Amended and Restated Certificate of Incorporation to (i) effect a reverse stock split of the Company’s issued and outstanding shares of Common Stock at a ratio of 1-for-5 (the “Reverse Stock Split”) and (ii) to reduce the number of authorized shares of Common Stock from 250,000,000 to 100,000,000 (the “Authorized Share Reduction”).  The Reverse Stock Split and the Authorized Share Reduction were effective on October 28, 2011. Pursuant to the Reverse Stock Split, every five shares of issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock without any change in the par value per share. This reduced the number of outstanding shares of Common Stock from approximately 158.4 million shares to approximately 31.7 million shares. The Company’s Common Shares commenced trading on a post-split basis on October 31, 2011 on the NASDAQ Global Select Market exchange under the symbol “PWAVD”.  All share data has been retroactively adjusted to give effect to the Reverse Stock Split.
 
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.
 
 
8

POWERWAVE TECHNOLOGIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in thousands, except per share data)
 
 
 
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.
 
Stock-based compensation expense was recognized as follows in the consolidated statement of operations:
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Cost of sales
  $ 192     $ 89     $ 601     $ 303  
Sales and marketing expenses
    165       34       449       121  
Research and development expenses
    342       134       1,191       451  
General and administrative expenses
    1,126       408       3,527       1,531  
Decrease to operating income before income taxes
    1,825       665       5,768       2,406  
Income tax benefit recognized
                       
Impact on net income (loss)
  $ 1,825     $ 665     $ 5,768     $ 2,406  
Impact to net income (loss) per share:
                               
Basic
  $ 0.06     $ 0.03     $ 0.17     $ 0.09  
Diluted
  $ 0.06     $ 0.02     $ 0.17     $ 0.09  

 
As of October 2, 2011, unrecognized compensation expense related to the unvested portion of the Company’s stock-based awards and employee stock purchase plan was approximately $6.0 million, net of estimated forfeitures of $0.7 million, which is expected to be recognized over a weighted-average period of 1.2 years.
 
The Black-Scholes-Merton option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation methods require the input of highly subjective assumptions including the weighted average risk-free interest rate, the expected life, and the expected stock price volatility. The weighted average risk-free interest rate was determined based upon actual U.S. treasury rates over a one to ten year horizon and the actual life of options granted. The Company grants options with either a five year or ten year life. The expected life is based on the Company’s actual historical option exercise experience. For the employee stock purchase plan, the actual life of 6 months is utilized in this calculation. The expected life was determined based upon actual option grant lives over a 10 year period. The Company has utilized various market sources to calculate the implied volatility factor utilized in the Black-Scholes-Merton option valuation model. These included the implied volatility utilized in the pricing of options on the Company’s Common Stock as well as the implied volatility utilized in determining market prices of the Company’s outstanding convertible notes. Using the Black-Scholes-Merton option valuation model, the estimated weighted average fair value of options granted during the third quarter and first nine months of fiscal year 2011 was $5.45 and $10.64, respectively, and for the third quarter and first nine months of 2010 was $5.16 per share and $3.40 per share, respectively.
 
The fair value of options granted under the Company’s stock incentive plans during the third quarter and first nine months 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
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Weighted average risk-free interest rate 
    1.1 %     1.2 %     2.0 %     2.5 %
Weighted average expected life (in years)
    3.6       3.4       3.6       3.4  
Expected stock volatility
    68 %     62.0 %     75 %     68.0 %
Dividend yield
 
None
   
None
   
None
   
None
 
 
Note 3. Supplemental Balance Sheet Information
 
Prepaid Expense and Other Current Assets
 
   
October 2,
2011
 
January 2,
2011
Prepaid expense and other current assets
   
15,300
     
9,634
 
Costs and estimated earnings in excess of billings
   
33,428
     
29,602
 
Total prepaid expense and other current assets
 
$
48,728
   
$
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:
 
   
October 2,
2011
 
January 2,
2011
Parts and components
 
$
26,968
   
$
22,165
 
Work-in-process
   
3,762
     
5,052
 
Finished goods
   
53,754
     
23,200
 
Total inventories
 
$
84,484
   
$
50,417
 
 
Inventories are net of an allowance for excess and obsolete inventory of approximately $14.9 million and $21.7 million as of October 2, 2011 and January 2, 2011, respectively.
 
Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities are as follows:
 
   
October 2,
2011
 
January 2,
2011
Accrued warranty costs
 
$
8,060
   
$
7,029
 
Other accrued expenses and other current liabilities
   
19,849
     
23,424
 
Total accrued expenses and other current liabilities
 
$
27,909
   
$
30,453
 
 
Warranty
 
Accrued warranty costs are as follows:
 
   
Nine Months Ended
Description
 
October 2,
2011
 
October 3,
2010
Warranty reserve beginning balance
 
$
7,029
   
$
7,038
 
Reductions for warranty costs incurred
   
(9,532
)
   
(5,201
)
Warranty accrual related to current period sales
   
10,563
     
5,577
 
Warranty reserve ending balance
 
$
8,060
   
$
7,414
 
 
Note 4. Financing Arrangements and Long-Term Debt
 
Long-term debt
 
   
October 2,
2011
 
January 2,
2011
3.875% Convertible Subordinated Notes due 2027
 
$
150,000
   
$
150,000
 
1.875% Convertible Subordinated Notes due 2024
   
11,301
     
57,916
 
2.750% Convertible Subordinated Notes due 2041
   
100,890
     
 
Subtotal
   
262,191
     
207,916
 
Less unamortized discount
   
(73
)
   
(2,545
)
Subtotal
   
262,118
     
205,371
 
Less: current portion of long-term debt                                                                              
   
(11,228
)
   
(55,371
)
Total long-term debt
 
$
250,890
   
$
150,000
 
 
 
10

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

 
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 (the “2.75% Notes).  The 2.75% Notes accrue interest at an annual rate of 2.75% per annum, payable semi-annually.  They are convertible into Common Stock at an initial conversion price of approximately $15.61 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, in our sole discretion, to 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 64.0615 shares of common stock per $1,000 in principal and interest of the 2.75% 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 2.75% Notes, plus accrued and unpaid interest on the outstanding original principal amount of the 2.75% Notes.
 
In connection with the private placement of the 2.75% Notes, we repurchased $42.6 million in aggregate principal amount of our 1.875% Convertible Subordinated Notes due 2024 (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 such repurchases, we have approximately $11.3 million in principal amount of the 1.875% Notes outstanding as of October 2, 2011.
 
Additionally, we utilized approximately $25 million of the net proceeds from the private placement of the 2.75% Notes to repurchase 2.2 million shares of our Common Stock.
 
We account for 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:
 
   
October 2,
2011
   
January 2,
2011
 
Carrying amount of equity component
 
$
49,703
   
$
49,703
 
                 
Principal amount of the 1.875% Notes
   
11,301
     
57,916
 
Unamortized discount of liability component
   
(73
   
   (2,545
)
Net carrying amount of liability component
 
$
11,228
   
$
55,371
 
 
 
   
Three Months Ended
 
Nine Months Ended
   
October 2,
2011
 
October 3,
 2010
 
October 2,
2011
 
October 3,
 2010
Effective interest rate on liability component
   
7.07
%
   
7.07
%
   
7.07
%
   
7.07
%
Contractual interest expense recognized
 
$
119
   
$
318
   
$
662
   
$
1,165
 
Amortization of the discount on liability component
 
$
372
   
$
805
   
$
1,807
   
$
2,887
 
 
The unamortized discount will be recognized using the effective interest method through November 15, 2011.  As of October 2, 2011, the if-converted value of the 1.875% Notes did not exceed the principal amount.
 
 
11

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

 
Credit Agreement
 
We entered into a Credit Agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”) on April 3, 2009 (“the Credit Agreement”).  On January 31, 2011, we 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, we 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 our borrowing base as defined in the Credit Agreement. The Credit Agreement is secured by a first priority security interest on a majority of our 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 line of credit falls below $15.0 million.  As of October 2, 2011, we are in compliance with all financial covenants and had approximately $28.5 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.
 
A summary of the activity affecting its accrued restructuring liability related to the 2009 Restructuring Plan for the first nine months of 2011 is as follows:
 
   
Workforce Reductions
 
Facility Closures
 & Equipment Write-downs
 
Total
Balance at January 2, 2011
 
$
596
   
$
   
$
596
 
Amounts accrued
   
309
     
(30
)
   
279
 
Amounts paid/incurred
   
(613
)
   
30
     
(583
)
Effects of exchange rates
   
8
     
     
8
 
Balance at October 2, 2011
 
$
300
     
     
300
 
 
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.  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.
 
