Edgar Filing: PULSE ELECTRONICS CORP

form10q.htm

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x The Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the six months ended July 1, 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 No. 1-5375

PULSE ELECTRONICS CORPORATION

(Exact name of registrant as specified in its Charter)

PENNSYLVANIA	23-1292472
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

12220 World Trade Drive
San Diego, CA	92128
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:	858-674-8100

Former name of registrant:	Technitrol, Inc.

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 the filing requirements for at least the past 90 days.

Yes x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer ¨

Accelerated filer x

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 x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of August 10, 2011: 41,639,058

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited)	3
	Consolidated Statements of Operations (Unaudited)	4
	Consolidated Statements of Cash Flows (Unaudited)	5
	Consolidated Statements of Changes in Equity (Unaudited)	6
	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	34

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1a.	Risk Factors	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

	Exhibit Index	45

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1:

Financial Statements

Pulse Electronics Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

In thousands

Assets	July 1, 2011			December 31, 2010

Current assets:
Cash and cash equivalents	$	35,560		$	35,905
Accounts receivable, net		58,993			65,532
Inventory		36,666			35,741
Prepaid expenses and other current assets		14,542			14,804
Total current assets		145,761			151,982

Long-term assets:
Property, plant and equipment		113,125			113,137
Less accumulated depreciation		82,498			82,456
Net property, plant and equipment		30,627			30,681
Deferred income taxes		33,713			33,669
Intangibles assets, net		4,931			5,657
Other assets		2,027			2,610
	$	217,059		$	224,599

Liabilities and Equity
Current liabilities:
Accounts payable	$	50,689		$	46,102
Accrued expenses and other current liabilities		47,159			54,602
Total current liabilities		97,848			100,704

Long-term liabilities:
Long-term debt		42,150			32,150
Convertible senior notes		50,000			50,000
Deferred income taxes		8,752			8,890
Other long-term liabilities		8,686			10,081

Equity:
Pulse Electronics Corporation shareholders’ equity:
Common stock and additional paid-in capital		218,752			219,393
Retained loss		(241,590	)		(232,660	)
Accumulated other comprehensive earnings		24,826			23,993
Total Pulse Electronics Corporation shareholders’ equity		1,988			10,726
Non-controlling interest		7,635			12,048
Total equity		9,623			22,774
	$	217,059		$	224,599

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

In thousands, except per share data

	Three Months Ended						Six Months Ended
	July 1, 2011			June 25, 2010			July 1, 2011			June 25, 2010
Net sales	$	94,758		$	116,473		$	182,797		$	209,333
Cost of sales		72,385			85,605			142,000			158,873
Gross profit		22,373			30,868			40,797			50,460

Selling, general and administrative expenses		21,255			24,689			42,796			47,387
Severance, impairment and other associated costs		3,867			3,767			10,623			31,094
Cost related to unsolicited takeover attempt		1,486			--			1,916			--
Operating (loss) profit		(4,235	)		2,412			(14,538	)		(28,021	)

Other (expense) income:
Interest expense, net		(1,158	)		(1,272	)		(2,451	)		(2,621	)
Other (expense) income, net		167			(1,625	)		1,709			(7,529	)
Total other (expense) income		(991	)		(2,897	)		(742	)		(10,150	)

Loss from continuing operations before income taxes		(5,226	)		(485	)		(15,280	)		(38,171	)

Income tax (benefit) expense		(765	)		1,997			(5,830	)		(145	)

Net loss from continuing operations		(4,461	)		(2,482	)		(9,450	)		(38,026	)

Net earnings (loss) from discontinued operations		--			2,908			612			(15,168	)

Net (loss) earnings		(4,461	)		426			(8,838	)		(53,194	)

Less: Net earnings (loss) attributable to non-controlling interest		44			290			92			597

Net earnings (loss) attributable to Pulse Electronics Corp.	$	(4,505	)	$	136		$	(8,930	)	$	(53,791	)

Amounts attributable to Pulse Electronics Corp. common shareholders:
Net loss from continuing operations	$	(4,505	)	$	(2,772	)	$	(9,542	)	$	(38,623	)
Net earnings (loss) from discontinued operations		--			2,908			612			(15,168	)
Net earnings (loss) attributable to Pulse Electronics Corp.	$	(4,505	)	$	136		$	(8,930	)	$	(53,791	)

Per share data:
Basic earnings (loss) per share:
Net loss from continuing operations	$	(0.11	)	$	(0.07	)	$	(0.23	)	$	(0.94	)
Net earnings (loss) from discontinued operations		--			0.07			0.01			(0.37	)
Net loss attributable to Pulse Electronics Corp.	$	(0.11	)	$	--		$	(0.22	)	$	(1.31	)

Diluted earnings (loss) per share:
Net loss from continuing operations	$	(0. 11	)	$	(0.07	)	$	(0.23	)	$	(0.94	)
Net earnings (loss) from discontinued operations		--			0.07			0.01			(0.37	)
Net loss attributable to Pulse Electronics Corp.	$	(0.11	)	$	--		$	(0.22	)	$	(1.31	)

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

In thousands

	Six Months Ended
	July 1, 2011			June 25, 2010
Cash flows from operating activities - continuing operations:
Net loss	$	(8,838	)	$	(53,194	)
(Earnings) loss from discontinued operations		(612	)		15,168
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		5,176			9,826
Goodwill and intangible asset impairment, net of income taxes		--			27,963
Changes in assets and liabilities, net of the effect of divestitures:
Accounts receivable		7,001			(8,725	)
Inventory		(635	)		(1,300	)
Prepaid expenses and other current assets		(762	)		374
Accounts payable and accrued expenses		(8,930	)		25,943
Severance, impairment and other associated costs, net of cash payments (excluding goodwill and intangible asset impairments)		5,889			(476	)
Other, net		(307	)		188

Net cash (used in) provided by operating activities		(2,018	)		15,767

Cash flows from investing activities – continuing operations:
Cash received from dispositions, net		1,072			1,245
Capital expenditures		(4,669	)		(3,195	)
Proceeds from sale of property, plant and equipment		105			19
Foreign currency impact on intercompany lending		1,200			(7,471	)

Net cash used in investing activities		(2,292	)		(9,402	)

Cash flows from financing activities – continuing operations:
Long-term borrowings		20,000			10,000
Principal payments on long-term debt		(10,000	)		(14,350	)
Purchases of shares in non-controlling interest		(4,134	)		--
Proceeds from exercise of stock options		3			--
Dividends paid		(2,077	)		(2,062	)

Net cash provided by (used in) financing activities		3,792			(6,412	)

Net effect of exchange rate changes on cash from continuing operations:		173			186

Cash flows of discontinued operations:
Net cash used in operating activities		--			(7,651	)
Net cash used in investing activities		--			(924	)
Net effect of exchange rate changes on cash		--			579

Net decrease in cash and cash equivalents from discontinued operations		--			(7,996	)

Net decrease in cash and cash equivalents		(345	)		(7,857	)
Cash and cash equivalents at beginning of period		35,905			39,707
Cash and cash equivalents at end of period	$	35,560		$	31,850

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

Consolidated Statement of Changes in Equity

Six Months Ended July 1, 2011

(Unaudited)

In thousands, except per share data

	Common stock and paid in capital					Retained loss			Accumulated other comprehensive income		Non-controlling interest
	Shares		Amount			Retained loss			Accumulated other comprehensive income		Non-controlling interest			Total equity			Comprehensive loss
Balance at December 31, 2010		41,490	$	219,393		$	(232,660	)	$	23,993	$	12,048		$	22,774
Stock options, awards, and related compensation		149		1,069			--			--		--			1,069
Dividends declared ($0.025 per share)		--		(2,081	)		--			--		--			(2,081	)
Purchases of shares in non-controlling interest		--		371			--			--		(4,505	)		(4,134	)
Net loss		--		--			(8,930	)		--		92			(8,838	)	$	(8,838	)
Currency translation adjustments		--		--			--			833		--			833			833
Balance at July 1, 2011		41,639	$	218,752		$	(241,590	)	$	24,826	$	7,635		$	9,623		$	(8,005	)

See accompanying Notes to Unaudited Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

(1)	Accounting policies

Pulse Electronics Corporation is a global producer of precision-engineered electronic components and modules. We sometimes refer to Pulse Electronics Corporation as “Pulse Electronics”, “Pulse”, “the Company”, “we” or “our.” Based on our estimates of the total annual revenues in our primary markets and our share of those markets relative to our competitors, we believe we are a leading global producer of electronic components and modules in the primary markets we serve. Our ticker symbol on the New York Stock Exchange is “PULS.”

