cpii_10q-2qfy08.htm
UNITED
STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 28, 2008
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ________ to ________
Commission
file number: 00051928
CPI
INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
or Other Jurisdiction of Incorporation or Organization)
|
75-3142681
(I.R.S.
Employer Identification No.)
|
811
Hansen Way, Palo Alto, California 94303
(Address
of Principal Executive Offices and Zip Code)
|
(650)
846-2900
(Registrant’s
telephone number, including area code)
|
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨ Accelerated
filer x
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company) 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
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding for each of the registrant’s classes of Common
Stock, as of the latest practicable date: 16,511,405 shares of Common Stock,
$0.01 par value, at April 28, 2008.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
10-Q
REPORT
INDEX
|
4
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
7
|
|
|
|
37
|
|
|
|
58
|
|
|
|
60
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
61
|
|
|
|
61
|
|
|
|
61
|
|
|
|
61
|
|
|
|
61
|
|
|
|
61
|
|
|
|
62
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
Cautionary
Statements Regarding Forward-Looking Statements
This
document contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that relate to future events or our future
financial performance. In some cases, readers can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. Forward-looking statements are subject to known and unknown risks
and uncertainties, which could cause actual results to differ materially from
the results projected, expected or implied by the forward-looking statements.
These risk factors include, without limitation, competition in our end markets;
our significant amount of debt; changes or reductions in the U.S. defense
budget; currency fluctuations; U.S. Government contracts laws and regulations;
changes in technology; the impact of unexpected costs; and inability to obtain
raw materials and components. All written and oral forward-looking statements
made in connection with this report that are attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the foregoing
risk factors and other cautionary statements included herein and in our other
filings with the Securities and Exchange Commission (“SEC”). We are under no
duty to update any of the forward-looking statements after the date of this
report to conform such statements to actual results or to changes in our
expectations.
The
information in this report is not a complete description of our business or the
risks and uncertainties associated with an investment in our securities. You
should carefully consider the various risks and uncertainties that impact our
business and the other information in this report and in our other filings with
the SEC before you decide to invest in our securities or to maintain or increase
your investment.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
(In
thousands, except per share data – unaudited)
|
|
March
28,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,241 |
|
|
$ |
20,474 |
|
Restricted
cash
|
|
|
1,790 |
|
|
|
2,255 |
|
Accounts
receivable, net
|
|
|
50,719 |
|
|
|
52,589 |
|
Inventories
|
|
|
66,861 |
|
|
|
67,447 |
|
Deferred
tax assets
|
|
|
9,948 |
|
|
|
9,744 |
|
Prepaid
and other current assets
|
|
|
3,787 |
|
|
|
4,639 |
|
Total
current assets
|
|
|
153,346 |
|
|
|
157,148 |
|
Property,
plant, and equipment, net
|
|
|
64,819 |
|
|
|
66,048 |
|
Deferred
debt issue costs, net
|
|
|
5,728 |
|
|
|
6,533 |
|
Intangible
assets, net
|
|
|
80,201 |
|
|
|
81,743 |
|
Goodwill
|
|
|
162,535 |
|
|
|
161,573 |
|
Other
long-term assets
|
|
|
796 |
|
|
|
3,177 |
|
Total
assets
|
|
$ |
467,425 |
|
|
$ |
476,222 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
2,000 |
|
|
$ |
1,000 |
|
Accounts
payable
|
|
|
21,849 |
|
|
|
21,794 |
|
Accrued
expenses
|
|
|
26,045 |
|
|
|
26,349 |
|
Product
warranty
|
|
|
4,952 |
|
|
|
5,578 |
|
Income
taxes payable
|
|
|
5,100 |
|
|
|
8,748 |
|
Advance
payments from customers
|
|
|
11,655 |
|
|
|
12,132 |
|
Total
current liabilities
|
|
|
71,601 |
|
|
|
75,601 |
|
Deferred
income taxes
|
|
|
26,310 |
|
|
|
28,394 |
|
Long-term
debt, less current portion
|
|
|
234,623 |
|
|
|
245,567 |
|
Other
long-term liabilities
|
|
|
2,120 |
|
|
|
754 |
|
Total
liabilities
|
|
|
334,654 |
|
|
|
350,316 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value, 90,000 shares authorized;
16,485 and 16,370 shares issued and
outstanding)
|
|
|
165 |
|
|
|
164 |
|
Additional
paid-in capital
|
|
|
70,165 |
|
|
|
68,763 |
|
Accumulated
other comprehensive (loss) income
|
|
|
(2,265 |
) |
|
|
937 |
|
Retained
earnings
|
|
|
64,706 |
|
|
|
56,042 |
|
Total
stockholders’ equity
|
|
|
132,771 |
|
|
|
125,906 |
|
Total
liabilities and stockholders' equity
|
|
$ |
467,425 |
|
|
$ |
476,222 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME
(In
thousands, except per share data – unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
Sales
|
|
$ |
94,804 |
|
|
$ |
88,444 |
|
|
$ |
180,714 |
|
|
$ |
172,167 |
|
Cost
of sales
|
|
|
66,738 |
|
|
|
60,739 |
|
|
|
128,512 |
|
|
|
117,881 |
|
Gross
profit
|
|
|
28,066 |
|
|
|
27,705 |
|
|
|
52,202 |
|
|
|
54,286 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,930 |
|
|
|
2,352 |
|
|
|
5,654 |
|
|
|
4,243 |
|
Selling
and marketing
|
|
|
5,328 |
|
|
|
4,799 |
|
|
|
10,500 |
|
|
|
9,628 |
|
General
and administrative
|
|
|
5,492 |
|
|
|
5,846 |
|
|
|
11,645 |
|
|
|
10,250 |
|
Amortization
of acquisition-related intangible assets
|
|
|
781 |
|
|
|
546 |
|
|
|
1,562 |
|
|
|
1,094 |
|
Net
loss on disposition of fixed assets
|
|
|
41 |
|
|
|
40 |
|
|
|
75 |
|
|
|
58 |
|
Total
operating costs and expenses
|
|
|
14,572 |
|
|
|
13,583 |
|
|
|
29,436 |
|
|
|
25,273 |
|
Operating
income
|
|
|
13,494 |
|
|
|
14,122 |
|
|
|
22,766 |
|
|
|
29,013 |
|
Interest
expense, net
|
|
|
4,805 |
|
|
|
5,275 |
|
|
|
9,617 |
|
|
|
10,614 |
|
Loss
on debt extinguishment
|
|
|
393 |
|
|
|
- |
|
|
|
393 |
|
|
|
- |
|
Income
before income taxes
|
|
|
8,296 |
|
|
|
8,847 |
|
|
|
12,756 |
|
|
|
18,399 |
|
Income
tax expense
|
|
|
2,142 |
|
|
|
3,087 |
|
|
|
4,092 |
|
|
|
6,804 |
|
Net
income
|
|
$ |
6,154 |
|
|
$ |
5,760 |
|
|
$ |
8,664 |
|
|
$ |
11,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on cash flow hedges
|
|
|
(2,001 |
) |
|
|
(17 |
) |
|
|
(3,202 |
) |
|
|
(406 |
) |
Comprehensive
income
|
|
$ |
4,153 |
|
|
$ |
5,743 |
|
|
$ |
5,462 |
|
|
$ |
11,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Basic
|
|
$ |
0.38 |
|
|
$ |
0.35 |
|
|
$ |
0.53 |
|
|
$ |
0.72 |
|
Earnings
per share - Diluted
|
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
$ |
0.49 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute earnings per share - Basic
|
|
|
16,387 |
|
|
|
16,253 |
|
|
|
16,379 |
|
|
|
16,161 |
|
Shares
used to compute earnings per share - Diluted
|
|
|
17,656 |
|
|
|
17,730 |
|
|
|
17,744 |
|
|
|
17,646 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
(In
thousands – unaudited)
|
|
Six Months Ended
|
|
|
|
March
28,
|
|
|
March
30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
10,439 |
|
|
$ |
6,299 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(2,558 |
) |
|
|
(5,347 |
) |
Proceeds
from adjustment to acquisition purchase price
|
|
|
1,615 |
|
|
|
- |
|
Capitalized
expenses relating to potential business acquisition
|
|
|
- |
|
|
|
(119 |
) |
Payment
of patent application fees
|
|
|
(147 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(1,090 |
) |
|
|
(5,466 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
(10,000 |
) |
|
|
(5,000 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
418 |
|
|
|
398 |
|
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
542 |
|
Excess
tax benefit on stock option exercises
|
|
|
- |
|
|
|
679 |
|
Net
cash used in financing activities
|
|
|
(9,582 |
) |
|
|
(3,381 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(233 |
) |
|
|
(2,548 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
20,474 |
|
|
|
30,153 |
|
Cash
and cash equivalents at end of period
|
|
$ |
20,241 |
|
|
$ |
27,605 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
8,293 |
|
|
$ |
10,707 |
|
Cash
paid for income taxes, net of refunds
|
|
$ |
8,722 |
|
|
$ |
10,495 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
(All
tabular dollar amounts in thousands except share and per share
amounts)
1.
|
The
Company and a Summary of its Significant Accounting
Policies
|
The
Company
Unless
the context otherwise requires, “CPI International” means CPI International,
Inc., and “CPI” means Communications & Power Industries, Inc. CPI is a
direct subsidiary of CPI International. CPI International is a
holding company with no operations of its own. The term the “Company”
refers to CPI International and its direct and indirect subsidiaries on a
consolidated basis.
The
accompanying consolidated financial statements represent the consolidated
results and financial position of CPI International, which is controlled by
affiliates of The Cypress Group L.L.C. (“Cypress”). CPI
International, through its wholly owned subsidiary, CPI, develops, manufactures,
and distributes microwave and power grid Vacuum Electron Devices (“VEDs”),
microwave amplifiers, modulators and various other power supply equipment and
devices. The Company has two reportable segments, VED and satcom
equipment.
Basis
of Presentation and Consolidation
The
Company’s fiscal year is the 52- or 53-week period that ends on the Friday
nearest September 30. Fiscal year 2008 comprises the 53-week period ending
October 3, 2008 and fiscal year 2007 comprised the 52-week period ending
September 28, 2007. The second quarters of fiscal years 2008 and 2007 both
include 13 weeks. The first two quarters of fiscal years 2008 and 2007
both include 26 weeks. All period references are to the Company’s fiscal periods
unless otherwise indicated.
The
accompanying unaudited condensed consolidated financial statements of the
Company as of March 28, 2008 and for the three and six months ended March 28,
2008 are unaudited and reflect all normal recurring adjustments which are, in
the opinion of management, necessary for the fair statement of such financial
statements. These unaudited condensed consolidated financial statements
should be read in conjunction with the Company’s consolidated financial
statements and notes thereto included in the Company’s Annual Report on
Form 10-K for the fiscal year ended September 28, 2007. The condensed
consolidated balance sheet as of September 28, 2007 has been derived from the
audited financial statements at that date. The results of operations for
the interim period ended March 28, 2008 are not necessarily indicative of
results to be expected for the full year.
The
accompanying unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances, transactions, and stockholdings have been eliminated in
consolidation.
Use
of Estimates and Assumptions
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of sales and
costs and expenses during the reporting period. On an ongoing basis, the Company
evaluates its estimates, including those related to provision for revenue
recognition; inventory and inventory reserves; product warranty; business
combinations; recoverability and valuation of recorded amounts of long-lived
assets and identifiable intangible assets, including goodwill; recognition of
share-based compensation; and recognition and
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
measurement
of current and deferred income tax assets and liabilities. The Company bases its
estimates on various factors and information, which may include, but are not
limited to, history and prior experience, experience of other enterprises in the
same industry, new related events, current economic conditions and information
from third party professionals that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Revenue
Recognition
Sales are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable, and collectibility is reasonably
assured. The Company’s products are generally subject to warranties, and the
Company provides for the estimated future costs of repair, replacement or
customer accommodation in cost of sales.
The
Company has commercial and U.S. Government fixed-price contracts that are
accounted for under American Institute of Certified Public Accountants Statement
of Position No. 81-1, “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.” These contracts are generally longer than
one year in duration and include a material amount of product development. The
Company uses the percentage-of-completion method when reasonably dependable
estimates of the extent of progress toward completion, contract revenues and
contract costs can be made. The portion of revenue earned or the amount of gross
profit earned for a period is determined by measuring the extent of progress
toward completion using total cost incurred to date and estimated costs at
contract completion.
2.
|
Recently
Issued Accounting Standards
|
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued
FASB Interpretation (“FIN”) No. 48, “Accounting for Income Tax Uncertainties.”