 
12

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


Note 6. Other Income (Expense), Net
 
The components of other income (expense), net, are as follows:
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
 2010
   
October 2,
2011
   
October 3,
 2010
 
Interest income
  $ 55     $ 47     $ 168     $ 137  
Interest expense
    (3,764 )     (3,450 )     (9,544 )     (10,793 )
Foreign currency gain (loss), net
    (2,158 )     1,970       (4,219 )     (510 )
Gain (loss) on repurchase of convertible debt
    (874 )           (874 )     85  
Gain on exchange of convertible debt
                      483  
Other income, net
    306       408       1,198       1,435  
Total
  $ (6,435 )   $ (1,025 )   $ (13,271 )   $ (9,163 )
 
Other income (expense), net, for the three and nine months ended October 2, 2011 includes a loss of $0.9 million related to the repurchase of $46.6 million in par value of the Company’s 1.875% Notes.
 
Other income (expense), net, for the nine months ended October 3, 2010 includes a gain of approximately $0.1 million on the repurchase of $3.0 million in par value of the Company’s 1.875% Notes and also includes a gain of approximately $0.5 million related to the exchange of approximately $60 million in par value of the Company’s 1.875% Notes for 1.875% Convertible Senior Subordinated 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 9,359,987 and 6,702,357 related to the Company’s stock option programs and convertible debt have been excluded from diluted weighted average common shares for the three and nine months ended October 2, 2011, respectively, as the effect would be anti-dilutive.  For the three and nine months ended October 3, 2010, potential common shares of 4,668,609 and 12,324,009, respectively, related to the Company’s stock option programs and convertible debt have been excluded from diluted weighted average common shares, as the effect would be anti-dilutive.
 
The following details the calculation of basic and diluted loss per share:
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
 2010
   
October 2,
2011
   
October 3,
 2010
 
Basic:
                       
Net income (loss)
  $ (35,084 )   $ 7,934     $ (35,038 )   $ (2,659 )
Weighted average common shares
    32,189       26,583       33,265       26,530  
Basic earnings (loss) per share
  $ (1.09 )   $ 0.30     $ (1.05 )   $ (0.10 )
Diluted:
                               
Net income (loss)
  $ (35,084 )   $ 7,934     $ (35,038 )   $ (2,659 )
Interest expense of convertible debt, net of tax
          362              
Net income (loss), as adjusted
  $ (35,084 )   $ 8,296     $ (35,038 )   $ (2,659 )
Weighted average common shares
    32,189       26,583       33,265       26,530  
Potential common shares
          7,677              
Weighted average common shares, as adjusted
    32,189       34,260       33,265       26,530  
Diluted income (loss) per share
  $ (1.09 )   $ 0.24     $ (1.05 )   $ (0.10 )
 
 
13

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


Note 8. Commitments and Contingencies
 
The Company is subject to legal proceedings and claims in the normal course of business.  Although the outcome of legal proceedings is inherently uncertain, the Company anticipates that it will be able to resolve these matters in a manner that will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 
Note 9. Contractual Guarantees and Indemnities
 
During the normal course of its business, the Company makes certain contractual guarantees and indemnities pursuant to which the Company may be required to make future payments under specific circumstances. The Company has not recorded any liability for these contractual guarantees and indemnities in the accompanying consolidated financial statements. A description of significant contractual guarantees and indemnities existing as of October 2, 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.
 
 
14

 
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 October 2, 2011, the liability for income taxes associated with uncertain tax positions decreased from $23.1 million at January 2, 2011 to $6.0 million.  The majority of the decrease resulted from the Company amending its originally filed tax reporting positions for fiscal years 2009 and 2010 in the amounts of $7.3 million and $8.4 million, respectively.  The net operating loss carry forward amount was reduced to reverse the uncertain tax position for fiscal year 2009.  The uncertain tax position for fiscal year 2010 was reported on the originally filed U.S. federal income tax return so there is no longer an uncertain tax position.  Accordingly, the Company reduced its deferred tax assets for which the Company has recorded a valuation allowance so there was no impact to the Company’s tax expense.  Of the Company’s remaining liability for income taxes associated with uncertain tax positions of $6.0 million, $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 $0.8 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.  
 
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 October 2, 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.
 
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 or plus any accreted premium.