We operate our business in three segments:

our Network product group which we refer to as Network,

our Power product group which we refer to as Power, and

our Wireless product group which we refer to as Wireless.

Network produces a variety of passive components that manage and regulate electronic signals for use in a variety of devices used in local area and wide area networks, such as connectors, filters, filtered connectors, transformers, splitters, micro-filters, baluns and chokes. Power primarily manufactures products that adjust and ensure proper current and voltage, limit distortion of voltage, sense and report current and voltage and cause mechanical movement or actuation, which includes power transformers, chokes, current and voltage sensors, ignition coils, automotive coils and military and aerospace products. Wireless manufactures products related to the capture or transmission of wireless communication signals, such as antennas, antenna modules and antenna mounting components.

We have discontinued operations that include our former electrical contact products business (“Electrical”), medtech components business (“Medtech”) and microelectromechanical systems (“MEMS”) microphone business. The results from these discontinued operations are presented in a single line on our Consolidated Statements of Operations for all periods presented and there are no remaining assets or liabilities related to our discontinued operations on our Consolidated Balance Sheets.

Our Consolidated Financial Statements include the accounts of Pulse Electronics and all of our subsidiaries. All material intercompany accounts, transactions and profits are eliminated in consolidation. For a complete description of our accounting policies refer to Note 1, Summary of significant accounting policies, of the Notes to Consolidated Financial Statements included in Pulse Electronics' Form 10-K filed for the year ended December 31, 2010.

The results for the six months ended July 1, 2011 and June 25, 2010 have been prepared by our management without audit. In the opinion of management, the consolidated financial statements fairly present in all material respects, the financial position, results of operations and cash flows for the periods presented. To the best of our knowledge and belief, all adjustments have been made to properly reflect income and expenses attributable to the periods presented. Except for severance, impairment and other associated costs and costs related to unsolicited takeover attempt, all such adjustments are of a normal recurring nature. Our operating results for the six months ended July 1, 2011 are not necessarily indicative of annual results.

Recently adopted accounting pronouncements

In October 2009, FASB issued an ASU to address the accounting for multiple-deliverable sales arrangements. This update provided guidance to enable vendors to account for products or services (deliverables) separately, rather than as a combined unit. This ASU also expanded the required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Adoption of these provisions did not have a material impact to our Consolidated Financial Statements.

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Pulse Electronics Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(1)	Accounting policies, continued

New accounting pronouncements

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, which requires presentation of the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. ASU 2011-05 is effective for our fiscal year beginning January 1, 2012 and must be applied retrospectively. We expect to present comprehensive income in two separate but consecutive statements. Other than the change in presentation, we have determined these changes will not have an impact on the Consolidated Financial Statements.

In December 2010, FASB amended its authoritative guidance related to business combinations that are material on an individual or aggregate basis. These amendments clarify existing guidance for comparative financial statements that include a business combination. Specifically, revenue and earnings of the combined business are required to be disclosed as though the combination had occurred as of the beginning of the comparable prior annual reporting period. Also, the amendment expands supplemental pro forma disclosures to include a description of the nature and amount of nonrecurring pro forma adjustments, to revenue and earnings, which are directly attributable to the business combination. This guidance is prospective for business combinations with an acquisition date on or after the first day of our fiscal 2012. We are currently evaluating the effect that this guidance may have on our Consolidated Financial Statements.

(2) Divestitures

Electrical: On September 2, 2010, we completed the divestiture of our former Electrical business in Europe and Asia to Tinicum Capital Partners II, L.P., (“Tinicum”). Our net cash proceeds were approximately $53.3 million in cash, including normal working capital adjustments and other financial adjustments. On January 4, 2010, we divested Electrical’s North American operations for an amount immaterial to our Consolidated Financial Statements. Electrical produced a full array of precious metal electrical contact products that range from materials used in the fabrication of electrical contacts to completed contact subassemblies. Net proceeds from each transaction, after funding related retirement plan obligations and transaction costs, were used to repay outstanding debt. We have reflected the results of Electrical as a discontinued operation on the Consolidated Statements of Operations for all periods presented. Electrical’s net sales and earnings (loss) before income taxes for the three and six months ended July 1, 2011 and June 25, 2010, respectively, were as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 1, 2011		June 25, 2010		July 1, 2011		June 25, 2010
Net sales	$	--	$	78,191	$	--	$	149,040
Earnings (loss) before income taxes		--		2,561		875		(15,914	)

Medtech: On June 25, 2009, we completed the disposition of our Medtech components business to Altor Fund III (“Altor”). Medtech was headquartered in Roskilde, Denmark with manufacturing facilities in Denmark, Poland and Vietnam producing components for the hearing aid, high-end audio headset and medical device markets. We had no activity related to Medtech in the six months ended July 1, 2011. We reflected the results of Medtech as a discontinued operation on the Consolidated Statement of Operations for the three and six months ended June 25, 2010. Medtech’s loss before income taxes for the three and six months ended June 25, 2010 was approximately $0.2 million and $0.4 million, respectively, with no net sales in either period. We have no material continuing involvement with Medtech.

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Pulse Electronics Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(2)	Divestitures, continued

MEMS: During 2009, we divested our microelectromechanical systems microphone business located in Denmark and Vietnam. We had no activity related to MEMS in the six months ended July 1, 2011. We reflected the results of MEMS as a discontinued operation on the Consolidated Statements of Operations for the three and six months ended June 25, 2010. MEMS’ net sales and loss before income taxes for the three months ended June 25, 2010 were both less than $0.1 million. MEMS’ net sales and loss before income taxes for the six months ended June 25, 2010 were less than $0.1 million and approximately $0.3 million, respectively. We have no material continuing involvement with MEMS.

(3) Financial statement details

The following are details of certain financial statement captions at July 1, 2011 and December 31, 2010:

	July 1, 2011		December 31, 2010
Inventory:
Finished goods	$	16,778	$	16,351
Work in process		6,238		6,896
Raw materials and supplies		13,650		12,494
	$	36,666	$	35,741

Accrued expenses and other current liabilities:
Income taxes payable	$	5,400	$	14,828
Accrued compensation		11,399		13,054
Other accrued liabilities		30,360		26,720
	$	47,159	$	54,602

During the first quarter of 2011, a majority owned subsidiary announced a plan to purchase its own common stock that is publicly traded on a non-U.S. exchange. During the three and six months ended July 1, 2011, the subsidiary purchased approximately $.4 million and $4.1 million, respectively, of its own common stock using its cash on hand. These purchases were accounted for as equity transactions, and the difference between the book value and fair value of the stock acquired of approximately $0.4 million was credited to our additional paid-in capital.

(4)	Intangible assets

We assess the impairment of long-lived assets, including identifiable intangible assets subject to amortization and property, plant and equipment, whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant changes in the use of any asset, changes in historical trends in operating performance, changes in projected operating performance, stock price and other significant negative economic trends.

Prior to 2011, we had goodwill on our Consolidated Balance Sheets subject to an annual impairment review. The annual review of our indefinite-lived intangible assets was performed in our fourth fiscal quarter of each year, or more frequently if indicators of a potential impairment existed, to determine if the carrying amount of these intangible assets were impaired. The impairment review process compares the fair value of each reporting unit, where goodwill resided, with its carrying value. If the net book value of the reporting unit exceeded its fair value, we would perform the second step of the impairment test that required an allocation of the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. An impairment charge was recognized only when the implied fair value of a reporting unit’s goodwill was less than its carrying amount. Our impairment review incorporated both an income and comparable-companies market approach to estimate potential impairment. We believe the use of multiple valuation techniques resulted in a more accurate indicator of the fair value of each reporting unit, rather than the use of only an income approach.

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Pulse Electronics Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(4)	Intangible assets, continued

The income approach is based on estimating future cash flows using various growth assumptions and discounting based on a present value factor. We developed the future net cash flows during our annual budget process, which was completed in the fourth fiscal quarter of each year. However, estimates of future cash flows were updated in conjunction with any goodwill recoverability analysis that was performed independent of our annual review. The growth rates we used were an estimate of the future growth in the industries in which we participate and were adjusted, if necessary, for issues specific to our business and our position in the industry. Our discount rate assumption was based on an estimated cost of capital, which we determined annually based on market participant estimated costs of debt and equity relative to our capital structure. The comparable-companies market approach considered the trading multiples of our peer companies to compute our estimated fair value. The majority of the comparable-companies utilized in our evaluation were included in the Dow Jones U.S. Electrical Components and Equipment Industry Group Index.