FIN No. 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by the taxing authority. The recently issued literature also provides guidance
on the derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties. FIN No. 48 also
includes guidance concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with any recorded
income tax uncertainties. Effective in the first quarter of fiscal year 2008
starting September 29, 2007, the Company adopted FIN No. 48. The adoption of FIN
No. 48 did not have any impact on the Company’s financial position,
net income or prior year financial statements. See Note 9, "Income Taxes,"
for further discussion.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value under other accounting
pronouncements that permit or require fair value measurements, changes the
methods used to measure fair value and expands disclosures about fair value
measurements. In particular, disclosures are required to provide information on:
the extent to which fair value is used to measure assets and liabilities; the
inputs used to develop measurements; and the effect of certain of the
measurements on earnings (or changes in net assets). SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007 for financial assets and
liabilities and for fiscal years beginning after November 15, 2008 for
non-financial assets and liabilities. Early adoption, as of the beginning of an
entity’s fiscal year, is also
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
permitted,
provided interim financial statements have not yet been issued. The Company will
be required to adopt SFAS No. 157 in its fiscal year 2009 commencing October 4,
2008 for financial assets and liabilities and in its fiscal year 2010 commencing
October 2, 2009 for non-financial assets and liabilities. The Company is
currently evaluating the potential impact, if any, that the adoption of this new
standard will have on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS No. 159
is to provide opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. The Company will be required to adopt SFAS No. 159 in its fiscal year
2009 commencing October 4, 2008 and is currently evaluating the impact, if any,
that the adoption of this new standard will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statement—amendments of ARB No. 51.” SFAS No. 160
states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS No.
160 applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The Company will be required to adopt SFAS
No. 160 in its fiscal year 2010 commencing October 3, 2009 and is currently
evaluating the impact, if any, that the adoption of this new standard will have
on its consolidated financial statements.
In December 2007, the FASB
issued SFAS No. 141 (revised 2007) (“SFAS No. 141(R)”), “Business
Combinations,” which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non controlling interest in the acquiree and the
goodwill acquired. The Statement also establishes disclosure requirements which
will enable users to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008. The Company will be required to adopt SFAS No. 141(R) in its
fiscal year 2010 commencing October 3, 2009 and is currently evaluating the
impact, if any, that the adoption of this new standard will have on its
consolidated financial statements.
In March 2008, the FASB issued SFAS
No. 161, “Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced
disclosures about an entity’s derivative instruments and hedging activities
including: (1) how and why an entity uses derivative instruments;
(2) how derivative instruments and related hedged items are accounted for
under SFAS No. 133 and its related interpretations; and (3) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15,
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
2008,
with earlier application encouraged. The Company will be required to adopt SFAS
No. 161 in its second quarter of fiscal year 2009 commencing January 3, 2009 and
is currently evaluating the impact, if any, that the adoption of this new
standard will have on its consolidated financial statements.
3.
|
Supplemental
Balance Sheet Information
|
Accounts
Receivable: Accounts receivable are stated net of allowances
for doubtful accounts as follows:
|
|
March
28,
|
|
|
September
28,
|
|
|
2008
|
|
|
2007
|
|
Accounts
receivable
|
|
$ |
51,108 |
|
|
$ |
52,678 |
|
Less:
Allowance for doubtful accounts
|
|
|
(389 |
) |
|
|
(89 |
) |
Accounts
receivable, net
|
|
$ |
50,719 |
|
|
$ |
52,589 |
|
Inventories: The
following table provides details of inventories, net of reserves:
|
|
March
28,
|
|
|
September
28,
|
|
|
2008
|
|
|
2007
|
|
Raw
material and parts
|
|
$ |
40,355 |
|
|
$ |
40,725 |
|
Work
in process
|
|
|
19,768 |
|
|
|
18,168 |
|
Finished
goods
|
|
|
6,738 |
|
|
|
8,554 |
|
|
|
$ |
66,861 |
|
|
$ |
67,447 |
|
Reserve for excess, slow moving and
obsolete inventory: The following table summarizes
the activity related to reserves for excess, slow moving and obsolete
inventory:
|
|
Six Months Ended
|
|
|
|
March
28,
|
|
|
March
30,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of fiscal year
|
|
$ |
9,784 |
|
|
$ |
8,822 |
|
Inventory
provision, charged to cost of sales
|
|
|
550 |
|
|
|
540 |
|
Inventory
write-offs
|
|
|
(397 |
) |
|
|
(218 |
) |
Balance
at end of period
|
|
$ |
9,937 |
|
|
$ |
9,144 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Reserve for loss
contracts: The following table summarizes the activity
related to reserves for loss contracts:
|
|
Six Months Ended
|
|
|
|
March
28,
|
|
|
March
30,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of fiscal year
|
|
$ |
2,700 |
|
|
$ |
1,702 |
|
Provision
for loss contracts, charged to
|
|
|
|
|
|
|
|
|
cost
of sales
|
|
|
1,431 |
|
|
|
629 |
|
Reduction
upon revenue
|
|
|
|
|
|
|
|
|
recognition
|
|
|
(2,096 |
) |
|
|
(1,033 |
) |
Balance
at end of period
|
|
$ |
2,035 |
|
|
$ |
1,298 |
|
Reserve
for loss contracts are reported in the condensed consolidated balance sheet in
the following accounts:
|
|
March
28,
|
|
|
March
30,
|
|
|
|
2008
|
|
|
2007
|
|
Inventories
|
|
$ |
953 |
|
|
$ |
971 |
|
Accrued
expenses
|
|
|
1,082 |
|
|
|
327 |
|
|
|
$ |
2,035 |
|
|
$ |
1,298 |
|
Intangible Assets: The
following tables present the details of the Company’s total acquisition-related
intangible assets:
|
|
Weighted Average Useful Life
(in years)
|
|
|
March 28, 2008
|
|
|
September 28, 2007
|
|
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
VED
Core Technology
|
|
50
|
|
|
|
$ |
30,700 |
|
|
$ |
(2,580 |
) |
|
$ |
28,120 |
|
|
$ |
30,700 |
|
|
$ |
(2,273 |
) |
|
$ |
28,427 |
|
VED
Application Technology
|
|
25
|
|
|
|
|
19,800 |
|
|
|
(3,317 |
) |
|
|
16,483 |
|
|
|
19,800 |
|
|
|
(2,921 |
) |
|
|
16,879 |
|
X-ray
Generator and Satcom
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
Technology
|
|
15
|
|
|
|
|
8,000 |
|
|
|
(2,241 |
) |
|
|
5,759 |
|
|
|
8,000 |
|
|
|
(1,974 |
) |
|
|
6,026 |
|
Antenna
and Telemetry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
25
|
|
|
|
|
5,300 |
|
|
|
(135 |
) |
|
|
5,165 |
|
|
|
5,300 |
|
|
|
(29 |
) |
|
|
5,271 |
|
Customer
backlog
|
|
1
|
|
|
|
|
580 |
|
|
|
(368 |
) |
|
|
212 |
|
|
|
580 |
|
|
|
(78 |
) |
|
|
502 |
|
Land
lease
|
|
46
|
|
|
|
|
11,810 |
|
|
|
(1,054 |
) |
|
|
10,756 |
|
|
|
11,810 |
|
|
|
(928 |
) |
|
|
10,882 |
|
Tradename
|
|
Indefinite
|
|
|
|
7,600 |
|
|
|
- |
|
|
|
7,600 |
|
|
|
7,600 |
|
|
|
- |
|
|
|
7,600 |
|
Customer
list and programs
|
|
25
|
|
|
|
|
6,280 |
|
|
|
(817 |
) |
|
|
5,463 |
|
|
|
6,280 |
|
|
|
(684 |
) |
|
|
5,596 |
|
Noncompete
agreement
|
|
5
|
|
|
|
|
640 |
|
|
|
(144 |
) |
|
|
496 |
|
|
|
640 |
|
|
|
(80 |
) |
|
|
560 |
|
Patent
application fees
|
|
-
|
|
|
|
|
147 |
|
|
|
- |
|
|
|
147 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
$ |
90,857 |
|
|
$ |
(10,656 |
) |
|
$ |
80,201 |
|
|
$ |
90,710 |
|
|
$ |
(8,967 |
) |
|
$ |
81,743 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Intangible
assets, net as of March 28, 2008 include a total of approximately $0.1 million
of application costs and associated legal costs incurred to obtain certain
patents. Upon obtaining these patents, they will be amortized on a straight-line
basis and charged to operations over their estimated useful lives, not to exceed
17 years.
The
amortization of intangible assets amounted to $0.8 million and $1.7 million for
the three and six months ended March 28, 2008, respectively, and $0.6 million
and $1.2 million for the corresponding periods of fiscal year 2007.
The
estimated future amortization expense of intangible assets, excluding the
Company’s unamortized tradenames, is as follows:
Fiscal Year
|
|
Amount
|
|
2008
(remaining six months)
|
|
$ |
1,615 |
|
2009
|
|
|
2,808 |
|
2010
|
|
|
2,786 |
|
2011
|
|
|
2,786 |
|
2012
|
|
|
2,772 |
|
Thereafter
|
|
|
59,834 |
|
|
|
$ |
72,601 |
|
Goodwill: The
following table sets forth the changes in goodwill by reportable
segment:
|
|
Reportable Segments
|
|
|
|
VED
|
|
|
Satcom
|
|
|
Other
|
|
|
Total
|
|
Balance
at September 28, 2007
|
|
$ |
132,897 |
|
|
$ |
13,830 |
|
|
$ |
14,846 |
|
|
$ |
161,573 |
|
Malibu
purchase price adjustment
|
|
|
- |
|
|
|
- |
|
|
|
1,009 |
|
|
|
1,009 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
(47 |
) |
|
|
(47 |
) |
Balance
at March 28, 2008
|
|
$ |
132,897 |
|
|
$ |
13,830 |
|
|
$ |
15,808 |
|
|
$ |
162,535 |
|
During the three months
ended March 28, 2008, the Company finalized the purchase price for Malibu
Research Associates, Inc., resulting in a $1.0 million increase in goodwill. See
Note 4 for details. Other represents tax benefit from amortization expense for
the excess of tax goodwill over the book goodwill.
Product
Warranty: The following table summarizes the
activity related to product warranty:
|
|
Six Months Ended
|
|
|
|
March
28,
|
|
|
March
30,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of fiscal year
|
|
$ |
5,578 |
|
|
$ |
5,958 |
|
Estimates
for product warranty, charged to cost of sales
|
|
|
1,406 |
|
|
|
2,374 |
|
Actual
costs of warranty claims
|
|
|
(2,032 |
) |
|
|
(2,807 |
) |
Balance
at end of period
|
|
$ |
4,952 |
|
|
$ |
5,525 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Malibu
Research Associates
On August
10, 2007, the Company completed its acquisition of all outstanding common stock
of the privately held Malibu Research Associates, Inc. (“Malibu”). Malibu,
headquartered in Camarillo, California, is a designer, manufacturer and
integrator of advanced antenna systems for radar, radar simulators and telemetry
systems, as well as for data links used in ground, airborne, unmanned aerial
vehicles (“UAV”) and shipboard systems. Under the terms of the purchase
agreement, at the closing of the acquisition, the Company paid cash of
approximately $22.4 million, which
included $2.3 million and $1.0 million placed into indemnity and working capital
escrow accounts, respectively. The indemnity escrow amount was provided to
ensure funds are available to satisfy potential indemnification claims asserted
prior to January 1, 2009, and the working capital escrow amount was provided to
satisfy any negative differences between the estimated working capital
amount as of the acquisition closing date and the actual working capital amount
at the acquisition closing date.
For
financial reporting purposes, consideration of approximately $2.6 million,
which was part of the cash consideration paid for Malibu at the
closing of the acquisition, was excluded from the purchase price allocation and
was reported as other long-term assets in the consolidated balance sheet at
September 28, 2007. This consideration amount represents the
difference between the estimated working capital amount as of the acquisition
closing date and the actual working capital amount as of the acquisition closing
date. In accordance with SFAS No. 141, any contingent consideration that has not
been determined beyond a reasonable doubt is excluded from the purchase price
allocation until the contingency is resolved. The Company intended to make a
claim against the working capital escrow account of $1.0 million and, if
necessary, the indemnity escrow account of $2.3 million to recover the working
capital shortfall once the amount of such shortfall had been finally
determined.
During the second quarter
of fiscal year 2008, the valuation of Malibu’s net working capital amount as of
the acquisition closing date was finalized, resulting in a disbursement of cash
to the Company of $1.6 million from the escrow accounts. The remaining $1.0
million of consideration was allocated to goodwill as the working capital
contingency was resolved, which
resulted in an adjusted cash purchase price of $20.7
million.
Additionally,
the Company may be required to pay a potential earnout to the former
stockholders of Malibu of up to $14.0 million, which is primarily contingent
upon the achievement of certain financial objectives over the three years
following the acquisition; and a discretionary earnout of up to $1.0 million
contingent upon achievement of certain succession planning goals by June 30,
2010. As of March 28, 2008, the Company has not accrued any of these contingent
earnout amounts as achievement of the objectives and goals has not occurred. Any
earnout consideration paid based on financial performance will be recorded as
additional goodwill. Any discretionary succession earnout consideration paid
will be recorded as general and administrative expense.
Under the
purchase method of accounting, the assets and liabilities of Malibu were
adjusted to their fair values and the excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill. The allocation of the
purchase price to specific assets and liabilities was based, in part, upon
internal estimates of cash flow and recoverability. The valuation of
identifiable intangible
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
assets
acquired was based on management’s estimates, currently available information
and reasonable and supportable assumptions. This purchase price allocation was
generally based on the fair value of these assets determined using the income
approach.