 
15

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



 
The estimated fair values of the Company’s financial instruments were as follows:
 
   
October 2, 2011
 
January 2, 2011
   
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents                                                                                   
 
$
45,619
   
$
45,619
   
$
61,601
   
$
61,601
 
Restricted cash                                                                                   
   
931
     
931
     
930
     
930
 
Long-term debt:
                               
3.875% Convertible Subordinated Notes due 2027
 
$
150,000
   
$
124,125
   
$
150,000
   
$
134,070
 
1.875% Convertible Subordinated Notes due 2024
   
11,228
     
11,329
     
55,371
     
57,626
 
2.750% Convertible Subordinated Notes due 2041
   
100,890
     
90,000
     
     
 
 
Note 12. Customer Concentrations
 
The Company’s product sales have historically been concentrated in a small number of customers. For the first nine months of fiscal 2011 and 2010, sales to customers that accounted for 10% or more of revenues totaled $186.5 million and $142.8 million, respectively. For the first nine months of 2011, Team Alliance, one of our North American resellers, Nokia Siemens, and Raycom, one of our European resellers, accounted for approximately 18%, 17%, and 13% of total net sales respectively, and in the first nine months of 2010, Nokia Siemens and Raycom accounted for approximately 24% and 10% of sales respectively.
 
As of October 2, 2011, approximately 52% of total accounts receivable related to customers that accounted for 10% or more of the Company’s total revenue during the first nine months of 2011. As of October 2, 2011, Team Alliance, Raycom, and Nokia Siemens, accounted for approximately 34%, 14%, and 4% 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 can 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.
 
Note 15. Subsequent Event
 
Sale Leaseback
 
On October 17, 2011, the Company entered into an Agreement of Purchase and Sale (the “Agreement”) with AG Net Lease Acquisition Corp. (the “Purchaser”) pursuant to which the Company sold to the Purchaser all of its interest in its current corporate headquarters facility located at 1761-1801 E. St. Andrew Place, Santa Ana, California, which is comprised of a building containing approximately 367,045 square feet, the underlying land, and an adjacent vacant 2.87 acre parcel of land  (collectively, the “Real Estate”).  The aggregate consideration paid by the Purchaser to the Company pursuant to the Agreement was $49,550,000 in cash.  The transaction was completed on October 21, 2011. 
 
In connection with the closing of the sale of the Real Estate, the Company entered into a Lease Agreement with AGNL Antenna L.P. with respect to the Real Estate (the “Lease”).  The effective date of the Lease was October 21, 2011.  The Lease is a 15-year lease and provides for two ten-year extension options.  The initial base rent under the Lease is approximately $3,964,000 per annum, payable in quarterly installments of $991,000, and it escalates 2% per year commencing on the first anniversary of the effective date of the Lease.  The Lease is a triple net lease under which the Company will pay insurance, real estate taxes, and maintenance and repair expenses.

 
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. During the third quarter of 2011, we experienced a significant drop in our revenues, which fell by over 50% from the second quarter of 2011. We believe that the reduction in our revenues was due to several factors, including, amongst others, significant slowdowns in spending by network operators in several of our markets, including North America, Western and Eastern Europe and the Middle East. In addition, we experienced a significant reduction in demand from our original equipment manufacturing customers. In response to this sudden reduction in revenues, we are planning to initiate new cost reduction measures to both lower our manufacturing costs and reduce our operating expenses. We cannot predict if such future measures will be successful, and we may be required to further reduce operating expenses and manufacturing costs 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 the third quarter of 2011, 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 are in the process of finalizing new 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 is inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
 
For a summary of our critical accounting policies and estimates, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of Part II of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011.
 
Accruals for Restructuring and Impairment Charges
 
In the first nine months of 2011 and 2010, we recorded restructuring and impairment charges of $0.2 million and $2.8 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.
 
In the fourth quarter of 2011, in response to the sudden reduction in revenues, we are planning to initiate a new restructuring plan to both lower our manufacturing costs and reduce our operating expenses. We are still finalizing the plans and currently cannot estimate the full range of expected charges.
 
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 Event
 
Sale Leaseback
 
On October 17, 2011, the Company entered into an Agreement of Purchase and Sale (the “Agreement”) with AG Net Lease Acquisition Corp. (the “Purchaser”) pursuant to which the Company sold to the Purchaser all of its interest in its current corporate headquarters facility located at 1761-1801 E. St. Andrew Place, Santa Ana, California, which is comprised of a building containing approximately 367,045 square feet, the underlying land, and an adjacent vacant 2.87 acre parcel of land  (collectively, the “Real Estate”).  The aggregate consideration paid by the Purchaser to the Company pursuant to the Agreement was $49,550,000 in cash.  The transaction was completed on October 21, 2011. 
 