The following is a summary of our intangible assets at July 1, 2011 and December 31, 2010 (in thousands):

	July 1, 2011			December 31, 2010
Intangible assets subject to amortization (definite lives):
Customer relationships	$	3,300		$	3,300
Technology		2,000			2,000
Other		960			960
Total		6,260			6,260

Accumulated amortization:
Customer relationships		(2,132	)		(1,897	)
Technology		(1,651	)		(1,178	)
Other		(146	)		(128	)
Total		(3,929	)		(3,203	)

Net intangible assets subject to amortization		2,331			3,057

Intangible assets not subject to amortization (indefinite lives):
Tradename		2,600			2,600

Intangible assets, net	$	4,931		$	5,657

Amortization expense was approximately $0.7 million and $1.4 million for the six months ended July 1, 2011 and June 25, 2010, respectively. The decrease in the amortization expense from the six months ended June 25, 2010 to the six months ended July 1, 2011 was primarily the result of lower amortizing intangibles due to impairment charges recorded during 2010.

The weighted average life of our finite intangible assets is approximately 1.9 years as of July 1, 2011. Estimated annual amortization expense for each of the next five years is as follows (in thousands):

Year Ending
2012	$	539
2013	$	539
2014	$	68
2015	$	68
2016	$	68

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Pulse Electronics Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(5) Income taxes

At July 1, 2011, we had approximately $12.8 million of unrecognized tax benefits, $6.2 million of which are classified as other long-term liabilities and are not expected to be realized within the next 12 months. All of these tax benefits would affect our effective tax rate, if recognized.

We recognize interest and penalties, if any, related to income tax matters as income tax expense. As of July 1, 2011, we have $0.2 million accrued for interest and/or penalties related to uncertain income tax positions. The amount accrued for interest and/or penalties decreased approximately $0.9 million from the year ended December 31, 2010 as a result of the release of a non-U.S. tax reserve during the six months ended July 1, 2011. The release of the reserve and related accrued interest and/or penalties was due to the dissolution of a non-U.S. legal entity which we no longer operate.

We are subject to U.S. federal income tax as well as income tax in multiple state and non-U.S. jurisdictions. Federal and state income tax returns for all years after 2006 are subject to future examination by the respective tax authorities. With respect to material non-U.S. jurisdictions where we operate, we have open tax years ranging from two to 10 years.

The effective tax rate for the six months ended July 1, 2011 was a benefit of 38.2% compared to a benefit of 0.4% for the six months ended June 25, 2010. The increase in the effective tax benefit was due to the absence of the goodwill impairment charges that reduced the 2010 tax benefit and the release of a non-U.S. tax reserve in 2011. These increases to the tax benefit were partially offset by restructuring charges incurred in lower tax rate jurisdictions during the six months ended July 1, 2011.

During the three months ended July 1, 2011, we paid $1.9 million related to an audit of one of our foreign subsidiaries’ income tax filings. Settlement of this matter may result in additional payments of as much as $4.4 million. This amount has been fully accrued for as of July 1, 2011, however, we do not anticipate additional payments related to this matter until 2012.

(6)	Defined benefit plans

We maintain defined benefit pension plans for certain U.S. and non-U.S. employees. However, the benefits under our domestic defined benefit plan were frozen as of December 31, 2010. Accrued benefits were based on years of service and average final compensation. We do not provide any post-retirement benefits outside of the U.S., except as may be required by certain foreign jurisdictions. Depending on the investment performance of our plan assets and other contributing factors, funding in a given year may not be required.

Our net periodic benefit income (expense) was less than $0.1 million of income and less than $0.1 million of expense for the six months ended July 1, 2011 and June 25, 2010, respectively. In the six months ended July 1, 2011, we contributed less than $0.1 million to our defined benefit plans.

Our domestic defined benefit retirement plan is currently under audit by the Pension Benefit Guarantee Corporation (“PBGC”). Initial communications from the PBGC have indicated that the sale of Electrical’s North American operations may have resulted in a partial plan termination, which may require us to accelerate the funding of up to approximately $7.3 million to this defined benefit plan. However, a partial plan termination would only result in a cash payment to fund our plan and will not directly result in additional expenses. We are continuing to have discussions with the PBGC on this matter.

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Pulse Electronics Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(7)	Commitments and contingencies

We are a party to various legal proceedings, claims and assessments that arise in the ordinary course of business, and may continue to incur significant costs in defending or settling legal matters. The total amount and timing of the expected future payments related to these matters cannot be estimated due to the uncertainty of the duration of the legal proceedings and the ultimate scope of other claims. However, an unfavorable outcome in a single matter or in multiple legal matters during the same reporting period could have a material adverse effect on our consolidated financial position, results from operations and cash flows.

We are a defendant in a lawsuit filed in March 2007 by Halo Electronics, Inc. in the United States District Court, District of Nevada. The case is captioned Halo Electronics, Inc. v. Pulse Electronics, Inc. and Pulse Electronics Corp., Case No. 2:07-cv-00331-PMP-PAL. The plaintiff claims that we infringed certain U.S. patents related to an electronic surface mount package and is seeking injunctive relief and damages. Discovery has been completed and summary judgment motions are now pending. A trial date has not yet been scheduled. We believe we have complete defenses to all claims asserted and therefore have no liability to the plaintiff. However, the plaintiff has produced expert reports asserting infringement and liability in the amount of $34.3 million, plus trebling and attorneys fees, and a judgment in favor of the plaintiff may have a material adverse effect on our consolidated financial position, results from operations and cash flows. We are aware that similar cases have been brought by Halo Electronics against certain of our competitors, and that at least one of our competitors commenced a similar independent patent litigation against Halo Electronics. Although we are not familiar with the specific details of these cases or the plaintiffs' claims, we believe that one of these cases has recently been settled on terms that, among other things, provide for significantly less up-front cash to Halo Electronics than the amount of damages that it has claimed in our case. During the six months ended July 1, 2011 and June 25, 2010, we incurred approximately $0.7 million and $1.2 million of legal expenses, respectively, related to this matter.

In March 2011, we received an unsolicited proposal from Bel Fuse Inc. (“Bel Fuse”) to acquire all of our outstanding shares for $6.00 per share. Our board of directors unanimously determined that Bel Fuse’s proposal significantly undervalued our business and was not in the best interests of our company, our shareholders, and other constituents. Bel Fuse had also nominated two directors for election to our board. At our annual meeting of shareholders on May 18, 2011, the Bel Fuse director nominees were not elected to our board.

During the six months ended July 1, 2011, we incurred $1.9 million of legal and professional fees and other costs related to Bel Fuse’s unsolicited takeover attempt. The majority of these costs represent accruals for the fees of our financial and legal advisors. We do not expect to incur significant additional fees or similar costs related to this matter.

(8)

Debt

We have $50.0 million in convertible senior notes which will mature on December 15, 2014. The notes bear a coupon rate of 7.0% per annum that is payable semi-annually in arrears on June 15 and December 15 of each year. We expect to pay approximately $3.5 million of interest on the convertible senior notes in 2011. These convertible notes rank junior to any secured indebtedness to the extent of the assets that secure such indebtedness, and are structurally subordinated in right of payment to all indebtedness and commitments of our subsidiaries.

Holders of our convertible notes may convert their shares to common stock at their option any day prior to the close of business on December 14, 2014. Upon conversion, for each $1,000 in principal amount outstanding, we will deliver a number of shares of our common stock equal to the conversion rate. The initial conversion rate for the notes is approximately 156.64 shares of common stock per $1,000 in principal amount of notes. The initial conversion price is approximately $6.38 per share of common stock. The conversion rate is subject to change upon the occurrence of specified normal and customary events as defined by the indenture, such as stock splits or stock dividends, but will not be adjusted for accrued interest. In addition, subject to certain fundamental change exceptions specified in the indenture, which generally pertain to circumstances in which the majority of our common stock is obtained, exchanged or no longer available for trading, holders may require us to repurchase all or part of their notes for cash at a price equal to 100% of the principal amount of the notes being repurchased plus any accrued and unpaid interest up to, but excluding, the relevant repurchase date. We are not permitted to redeem the notes prior to maturity.