The
following table summarizes the allocation of the fair value of Malibu’s assets
acquired and liabilities assumed:
Net
current liabilities
|
|
$ |
(3,938 |
) |
Property,
plant and equipment
|
|
|
719 |
|
Deferred
tax liabilities
|
|
|
(703 |
) |
Identifiable
intangible assets
|
|
|
8,790 |
|
Goodwill
|
|
|
15,865 |
|
|
|
$ |
20,733 |
|
The
following table presents details of the purchased intangible assets
acquired:
|
|
Weighted Average Useful Life
(in years)
|
|
|
Amount
|
|
Non
compete agreements
|
|
5
|
|
|
|
$ |
530 |
|
Tradename
|
|
Indefinite
|
|
|
|
|
1,800 |
|
Antenna
and Telemetry technology
|
|
25
|
|
|
|
|
5,300 |
|
Backlog
|
|
1
|
|
|
|
|
580 |
|
Customer
relationships
|
|
15
|
|
|
|
|
580 |
|
|
|
|
|
|
|
$ |
8,790 |
|
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”
goodwill and indefinite lived intangibles will not be amortized but will be
tested for impairment at least annually.
The
Company’s consolidated financial statements include Malibu’s financial results
from the acquisition date.
Pro
Forma Results
Pro forma information giving effect to the Malibu acquisition has not been
presented because the pro forma information would not differ materially from the
historical results of the Company.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Long-term
debt comprises the following:
|
|
March
28,
|
|
|
September 28,
|
|
|
2008
|
|
|
2007
|
|
Term
loan, expiring 2014
|
|
$ |
95,750 |
|
|
$ |
99,750 |
|
8%
Senior subordinated notes due 2012
|
|
|
125,000 |
|
|
|
125,000 |
|
Floating rate senior notes
due 2015, net of issue
discount of $127 and $183
|
|
|
15,873 |
|
|
|
21,817 |
|
|
|
|
236,623 |
|
|
|
246,567 |
|
Less: Current
portion
|
|
|
2,000 |
|
|
|
1,000 |
|
Long-term
portion
|
|
$ |
234,623 |
|
|
$ |
245,567 |
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit
|
|
$ |
5,882 |
|
|
$ |
3,725 |
|
Senior Credit
Facilities: On August 1, 2007, CPI
amended and restated its then existing senior credit facilities. The amended and
restated senior credit facilities (the “Senior Credit Facilities”) provide for
borrowings of up to an aggregate principal amount of $160 million, consisting of
a $100 million term loan facility (“Term Loan”) and a $60 million revolving
credit facility (“Revolver”), with a sub-facility of $15 million for letters of
credit and $5 million for swing line loans. Upon certain specified conditions,
including
maintaining a senior secured leverage ratio of 3.75:1 or less on a pro forma
basis, CPI may seek commitments for a new class of term loans, not to exceed
$125 million in the aggregate. The Senior Credit Facilities are
guaranteed by CPI International and all of CPI’s domestic subsidiaries and are
secured by substantially all of the assets of CPI International, CPI and CPI’s
domestic subsidiaries.
Except as
provided in the following sentence, the Term Loan will mature on August 1, 2014
and the Revolver will mature on August 1, 2013. However, if, prior to
August 1, 2011, CPI has not repaid or refinanced its $125 million 8% Senior
Subordinated Notes due 2012, both the Term Loan and the Revolver will mature on
August 1, 2011.
The
Senior Credit Facilities replaced CPI’s previous senior credit facilities of
$130 million. On the closing date of the Senior Credit Facilities, CPI borrowed
$100 million under the Term Loan. Borrowings under the Senior Credit Facilities
bear interest at a rate equal to, at CPI’s option, LIBOR or the ABR plus the
applicable margin. The ABR is the greater of the (a) the prime rate and (b) the
federal funds rate plus 0.50%. For Term Loans, the applicable margin will be
2.00% for LIBOR borrowings and 1.00% for ABR borrowings. The applicable margins
under the Revolver vary depending on CPI’s leverage ratio, as defined in the
Senior Credit Facilities, and range from 1.25% to 2.00% for LIBOR borrowings and
from 0.25% to 1.00% for ABR borrowings.
In
addition to customary fronting and administrative fees under the Senior Credit
Facilities, CPI will pay letter of credit participation fees equal to the
applicable LIBOR margin per annum on the average daily amount of the letter of
credit exposure, and a commitment fee on the average daily unused commitments
under the Revolver. The commitment fee will vary depending on CPI’s
leverage ratio, as defined in the Senior Credit Facilities, and will range from
0.25% to 0.50%.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
The
Senior Credit Facilities require that CPI repay $250,000 of the Term Loan at the
end of each fiscal quarter prior to the maturity date of the Term Loan, with the
remainder due on the maturity date. CPI is required to prepay its
outstanding loans under the Senior Credit Facilities, subject to certain
exceptions and limitations, with net cash proceeds received from certain events,
including, without limitation (1) all such proceeds received from certain asset
sales by CPI International, CPI or any of CPI’s subsidiaries, (2) all such
proceeds received from issuances of debt (other than certain specified permitted
debt) or preferred stock by CPI International, CPI or any of CPI’s subsidiaries,
and (3) all such proceeds paid to CPI International, CPI or any of CPI’s
subsidiaries from casualty and condemnation events in excess of amounts applied
to replace, restore or reinvest in any properties for which proceeds were paid
within a specified period.
If CPI’s
leverage ratio, as defined in the Senior Credit Facilities, exceeds 3.5:1 at the
end of any fiscal year, CPI will also be required to make an annual prepayment
within 90 days after the end of such fiscal year equal to 50% of excess cash
flow, as defined in the Senior Credit Facilities, less optional prepayments made
during the fiscal year. CPI can make optional prepayments on the
outstanding loans at any time without premium or penalty, except for customary
“breakage” costs with respect to LIBOR loans.
The
Senior Credit Facilities contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of CPI International, CPI
or any of CPI’s subsidiaries to: sell assets; engage in mergers and
acquisitions; pay dividends and distributions or repurchase their capital stock;
incur additional indebtedness or issue equity interests; make investments and
loans; create liens or further negative pledges on assets; engage in certain
transactions with affiliates; enter into sale and leaseback
transactions; amend agreements or make prepayments relating to subordinated
indebtedness; and amend or waive provisions of charter documents in a manner
materially adverse to the lenders. CPI and its subsidiaries must comply with a
maximum capital expenditure limitation and a maximum total secured leverage
ratio, each calculated on a consolidated basis for CPI.
CPI made
repayments on the Term Loan of $4.0 million during the first six months of
fiscal year 2008 and $250,000 during the fourth quarter of fiscal year 2007,
leaving a principal balance of $95.75 million as of March 28, 2008. The $4.0
million Term Loan repayment during the first six months of fiscal year 2008
comprised the scheduled amortization payment of $250,000 for each of the first
and second quarters of fiscal year 2008 and an optional prepayment of $3.5
million. A portion of the optional prepayment will be applied against the
scheduled amortization payments due for the third and fourth quarters of fiscal
year 2008 and those due for fiscal years 2009 and 2010.
At March
28, 2008, the amount available for borrowing under the Revolver, after taking
into account the Company’s outstanding letters of credit of $5.9 million, was
approximately $54.1 million.
See Note
12 “Subsequent Event” for a discussion of the additional $2.0 million prepayment
of the Term Loan made in April 2008.
8% Senior
Subordinated Notes due 2012 of CPI: As of March 28, 2008, CPI
had $125.0 million in aggregate principal amount of its 8% Senior
Subordinated Notes
due 2012 (the “8% Notes”). The 8% Notes have no sinking fund
requirements.
The 8%
Notes bear interest at the rate of 8.0% per year, payable on February 1 and
August 1 of each year. The 8% Notes will mature on February 1, 2012.
The 8% Notes are unsecured obligations,
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
jointly and severally
guaranteed by CPI International and each of CPI’s domestic subsidiaries. The
payment of all obligations relating to the 8% Notes are subordinated in right of
payment to the prior payment in full in cash or cash equivalents of all senior
debt (as defined in the indenture governing the 8% Notes) of CPI, including debt
under the Senior Credit Facilities. Each guarantee of the 8% Notes is and will
be subordinated to guarantor senior debt (as defined in the indenture governing
the 8% Notes) on the same basis as the 8% Notes are subordinated to CPI’s senior
debt.
At any
time or from time to time on or after February 1, 2008, CPI, at its option,
may redeem the 8% Notes, in whole or in part, at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest thereon, if any, to the redemption date, if redeemed
during the 12-month period beginning on February 1 of the years indicated
below:
|
|
Optional
Redemption Price
|
|
2008
|
|
|
104 |
% |
2009
|
|
|
102 |
% |
2010
and thereafter
|
|
|
100 |
% |
Upon a
change of control, CPI may be required to purchase all or any part of the 8%
Notes for a cash price equal to 101% of the principal amount, plus accrued and
unpaid interest thereon, if any, to the date of purchase.
The
indenture governing the 8% Notes contains a number of covenants that, among
other things, restrict, subject to certain exceptions, the ability of CPI and
its restricted subsidiaries (as defined in the indenture
governing the 8% Notes) to incur additional indebtedness, sell assets,
consolidate or merge with or into other companies, pay dividends or repurchase
or redeem capital stock or subordinated indebtedness, make certain investments,
issue capital stock of their subsidiaries, incur liens and enter into certain
types of transactions with their affiliates.
Events of
default under the indenture governing the 8% Notes include: failure to make
payments on the 8% Notes when due; failure to comply with covenants in the
indenture governing the 8% Notes; a default under certain other indebtedness of
CPI or any of its restricted subsidiaries that is caused by a failure to make
payments on such indebtedness or that results in the acceleration of the
maturity of such indebtedness; the existence of certain final judgments or
orders against CPI or any of the restricted subsidiaries; and the occurrence of
certain insolvency or bankruptcy events.
Floating Rate
Senior Notes due 2015 of CPI International: As of March 28, 2008, after
giving effect to the redemption of $6.0 million in principal amount of CPI
International’s Floating Rate Senior Notes due 2015 (the “FR Notes”) on March
17, 2008, $16.0 million of aggregate principal remained outstanding under the FR
Notes. The FR Notes were originally issued at a 1% discount. The FR Notes have
no sinking fund requirements.
The FR
Notes require interest payments at an annual interest rate, reset at the
beginning of each semi-annual period, equal to the then six-month LIBOR plus
5.75%, payable semiannually on February 1 and August 1 of each year. The
interest rate on the semi-annual interest payment due August 1, 2008 is 8.93625%
per annum. CPI International may, at its option, elect to pay interest through
the issuance of additional FR Notes for any interest payment date on or after
August 1, 2006 and on or before February 1, 2010. If CPI International
elects to pay interest through the issuance of additional FR Notes, the annual
interest rate on the FR Notes will increase by an additional 1% step-up, with
the step-up increasing by an
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
additional
1% for each interest payment made through the issuance of additional FR Notes
(up to a maximum of 4%). The FR Notes will mature on February 1,
2015.
The FR Notes are general
unsecured obligations of CPI International. The FR Notes are not guaranteed by
any of CPI International’s subsidiaries but are structurally subordinated to all
existing and future indebtedness and other liabilities of CPI International’s
subsidiaries. The FR Notes are senior in right of payment to CPI International’s
existing and future indebtedness that is expressly subordinated to the FR
Notes.
Because
CPI International is a holding company with no operations of its own, CPI
International relies on distributions from Communications & Power Industries
to satisfy its obligations under the FR Notes. The Senior Credit Facilities and
the indenture governing the 8% Notes restrict CPI’s ability to make
distributions to CPI International. The Senior Credit Facilities prohibit CPI
from making distributions to CPI International unless there is no default under
the Senior Credit Facilities and CPI satisfies a senior secured leverage ratio
of 3.75:1, and in the case of distributions to pay amounts other than interest
on the FR Notes, the amount of the distribution and all prior such distributions
do not exceed a specified amount. The indenture governing the 8% Notes prohibits
CPI from making distributions to CPI International unless, among other things,
there is no default under the indenture and the amount of the proposed dividend
plus all previous Restricted Payments (as defined in the indenture governing the
8% Notes) does not exceed a specified amount.
At any
time or from time to time on or after February 1, 2007, CPI International, at
its option, may redeem the FR Notes in whole or in part at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest thereon, if any, to the redemption date, if redeemed
during the 12-month period beginning on February 1 of the years indicated
below:
|
|
Optional
Redemption Price
|
|
2007
|
|
|
103 |
% |
2008
|
|
|
102 |
% |
2009
|
|
|
101 |
% |
2010
and thereafter
|
|
|
100 |
% |
Upon a
change of control, as defined in the indenture governing the FR Notes, CPI
International may be required to purchase all or any part of the outstanding FR
Notes for a cash price equal to 101% of the principal amount, plus accrued and
unpaid interest thereon, if any, to the date of purchase.
The
indenture governing the FR Notes contains certain covenants that, among other
things, limit the ability of CPI International and its restricted subsidiaries
(as defined in the indenture governing the FR Notes) to incur additional
indebtedness, sell assets, consolidate or merge with or into other companies,
pay dividends or repurchase or redeem capital stock or subordinated
indebtedness, make certain investments, issue capital stock of their
subsidiaries, incur liens and enter into certain types of transactions with
their affiliates.
Events of
default under the indenture governing the FR Notes include: failure to make
payments on the FR Notes when due; failure to comply with covenants in the
indenture governing the FR Notes; a
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
default
under certain other indebtedness of CPI International or any of its restricted
subsidiaries that is caused by a failure to make payments on such indebtedness
or that results in the acceleration of the maturity of such indebtedness; the
existence of certain final judgments or orders against CPI International or any
of the restricted subsidiaries; and the occurrence of certain insolvency or
bankruptcy events.