In connection with the closing of the sale of the Real Estate, the Company entered into a Lease Agreement with AGNL Antenna L.P. with respect to the Real Estate (the “Lease”).  The effective date of the Lease was October 21, 2011.  The Lease is a 15-year lease and provides for two ten-year extension options.  The initial base rent under the Lease is approximately $3,964,000 per annum, payable in quarterly installments of $991,000, and it escalates 2% per year commencing on the first anniversary of the effective date of the Lease.  The Lease is a triple net lease under which the Company will pay insurance, real estate taxes, and maintenance and repair expenses.
 
 
Results of Operations
 
The following table summarizes our results of operations as a percentage of net sales for the three and nine months ended October 2, 2011 and October 3, 2010:
 
   
Three Months Ended
   
Nine Months Ended
 
   
October 2,
2011
   
October 3,
2010
   
October 2,
2011
   
October 3,
2010
 
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales:
                               
Cost of goods
    92.5       69.9       76.7       71.2  
Restructuring and impairment charges
          0.7             0.5  
Total cost of sales
    92.5       70.6       76.7       71.7  
Gross profit
    7.5       29.4       23.3       28.3  
Operating expenses:
                               
Sales and marketing
    9.8       4.7       6.4       6.0  
Research and development
    19.9       10.0       12.5       11.0  
General and administrative
    15.0       7.5       9.1       8.2  
Restructuring and impairment charges
    0.2       0.2             0.2  
Total operating expenses
    44.9       22.4       28.0       25.4  
Operating income (loss)
    (37.4 )     7.0       (4.7 )     2.9  
Other income (expense), net
    (8.3 )     (0.6 )     (3.4 )     (2.2 )
Income (loss) before income taxes
    (45.7 )     6.4       (8.1 )     0.7  
Income tax provision (benefit)
    (0.2 )     1.3       1.0       1.3  
Net income (loss)
    (45.5 )%     5.1 %     (9.1 )%     (0.6 )%
 
Three Months ended October 2, 2011 and October 3, 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
 
October 2, 2011
 
October 3, 2010
Wireless network operators and other
 
$
52,334
     
68 
%
 
$
107,004
     
68 
%
Original equipment manufacturers
   
24,744
     
32 
%
   
49,809
     
32 
%
Total
 
$
77,078
     
100 
%
 
$
156,813
     
100 
 
Sales decreased by 51% to $77.1 million for the third quarter of 2011, from $156.8 million for the third quarter of 2010. This decrease was due to several factors, including, but not limited to, a significant slowdown in spending by North American network operators coupled with further weakness in several international markets, including Western and Eastern Europe and the Middle East. In addition, we experienced a significant reduction in demand with our original equipment manufacturing customers. In particular, we experienced a reduction in demand by Nokia Siemens Networks of over 80% when compared to the prior year period. Sales to our direct operator customers decreased by approximately 51% for the third quarter of 2011 from the third quarter of 2010. Sales to our original equipment manufacturers decreased by 50% for the third quarter of 2011 from the third quarter of 2010. We believe that, among other factors, the current negative global economic environment has caused network operators to reduce or postpone their spending plans for the near term while they evaluate the macro-economic pressures in each individual market.
 
 
The following table presents a further analysis of our sales based upon our various product groups:
 
   
Three Months Ended
(in thousands)
Wireless Communications Product Group
 
October 2, 2011
 
October 3, 2010
Antenna systems
 
$
45,327
     
59 
%
 
$
75,995
     
48 
%
Base station systems
   
19,142
     
25 
%
   
63,997
     
41 
%
Coverage systems
   
12,609
     
16 
%
   
16,821
     
11 
%
Total
 
$
77,078
     
100 
%
 
$
156,813
     
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 decrease in antenna systems and base station systems sales during the third quarter of 2011 as compared with the third quarter of 2010 is due to the previously mentioned significant decrease in demand we experienced from our wireless network operator and original equipment manufacturer customers. The decrease in coverage systems business was due to reduced project activity during the third quarter of 2011 versus the third 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
 