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Notes to Unaudited Consolidated Financial Statements, continued

(8)	Debt, continued

On July 1, 2011, we had a senior revolving credit facility that provided for $100.0 million of borrowings in U.S. dollars, euro or yen, with a multi-currency facility that provides for the issuance of letters of credit in an aggregate amount not to exceed the U.S. dollar equivalent of $10.0 million. We had approximately $42.2 million of borrowings outstanding and two standby letters of credit outstanding in the aggregate amount of $1.5 million securing transactions entered into in the ordinary course of business.

The weighted-average interest rate on our credit facility borrowings for the three and six months ended July 1, 2011 including the credit margin spread was approximately 1.7%. Average borrowings outstanding on our senior revolving credit facility during the three and six months ended July 1, 2011 were approximately $41.4 million.

On August 5, 2011, we amended our senior revolving credit facility. The revised terms included a reduction to the borrowings permitted under the credit facility from $100.0 million to $70.0 million, an increase in the interest rates on both the unborrowed portion of the commitment and on the outstanding borrowings, changes to our debt covenants, a change to our permitted capital expenditure levels, and restrictions on our ability to make dividend payments. The maturity date of the facility continues to be February 28, 2013.

We expect to pay total fees and expenses of approximately $1.2 million in connection with the amendment.

Interest: Under the amendment, the fee on the unborrowed portion of the commitment ranges from 0.40% to 0.50% of the total commitment, depending on the following total debt-to-EBITDA ratios:

Total debt-to-EBITDA ratio	Commitment fee percentage
Less than 1.50		0.40	%
Less than 2.25		0.40	%
Less than 3.00		0.45	%
Less than 4.00		0.50	%
Less than 5.00		0.50	%
Greater than 5.00		0.50	%

The credit margin spread on the outstanding borrowings ranges from 3.25% to 4.50% depending on the following total debt-to-EBITDA ratios:

Total debt-to-EBITDA ratio	Credit margin spread
Less than 1.50		3.25	%
Less than 2.25		3.50	%
Less than 3.00		3.75	%
Less than 4.00		4.00	%
Less than 5.00		4.25	%
Greater than 5.00		4.50	%

In calculating the total debt-to-EBITDA ratio, the total debt includes the debt outstanding under the credit facility and the convertible senior notes.

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Notes to Unaudited Consolidated Financial Statements, continued

(8)	Debt, continued

Debt covenants: We revised the EBITDA definition used in the calculation of the leverage and fixed charges covenants to include restructuring cost addbacks in 2011 and 2012 and have amended our covenant levels.

Outstanding borrowings under our credit facility are subject to leverage and fixed charges covenants, which are computed as of the most recent quarter-end. These covenants require the calculation of a rolling four quarter EBITDA according to the definition prescribed by the amended senior revolving credit facility agreement.

Our fixed charges covenant requires that our EBITDA be equal to or greater than the following levels:

Quarter ended		Level
September 30, 2011		1.10 times fixed charges
December 30, 2011		0.75 times fixed charges
March 30, 2012		1.10 times fixed charges
June 29, 2012 and thereafter		1.50 times fixed charges

Our leverage covenant requires that our total debt outstanding, excluding our senior convertible notes, is not to exceed the following levels:

Quarter ended		Level
September 30, 2011		3.75 times EBITDA
December 30, 2011		6.00 times EBITDA
March 30, 2012		3.50 times EBITDA
June 29, 2012		3.00 times EBITDA
September 28, 2012		2.25 times EBITDA
December 28, 2012		2.00 times EBITDA

In addition, we will be required to comply with a minimum six month rolling EBITDA level as follows:

Quarter ended		Level
September 30, 2011		$6.00 million
December 30, 2011		$8.25 million
March 30, 2012		$9.50 million
June 29, 2012		$13.50 million
September 28, 2012		$15.00 million
December 28, 2012		$15.50 million

Borrowing base, capital expenditures and dividend payments: We have agreed to limit our borrowings to an amount not to exceed total eligible accounts receivable and cash, to maintain unrestricted cash of $15.0 million, and to suspend payment of dividends following a payment in the quarter ended December 30, 2011. We have also agreed to limit our capital expenditures to the following levels:

Period		Capital expenditure level
Six months ended December 30, 2011		$13.5 million
Six months ended June 29, 2012		$8.5 million
Six months ended December 28, 2012		$10.0 million

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Pulse Electronics Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements, continued

(8)	Debt, continued

The amended senior revolving credit facility also has other customary and normal provisions. Multiple subsidiaries, both domestic and international, have guaranteed obligations specified by our senior revolving credit facility agreement. Also, certain domestic and international subsidiaries have pledged shares of certain subsidiaries, as well as selected accounts receivable, inventory, machinery and equipment and other assets as collateral. If we default on our obligations, our lenders may take possession of the collateral and may license, sell or otherwise dispose of those related assets in order to satisfy our obligations. As of July 1, 2011, we were in compliance with all covenants of our senior revolving credit facility agreement.

(9)	Stock-based compensation

We have an incentive compensation plan for our employees. One component of this plan is restricted stock, which grants the recipient the right of ownership of our common stock, generally conditional on continued employment for a specified period. Another component is stock options. The following table presents the amount of stock-based compensation expense included in our Consolidated Statements of Operations for the three and six months ended July 1, 2011 and June 25, 2010 (in thousands):

	Three Months Ended						Six Months Ended
	July 1, 2011			June 25, 2010			July 1, 2011			June 25, 2010
Restricted Stock	$	431		$	442		$	683		$	910
Stock options		250			62			419			62
Total stock-based compensation included in:
Selling, general and administrative expenses		497			504			918			972
Severance, impairment and other associated costs		184			--			184			--
Income tax benefit		(238	)		(176	)		(386	)		(340	)
Total after-tax stock-based compensation expense	$	443		$	328		$	716		$	632

Restricted stock: The value of restricted stock issued is based on the market price of the stock at the award date. We retain the restricted shares until the continued employment requirement has been met. The market value of the shares at the date of grant is charged to expense on a straight-line basis over the vesting period, which is generally three years. Cash awards, which have been made in the past, were intended to assist recipients with their resulting personal tax liability, were based on the market value of the shares and were accrued over the vesting period. If the recipient made an election under Section 83(b) of the Internal Revenue Code, the expense related to the cash award was generally fixed based on the value of the awarded stock on the grant date. If the recipient did not make the election under Section 83(b), the expense related to the cash award would fluctuate based on the current market value of the shares, subject to limitations set forth in our restricted stock plan. The Company does not expect to make cash awards in the future. A summary of the restricted stock activity is as follows (in thousands, except per share data):

	Shares			Weighted Average Stock Grant Price (Per Share)
Nonvested at December 31, 2010		420		$	6.69
Granted		120		$	4.99
Vested		(144	)	$	6.11
Forfeited/cancelled		(38	)	$	4.65
Nonvested at July 1, 2011		358		$	6.57

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Notes to Unaudited Consolidated Financial Statements, continued

(9)	Stock-based compensation, continued

As of July 1, 2011, there was approximately $1.2 million of unrecognized compensation costs related to restricted stock grants. This unrecognized compensation is expected to be recognized over a weighted-average period of approximately 2.0 years.

Stock options: Stock options are granted at no cost to the employee and, under our incentive compensation plan, the exercise price of these options cannot be less than the fair market value of our common shares on the date of grant. These options expire seven years from the date of grant and generally vest equally over four years. We value our stock options according to the fair value method using the Black-Scholes option pricing model.

A summary of the stock options activity is as follows (in thousands, except per share data):

	Shares			Weighted Average Option Grant Price (Per Share)		Aggregate Intrinsic Value
Outstanding as of December 31, 2010		157		$	7.41
Granted		929		$	5.36
Exercised		(1	)	$	3.72	$	1
Forfeited/cancelled		(53	)	$	4.67
Outstanding as of July 1, 2011		1,032		$	5.71		8
Exercisable at July 1, 2011		70		$	11.14		--

The per share weighted average fair value of stock options granted during 2011 was calculated as $3.02 on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions based on the date of grant are as follows:

	2011
Dividend yield		1.9	%
Volatility		79.9	%
Risk-free interest rate		2.0	%
Expected life (years)		4.8

Tax benefits from deductions in excess of the compensation cost of stock options exercised are required to be classified as a cash inflow from financing. There was no effect of excess tax benefits on the current or prior year net cash used in or provided by operating activities or the net cash used in or provided by financing activities. During the six months ended July 1, 2011, there were 900 stock options exercised, however we have not realized any excess tax benefits in connection with the exercise of these stock options due to the fact that we have recorded a net loss in the period. In the six months ended June 25, 2010, there were no stock options exercised. There have been no amounts of stock-based compensation cost capitalized into inventory or other assets during the six months ended July 1, 2011 or June 25, 2010.