Debt
Maturities: As of March 28, 2008, maturities on
long-term debt were as follows:
Fiscal Year
|
|
Term Loan
|
|
|
8% Senior
Subordinated Notes
|
|
|
Floating Rate
Senior Notes
|
|
|
Total
|
|
2008
(remaining six months)
|
|
$ |
2,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,000 |
|
2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2010
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2011
|
|
|
93,750 |
|
|
|
- |
|
|
|
- |
|
|
|
93,750 |
|
2012
|
|
|
- |
|
|
|
125,000 |
|
|
|
- |
|
|
|
125,000 |
|
Thereafter
|
|
|
- |
|
|
|
- |
|
|
|
16,000 |
|
|
|
16,000 |
|
|
|
$ |
95,750 |
|
|
$ |
125,000 |
|
|
$ |
16,000 |
|
|
$ |
236,750 |
|
The above
table assumes (1) that the respective debt instruments will be outstanding until
their scheduled maturity dates, except for the Term Loan under the Senior Credit
Facilities, which is assumed
to mature
on the earlier date of August 1, 2011 as described above under “Senior Credit
Facilities,” and (2) a debt level based on mandatory repayments according to the
contractual amortization schedule. The above table also excludes any unplanned
optional prepayments.
As of
March 28, 2008, the Company was in compliance with the covenants under the
indentures governing the 8% Notes and FR Notes and the agreements governing the
Senior Credit Facilities, and the Company expects to remain in compliance with
those covenants throughout the remainder of fiscal year 2008.
Loss on debt
extinguishment: The redemption of $6.0 million in principal amount of the
FR Notes on March 17, 2008, as discussed above, resulted in a loss on debt
extinguishment of approximately $0.4 million, including non-cash write-offs
of $0.3 million of unamortized debt issue costs and issue discount
costs and $0.1 million in cash payments primarily for call
premiums.
Interest rate
swap agreements: See Note 6 for information on the
interest rate swap agreements entered into by the Company to hedge the interest
rate exposure associated with the Term Loan.
The
Company uses forward exchange contracts to hedge the foreign currency exposure
associated with forecasted manufacturing costs in Canada. As of March 28, 2008,
the Company had outstanding forward contract commitments to purchase Canadian
dollars for an aggregate U.S. notional amount of $18.8 million; the last forward
contract expires on September 29, 2008. At March 28, 2008 and September 28,
2007, the fair value of foreign currency forward contracts was a net asset of
$67,000 and $1.3 million, respectively, and the unrealized gain, net of related
tax expense, was $5,000 and $1.2 million, respectively.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
The
Company’s foreign currency forward contracts are designated as a cash flow hedge
and are considered highly effective, as defined by SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The unrealized gains and losses
from foreign exchange forward contracts are included in “accumulated other
comprehensive income” in the condensed consolidated balance sheets, and the
Company anticipates recognizing the entire unrealized gain in operating earnings
within the next 12 months. Changes in the fair value of foreign currency forward
contracts due to changes in time value are excluded from the assessment of
effectiveness, and are immediately recognized in general and administrative in
the consolidated statements of operations. The time value was not material for
the first two quarters of fiscal years 2008 and 2007. If the transaction being
hedged fails to occur, or if a portion of any derivative is ineffective, then
the Company promptly recognizes the gain or loss on the associated financial
instrument in the consolidated statements of operations. No ineffective amounts
were recognized due to anticipated transactions failing to occur in the first
two quarters of fiscal years 2008 and 2007. Realized gains and losses from
foreign currency forward contracts are recognized in cost of sales and general
and administrative in the condensed consolidated statements of operations. Net
income for the three and six months ended March 28, 2008 includes a recognized
gain of $0.4 million from foreign currency forward contracts. Net income in the
three and six months ended March 30, 2007 includes a recognized gain from
foreign currency forward contracts of $0.1 million.
The
Company also uses derivatives to hedge the interest rate exposure associated
with its long- term debt. On September 21, 2007, the Company entered into an
interest rate swap contract (the “2007 Swap”) to
receive three-month USD-LIBOR-BBA (British Bankers’ Association) interest and
pay 4.77% fixed rate interest. Net interest positions are settled quarterly. The
Company has structured the 2007 Swap with decreasing notional amounts to match
the expected pay down of its Term Loan under the Senior Credit Facilities
discussed in Note 5. The notional value of the 2007 Swap was $85.0 million at
March 28, 2008 and represented approximately 89% of the aggregate Term Loan
balance. The Swap agreement is effective through June 30, 2011. Under the
provisions of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, this arrangement was
initially designated and qualified as an effective cash flow hedge of interest
rate risk related to the Term Loan, which permitted recording the fair value of
the 2007 Swap and corresponding unrealized gain or loss to accumulated other
comprehensive income in the condensed consolidated balance sheets. The interest
rate swap gain or loss is included in the assessment of hedge effectiveness. At
March 28, 2008, the fair value of the short-term and long-term portions of the
2007 Swap was a liability of $1.8 million (accrued expenses) and $1.6 million
(other long-term liabilities), respectively. At September 28, 2007, the fair
value of the short-term and long-term portions of the 2007 Swap was an asset of
$0.1 million (other current assets) and a liability of $0.3 million (other
long-term liabilities), respectively. At March 28, 2008 and September 28, 2007,
the unrealized loss, net of tax, was $2.1 million and $0.1 million,
respectively.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
7. Commitments
and Contingencies
Leases: The Company is
committed to minimum rentals under non-cancelable operating lease agreements,
primarily for land and facility space, that expire on various dates through
2050. Certain of the leases provide for escalating lease payments. Future
minimum lease payments for all non-cancelable operating lease agreements at
March 28, 2008 were as follows:
|
|
|
|
2008
(remaining six months)
|
|
$ |
992 |
|
2009
|
|
|
1,435 |
|
2010
|
|
|
1,175 |
|
2011
|
|
|
507 |
|
2012
|
|
|
392 |
|
Thereafter
|
|
|
3,094 |
|
Total
future minimum lease payments
|
|
$ |
7,595 |
|
Real
estate taxes, insurance, and maintenance are also obligations of the Company.
Rental expense under non-cancelable operating leases amounted to $0.6 million
and $1.2 million for the three and six months ended March 28, 2008,
respectively, and to $0.5 million and $1.0 million for the corresponding periods
of fiscal year 2007. Assets subject to capital leases at March 28, 2008 and
September 28, 2007 were not material.
Guarantees: The Company has
restricted cash of $1.8 million and $2.3 million as of March 28, 2008 and
September 28, 2007, respectively, consisting primarily of bank guarantees from
customer advance payments to the Company’s international subsidiaries. The bank
guarantees become unrestricted cash when performance under the sales or supply
contract is complete.
Purchase commitments: As of
March 28, 2008, the Company had the following known purchase commitments, which
include primarily future purchases for inventory-related items under various
purchase arrangements as well as other obligations in the ordinary course of
business that the Company cannot cancel or where it would be required to pay a
termination fee in the event of cancellation:
|
|
|
|
2008
(remaining six months)
|
|
$ |
31,071 |
|
2009
|
|
|
5,966 |
|
2010
|
|
|
388 |
|
2011
|
|
|
307 |
|
Total
purchase commitments
|
|
$ |
37,732 |
|
Contingent Earnout Consideration:
As discussed in Note 4, in addition to the $20.5 million of net cash
consideration paid for the Malibu acquisition, there is a potential earnout
payable to the former stockholders of Malibu of up to $14.0 million, which is
primarily contingent upon the achievement of certain financial objectives over
the three years following the acquisition, and a discretionary earnout of
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
up to
$1.0 million contingent upon achievement of certain succession planning goals by
June 30, 2010. The Company does not expect to make an earnout payment for fiscal
year 2008.
Indemnification: As permitted
under Delaware law, the Company has agreements whereby the Company indemnifies
its officers, directors and certain employees for certain events or occurrences
while the employee, officer or director is, or was serving, at the Company’s
request in such capacity. The term of the indemnification period is for the
officer’s or director’s lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has Director and Officer insurance
policies that limit its exposure and may enable it to recover a portion of any
future amounts paid.
The
Company has entered into other standard indemnification agreements in its
ordinary course of business. Pursuant to these agreements, the Company agrees to
indemnify, defend, hold harmless, and to reimburse the indemnified party for
losses suffered or incurred by the indemnified party, generally the Company’s
business partners or customers, in connection with any patent, copyright or
other intellectual property infringement claim by any third party with respect
to its products. The term of these indemnification agreements is generally
perpetual after execution of the agreement. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company has not incurred
significant costs to defend lawsuits or settle claims related to these
indemnification agreements. The Company believes that the estimated fair value
of these agreements is minimal. Accordingly, the Company has no liabilities
recorded for these agreements as of March 28, 2008.
Employment Agreements: The
Company has entered into employment agreements with certain members of executive
management that include provisions for the continued payment of salary, benefits
and a pro-rata portion of annual bonus upon employment termination for periods
ranging from 12 months to 30 months.
Contingencies: From time to
time, the Company may be subject to claims that arise in the ordinary course of
business. In the opinion of management, all such matters involve amounts that
would not have a material adverse effect on the Company’s consolidated financial
position if unfavorably resolved.
8.
|
Stock-based
Compensation Plans
|
As of
March 28, 2008, the Company had an aggregate of 1.2 million shares of its common
stock available for future grant and approximately 3.4 million options that were
outstanding under its various equity plans. Awards are subject to terms and
conditions as determined by the Company’s Board of Directors.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Stock Options: The following
table summarizes stock option activity as of March 28, 2008, and changes during
the six months ended March 28, 2008 under the Company’s stock option
plans:
|
|
Oustanding Options
|
|
|
Exercisable Options
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Remaining Contractual Term
(Years)
|
|
|
Aggregate Intrinsic Value
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Remaining Contractual Term
(Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance
at September 28, 2007
|
|
|
3,171,081 |
|
|
$ |
5.61 |
|
|
|
6.58 |
|
|
$ |
42,513 |
|
|
|
2,259,528 |
|
|
$ |
3.00 |
|
|
|
5.98 |
|
|
$ |
36,184 |
|
Granted
|
|
|
208,750 |
|
|
|
16.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or cancelled
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 28, 2008
|
|
|
3,379,831 |
|
|
$ |
6.30 |
|
|
|
6.30 |
|
|
$ |
17,585 |
|
|
|
2,488,350 |
|
|
$ |
3.43 |
|
|
|
5.61 |
|
|
$ |
16,658 |
|
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $9.98 as of March 28, 2008,
which would have been received by the option holders had all option holders
exercised their options as of that date. As of March 28, 2008, 2,411,100
exercisable options were in-the-money.
There
were no options exercised during the three and six months ended March 28, 2008.
During the three and six months ended March 30, 2007, cash received from option
exercises was approximately $0.5 million, and the total intrinsic value of
options exercised was $2.5 million and $2.8 million, respectively. As of March
28, 2008, there was approximately $5.0 million of total unrecognized
compensation costs related to nonvested stock options, which is expected to be
recognized over a weighted-average vesting period of 2.0 years.
Stock Purchase
Plan: Employees purchased 13,742 shares for $0.2 million and
26,743 shares for $0.4 million in the three and six months ended March 28, 2008,
respectively, under the 2006 Employee Stock Purchase Plan (the “2006 ESPP”). As
of March 28, 2008, there were no unrecognized compensation costs related to
rights to acquire stock under the 2006 ESPP.
Restricted Stock and Restricted Stock
Units: As of March 28, 2008 there were outstanding 120,254 shares of
nonvested restricted stock and restricted stock units, and as of September 28,
2007 there were outstanding 11,466 shares of nonvested restricted stock, in each
case granted to directors and employees. The restricted stock and restricted
stock units vest over periods of one to four years and have a 10 year
contractual life. Upon vesting, each restricted stock unit will automatically
convert into one share of common stock of CPI International.
A summary
of the status of the Company’s nonvested restricted stock and restricted stock
unit awards as of March 28, 2008, and changes during the six months then ended
is presented below:
|
|
Number
of Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested
at September 28, 2007
|
|
|
11,466 |
|
|
$ |
17.44 |
|
Granted
|
|
|
114,461 |
|
|
|
15.22 |
|
Vested
|
|
|
(5,673 |
) |
|
|
17.62 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Nonvested
at March 28, 2008
|
|
|
120,254 |
|
|
$ |
15.32 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Aggregate
intrinsic value of the nonvested restricted stock and restricted stock unit
awards at March 28, 2008 was $1.2 million. As of March 28, 2008, there was $1.7
million of total unrecognized compensation costs related to nonvested restricted
stock and restricted stock units, which is expected to be recognized over a
weighted average vesting period of 2.1 years.
The
Company settles stock option exercises, restricted stock awards and restricted
stock units with newly issued common shares.