October 2, 2011
 
October 3, 2010
Americas
 
$
32,525
     
42 
%
 
$
71,484
     
46 
%
Asia Pacific
   
14,596
     
19 
%
   
33,676
     
21 
%
Europe
   
25,244
     
33 
%
   
41,845
     
27 
%
Other International
   
4,713
     
%
   
9,808
     
%
Total
 
$
77,078
     
100 
%
 
$
156,813
     
100 
 
Revenues decreased in all regions in the third quarter of 2011 as compared to the third quarter of 2010. The decrease is attributable to a significant reduction in demand from our wireless network operator customers, other direct customers and original equipment manufacturers which we believe is due to several factors, including, but not limited to, the current negative global economic environment that has caused network operators to reduce or postpone their equipment spending plans. In North America, we believe that the uncertainty arising from the government’s recent opposition to the proposed merger of AT&T and T-Mobile has led to delayed spending as these operators re-evaluate their capital spending plans. 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 third quarter of 2010 to those in effect for the third 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 third quarter of 2011, sales to Ericsson accounted for approximately 11% and sales to Raycom, one of our European resellers, accounted for approximately 11% of our total sales.  For the third quarter of 2010, total sales to Nokia Siemens accounted for approximately 20% of sales, sales to Raycom accounted for approximately 13% of sales, and sales to Team Alliance, one of our North American resellers, accounted for 11% of our total 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 depreciation, facility lease expense, transportation costs and warranty costs. Components of our fixed cost structure include test equipment depreciation, facility lease expense, purchasing and procurement expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our overhead costs into inventory decreases and the amount of overhead variances expensed to cost of sales increases as volumes decline since we have fewer units to absorb our overhead costs against. Conversely, the absorption of our overhead costs into inventory increases and the amount of overhead variances expensed to cost of sales decreases as volumes increase since we have more units to absorb our overhead costs against. As a result, our gross profit margins generally decrease as revenue and volumes decline due to lower sales volume and higher amounts of overhead variances expensed to cost of sales. Our gross profit margins generally increase as our revenue and volumes increase due to higher sales volume and lower amounts of overhead variances expensed to cost of sales.
 
The following table presents an analysis of our gross profit:
 
   
Three Months Ended
(in thousands)
   
October 2, 2011
 
October 3, 2010
Net sales
 
$
77,078
     
100.0
%
 
$
156,813
     
100.0
%
Cost of sales:
                               
Cost of sales
   
71,282
     
92.5
%
   
109,608
     
69.9
%
Restructuring and impairment charges
   
     
%
   
1,175
     
0.7
%
Total cost of sales
   
71,282
     
92.5
%
   
110,783
     
70.6
%
Gross profit
 
$
5,796
     
7.5
%
 
$
46,030
     
29.4
%
 
Our actual gross profit decreased during the third quarter of fiscal 2011, compared to the third quarter of fiscal 2010, primarily as a result of our decreased revenues. The sudden significant drop in our revenues during the third quarter of 2011 caused us to be unable to absorb our overhead and manufacturing costs, which resulted in the reduction in our gross margin as a percentage of revenue. We incurred $1.2 million of restructuring charges during the third quarter of fiscal 2010 related to severance charges and facility closure charges in connection with the closure of our manufacturing operations in Estonia and none in the third quarter of 2011, which partially offset the decline in gross profit.
 
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. We recognize 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 when our gross profit was negatively impacted by a coverage solution project cost estimate adjustment of approximately $3.6 million.
 
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. With the significant reduction in revenues during the third quarter of 2011, we are currently finalizing a new restructuring plan, which we plan to begin to implement during the fourth quarter of 2011. 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  
October 2, 2011
 
October 3, 2010
Sales and marketing
 
$
7,544
     
9.8 
%
 
$
7,315
     
4.7
%
Research and development
   
15,315
     
19.9 
%
   
15,662
     
10.0
%
General and administrative
   
11,597
     
15.0 
%
   
11,741
     
7.5
%
Restructuring and impairment charges
   
147
     
0.2 
%
   
312
     
0.2
%
Total operating expenses
 
$
34,603
     
44.9 
%
 
$
35,030
     
22.4
%
 
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 increased by $0.2 million, or 3.1%, during the third quarter of 2011 as compared to the third quarter of 2010, primarily due to increased personnel and bad debt expense, partially offset by lower commissions.
 
Research and development expenses consist primarily of ongoing design and development expenses for new wireless communications network products, as well as for advanced coverage solutions. We also incur design expenses associated with reducing the cost and improving the manufacturability of our existing products. Research and development expenses can fluctuate dramatically from period to period depending on numerous factors including new product introduction schedules, prototype developments and hiring patterns. Total research and development expenses decreased $0.3 million or 2.2% during the third quarter of 2011 as compared to the third quarter of 2010 due to lower bonus expenses, offset in part by higher personnel costs and higher non-cash equity based compensation expense.
 