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Notes to Unaudited Consolidated Financial Statements, continued

(10)	Per share amounts

Basic loss per share was calculated by dividing our net loss by the weighted average number of common shares outstanding during the period, excluding restricted shares which are considered to be contingently issuable. To calculate diluted earnings per share, common share equivalents would be added to the weighted average number of common shares outstanding. Common share equivalents are computed based on the number of outstanding options to purchase common stock and unvested restricted shares as calculated using the treasury stock method. However, in periods when we have a net loss, or the exercise price of our stock options, by grant, are greater than the actual price of a share of our common stock as of the end of the period, those common share equivalents are anti-dilutive and we exclude them from the calculation of diluted earnings per share. There were approximately 20,000 common share equivalents for the three months ended June 25, 2010. As we had net losses in the three and six months ended July 1, 2011 and in the six months ended June 25, 2010, we did not include any common stock equivalents in our calculation of diluted loss per share. There were approximately 1.0 million and 0.4 million stock options outstanding as of July 1, 2011 and June 25, 2010, respectively. Also, we had unvested restricted shares outstanding of approximately 0.4 million and 0.5 million as of July 1, 2011 and June 25, 2010, respectively.

The dilutive effect of our convertible senior notes is included in our diluted earnings per share calculation using the if-converted method. Interest attributable to the convertible senior notes, net of tax, is added back to net earnings for the period and the total shares that would be converted, if the notes were settled at the end of the period, are added to the weighted average common shares outstanding. However, in periods when we have a net loss or the amount of interest attributable to the convertible senior notes, net of tax, per the potential common shares obtainable in a conversion exceeds our basic earnings per share, the overall effects of the convertible senior notes are considered anti-dilutive and are excluded from the calculation of diluted earnings per share. For both the three and six months ended July 1, 2011 and June 25, 2010, the effects of the convertible notes were anti-dilutive and excluded from our per share calculation.

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are required to be treated as participating securities. Under our restricted stock plan, non-forfeitable dividends are paid on unvested shares of restricted stock, which meets the qualifications of participating securities and requires the two-class method of calculating earnings per share to be applied. We have calculated basic and diluted earnings per share under both the treasury stock method and the two-class method for the three and six months ended July 1, 2011 and June 25, 2010 and there were no significant differences in the per share amounts calculated under the two methods. Therefore, we have not presented the reconciliation of earnings per share under the two class method for any period presented.

Earnings (loss) per share calculations are as follows (in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	July 1,			June 25,			July 1,			June 25,
	2011			2010			2011			2010
Net loss from continuing operations	$	(4,461	)	$	(2,482	)	$	(9,450	)	$	(38,026	)
Net earnings (loss) from discontinued operations		--			2,908			612			(15,168	)
Net (earnings) loss attributable to non-controlling interest		44			290			92			597
Net earnings (loss) attributable to Pulse Electronics Corporation	$	(4,505	)	$	136		$	(8,930	)	$	(53,791	)

Basic and diluted loss per share:
Shares		41,153			40,916			41,186			40,922
Continuing operations	$	(0.11	)	$	(0.07	)	$	(0.23	)	$	(0.94	)
Discontinued operations		--			0.07			0.01			(0.37	)
Per share amount	$	(0.11	)	$	--		$	(0.22	)	$	(1.31	)

Diluted earnings (loss) per share:
Shares		41,153			40,936			41,186			40,922
Continuing operations	$	(0.11	)	$	(0.07	)	$	(0.23	)	$	(0.94	)
Discontinued operations		--			0.07			0.01			(0.37	)
Per share amount	$	(0.11	)	$	--		$	(0.22	)	$	(1.31	)

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Notes to Unaudited Consolidated Financial Statements, continued

(11)	Severance, impairment and other associated costs

We continue to simplify our operations so that costs are optimally matched to current and anticipated future revenue and unit demand and, also, to focus resources on our core businesses. The amounts and timing of charges depend on specific actions taken. The actions taken, including plant closures and relocations, asset impairments and reduction in personnel worldwide, have resulted in the elimination of a variety of costs. The majority of these costs, not related to the impairment of long-lived assets, represent severance benefits for terminated employees, including both those related to our manufacturing and those that provide selling, general and administrative services. Also, the eliminated costs include depreciation from disposed equipment and rental payments from the termination of lease agreements. During the six months ended July 1, 2011, we incurred a charge of $10.6 million for a number of cost reduction actions approved by management. These charges include severance and related costs of $10.4 million and a $0.2 million write-down of a manufacturing facility to its fair value.

Of the $10.4 million severance charge incurred during the six months ended July 1, 2011, approximately $2.6 million related to the transition and reorganization of our corporate headquarters in North America, which was initiated in the first quarter of 2011 and is expected to be completed by the third quarter of 2011. Approximately 30 employees have been or will be severed under this program.

In the fourth quarter of 2010, we initiated a restructuring program to reduce and reorganize the capacity of our Chinese manufacturing plants, which we expect to complete by the end of our fiscal 2011 year. During the six months ended July 1, 2011, we incurred approximately $5.0 million of severance and $0.2 million of a write-down of a manufacturing facility to its fair value. These costs were primarily related to two plant closures in China and reductions in staff at other facilities in China as we shift manufacturing to lower cost facilities. There were approximately 1,800 employees of our direct labor severed under this program.

During 2010, we decided to withdraw from Wireless’ audio components business. In the first quarter of 2011, we initiated a restructuring program to shutdown our audio operations, which was also materially completed during the first quarter of 2011. Related to this program, we incurred approximately $0.9 million of severance and other closure fees during the six months ended July 1, 2011, which was primarily for the severance of approximately 25 employees.

We expect that cash payments resulting from these severance charges incurred during the six months ended July 1, 2011 will be completed within approximately one year.

The change in our accrual related to severance and other associated costs is summarized as follows (in millions):

Balance accrued at December 31, 2010	$	0.6

Net expense during the six months ended July 1, 2011		10.4
Severance payments		(4.6	)
Other associated costs		(0.1	)

Balance accrued at July 1, 2011	$	6.3

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Notes to Unaudited Consolidated Financial Statements, continued

(12)	Financial instruments

We utilize derivative financial instruments, primarily forward exchange contracts, to manage certain foreign currency risk. While these instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposure being hedged. During the six months ended July 1, 2011, we utilized forward contracts to sell forward euro to receive Chinese renminbi. These contracts were used to mitigate the risk of currency fluctuations in our Chinese operations. At July 1, 2011, we had six foreign exchange forward contracts outstanding to sell forward approximately 3.0 million euro, or approximately $4.4 million, to receive Chinese renminbi. The fair value of these forward contracts was a liability of $0.2 million as determined through the use of Level 2 fair value inputs as defined in ASC Topic 815. During the six months ended July 1, 2011 and June 25, 2010, no financial instruments were designated as hedges.

The following presents the classifications and fair values of our derivative instruments not designated as hedges in our Consolidated Balance Sheets (in thousands):

Consolidated Balance Sheets (Liability derivative)

Derivatives	Classification	July 1, 2011			December 31, 2010
Foreign exchange forward contracts	Accrued expenses and Other current liabilities	$	(0.2	)	$	(0.5	)

	Total:	$	(0.2	)	$	(0.5	)

The following presents the classifications and fair values of our derivative instruments not designated as hedges in our Consolidated Statement of Operations (in thousands):

Consolidated Statements of Operations (Unrealized/realized (losses)/gains)
		Three months ended					Six months ended
Derivatives	Classification	July 1, 2011			June 25, 2010		July 1, 2011			June 25, 2010
Foreign exchange forward contracts	Other (expense) income, net	$	(0.2	)	$	0.8	$	(0.5	)	$	1.6

	Total:	$	(0.2	)	$	0.8	$	(0.5	)	$	1.6

During the six months ended July 1, 2011, there were no changes in the fair value level used in the valuation of our financial assets and liabilities measured at fair value on a recurring basis.