Valuation
and Expense Information under SFAS No. 123(R)
On
October 1, 2005, the Company adopted SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123(R)”), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to
the Company’s employees and directors, including employee stock options,
restricted stock, restricted stock units and employee stock purchases related to
the 2006 ESPP based on estimated fair values. The following table summarizes
stock-based compensation expense for the three and six months ended March 28,
2008 and March 30, 2007, which was allocated as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 28, 2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
Share-based
compensation cost recognized in the income
statement by caption:
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
111 |
|
|
$ |
63 |
|
|
$ |
191 |
|
|
$ |
102 |
|
Research
and development
|
|
|
38 |
|
|
|
16 |
|
|
|
69 |
|
|
|
26 |
|
Selling
and marketing
|
|
|
59 |
|
|
|
32 |
|
|
|
104 |
|
|
|
51 |
|
General
and administrative
|
|
|
342 |
|
|
|
177 |
|
|
|
610 |
|
|
|
314 |
|
|
|
$ |
550 |
|
|
$ |
288 |
|
|
$ |
974 |
|
|
$ |
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation cost capitalized in inventory
|
|
$ |
119 |
|
|
$ |
63 |
|
|
$ |
215 |
|
|
$ |
107 |
|
Share-based
compensation cost remaining in inventory at end of period
|
|
$ |
72 |
|
|
$ |
36 |
|
|
$ |
72 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and stock purchase plan
|
|
$ |
433 |
|
|
$ |
260 |
|
|
$ |
807 |
|
|
$ |
435 |
|
Restricted
stock and restricted stock units
|
|
|
117 |
|
|
|
28 |
|
|
|
167 |
|
|
|
58 |
|
|
|
$ |
550 |
|
|
$ |
288 |
|
|
$ |
974 |
|
|
$ |
493 |
|
The tax
benefit realized from option exercises and restricted stock vesting totaled
approximately $19,000 during the three and six months ended March 28, 2008. The
tax benefit realized from option exercises and restricted stock vesting totaled
approximately $1.0 million and $1.1 million during the three and six months
ended March 30, 2007, respectively.
There
were no stock options granted during the three months ended March 28, 2008. The
weighted-average estimated fair value of stock options granted during the six
months ended March 28,
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
2008 was
$7.83 per share. The weighted-average estimated fair value of stock options
granted during the three and six months ended March 30, 2007 was $9.07 and $7.69
per share, respectively. Assumptions used in the Black-Scholes model to estimate
the fair value of stock option grants during each period are presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
|
*
|
|
|
|
|
5.99 |
|
|
|
6.25 |
|
|
|
6.24 |
|
Expected
volatility
|
|
*
|
|
|
|
|
49.33 |
% |
|
|
41.20 |
% |
|
|
49.33 |
% |
Risk-free
rate
|
|
*
|
|
|
|
|
4.73 |
% |
|
|
3.82 |
% |
|
|
4.56 |
% |
Dividend
yield |
|
*
|
|
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
*
No new stock options were issued during the three months ended March 28,
2008.
|
|
Since the
Company’s common stock has not been publicly traded for a sufficient time
period, the expected volatility is based on expected volatilities of similar
companies that have a longer history of being publicly traded. The risk-free
rates are based on the U.S. Treasury yield in effect at the time of the grant.
Since the Company’s historical data is limited, the expected term of options
granted
is based on the simplified method for plain vanilla options in accordance with
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No.
107. In
December 2007, the SEC issued SAB No. 110, an amendment of SAB No. 107. SAB
No. 110 states that the staff will continue to accept, under certain
circumstances, the continued use of the simplified method beyond
December 31, 2007. Accordingly, the Company will continue to use the
simplified method until it has enough historical experience to provide a
reasonable estimate of expected term.
Based on
the 15% discount received by the employees, the weighted-average fair value of
shares issued under the 2006 ESPP was $2.67 and $2.76 per share during the three
and six months ended March 28, 2008, respectively, and $2.25 and $2.11 per share
during the three and six months ended March 30, 2007, respectively.
Using the
market price of the Company’s common stock on the date of grant, the
weighted-average estimated fair value of restricted stock and restricted stock
units granted was $10.98 and $15.22 per share during the three and six months
ended March 28, 2008, respectively, and $9.07 per share during the three and six
months ended March 30, 2007.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the three and six months ended March 28, 2008 and
for the corresponding periods of fiscal year 2007 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates.
The
Company recorded an income tax provision of $4.1 million and $6.8 million for
the six months ended March 28, 2008 and March 30, 2007, respectively. The
Company’s effective tax rate was approximately 32% for the six months ended
March 28, 2008 as compared to approximately 37% for the corresponding period of
fiscal year 2007.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Income
tax expense for the three months ended March 28, 2008 includes a tax benefit of
approximately $0.4 million attributable to the correction of an immaterial error
that arose in the fourth quarter of fiscal year 2007 relating to the warranty
expense tax deduction at a foreign tax jurisdiction.
CPI
International adopted FIN No. 48, “Accounting for Uncertainty in Income
Taxes,” in the first quarter of fiscal year 2008 commencing on
September 29, 2007. In connection with the Company’s adoption of
FIN No. 48, there was no cumulative effect adjustment necessary to the
September 29, 2007 balance of retained earnings. The total unrecognized tax
benefit was $6.8 million and $6.3 million as of March 28, 2008 and
September 29, 2007, respectively, and is reported as a current liability
(income taxes payable) since it is expected to be settled within 12 months of
the reporting date. Of the total unrecognized tax benefit balance, $6.2
million and $5.7 million of unrecognized tax benefits would reduce the
effective tax rate if recognized as of March 28, 2008 and
September 29, 2007, respectively. The interest expense with uncertain tax
positions are accrued as a component of income tax expense in the statements of
operations and comprehensive income. As of March 28, 2008 and
September 29, 2007, the Company had accrued $1.6 million and $1.3 million
of interest, respectively. The Company had minimal penalties accrued in income
tax expense.
The Company is subject to
U.S. federal, California, Massachusetts and Canada income tax as well as income
tax in various other states, local and international jurisdictions. Fiscal years
2004 to 2007 remain
open to examination by the foregoing major taxing jurisdictions to which
the Company is subject, with the exception of California which is open
from 2003 to 2007. The Company has not been audited for U.S. federal
income tax matters. The Company has income tax audits in progress in Canada and
in several states, local and international jurisdictions in which it
operates. The years under examination by the Canadian taxing authorities are
2001 to 2002. The years under examination by other taxing authorities vary,
with the earliest year being 2004.
Based on
the outcome of examinations of the Company, the result of the expiration of
statutes of limitations for specific jurisdictions, it is reasonably possible
that the related unrecognized tax benefits could change from those recorded in
the statement of financial position. The majority of the Company’s
unrecognized tax benefit is attributable to the Canada Revenue Agency (“CRA”)
income tax contingency. The CRA is conducting an audit of the Company’s
income tax returns in Canada for fiscal years 2001 and 2002. The Company
received a proposed tax assessment, including interest expense from the CRA for
fiscal years 2001 and 2002. The tax assessment is based on tax deductions
related to the valuation of the Satcom business, which was purchased by
Communications & Power Industries Canada Inc. from CPI in fiscal years
2001 and 2002. While the Company believes that it has meritorious defenses
and intends to vigorously defend its position, it is reasonably possible that
the CRA may issue a formal tax assessment requiring the Company to settle the
tax deficiency within 12 months.
10. Earnings
Per Share
Basic
earnings per share are computed using the weighted-average number of common
shares outstanding during the period, excluding outstanding nonvested restricted
shares subject to repurchase. Diluted earnings per share are computed using the
weighted-average number of common and dilutive potential common equivalent
shares outstanding during the period. Potential common equivalent shares consist
of common stock issuable upon exercise of stock options and nonvested restricted
shares using the treasury stock method.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
The
following table is a reconciliation of the shares used to calculate basic and
diluted earnings per share (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 28, 2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
Weighted
average common shares outstanding -- Basic
|
|
|
16,387 |
|
|
|
16,253 |
|
|
|
16,379 |
|
|
|
16,161 |
|
Effect
of dilutive stock options and nonvested restricted stock awards and
units
|
|
|
1,269 |
|
|
|
1,477 |
|
|
|
1,365 |
|
|
|
1,485 |
|
Weighted
average common shares outstanding -- Diluted
|
|
|
17,656 |
|
|
|
17,730 |
|
|
|
17,744 |
|
|
|
17,646 |
|
The
calculation of diluted net income per share excludes all anti-dilutive shares.
For the three and six months ended March 28, 2008, the number of anti-dilutive
shares, as calculated based on the weighted average price of the Company’s
common stock for the periods, was approximately 0.9 million and 0.7 million
shares, respectively. For the three and six months ended March 30, 2007, the
number of anti-dilutive shares, as calculated based on the weighted average
price of the Company’s common stock for the periods, was approximately
0.6 million and 0.5 million shares, respectively.
11. Segments,
Geographic and Customer Information
The
Company’s reportable segments are VED and satcom equipment. The VED segment
develops, manufactures and distributes high power/high frequency microwave and
radio frequency signal components. The satcom equipment segment manufactures and
supplies high power amplifiers and networks for satellite communication uplink
and industrial applications. Segment information reported below is consistent
with the manner in which it is reviewed and evaluated by the Company’s chief
operating decision maker (“CODM”), its chief executive officer, and is based on
the nature of the Company’s operations and products offered to
customers.
Amounts
not reported as VED or satcom equipment are reported as Other. In
accordance with quantitative and qualitative guidelines established by SFAS No.
131, Other includes the activities of the Company’s recently acquired Malibu
division and unallocated corporate expenses, such as business
combination-related expenses, share-based compensation expense, and certain
non-recurring or unusual expenses. The Malibu division is a designer,
manufacturer and integrator of advanced antenna systems for radar, radar
simulators and telemetry systems, as well as for data links used in ground,
airborne, UAV and shipboard systems.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Summarized
financial information concerning the Company’s reportable segments is shown in
the following tables:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
28,
|
|
|
March
30,
|
|
|
March
28,
|
|
|
March
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Sales
to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
73,744 |
|
|
$ |
72,216 |
|
|
$ |
137,734 |
|
|
$ |
139,191 |
|
Satcom
equipment
|
|
|
17,134 |
|
|
|
16,228 |
|
|
|
34,709 |
|
|
|
32,976 |
|
Other
|
|
|
3,926 |
|
|
|
- |
|
|
|
8,271 |
|
|
|
- |
|
|
|
$ |
94,804 |
|
|
$ |
88,444 |
|
|
$ |
180,714 |
|
|
$ |
172,167 |
|
Intersegment
product transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
7,287 |
|
|
$ |
4,582 |
|
|
$ |
13,148 |
|
|
$ |
9,705 |
|
Satcom
equipment
|
|
|
14 |
|
|
|
9 |
|
|
|
63 |
|
|
|
9 |
|
|
|
$ |
7,301 |
|
|
$ |
4,591 |
|
|
$ |
13,211 |
|
|
$ |
9,714 |
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
502 |
|
|
$ |
2,429 |
|
|
$ |
1,344 |
|
|
$ |
5,231 |
|
Satcom
equipment
|
|
|
210 |
|
|
|
22 |
|
|
|
654 |
|
|
|
22 |
|
Other
|
|
|
159 |
|
|
|
25 |
|
|
|
560 |
|
|
|
94 |
|
|
|
$ |
871 |
|
|
$ |
2,476 |
|
|
$ |
2,558 |
|
|
$ |
5,347 |
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
18,647 |
|
|
$ |
17,932 |
|
|
$ |
32,287 |
|
|
$ |
35,516 |
|
Satcom
equipment
|
|
|
656 |
|
|
|
1,121 |
|
|
|
2,377 |
|
|
|
2,618 |
|
Other
|
|
|
(3,460 |
) |
|
|
(2,743 |
) |
|
|
(6,899 |
) |
|
|
(4,739 |
) |
|
|
$ |
15,843 |
|
|
$ |
16,310 |
|
|
$ |
27,765 |
|
|
$ |
33,395 |
|
|
|
March
28,
|
|
|
September
28,
|
|
|
2008
|
|
|
2007
|
|
Total
assets
|
|
|
|
|
|
|
VED
|
|
$ |
333,284 |
|
|
$ |
335,926 |
|
Satcom
equipment
|
|
|
48,155 |
|
|
|
49,266 |
|
Other
|
|
|
85,986 |
|
|
|
91,030 |
|
|
|
$ |
467,425 |
|
|
$ |
476,222 |
|
EBITDA
represents earnings before provision for income taxes, net interest expense and
depreciation and amortization. For the reasons listed below, the Company
believes that GAAP-based financial information for leveraged businesses such as
the Company’s business should be supplemented by EBITDA so that investors better
understand the Company’s financial performance in connection with their analysis
of the Company’s business:
|
•
|
EBITDA
is a component of the measures used by the Company’s board of directors
and management team to evaluate the Company’s operating
performance;
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
|
|
the
Senior Credit Facilities contain a covenant that requires the Company to
maintain a senior secured leverage ratio that contains EBITDA as a
component, and the Company’s management team uses EBITDA to monitor
compliance with this covenant;
|
|
|
EBITDA
is a component of the measures used by the Company’s management team to
make day-to-day operating
decisions;
|
|
|
EBITDA
facilitates comparisons between the Company’s operating results and those
of competitors with different capital structures and therefore is a
component of the measures used by the Company’s management to facilitate
internal comparisons to competitors’ results and the Company’s industry in
general; and
|
|
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by the Company of certain targets that contain EBITDA as a
component.
|
Other
companies may define EBITDA differently and, as a result, the Company’s measure
of EBITDA may not be directly comparable to EBITDA of other companies. Although
the Company uses EBITDA as a financial measure to assess the performance of its
business, the use of EBITDA is limited because it does not include certain
material costs, such as interest and taxes, necessary to operate the Company’s
business. When analyzing the Company’s performance, EBITDA should be considered
in addition to, and not as a substitute for, net income, cash flows from
operating activities or other statements of operations or statements of cash
flows data prepared in accordance with GAAP.