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 decreased $0.1 million, or 1.2% during the third quarter of 2011 as compared to the third quarter of 2010.
 
Restructuring charges of $0.1 million were recorded in the third quarter of fiscal 2011, primarily for adjustments to severance costs for previously terminated employees in Europe. Restructuring charges of $0.3 million were recorded in the third quarter of fiscal 2010, primarily for severance costs in the United Kingdom and United States.
 
Other Income (Expense), net
 
The following table presents an analysis of other income (expense), net:
 
   
Three Months Ended
(in thousands)
   
October 2, 2011
 
October 3, 2010
Interest income
 
$
55
     
0.1
%
 
$
47
     
0.0
%
Interest expense
   
(3,764
)
   
(4.9
)%
   
(3,450
)
   
(2.2
)%
Foreign currency gain (loss), net
   
(2,158
)
   
(2.8
)%
   
1,970
     
1.3
%
Loss on repurchase of convertible debt
   
(874
)
   
(1.1
)%
   
     
%
Other income, net
   
306
     
0.4
%
   
408
     
0.2
%
Other income (expense), net
 
$
(6,435
)
   
(8.3
)%
 
$
(1,025
)
   
(0.7
)%
 
Interest income remained consistent during the third quarter of 2011 compared to the third quarter of 2010 due to the historically low interest rates on cash balances.  Interest expense increased by $0.3 million during the third quarter of fiscal 2011 as compared to the third quarter of 2010 primarily due to non-cash charges in interest expense. Included in non-cash charges are the amortization of debt issuance costs, debt discount and bond accretion totaling $1.6 and $1.2 million for the third quarters of 2011 and 2010, respectively. Additionally, we recognized a net foreign currency translation loss of $2.2 million in the third 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 third quarter of 2010 when we recognized a foreign currency translation gain of $2.0 million.  The net loss on repurchase of convertible debt of $0.9 during the third quarter of 2011 was related to expensing of the discount associated with the debt.
 
 
Income Tax Provision
 
Our effective tax rate for the third quarter of 2011 was a benefit of approximately 0.4% of our pre-tax loss of $35.2 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.
 
Net Income
 
The following table presents a reconciliation of operating income to net income:
 
   
Three Months Ended
(in thousands)
   
October 2, 2011
 
October 3, 2010
Operating income (loss)
 
$
(28,807
)
 
$
11,000
 
Other income (expense), net
   
(6,435
)
   
(1,025
)
Income before income taxes
   
(35,242
)
   
9,975
 
Income tax provision (benefit) 
   
(158
)
   
2,041
 
Net income (loss)
 
$
(35,084
)
 
$
7,934
 
 
Our net loss for the third quarter of 2011 was $35.1 million, compared to net income of $7.9 million for the third quarter of 2010. The net loss in the third quarter of 2011 was largely due to our decreased revenue during that period, which resulted in significantly lower gross profit and, consequently, resulted in an operating loss and the resulting net loss.
 
Nine Months ended October 2, 2011 and October 3, 2010
 
Net Sales
 
The following table presents a further analysis of our sales based upon our various customer groups:
 
   
Nine Months Ended
(in thousands)
Customer Group
 
October 2, 2011
 
October 3, 2010
Wireless network operators and other
 
$
254,625
     
66 
%
 
$
237,909
     
57 
%
Original equipment manufacturers
   
129,718
     
34 
%
   
177,957
     
43 
%
Total
 
$
384,343
     
100 
%
 
$
415,866
     
100 
 
Sales decreased by 8% to $384.3 million for the first nine months of 2011, from $415.9 million, for the first nine months of 2010. This decrease was due to several factors, including, amongst others, a significant slowdown in several international markets, including Western and Eastern Europe and the Middle East. In addition, we experienced a significant reduction in demand from original equipment manufacturing customers.  Sales to our wireless network operator customers increased by approximately 7% for the first nine months of 2011 from the first nine months of 2010, which partially offset the decline in sales from 2010.
 