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Notes to Unaudited Consolidated Financial Statements, continued

(12)	Financial instruments, continued

We categorize our financial assets and liabilities on our Consolidated Balance Sheets into a three-level fair value hierarchy based on inputs used for valuation, which are categorized as follows:

Level 1–

Financial assets and liabilities whose values are based on quoted prices for identical assets or liabilities in an active public market.

Level 2–

Financial assets and liabilities whose values are based on quoted prices in markets that are not active or a valuation using model inputs that are observable for substantially the full term of the asset or liability.

Level 3–

Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s assumptions and judgments when pricing the asset or liability.

The following table presents our fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis in our Consolidated Balance Sheets as of July 1, 2011 (in millions):

	July 1, 2011			Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Liabilities:
Other (1)	$	(0.2	)	$	--	$	(0.2	)	$	--
Total	$	(0.2	)	$	--	$	(0.2	)	$	--

(1)

Amounts include forward contracts outstanding in our Consolidated Balance Sheet.

The majority of our financial instruments and financial assets approximate fair value, as presented on our Consolidated Balance Sheets. As of July 1, 2011, the estimated fair value of the outstanding borrowings under our senior revolving credit facility was approximately $43.0 million and the estimated fair value of our convertible senior notes was approximately $49.1 million, as determined through the use of Level 2 fair value inputs as defined in the fair value hierarchy of ASC topic 815. These liabilities are not measured at their fair value in our Consolidated Balance Sheets for any period presented.

During the six months ended July 1, 2011, we did not have any non-financial assets or non-financial liabilities that were required to be measured at fair value on a recurring basis. Management believes that there is no material risk of loss from changes in inherent market rates or prices in our financial instruments due to the materiality of our financial instruments in relation to our Consolidated Balance Sheets.

Our financial instruments, including cash and cash equivalents and long-term debt, our financial assets, including accounts receivable and inventory, and our financial liabilities, including accounts payable and accrued expenses, are exposed to interest rate, credit risk and foreign currency risk. We have policies relating to these financial instruments and their associated risks and monitor compliance with those policies.

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Notes to Unaudited Consolidated Financial Statements, continued

(13)	Business segment information

We operate our business in three reportable segments: Network, Power and Wireless. Network produces a variety of passive components that manage and regulate electronic signals for use in a variety of devices used in local area and wide area networks, such as connectors, filters, filtered connectors, transformers, splitters, micro-filters, baluns and chokes. Power primarily manufactures products that adjust and ensure proper current and voltage, limit distortion of voltage, sense and report current and voltage and cause mechanical movement or actuation, which includes power transformers, chokes, current and voltage sensors, ignition coils, automotive coils and military and aerospace products. Wireless manufactures products related to the capture or transmission of wireless communication signals, such as antennas, antenna modules and antenna mounting components.

Selling, general and administrative expenses related to our world-wide operations, primarily related to selling, finance, information technology, human resources and other administrative functions, are allocated to each segment based on the ratio of the segment’s respective budgeted net sales to our consolidated total budgeted net sales.

Our Chief Operating Decision Maker (“CODM”), which we have identified as our Chief Executive Officer, allocates resources and assesses the performance of each segment based on a review of each segment’s net sales and operating profit excluding severance, impairment and other associated charges and costs related to unsolicited takeover attempt. We do not allocate severance, impairment and other associated charges, costs related to unsolicited takeover attempt, interest income, interest expense, other income, other expense or income taxes per segment. Also, the CODM does not review a measure of segment assets. Many of our long-term assets, including manufacturing facilities and equipment, are shared between our segments, therefore expenditures and expenses related to long-term assets cannot be assigned to a specific segment.

Our segments’ net sales and operating loss excluding severance, impairment and other associated costs and costs related to unsolicited takeover attempt for the three and six months ended July 1, 2011 and June 25, 2010 were as follows (in thousands):

	Three months ended						Six months ended
	July 1, 2011			June 25, 2010			July 1, 2011			June 25, 2010
Net sales:
Network	$	43,391		$	60,845		$	85,935		$	104,219
Power		38,668			32,819			70,567			58,299
Wireless		12,699			22,809			26,295			46,815
Total net sales	$	94,758		$	116,473		$	182,797		$	209,333

Loss from continuing operations before income taxes:
Network	$	1,278		$	8,368		$	1,687		$	10,646
Power		3,399			1,625			3,927			246
Wireless		(3,559	)		(3,814	)		(7,613	)		(7,819	)
Operating loss excluding severance, impairment and other associated costs and costs related to unsolicited takeover attempt	$	1,118		$	6,179		$	(1,999	)	$	3,073

Severance, impairment and other associated costs		3,867			3,767			10,623			31,094
Costs related to unsolicited takeover attempt		1,486		--				1,916			--
Operating profit (loss)		(4,235	)		2,412			(14,538	)		(28,021	)

Interest expense, net		(1,158	)		(1,272	)		(2,451	)		(2,621	)
Other income (expense), net		167			(1,625	)		1,709			(7,529	)

Loss from continuing operations before income taxes	$	(5,226	)	$	(485	)	$	(15,280	)	$	(38,171	)

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Notes to Unaudited Consolidated Financial Statements, continued

(14)	Subsequent events

On August 5, 2011, we amended our senior revolving credit facility. Refer to Note 8, Debt, for additional information regarding the amended terms.

In August 2011, we also made the decision to suspend payment of dividends following a dividend payment to be made in the quarter ended December 30, 2011. We believe use of these funds can generate a higher return if utilized to continue the execution of our strategic initiatives, in particular in the near term to improve our wireless business, to continue our restructuring program, and to implement a new enterprise resource planning (“ERP”) system.

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Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This discussion and analysis of our financial condition and results of operations as well as other sections of this report contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements for many reasons, including the risks we face described in the “Risk Factors” section of this report on pages 37 through 44. Except to the extent required by law, we assume no obligation to update or revise any forward-looking statements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1, Summary of significant accounting policies, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the period ended December 31, 2010 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.

Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the period ended December 31, 2010 describes the following critical accounting policies, which are significantly impacted by judgments, assumptions and estimates used in the preparation of our Consolidated Financial Statements:

Inventory valuation;

Divestiture accounting;

Purchase accounting;

Goodwill and identifiable intangibles;

Income taxes;

Defined benefit plans;

Contingency accruals; and

Severance, impairment and other associates costs.

Actual results could differ from our estimates as described in the significant and critical accounting policies in our Annual Report on Form 10-K for the period ended December 31, 2010.

Overview

We are a global producer of precision-engineered electronic components and modules. Based on our estimates of the total annual revenues in our primary markets and our share of those markets relative to our competitors, we believe we are a leading global producer of electronic components and modules in the primary markets we serve. We operate our business in three segments:

our Network product group which we refer to as Network,

our Power product group which we refer to as Power, and

our Wireless product group which we refer to as Wireless.

Network produces a variety of passive components that manage and regulate electronic signals for use in various devices used in local area and wide area networks, such as connectors, filters, filtered connectors, transformers, splitters, micro-filters, baluns and chokes. Power primarily manufactures products that adjust and ensure proper current and voltage, limit distortion of voltage, sense and report current and voltage and cause mechanical movement or actuation, which includes power transformers, chokes, current and voltage sensors, ignition coils, automotive coils and military and aerospace products. Wireless manufactures products related to the capture or transmission of wireless communication signals, such as antennas, antenna modules and antenna mounting components.

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General. We define net sales as gross sales less returns and allowances. We sometimes refer to net sales as revenue.

Historically, our gross margin has been significantly affected by product mix and capacity utilization. The markets served by each of our segments are characterized by relatively short product life cycles, which causes significant product turnover each year and, subsequently, frequent variations in the prices of products sold. Due to the constantly changing quantity of parts each segment offers and the frequent changes in our average selling prices, we cannot isolate the impact of changes in unit volume and unit prices on our net sales or gross margin in any given period. In addition, our operations are subject to changes in foreign exchange rates, especially the U.S. dollar as compared to the euro and Chinese renminbi, which affect our U.S. dollar reported results of operations.

We believe our focus on technology and other strategic investments, both internal and external, provides us opportunities for future growth in net sales and operating profit in all our segments. However, unfavorable economic and market conditions, as well as customer preferences, may result in a reduction in demand for our products, thus negatively impacting our financial performance. Also, we may divest portions of our business, close certain locations or complete other cost reduction programs to enable our management to focus on our core businesses and to improve our overall long-term financial performance.