The
following table reconciles net income to EBITDA:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
Net
income
|
|
$ |
6,154 |
|
|
$ |
5,760 |
|
|
$ |
8,664 |
|
|
$ |
11,595 |
|
Depreciation
and amortization
|
|
|
2,742 |
|
|
|
2,188 |
|
|
|
5,392 |
|
|
|
4,382 |
|
Interest
expense, net
|
|
|
4,805 |
|
|
|
5,275 |
|
|
|
9,617 |
|
|
|
10,614 |
|
Income
tax expense
|
|
|
2,142 |
|
|
|
3,087 |
|
|
|
4,092 |
|
|
|
6,804 |
|
EBITDA
|
|
$ |
15,843 |
|
|
$ |
16,310 |
|
|
$ |
27,765 |
|
|
$ |
33,395 |
|
Net
property, plant and equipment by geographic area was as follows:
|
|
March
28,
|
|
|
September
28,
|
|
|
2008
|
|
|
2007
|
|
United
States
|
|
$ |
50,526 |
|
|
$ |
51,704 |
|
Canada
|
|
|
14,247 |
|
|
|
14,308 |
|
Other
|
|
|
46 |
|
|
|
36 |
|
|
|
$ |
64,819 |
|
|
$ |
66,048 |
|
With the
exception of goodwill, the Company does not identify or allocate assets by
operating segment, nor does its CODM evaluate operating segments using discrete
asset information.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Goodwill
by geographic area was as follows:
|
|
March
28,
|
|
|
September
28,
|
|
|
2008
|
|
|
2007
|
|
United
States
|
|
$ |
114,221 |
|
|
$ |
113,310 |
|
Canada
|
|
|
48,314 |
|
|
|
48,263 |
|
|
|
$ |
162,535 |
|
|
$ |
161,573 |
|
The
increase in goodwill from September 28, 2007 to March 28, 2008 was primarily due
to a purchase price adjustment associated with the acquisition of Malibu. See
Note 4.
Geographic
sales by customer location were as follows for external customers:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
United
States
|
|
$ |
62,206 |
|
|
$ |
52,577 |
|
|
$ |
116,729 |
|
|
$ |
102,081 |
|
All
foreign countries
|
|
|
32,598 |
|
|
|
35,867 |
|
|
|
63,985 |
|
|
|
70,086 |
|
Total
sales
|
|
$ |
94,804 |
|
|
$ |
88,444 |
|
|
$ |
180,714 |
|
|
$ |
172,167 |
|
There
were no individual foreign countries with sales greater than 10% of total sales
for the `periods presented.
The U.S.
Government is the only customer that accounted for 10% or more of the Company’s
consolidated sales in the three and six months ended March 28, 2008 and in the
corresponding periods of fiscal year 2007. Direct sales to the U.S. Government
were $16.1 million and $30.9 million for the three and six months ended March
28, 2008, respectively, and $14.1 million and $29.0 million for the three and
six months ended March 30, 2007, respectively. Accounts receivable from this
customer represented 13% and 15% of consolidated accounts receivable as of March
28, 2008 and September 28, 2007, respectively.
12. Subsequent
Event
On April
1, 2008, the Company made another optional prepayment of $2.0 million on its
Term Loan, further reducing the balance of the loan to $93.75 million. The $2.0
million brings the total Term Loan repayments made in fiscal year 2008 to $6.0
million, including those that were applied against the scheduled amortization
payments for the first and second quarters of fiscal year 2008. Including the
April 1, 2008 $2.0 million Term Loan prepayment and the redemption of $6.0
million in principal amount of CPI International’s FR Notes made in the second
quarter of fiscal year 2008, the Company has made an aggregate of $12.0 million
in repayments of its debt to date in fiscal year 2008.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
13. Supplemental
Guarantors Condensed Consolidating Financial Information
On
January 23, 2004, CPI issued $125.0 million of 8% Notes that are guaranteed by
CPI International and all of CPI’s domestic subsidiaries. Separate financial
statements of the guarantors are not presented because (i) the guarantors are
wholly-owned and have fully and unconditionally guaranteed the 8% Notes on a
joint and several basis and (ii) the Company’s management has determined that
such separate financial statements are not material to investors. Instead,
presented below are the consolidating financial statements of: (a) the parent,
CPI International, (b) the issuer, CPI, (c) the guarantor subsidiaries (all of
the domestic subsidiaries), (d) the non-guarantor subsidiaries, (e) the
consolidating elimination entries, and (f) the consolidated totals. The
accompanying consolidating financial information should be read in connection
with the condensed consolidated financial statements of CPI
International.
Investments
in subsidiaries are accounted for based on the equity method. The principal
elimination entries eliminate investments in subsidiaries, intercompany
balances, intercompany transactions and intercompany sales.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
CONDENSED
CONSOLIDATING BALANCE SHEET
As
of March 28, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
184 |
|
|
$ |
16,436 |
|
|
$ |
800 |
|
|
$ |
2,821 |
|
|
$ |
- |
|
|
$ |
20,241 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
1,606 |
|
|
|
184 |
|
|
|
- |
|
|
|
1,790 |
|
Accounts
receivable, net
|
|
|
- |
|
|
|
25,413 |
|
|
|
12,511 |
|
|
|
12,795 |
|
|
|
- |
|
|
|
50,719 |
|
Inventories
|
|
|
- |
|
|
|
43,400 |
|
|
|
7,299 |
|
|
|
16,925 |
|
|
|
(763 |
) |
|
|
66,861 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
9,260 |
|
|
|
- |
|
|
|
688 |
|
|
|
- |
|
|
|
9,948 |
|
Intercompany
receivable
|
|
|
- |
|
|
|
17,676 |
|
|
|
3,292 |
|
|
|
6,652 |
|
|
|
(27,620 |
) |
|
|
- |
|
Prepaid
and other current assets
|
|
|
- |
|
|
|
2,371 |
|
|
|
835 |
|
|
|
581 |
|
|
|
- |
|
|
|
3,787 |
|
Total
current assets
|
|
|
184 |
|
|
|
114,556 |
|
|
|
26,343 |
|
|
|
40,646 |
|
|
|
(28,383 |
) |
|
|
153,346 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
47,349 |
|
|
|
3,184 |
|
|
|
14,286 |
|
|
|
- |
|
|
|
64,819 |
|
Deferred
debt issue costs, net
|
|
|
552 |
|
|
|
5,176 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,728 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
57,550 |
|
|
|
14,683 |
|
|
|
7,968 |
|
|
|
- |
|
|
|
80,201 |
|
Goodwill
|
|
|
- |
|
|
|
92,557 |
|
|
|
21,715 |
|
|
|
48,263 |
|
|
|
- |
|
|
|
162,535 |
|
Other
long-term assets
|
|
|
- |
|
|
|
424 |
|
|
|
272 |
|
|
|
100 |
|
|
|
- |
|
|
|
796 |
|
Intercompany
notes receivable
|
|
|
- |
|
|
|
1,035 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,035 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
176,007 |
|
|
|
97,861 |
|
|
|
- |
|
|
|
- |
|
|
|
(273,868 |
) |
|
|
- |
|
Total
assets
|
|
$ |
176,743 |
|
|
$ |
416,508 |
|
|
$ |
66,197 |
|
|
$ |
111,263 |
|
|
$ |
(303,286 |
) |
|
$ |
467,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
- |
|
|
$ |
2,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,000 |
|
Accounts
payable
|
|
|
249 |
|
|
|
10,874 |
|
|
|
2,860 |
|
|
|
7,866 |
|
|
|
- |
|
|
|
21,849 |
|
Accrued
expenses
|
|
|
230 |
|
|
|
18,038 |
|
|
|
3,260 |
|
|
|
4,517 |
|
|
|
- |
|
|
|
26,045 |
|
Product
warranty
|
|
|
- |
|
|
|
2,630 |
|
|
|
501 |
|
|
|
1,821 |
|
|
|
- |
|
|
|
4,952 |
|
Income
taxes payable
|
|
|
- |
|
|
|
(276 |
) |
|
|
203 |
|
|
|
5,173 |
|
|
|
- |
|
|
|
5,100 |
|
Advance
payments from customers
|
|
|
- |
|
|
|
6,698 |
|
|
|
3,841 |
|
|
|
1,116 |
|
|
|
- |
|
|
|
11,655 |
|
Intercompany
payable
|
|
|
27,620 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,620 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
28,099 |
|
|
|
39,964 |
|
|
|
10,665 |
|
|
|
20,493 |
|
|
|
(27,620 |
) |
|
|
71,601 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
20,941 |
|
|
|
- |
|
|
|
5,369 |
|
|
|
- |
|
|
|
26,310 |
|
Intercompany
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,035 |
|
|
|
(1,035 |
) |
|
|
- |
|
Long-term
debt, less current portion
|
|
|
15,873 |
|
|
|
218,750 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
234,623 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
1,923 |
|
|
|
- |
|
|
|
197 |
|
|
|
- |
|
|
|
2,120 |
|
Total
liabilities
|
|
|
43,972 |
|
|
|
281,578 |
|
|
|
10,665 |
|
|
|
27,094 |
|
|
|
(28,655 |
) |
|
|
334,654 |
|
Common
stock
|
|
|
165 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
165 |
|
Parent
investment
|
|
|
- |
|
|
|
55,967 |
|
|
|
43,824 |
|
|
|
57,919 |
|
|
|
(157,710 |
) |
|
|
- |
|
Additional
paid-in capital
|
|
|
70,165 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
70,165 |
|
Accumulated
other comprehensive (loss) income
|
|
|
(2,265 |
) |
|
|
(2,265 |
) |
|
|
- |
|
|
|
(220 |
) |
|
|
2,485 |
|
|
|
(2,265 |
) |
Retained
earnings
|
|
|
64,706 |
|
|
|
81,228 |
|
|
|
11,708 |
|
|
|
26,470 |
|
|
|
(119,406 |
) |
|
|
64,706 |
|
Total
stockholders’ equity
|
|
|
132,771 |
|
|
|
134,930 |
|
|
|
55,532 |
|
|
|
84,169 |
|
|
|
(274,631 |
) |
|
|
132,771 |
|
Total
liabilities and stockholders' equity
|
|
$ |
176,743 |
|
|
$ |
416,508 |
|
|
$ |
66,197 |
|
|
$ |
111,263 |
|
|
$ |
(303,286 |
) |
|
$ |
467,425 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
CONDENSED
CONSOLIDATING BALANCE SHEET
As
of September 28, 2007
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,378 |
|
|
$ |
16,518 |
|
|
$ |
958 |
|
|
$ |
1,620 |
|
|
$ |
- |
|
|
$ |
20,474 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
1,945 |
|
|
|
310 |
|
|
|
- |
|
|
|
2,255 |
|
Accounts
receivable, net
|
|
|
- |
|
|
|
25,857 |
|
|
|
10,816 |
|
|
|
15,916 |
|
|
|
- |
|
|
|
52,589 |
|
Inventories
|
|
|
- |
|
|
|
43,949 |
|
|
|
7,092 |
|
|
|
17,084 |
|
|
|
(678 |
) |
|
|
67,447 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
9,272 |
|
|
|
3 |
|
|
|
469 |
|
|
|
- |
|
|
|
9,744 |
|
Intercompany
receivable
|
|
|
- |
|
|
|
23,323 |
|
|
|
2,076 |
|
|
|
2,725 |
|
|
|
(28,124 |
) |
|
|
- |
|
Prepaid
and other current assets
|
|
|
- |
|
|
|
3,250 |
|
|
|
545 |
|
|
|
844 |
|
|
|
- |
|
|
|
4,639 |
|
Total
current assets
|
|
|
1,378 |
|
|
|
122,169 |
|
|
|
23,435 |
|
|
|
38,968 |
|
|
|
(28,802 |
) |
|
|
157,148 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
48,327 |
|
|
|
3,382 |
|
|
|
14,339 |
|
|
|
- |
|
|
|
66,048 |
|
Deferred
debt issue costs, net
|
|
|
795 |
|
|
|
5,738 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,533 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
67,008 |
|
|
|
6,465 |
|
|
|
8,270 |
|
|
|
- |
|
|
|
81,743 |
|
Goodwill
|
|
|
- |
|
|
|
107,462 |
|
|
|
5,848 |
|
|
|
48,263 |
|
|
|
- |
|
|
|
161,573 |
|
Other
long-term assets
|
|
|
- |
|
|
|
3,077 |
|
|
|
- |
|
|
|
100 |
|
|
|
- |
|
|
|
3,177 |
|
Intercompany
notes receivable
|
|
|
- |
|
|
|
1,035 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,035 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
175,889 |
|
|
|
65,491 |
|
|
|
- |
|
|
|
- |
|
|
|
(241,380 |
) |
|
|
- |
|
Total
assets
|
|
$ |
178,062 |
|
|
$ |
420,307 |
|
|
$ |
39,130 |
|
|
$ |
109,940 |
|
|
$ |
(271,217 |
) |
|
$ |
476,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
- |
|
|
$ |
1,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,000 |
|
Accounts
payable
|
|
|
224 |
|
|
|
10,421 |
|
|
|
2,430 |
|
|
|
8,719 |
|
|
|
- |
|
|
|
21,794 |
|
Accrued
expenses
|
|
|
404 |
|
|
|
16,695 |
|
|
|
3,991 |
|
|
|
5,259 |
|
|
|
- |
|
|
|
26,349 |
|
Product
warranty
|
|
|
- |
|
|
|
3,141 |
|
|
|
481 |
|
|
|
1,956 |
|
|
|
- |
|
|
|
5,578 |
|
Income
taxes payable
|
|
|
- |
|
|
|
1,888 |
|
|
|
562 |
|
|
|
6,298 |
|
|
|
- |
|
|
|
8,748 |
|
Advance
payments from customers
|
|
|
- |
|
|
|
5,926 |
|
|
|
4,933 |
|
|
|
1,273 |
|
|
|
- |
|
|
|
12,132 |
|
Intercompany
payable
|
|
|
28,124 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(28,124 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
28,752 |
|
|
|
39,071 |
|
|
|
12,397 |
|
|
|
23,505 |
|
|
|
(28,124 |
) |
|
|
75,601 |
|
Deferred
income taxes
|
|
|
31 |
|
|
|
22,833 |
|
|
|
- |
|
|
|
5,530 |
|
|
|
- |
|
|
|
28,394 |
|
Intercompany
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,035 |
