Powerwave Technologies, Inc. (“Powerwave” or the “Company” or “our” or “we”) was incorporated in Delaware in January 1985, under the name Milcom International, Inc., and changed its name to Powerwave Technologies, Inc. in June 1996. 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.
We believe that our future success depends upon continued growth in demand for wireless services as well as our ability to broaden our customer base. For the fiscal year ended January 3, 2010 (“fiscal 2009”), our largest customers continued to be original equipment manufacturers. Nokia Siemens accounted for approximately 34% of our sales. As a result, Nokia Siemens has the ability to significantly impact our financial results by demanding price reductions and threatening to reduce their business with us, transfer that business to other companies, or take it internal to their operations. The loss of this customer, or a significant loss, reduction or rescheduling of orders from this customer would have a material adverse effect on our business, financial condition and results of operations.
A limited number of large original equipment manufacturers and large global wireless network operators account for a majority of wireless infrastructure equipment purchases in the wireless equipment market, and our future success is dependent upon our ability to establish and maintain relationships with these types of customers. While we regularly attempt to expand our customer base, we cannot give any assurance that a major customer will not reduce, delay or eliminate its purchases from us. During fiscal 2009, we experienced significant reductions in demand from both our original equipment manufacturer customers such as Nokia Siemens and Alcatel-Lucent, and our direct operator customers, which had an adverse effect on our business and results of operations. Any future reductions in demand by any of our major customers would have a material adverse effect on our business, financial condition and results of operations.
We have experienced, and expect to continue to experience, declining average sales prices for our products. Consolidation among both original equipment manufacturers and wireless service providers has enabled such companies to place continual pricing pressure on wireless infrastructure manufacturers, which has resulted in downward pricing pressure on our products. In addition, ongoing competitive pressures and consolidation within the wireless infrastructure equipment market have put pressure on us to continually reduce the sales price of our products. Consequently, we believe that our gross margins may decline over time and that in order to maintain or improve our gross margins, we must reduce manufacturing costs, redesign our products to reduce their cost, reduce our overhead costs as well as our operating expenses, and develop new products that incorporate advanced features that may generate higher gross margins. We may not be able to achieve the necessary cost and expense reductions.
Significant Business Developments in Fiscal 2009
Beginning in the fourth quarter of 2008, global economic instability driven by the subprime mortgage crisis and the tightening of credit availability impacted all of the markets in which we compete. As the extent of the crisis unfolded, it became apparent that the global economy had entered a significant recessionary period, which included sharply lower economic activity, inflation and deflation concerns, decreased consumer confidence, reduced corporate profits, reduced or canceled capital spending, liquidity concerns and generally adverse business conditions. All of these factors combined had a negative impact on the availability of financial capital which we believe contributed to a reduction in demand for infrastructure in the wireless communications market. These conditions have made it difficult for our customers and vendors to accurately forecast and plan future business activities, causing domestic and foreign businesses to reduce or suspend expenditures on our products and services. We cannot predict how long this economic recession will last or what the ultimate effects on the economy or the wireless infrastructure industry will be.
In the first quarter of 2009, we formulated and began to implement a plan to further reduce manufacturing overhead costs and operating expenses. As part of this plan, we initiated personnel reductions in both our domestic and foreign locations, with primary reductions in the United States, Estonia and Sweden. These reductions were undertaken in response to current economic conditions and the ongoing global recession that began in the fourth quarter of 2008. The goal of all of these actions was to reduce the Company’s operating and manufacturing costs in order to improve cash flow and increase profitability.
During 2009, we expanded our operations in India. We opened a 40,000-square foot research and development facility in Hyderabad, India, to facilitate sales and marketing, engineering and technical and customer support functions. We also expanded our operations with a new manufacturing facility in Laem Chabang, Thailand. The 135,000-square foot facility has the capacity to manufacture various products, as well as support our repair activities. This facility was fully-operational in the fourth quarter of 2009.
In the second quarter of 2009, we entered into a $50.0 million Credit Agreement (“Credit Agreement”) with Wells Fargo Capital Finance LLC (formerly Wells Fargo Foothill, LLC), as arranger and administrative agent. In connection with entering into the Credit Agreement, we terminated our Revolving Trade Receivables Purchase Agreement with Deutsche Bank AG, New York Branch, as Administrative Agent.
During 2009, we repurchased $25.4 million par value of our outstanding 1.875% convertible subordinated notes due November 2024 at various discounts which resulted in a gain of $12.7 million.
In the fourth quarter of 2009, we sold our previously vacated manufacturing facility in Salisbury, Maryland for net proceeds of approximately $3.9 million.
Industry Segments and Geographic Information
We operate in one reportable business segment: “Wireless Communications.” All of our revenues are derived from the sale of wireless communications 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 all major frequency bands including cellular, PCS, 3G and 4G wireless communications networks throughout the world. Our products are sold globally and produced in multiple locations.