 
The following table presents a further analysis of our sales based upon our various product groups:
 
   
Nine Months Ended
(in thousands)
Wireless Communications Product Group
 
October 2, 2011
 
October 3, 2010
Antenna systems
 
$
186,319
     
49 
%
 
$
172,129
     
41 
%
Base station systems
   
155,798
     
40 
%
   
206,748
     
50 
%
Coverage systems
   
42,226
     
11 
%
   
36,989
     
%
Total
 
$
384,343
     
100 
%
 
$
415,866
     
100 
 
The decrease in base station systems sales for the first nine months of 2011 compared to the first nine months of 2010 is primarily due to the previously mentioned significant reduction in demand from our original equipment manufacturing customers.
 
The following table presents an analysis of our net sales based upon the geographic area to which a product was shipped:
 
   
Nine Months Ended
(in thousands)
Geographic Area
 
October 2, 2011
 
October 3, 2010
Americas
 
$
166,993
     
43 
%
 
$
158,102
     
38 
%
Asia Pacific
   
100,552
     
26 
%
   
127,863
     
31 
%
Europe
   
102,115
     
27 
%
   
108,833
     
26 
%
Other International
   
14,683
     
%
   
21,068
     
%
Total
 
$
384,343
     
100 
%
 
$
415,866
     
100 
 
Revenues decreased in all regions except the Americas for the first nine months of 2011, as compared to the first nine months of 2010. The decrease is attributable to a significant reduction in demand from our wireless network operator customers and other direct customers and original equipment manufacturers.  In North America for the first six months of 2011, spending by network operators was running ahead of 2010 and then significantly slowed during the third quarter. The reduction in Asia Pacific for the first nine months is largely due to the reduction in demand by our original equipment manufacturing customers who typically take a large percentage of products in the Asia Pacific region.  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 most other currencies.  We have calculated that when comparing exchange rates in effect for the first nine months of 2010 to those in effect for the first nine months 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 nine months of 2011, total sales to Team Alliance, one of our North American resellers, accounted for approximately 18% of sales, total sales to Nokia Siemens accounted for approximately 17% of sales, and total sales to Raycom, one of our European resellers, accounted for approximately 13% of sales.  For the first nine months of 2010, total sales to Nokia Siemens and Raycom accounted for approximately 24% and 10% of sales, respectively.
 
Cost of Sales and Gross Profit
 
The following table presents an analysis of our gross profit:
 
   
Nine Months Ended
(in thousands)
   
October 2, 2011
 
October 3, 2010
Net sales
 
$
384,343
     
100.0 
%
 
$
415,866
     
100.0 
%
Cost of sales:
                               
Cost of sales
   
294,895
     
76.7 
%
   
296,135
     
71.2 
%
Restructuring and impairment charges
   
     
— 
%
   
1,901
     
0.5 
%
Total cost of sales
   
294,895
     
76.7 
%
   
298,036
     
71.7 
%
Gross profit
 
$
89,448
     
23.3 
%
 
$
117,830
     
28.3 
%
 
Our actual total gross profit and gross profit margin both decreased during the first nine months of fiscal 2011 compared with the first nine months of fiscal 2010, primarily as a result of our decreased revenue. We incurred approximately $1.9 million of restructuring and impairment charges during the first nine months of fiscal 2010 related to severance and facility closure charges, primarily attributable to the closure of our manufacturing operations in Estonia and none in 2011, which partially offset the decline in gross profit. In addition, the first nine months of 2011 was negatively impacted by a coverage solution project cost estimate adjustment of approximately $3.6 million.
 
 
Operating Expenses
 
The following table presents a breakdown of our operating expenses by functional category and as a percentage of net sales:
 
   
Nine Months Ended
(in thousands)
Operating Expenses  
October 2, 2011
 
October 3, 2010
Sales and marketing
 
$
24,695
     
6.4 
%
 
$
25,073
     
6.0 
%
Research and development
   
47,666
     
12.5 
%
   
45,623
     
11.0 
%
General and administrative
   
34,920
     
9.1 
%
   
34,316
     
8.2 
%
Restructuring and impairment charges
   
189
     
0.0 
%
   
872
     
0.2 
%
Total operating expenses
 
$
107,470
     
28.0 
%
 
$
105,884
     
25.4 
%
 
Sales and marketing expenses decreased by $0.4 million, or 1.5%, during the first nine months of 2011 as compared with the first nine months of 2010. The decrease resulted primarily from lower commissions, offset in part by increased personnel costs.
 
Research and development expenses increased by $2.0 million, or 4.5%, during the first nine months of 2011 as compared with the first nine months of 2010, primarily due to higher per