Technology and strategic investments. Our products evolve along with changes in technology, changes in the availability and price of raw materials and changes in design preferences of the end users of our products. Also, regulatory requirements can occasionally impact the design and functionality of our products. We address these dynamic conditions, as well as our customers’ desires, by continually investing in the development of each of our segments’ products and by maintaining a diverse product portfolio which contains both mature and emerging technologies. We remain committed to technological development through investing in research, development and engineering activities focused on designing next generation products, improving our existing products and improving our manufacturing processes. If we determine that any of our segments’ manufacturing processes would benefit from capital investment, we may allocate resources to fund the expansion of property, plant and equipment used in these processes. For example, we have committed capital to advanced three dimensional antenna equipment which are used to produce the next-generation of our Wireless products. We have also committed capital to automate certain manual manufacturing processes and to implement an enterprise resource planning (“ERP”) system to enhance visibility, reduce cost, and enhance customer service. In the future, similar investments in property, plant and equipment or research, development and engineering may be funded through internally generated cash flows or through other external resources.

Cost reduction programs. We continue to simplify our operations to optimally match our capacity to the current and anticipated revenues and unit demand of each of our operating segments. Specific actions to simplify our operations will dictate the future expenses associated with our cost reduction programs. Actions taken over the past several years, such as divestitures, plant closures, plant relocations, asset impairments and reduction in personnel, have resulted in the elimination of a variety of future costs. The majority of these costs, not related to the impairment of long-lived assets, represent the annual salaries and benefits of terminated employees, including both those related to manufacturing and those that provided selling, general and administrative services. Also, we have experienced depreciation savings from disposed equipment and reductions in rental expense from the termination of lease agreements. Historically, we have also reduced labor and overhead costs as a result of relocating factories to lower-cost locations, specifically China. The savings created by these cost reduction programs impact cost of goods sold and selling, general and administrative expenses, but the timing of such savings may not be apparent due to other performance factors such as unanticipated changes in demand, changes in unit selling prices, operational challenges and changes in operating strategies.

During the six months ended July 1, 2011, we incurred expenses of $10.6 million for a number of cost reduction actions approved by our management. These charges include severance and related costs of $10.4 million and a $0.2 million write-down of a manufacturing facility to its fair value. During the six months ended June 25, 2010, we determined that approximately $29.7 million of our wireless reporting unit’s goodwill and identifiable intangible assets were impaired. Also, we recorded a charge of $1.4 million for a number of cost reduction actions. These charges include severance and related payments of $1.0 million and fixed asset impairments of $0.4 million. The impaired assets were identified in 2010 and primarily include machinery and equipment that were unable to be cost-efficiently repaired or refitted for other manufacturing purposes.

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Divestitures. We complete divestitures to streamline our operations, to focus on our core businesses, to reduce our external debt and to strengthen our financial position. For example, we divested the European and Asian businesses of our former Electrical contact products segment in September 2010 for net proceeds of approximately $53.3 million. Also, we completed the sale of Electrical’s North American business for an amount immaterial to our Consolidated Financial Statements during January 2010. We have had no continuing material involvement with any of our divested operations after each respective sale.

Management focus. Our executives focus on a number of metrics to evaluate our consolidated financial condition and operating performance. For example, we use consolidated revenue growth, gross margin, operating margin and return on research, development and engineering as performance measures. Operating leverage, or incremental operating profit as a percentage of incremental sales, is also reviewed, which reflects the benefit of absorbing fixed overhead and operating expenses. In evaluating consolidated working capital, liquidity and cash flow, our executives also use performance measures such as days sales outstanding, days payables outstanding, inventory turnover, debt-to-EBITDA leverage, cash conversion efficiency and free cash flow. We define free cash flow as cash flow from operations less capital spending. Additionally, as the continued success of our business is largely dependent on meeting and exceeding our customers’ expectations, non-financial performance measures relating to product development, product quality and on-time delivery assists in monitoring customer satisfaction on an on-going basis.

International operations. At July 1, 2011, we had manufacturing operations in the United States of America and China. However, nearly all of our products are manufactured in China and sold to customers in China and other foreign countries. Our net sales are denominated primarily in U.S. dollars, euros and Chinese renminbi. Changing exchange rates often impact our financial results and our period-over-period comparisons. This is particularly true of movements in the U.S. dollar’s exchange rate with the Chinese renminbi and the euro, and each of these and other foreign currencies relative to each other. Sales and net earnings denominated in currencies other than the U.S. dollar may result in higher or lower net sales and net earnings upon translation for our U.S. dollar denominated Consolidated Financial Statements. For example, sales in certain divisions of Power and Wireless are denominated primarily in renminbi and euro. Also, net earnings may be affected by the mix of sales and expenses by currency within each of our segments. Foreign currency gains or losses may be incurred when non-functional currency denominated transactions are remeasured to an operation’s functional currency for financial reporting purposes. An increase in the percentage of our transactions denominated in non-U.S. currencies may result in increased foreign exchange exposure on our Consolidated Statements of Operations. In addition, we may also experience a positive or negative translation adjustment to equity because our investments in non-U.S. dollar-functional subsidiaries may translate to more or less U.S. dollars in our U.S. Consolidated Financial Statements.

In order to reduce our exposure to currency fluctuations, we may purchase foreign exchange forward contracts and/or currency options. These contracts provide a predetermined exchange rate or range of rates at the time the contract is purchased. This allows us to shift the majority of the risk of currency fluctuation from the date of the contract to a third party for a fee. In determining the use of forward exchange contracts and currency options, we consider the amount of sales, purchases and net assets or liabilities denominated in local currencies, the currency to be hedged and the costs associated with the contracts. At July 1, 2011, we had six foreign exchange forward contracts outstanding to sell forward approximately 3.0 million euro, or approximately $4.4 million, to receive Chinese renminbi. The fair value of these forward contracts was a liability of $0.2 million as determined through the use of Level 2 fair value inputs as defined in ASC Topic 815. These contracts were used to mitigate the risk of currency fluctuations at our Chinese operations.

Income taxes. Our effective income tax rate is affected by the proportion of our income earned in higher tax jurisdictions, such as those in Europe and the United States, and income earned in lower tax jurisdictions, such as Hong Kong and China. This mix of income can vary significantly from one period to another. Additionally, our effective income tax rate will be impacted from period to period by significant transactions and the deductibility of severance and impairment costs and other similar costs. Changes in operations, tax legislation, estimates, judgments and forecasts may also affect our tax rate from period to period. We have benefited over the years from favorable tax incentives and other tax policies. However, there is no guarantee as to how long these benefits will continue to exist, which could materially impact our Consolidated Financial Statements.

Except in limited circumstances, we have not provided for U.S. income and foreign withholding taxes on our non-U.S. subsidiaries’ undistributed earnings. Such earnings may include our pre-acquisition earnings of foreign entities acquired through stock purchases, which, with the exception of approximately $8.5 million, are intended to be reinvested outside of the U.S. indefinitely.

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Results of Operations

Three months ended July 1, 2011 compared to the three months ended June 25, 2010

The table below presents our results of operations and the change in those results from period to period in both U.S dollars and percentage (in thousands):

	Three Months Ended
	July 1,			June 25,			Change			Change			Results as % of net sales
	2011			2010			$			%				2011		2010
Net sales	$	94,758		$	116,473		$	(21,715	)		(18.6	)%		100.0	%	100.0	%
Cost of sales		72,385			85,605			13,220			15.4	%		(76.4	)%	(73.5	)%
Gross profit		22,373			30,868			(8,495	)		(27.5	)%		23.6	%	26.5	%

Selling, general and administrative expenses		21,255			24,689			3,434			13.9	%		(22.4	)%	(21.2	)%
Severance, impairment and other associated costs		3,867			3,767			(100	)		(2.7	)%		(4.1	)%	(3.2	)%
Costs related to unsolicited takeover attempt		1,486			--			(1,486	)		100	%		(1.6	)%	--
Operating profit (loss)		(4,235	)		2,412			(6,647	)		(275.6	)%		(4.5	)%	(2.1	)%

Interest expense, net		(1,158	)		(1,272	)		114			(9.0	)%		(1.2	)%	(1.1	)%
Other income (expense), net		167			(1,625	)		1,792			(110.3	)%		0.2	%	(1.4	)%

Loss from continuing operations before income taxes		(5,226	)		(485	)		(4,741	)		977.5	%		(5.5	)%	(0.4	)%

Income tax expense (benefit)		(765	)		1,997			2,762			138.3	%		0.8	%	(1.7	)%

Net loss from continuing operations		(4,461	)		(2,482	)		(1,979	)		79.7	%		(4.7	)%	(2.1	)%

Net earnings (loss) from discontinued operations		--			2,908			(2,908	)		(100.0	)%		--		(2.5	)%

Net earnings (loss)	$	(4,461	)	$	426		$	(4,887	)		(1,147.2	)%		(4.7	)%	0.4	%

Net sales. Our consolidated net sales decreased by 18.6% primarily as a result of the decline in sales of our wireless products in the mobile handset market, which continues to be negatively impacted by the loss of certain business with a major handset OEM customer due to a sourcing change. We also experienced lower demand in Network due to lower industry demand and the utilization of remaining inventory purchased by certain customers during 2010. These declines were partially offset by growth in the sales of Power’s automotive and military and aerospace products and an increase in sales to new antenna customers by Wireless.