|
|
|
(1,035 |
) |
|
|
- |
|
Long-term
debt, less current portion
|
|
|
21,817 |
|
|
|
223,750 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
245,567 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
547 |
|
|
|
- |
|
|
|
207 |
|
|
|
- |
|
|
|
754 |
|
Total
liabilities
|
|
|
50,600 |
|
|
|
286,201 |
|
|
|
12,397 |
|
|
|
30,277 |
|
|
|
(29,159 |
) |
|
|
350,316 |
|
Common
stock
|
|
|
164 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
164 |
|
Parent
investment
|
|
|
- |
|
|
|
60,705 |
|
|
|
19,167 |
|
|
|
57,746 |
|
|
|
(137,618 |
) |
|
|
- |
|
Additional
paid-in capital
|
|
|
68,763 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
68,763 |
|
Accumulated
other comprehensive income
|
|
|
1,110 |
|
|
|
1,059 |
|
|
|
- |
|
|
|
155 |
|
|
|
(1,387 |
) |
|
|
937 |
|
Retained
earnings
|
|
|
57,425 |
|
|
|
72,342 |
|
|
|
7,566 |
|
|
|
21,762 |
|
|
|
(103,053 |
) |
|
|
56,042 |
|
Total
stockholders’ equity
|
|
|
127,462 |
|
|
|
134,106 |
|
|
|
26,733 |
|
|
|
79,663 |
|
|
|
(242,058 |
) |
|
|
125,906 |
|
Total
liabilities and stockholders' equity
|
|
$ |
178,062 |
|
|
$ |
420,307 |
|
|
$ |
39,130 |
|
|
$ |
109,940 |
|
|
$ |
(271,217 |
) |
|
$ |
476,222 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For
the Three Months Ended March 28, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
60,336 |
|
|
$ |
21,125 |
|
|
$ |
34,490 |
|
|
$ |
(21,147 |
) |
|
$ |
94,804 |
|
Cost
of sales
|
|
|
- |
|
|
|
42,877 |
|
|
|
17,891 |
|
|
|
27,079 |
|
|
|
(21,109 |
) |
|
|
66,738 |
|
Gross
profit
|
|
|
- |
|
|
|
17,459 |
|
|
|
3,234 |
|
|
|
7,411 |
|
|
|
(38 |
) |
|
|
28,066 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
729 |
|
|
|
272 |
|
|
|
1,929 |
|
|
|
- |
|
|
|
2,930 |
|
Selling
and marketing
|
|
|
- |
|
|
|
2,070 |
|
|
|
1,175 |
|
|
|
2,083 |
|
|
|
- |
|
|
|
5,328 |
|
General
and administrative
|
|
|
- |
|
|
|
3,817 |
|
|
|
1,018 |
|
|
|
657 |
|
|
|
- |
|
|
|
5,492 |
|
Amortization
of acquisition-related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible
assets
|
|
|
- |
|
|
|
100 |
|
|
|
531 |
|
|
|
150 |
|
|
|
- |
|
|
|
781 |
|
Net
loss on disposition of assets
|
|
|
- |
|
|
|
22 |
|
|
|
10 |
|
|
|
9 |
|
|
|
- |
|
|
|
41 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
6,738 |
|
|
|
3,006 |
|
|
|
4,828 |
|
|
|
- |
|
|
|
14,572 |
|
Operating
income
|
|
|
- |
|
|
|
10,721 |
|
|
|
228 |
|
|
|
2,583 |
|
|
|
(38 |
) |
|
|
13,494 |
|
Interest
expense (income), net
|
|
|
512 |
|
|
|
4,314 |
|
|
|
(17 |
) |
|
|
(4 |
) |
|
|
- |
|
|
|
4,805 |
|
Loss
on debt extinguishment
|
|
|
393 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
393 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(905 |
) |
|
|
6,407 |
|
|
|
245 |
|
|
|
2,587 |
|
|
|
(38 |
) |
|
|
8,296 |
|
Income
tax (benefit) expense
|
|
|
(344 |
) |
|
|
2,741 |
|
|
|
(135 |
) |
|
|
(120 |
) |
|
|
- |
|
|
|
2,142 |
|
Equity
in income of subsidiaries
|
|
|
6,715 |
|
|
|
3,049 |
|
|
|
- |
|
|
|
- |
|
|
|
(9,764 |
) |
|
|
- |
|
Net
income
|
|
$ |
6,154 |
|
|
$ |
6,715 |
|
|
$ |
380 |
|
|
$ |
2,707 |
|
|
$ |
(9,802 |
) |
|
$ |
6,154 |
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For
the Three Months Ended March 30, 2007
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
56,666 |
|
|
$ |
16,351 |
|
|
$ |
34,143 |
|
|
$ |
(18,716 |
) |
|
$ |
88,444 |
|
Cost
of sales
|
|
|
- |
|
|
|
40,211 |
|
|
|
13,642 |
|
|
|
26,255 |
|
|
|
(19,369 |
) |
|
|
60,739 |
|
Gross
profit
|
|
|
- |
|
|
|
16,455 |
|
|
|
2,709 |
|
|
|
7,888 |
|
|
|
653 |
|
|
|
27,705 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
902 |
|
|
|
- |
|
|
|
1,450 |
|
|
|
- |
|
|
|
2,352 |
|
Selling
and marketing
|
|
|
- |
|
|
|
2,015 |
|
|
|
869 |
|
|
|
1,915 |
|
|
|
- |
|
|
|
4,799 |
|
General
and administrative
|
|
|
- |
|
|
|
4,402 |
|
|
|
515 |
|
|
|
929 |
|
|
|
- |
|
|
|
5,846 |
|
Amortization
of acquisition-related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible
assets
|
|
|
- |
|
|
|
334 |
|
|
|
62 |
|
|
|
150 |
|
|
|
- |
|
|
|
546 |
|
Net
loss on disposition of assets
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
23 |
|
|
|
- |
|
|
|
40 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
7,670 |
|
|
|
1,446 |
|
|
|
4,467 |
|
|
|
- |
|
|
|
13,583 |
|
Operating
income
|
|
|
- |
|
|
|
8,785 |
|
|
|
1,263 |
|
|
|
3,421 |
|
|
|
653 |
|
|
|
14,122 |
|
Interest
expense (income), net
|
|
|
2,072 |
|
|
|
3,328 |
|
|
|
(9 |
) |
|
|
(116 |
) |
|
|
- |
|
|
|
5,275 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(2,072 |
) |
|
|
5,457 |
|
|
|
1,272 |
|
|
|
3,537 |
|
|
|
653 |
|
|
|
8,847 |
|
Income
tax (benefit) expense
|
|
|
(787 |
) |
|
|
2,650 |
|
|
|
356 |
|
|
|
868 |
|
|
|
- |
|
|
|
3,087 |
|
Equity
in income of subsidiaries
|
|
|
7,045 |
|
|
|
4,238 |
|
|
|
- |
|
|
|
- |
|
|
|
(11,283 |
) |
|
|
- |
|
Net
income
|
|
$ |
5,760 |
|
|
$ |
7,045 |
|
|
$ |
916 |
|
|
$ |
2,669 |
|
|
$ |
(10,630 |
) |
|
$ |
5,760 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For
the Six Months Ended March 28, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
110,098 |
|
|
$ |
40,951 |
|
|
$ |
69,328 |
|
|
$ |
(39,663 |
) |
|
$ |
180,714 |
|
Cost
of sales
|
|
|
- |
|
|
|
80,308 |
|
|
|
34,476 |
|
|
|
53,306 |
|
|
|
(39,578 |
) |
|
|
128,512 |
|
Gross
profit
|
|
|
- |
|
|
|
29,790 |
|
|
|
6,475 |
|
|
|
16,022 |
|
|
|
(85 |
) |
|
|
52,202 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
1,621 |
|
|
|
421 |
|
|
|
3,612 |
|
|
|
- |
|
|
|
5,654 |
|
Selling
and marketing
|
|
|
- |
|
|
|
3,993 |
|
|
|
2,187 |
|
|
|
4,320 |
|
|
|
- |
|
|
|
10,500 |
|
General
and administrative
|
|
|
- |
|
|
|
7,535 |
|
|
|
2,088 |
|
|
|
2,022 |
|
|
|
- |
|
|
|
11,645 |
|
Amortization
of acquisition-related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible
assets
|
|
|
- |
|
|
|
668 |
|
|
|
593 |
|
|
|
301 |
|
|
|
- |
|
|
|
1,562 |
|
Net
loss on disposition of assets
|
|
|
- |
|
|
|
44 |
|
|
|
12 |
|
|
|
19 |
|
|
|
- |
|
|
|
75 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
13,861 |
|
|
|
5,301 |
|
|
|
10,274 |
|
|
|
- |
|
|
|
29,436 |
|
Operating
income
|
|
|
- |
|
|
|
15,929 |
|
|
|
1,174 |
|
|
|
5,748 |
|
|
|
(85 |
) |
|
|
22,766 |
|
Interest
expense (income), net
|
|
|
1,057 |
|
|
|
8,599 |
|
|
|
(37 |
) |
|
|
(2 |
) |
|
|
- |
|
|
|
9,617 |
|
Loss
on debt extinguishment
|
|
|
393 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
393 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(1,450 |
) |
|
|
7,330 |
|
|
|
1,211 |
|
|
|
5,750 |
|
|
|
(85 |
) |
|
|
12,756 |
|
Income
tax (benefit) expense
|
|
|
(551 |
) |
|
|
3,482 |
|
|
|
119 |
|
|
|
1,042 |
|
|
|
- |
|
|
|
4,092 |
|
Equity
in income of subsidiaries
|
|
|
9,563 |
|
|
|
5,715 |
|
|
|
- |
|
|
|
- |
|
|
|
(15,278 |
) |
|
|
- |
|
Net
income
|
|
$ |
8,664 |
|
|
$ |
9,563 |
|
|
$ |
1,092 |
|
|
$ |
4,708 |
|
|
$ |
(15,363 |
) |
|
$ |
8,664 |
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For
the Six Months Ended March 30, 2007
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
108,031 |
|
|
$ |
30,931 |
|
|
$ |
68,686 |
|
|
$ |
(35,481 |
) |
|
$ |
172,167 |
|
Cost
of sales
|
|
|
- |
|
|
|
75,706 |
|
|
|
25,707 |
|
|
|
52,681 |
|
|
|
(36,213 |
) |
|
|
117,881 |
|
Gross
profit
|
|
|
- |
|
|
|
32,325 |
|
|
|
5,224 |
|
|
|
16,005 |
|
|
|
732 |
|
|
|
54,286 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
1,545 |
|
|
|
- |
|
|
|
2,698 |
|
|
|
- |
|
|
|
4,243 |
|
Selling
and marketing
|
|
|
- |
|
|
|
3,984 |
|
|
|
1,698 |
|
|
|
3,946 |
|
|
|
- |
|
|
|
9,628 |
|
General
and administrative
|
|
|
- |
|
|
|
8,093 |
|
|
|
722 |
|
|
|
1,435 |
|
|
|
- |
|
|
|
10,250 |
|
Amortization
of acquisition-related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible
assets
|
|
|
- |
|
|
|
668 |
|
|
|
125 |
|
|
|
301 |
|
|
|
- |
|
|
|
1,094 |
|
Net
loss on disposition of assets
|
|
|
- |
|
|
|
17 |
|
|
|
- |
|
|
|
41 |
|
|
|
- |
|
|
|
58 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
14,307 |
|
|
|
2,545 |
|
|
|
8,421 |
|
|
|
- |
|
|
|
25,273 |
|
Operating
income
|
|
|
- |
|
|
|
18,018 |
|
|
|
2,679 |
|
|
|
7,584 |
|
|
|
732 |
|
|
|
29,013 |
|
Interest
expense (income), net
|
|
|
4,120 |
|
|
|
6,619 |
|
|
|
(15 |
) |
|
|
(110 |
) |
|
|
- |
|
|
|
10,614 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(4,120 |
) |
|
|
11,399 |
|
|
|
2,694 |
|
|
|
7,694 |
|
|
|
732 |
|
|
|
18,399 |
|
Income
tax (benefit) expense
|
|
|
(1,566 |
) |
|
|
5,221 |
|
|
|
737 |
|
|
|
2,412 |
|
|
|
- |
|
|
|
6,804 |
|
Equity
in income of subsidiaries
|
|
|
14,149 |
|
|
|
7,971 |
|
|
|
- |
|
|
|
- |
|
|
|
(22,120 |
) |
|
|
- |
|
Net
income
|
|
$ |
11,595 |
|
|
$ |
14,149 |
|
|
$ |
1,957 |
|
|
$ |
5,282 |
|
|
$ |
(21,388 |
) |
|
$ |
11,595 |
|
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For
the Six Months Ended March 28, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
$ |
(1,812 |
) |
|
$ |
1,779 |
|
|
$ |
8,749 |
|
|
$ |
1,723 |
|
|
$ |
- |
|
|
$ |
10,439 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(1,941 |
) |
|
|
(95 |
) |
|
|
(522 |
) |
|
|
- |
|
|
|
(2,558 |
) |
Proceeds
from adjustment to acquisition purchase price
|
|
|
- |
|
|
|
1,615 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,615 |
|
Payment
of patent application fees
|
|
|
- |
|
|
|
- |
|
|
|
(147 |
) |
|
|
- |
|
|
|
- |
|
|
|
(147 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(326 |
) |
|
|
(242 |
) |
|
|
(522 |
) |
|
|
- |
|
|
|
(1,090 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
(6,000 |
) |
|
|
(4,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,000 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
418 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
418 |
|
Intercompany
dividends
|
|
|
6,200 |
|
|
|
(6,200 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash provided by (used in) financing activities
|
|
|
618 |
|
|
|
(10,200 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,582 |
) |
Net
(decrease) increase in cash and cash equivalents
|
|
|
(1,194 |
) |
|
|
(8,747 |
) |
|
|
8,507 |
|
|
|
1,201 |
|
|
|
- |
|
|
|
(233 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
1,378 |
|
|
|
16,518 |
|
|
|
958 |
|
|
|
1,620 |
|
|
|
- |
|
|
|
20,474 |
|
Cash
and cash equivalents at end of period
|
|
$ |
184 |
|
|
$ |
7,771 |
|
|
$ |
9,465 |
|
|
$ |
2,821 |
|
|
$ |
- |
|
|
$ |
20,241 |
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For
the Six Months Ended March 30, 2007
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
$ |
(563 |
) |
|
$ |
2,888 |
|
|
$ |
239 |
|
|
$ |
3,735 |
|
|
$ |
- |
|
|
$ |
6,299 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(1,634 |
) |
|
|
(21 |
) |
|
|
(3,692 |
) |
|
|
- |
|
|
|
(5,347 |
) |
Capitalized
expenses relating to potential business acquisition
|
|
|
- |
|
|
|
(119 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(119 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(1,753 |
) |
|
|
(21 |
) |
|
|
(3,692 |
) |
|
|
- |
|
|
|
(5,466 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
- |
|
|
|
(5,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,000 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
398 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
398 |
|
Proceeds
from exercise of stock options
|
|
|
542 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
542 |
|
Excess
tax benefit on stock option exercises
|
|
|
- |
|
|
|
679 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
679 |
|
Net
cash provided by (used in) financing activities
|
|
|
940 |
|
|
|
(4,321 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,381 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
377 |
|
|
|
(3,186 |