Net sales for our three segments for the three months ended July 1, 2011 and June 25, 2010 were as follows (in thousands):

	July 1, 2011		June 25, 2010
Network	$	43,391	$	60,845
Power		38,668		32,819
Wireless		12,699		22,809
Net sales	$	94,758	$	116,473

Gross profit. Our consolidated gross margin for the three months ended July 1, 2011 was 23.6% as compared to 26.5% for the three months ended June 25, 2010. The decrease in our gross profit during the three months ended July 1, 2011 was primarily the result of lower demand in Network and Wireless, higher wage rates, higher raw material costs, and lower pricing for certain Network products. Partially offsetting these decreases to our gross profit were increased demand in Power products and continued migration of our manufacturing to lower-cost existing facilities located in central China.

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Selling, general and administrative expenses. Total selling, general and administrative expenses decreased by $3.4 million primarily due to prudent expense management in light of lower sales in Wireless and Network and the early benefits of expense reduction actions announced earlier this year.

Research, development and engineering expenses (“RD&E”) are included in selling, general and administrative expenses. For the three months ended July 1, 2011 and June 25, 2010, respectively, RD&E was as follows (in thousands):

	2011			2010
RD&E	$	6,935		$	7,282
Percentage of sales		7.3	%		6.3	%

Our RD&E spending tends to develop at a rate which is less dramatic than our sales changes. Due to decreased sales levels experienced in the three months ended July 1, 2011, our RD&E as a percentage of sales increased. We believe that future sales in the electronic components markets will be driven by next-generation products. As a result, design and development activities with our OEM customers continue at an aggressive pace that is consistent with market activity. Also, included in RD&E expense for both the three months ended July 1, 2011 and June 25, 2010 was approximately $0.1 million and $0.5 million of legal expenses, respectively, which we incurred in connection with the patent lawsuit filed by Halo Electronics. Refer to further discussion in Note 7, Commitments and contingencies.

Severance, impairment and other associated costs. During the three months ended July 1, 2011, we incurred a charge of $3.9 million for a number of cost reduction actions approved by management. These charges are for severance and related payments.

During the three months ended June 25, 2010, we determined that a $3.6 million technology asset related to our audio products was impaired as a result of our decision to begin considering alternatives to withdraw from the audio market. Additionally we incurred a charge of $0.2 million related to a program initiated in 2010 to reorganize our wireless group’s operation in Finland and China.

Interest. Net interest expense was consistent between the three months ended July 1, 2011 and June 25, 2010, which reflects comparable average debt levels related to our continuing operations for both periods.

Other. Net other income (expense) is primarily attributable to our net foreign exchange activity related to changes in the varying currencies of our intercompany lending program. During the three months ended July 1, 2011 and June 25, 2010, we recorded net foreign currency losses of approximately $0.1 million and $1.7 million, respectively. The decreased exposure in foreign currency changes from June 25, 2010 to July 1, 2011 was the result of continued simplification efforts and the reduction of legal entities.

Income taxes. For the three months ended July 1, 2011, we recorded a tax benefit of $0.8 million compared to a tax expense of $2.0 million for the three months ended June 25, 2010. The increase in our benefit was primarily due to the absence of the non-deductible goodwill impairment charges that reduced the 2010 tax benefit, partially offset by higher restructuring charges incurred in lower rate tax jurisdictions during the three months ended July 1, 2011.

Discontinued operations. Net earnings from discontinued operations was $2.9 million in the three months ended June 25, 2010 and relates to Electrical’s operations in Europe and Asia. This business was divested in 2010.

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A summary of our net earnings (loss) from each of our discontinued operations for the three months ended July 1, 2011 and June 25, 2010 is as follows (in thousands):

	Three months ended
	July 1, 2011		June 25, 2010
Electrical	$	--	$	3,143
Medtech		--		(201	)
MEMS		--		(34	)
Total	$	--	$	2,908

Results of Operations

Six months ended July 1, 2011 compared to the six months ended June 25, 2010

The table below presents our results of operations and the change in those results from period to period in both U.S dollars and percentage (in thousands):

	Six Months Ended
	July 1,			June 25,			Change			Change			Results as % of net sales
	2011			2010			$			%				2011		2010
Net sales	$	182,797		$	209,333		$	(26,536	)		(12.7	)%		100.0	%	100.0	%
Cost of sales		142,000			158,873			16,873			10.6	%		(77.7	)%	(75.9	)%
Gross profit		40,797			50,460			(9,663	)		(19.1	)%		22.3	%	24.1	%

Selling, general and administrative expenses		42,796			47,387			4,591			9.7	%		(23.4	)%	(22.6	)%
Severance, impairment and other associated costs		10,623			31,094			20,471			65.8	%		(5.8	)%	(14.9	)%
Cost related to unsolicited takeover attempt		1,916			--			(1,916	)		100.0	%		(1.0	)%	--
Operating loss		(14,538	)		(28,021	)		13,483			(48.1	)%		(8.0	)%	(13.4	)%

Interest expense, net		(2,451	)		(2,621	)		170			(6.5	)%		(1.3	)%	(1.3	)%
Other income (expense), net		1,709			(7,529	)		9,238			(122.7	)%		0.9	%	(3.6	)%

Loss from continuing operations before income taxes		(15,280	)		(38,171	)		22,891			(60.0	)%		(8.4	)%	(18.2	)%

Income tax (benefit) expense		(5,830	)		(145	)		5,685			(3,920.7	)%		3.2	%	0.1	%
Net loss from continuing operations		(9,450	)		(38,026	)		28,576			(75.1	)%		(5.2	)%	(18.2	)%

Net income (loss) from discontinued operations		612			(15,168	)		15,780			(104.0	)%		0.3	%	(7.2	)%

Net loss	$	(8,838	)	$	(53,194	)	$	44,356			(83.4	)%		(4.8	)%	(25.4	)%

Net Sales. Our consolidated net sales decreased by 12.7% in the six months ended July 1, 2011 as compared to the prior year period primarily as a result of the decline in Network sales due to lower industry demand, utilization of inventory purchased by certain customers in 2010, and due to sales of our wireless products in the mobile handset market, which continue to be negatively impacted by the loss of certain business with a major OEM customer due to a sourcing change. The foreign currency effect on our US dollar reported sales were neutral when comparing the results for the six months ended July 1, 2011 and June 25, 2010.

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Net sales for our three segments for the six months ended July 1, 2011 and June 25, 2011 were as follows (in thousands):

	July 1, 2011		June 25, 2010
Network	$	85,935	$	104,219
Power		70,567		58,299
Wireless		26,295		46,815
Net sales	$	182,797	$	209,333

Gross profit. Our consolidated gross margin for the six months ended July 1, 2011 was 22.3% as compared to 24.1% for the six months ended June 25, 2010. The decrease in our gross profit during the six months ended July 1, 2011 was primarily the result of lower demand in Network and Wireless, higher wage rates, higher raw material costs, and price concessions for certain Network products. Partially offsetting these decreases to our gross profit was increased demand in Power products and the continued migration of our manufacturing to existing facilities located in lower cost areas in central China.

Selling, General and Administrative Expenses. Total selling, general and administrative expenses decreased $4.6 million primarily due to prudent expense management in light of lower sales in Wireless and Network and the early benefits of expense reduction actions announced earlier this year.

Research, development and engineering expenses (“RD&E”) are included in selling, general and administrative expenses. For the six months ended July 1, 2011 and June 25, 2010, respectively, RD&E was as follows (in thousands):

	2011		2010
RD&E	$	14,505	$	14,771
Percentage of sales