) |
|
|
218 |
|
|
|
43 |
|
|
|
- |
|
|
|
(2,548 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
139 |
|
|
|
28,299 |
|
|
|
290 |
|
|
|
1,425 |
|
|
|
- |
|
|
|
30,153 |
|
Cash
and cash equivalents at end of period
|
|
$ |
516 |
|
|
$ |
25,113 |
|
|
$ |
508 |
|
|
$ |
1,468 |
|
|
$ |
- |
|
|
$ |
27,605 |
|
Our
fiscal years are the 52- or 53-week periods that end on the Friday nearest
September 30. Fiscal year 2008 comprises the 53-week period ending October 3,
2008 and fiscal year 2007 comprised the 52-week period ended September 28, 2007.
The following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements, and the notes thereto, of
CPI International, Inc.
Overview
CPI
International, Inc., headquartered in Palo Alto, California, is the parent
company of Communications & Power Industries, a provider of microwave, radio
frequency, power and control solutions for critical defense, communications,
medical, scientific and other applications. Communications & Power
Industries develops, manufactures and distributes products used to generate,
amplify and transmit high-power/high-frequency microwave and radio frequency
signals and/or provide power and control for various applications. End-use
applications of these systems include the transmission of radar signals for
navigation and location; transmission of deception signals for electronic
countermeasures; transmission and amplification of voice, data and video signals
for broadcasting, Internet and other types of commercial and military
communications; providing power and control for medical diagnostic imaging; and
generating microwave energy for radiation therapy in the treatment of cancer and
for various industrial and scientific applications.
Unless
the context otherwise requires, “CPI International” means CPI International,
Inc., and “CPI” means Communications & Power Industries, Inc. CPI is a
direct subsidiary of CPI International. CPI International is a holding company
with no operations of its own. The terms “we,” “us,” “our” and the “Company”
refer to CPI International and its direct and indirect subsidiaries on a
consolidated basis.
Acquisition
of Malibu Research Associates, Inc.
On August
10, 2007, we completed the acquisition of all of the outstanding common stock of
Malibu Research Associates, Inc. (“Malibu”). Malibu, headquartered in Camarillo,
California, is a designer, manufacturer and integrator of advanced antenna
systems for radar, radar simulators and telemetry systems, as well as for data
links used in ground, airborne, unmanned aerial vehicles (“UAVs”) and shipboard
systems. Under the terms of the purchase agreement, at the closing of the
acquisition, we paid cash of approximately $22.4 million, which
included $2.3 million and $1.0 million placed into indemnity and working capital
escrow accounts, respectively. The indemnity escrow amount was provided to
ensure funds are available to satisfy potential indemnification claims asserted
prior to January 1, 2009, and the working capital escrow amount was provided to
satisfy any negative differences between the estimated working capital amount as
of the acquisition closing date and the actual working capital amount at the
acquisition closing date.
For
financial reporting purposes, consideration of approximately $2.6 million, which
was part of the cash consideration paid for Malibu at the closing of the
acquisiton, was excluded from the purchase price allocation and was reported as
other long-term assets in the consolidated balance sheet at September 28,
2007. This consideration amount represents the difference between the
estimated working capital amount as of the acquisition closing date and the
actual working capital amount as of the acquisition closing date. In accordance
with SFAS No. 141, any contingent consideration that has not been determined
beyond a reasonable doubt is excluded from the purchase price allocation until
the contingency is resolved. We intended to make a claim against the working
capital escrow account of $1.0
million and, if necessary,
the indemnity escrow account of $2.3 million to recover the working capital
shortfall once the amount of such shortfall had been finally
determined.
During
the second quarter of fiscal year 2008, the valuation of Malibu’s net working
capital amount as of the acquisition closing date was finalized, resulting in a
disbursement of cash to us of $1.6 million from the escrow accounts. The
remaining $1.0 million of consideration was allocated to goodwill as the working
capital contingency was resolved, which
resulted in an adjusted cash purchase price of $20.7
million.
Additionally, we may be required to pay
a potential earnout to the former stockholders of Malibu of up to $14.0 million,
which is primarily contingent upon the achievement of certain financial
objectives over the three years following the acquisition; and a discretionary
earnout of up to $1.0 million contingent upon achievement of certain succession
planning goals.
Orders
We sell
our products into six end markets: radar, electronic warfare, medical,
communications, industrial and scientific. Because they have similar
characteristics, our radar and electronic warfare markets together are
frequently referred to as “defense markets.”
Our
customer sales contracts are recorded as orders when we accept written customer
purchase orders or contracts. Customer purchase orders with an undefined
delivery schedule, or blanket purchase orders, are not reported as orders until
the delivery date is determined. Our government sales contracts are not reported
as orders until we have been notified that the contract has been funded. Total
orders for a fiscal period represent the total dollar amount of customer orders
recorded by us during the fiscal period, reduced by the dollar amount of any
order cancellations or terminations during the fiscal period.
Our
orders by market for the six months ended March 28, 2008 and March 30, 2007 are
summarized as follows (dollars in millions):
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
March
28, 2008
|
|
|
March
30, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
70.7 |
|
|
|
38
|
% |
|
$ |
76.3 |
|
|
|
41
|
% |
|
$ |
(5.6 |
) |
|
|
(7 |
)
% |
Medical
|
|
|
36.7 |
|
|
|
20 |
|
|
|
36.8 |
|
|
|
20 |
|
|
|
(0.1 |
) |
|
|
- |
|
Communications
|
|
|
55.9 |
|
|
|
30 |
|
|
|
54.6 |
|
|
|
30 |
|
|
|
1.3 |
|
|
|
2 |
|
Industrial
|
|
|
14.3 |
|
|
|
8 |
|
|
|
10.6 |
|
|
|
6 |
|
|
|
3.7 |
|
|
|
35 |
|
Scientific
|
|
|
7.6 |
|
|
|
4 |
|
|
|
5.9 |
|
|
|
3 |
|
|
|
1.7 |
|
|
|
29 |
|
Total
|
|
$ |
185.2 |
|
|
|
100
|
% |
|
$ |
184.2 |
|
|
|
100
|
% |
|
$ |
1.0 |
|
|
|
1
|
% |
In the
six months ended March 28, 2008, our new Malibu division received orders
totaling $11.6 million, of which approximately one-third was in the radar market
and approximately two-thirds were in the communications market. As we acquired
Malibu in August 2007, orders from the Malibu division are not included in our
results for the six months ended March 30, 2007.
Explanations for the order
increase or decrease by market for the six months ended March 28, 2008 compared
to the corresponding period of fiscal year 2007 are as
follows:
·
|
Radar and Electronic
Warfare: The majority of our sales
in the radar and electronic warfare markets are for products for domestic
and international defense and government end uses. Orders in these markets
are characterized by many smaller orders in the $0.5 million to $3.0
million range by product or program, and the timing of these orders may
vary from year to year. On a combined basis, orders for the radar and
electronic warfare markets decreased approximately 7% from an aggregate of
$76.3 million in the six months ended March 30, 2007 to an aggregate of
$70.7 million in the six months ended March 28, 2008. The decrease in
orders for these combined markets primarily resulted from decreased demand
for radar products to support Aegis weapons system and continued delays in
the placement of orders, and was partially offset by radar orders received
by our recently acquired Malibu division.
Demand
for our products to support ships with the Aegis weapons system has two
components: we support new ship builds and we provide spare and repair
products for previously
fielded ships. Over the past several years, we have seen high demand for
products to support a significant number of new ship builds for the Aegis
weapons program for U.S. and international military customers. We have now
received all orders for our products required to support these new ship
builds. As a result, we expect the demand to be primarily for spare and
repair products and, therefore, at overall lower levels than in the past
several years. We expect demand for our products to increase again as the
new ships are commissioned, deployed and added to the installed base,
after which they will require spare and repair products.
During fiscal year 2008, we have been
experiencing delays in the receipt of orders for radar and electronic
warfare programs, which subsequently impacts the timing of our sales for
these programs, and we expect these delays to continue for the foreseeable
future.
|
·
|
Medical: Orders for
our medical products consist of orders for medical imaging applications,
such as x-ray imaging, positron emission tomography (“PET”) and magnetic
resonance imaging (“MRI”), and for radiation therapy applications for the
treatment of cancer. Order levels in this market were essentially
unchanged.
A
Russian tender program in which we participated in fiscal years 2006 and
2007 will not recur in fiscal year 2008. In the six months ended March 30,
2007, we received approximately $1.4 million of the fiscal year’s $5.8
million in orders for the Russian tender program. In the six months ended
March 28, 2008, the decrease in x-ray generator orders for this Russian
tender program was offset by growth in orders for x-ray generators for
international customers.
In
fiscal year 2007, demand for products for MRI applications was very
strong, as a large customer ordered a two-year supply of these products in
one fiscal year, and we shipped a significant amount of these products
during that fiscal year. As a result, in the first half of fiscal year
2008, orders for products for MRI applications decreased approximately
$2.2 million. This decrease was partially offset by an increase in orders
for products for radiation therapy
applications.
|
·
|
Communications: The
2% increase in communications orders was primarily attributable to
telemetry orders received by our recently acquired Malibu division, as
well as the receipt of our first production orders, totaling approximately
$3 million, for Increment One of the
|
|
Warfighter
Information Network Tactical (“WIN-T”) military communications program.
These increases were partially offset by a decrease in orders for certain
military communications programs, including WIN-T’s predecessor program,
the Joint Network Node (“JNN”) military communications program, for which
we had strong demand in the first six months of fiscal year 2007, and a
decrease in orders for direct-to-home broadcast applications due to order
timing. In the six months ended March 28, 2008, as the WIN-T program began
to ramp up for production, orders to support the predecessor JNN program
decreased $3.9 million due the completion of that program. Once
the WIN-T program is fully ramped up for production, we expect that our
overall participation levels in the WIN-T program will be significantly
higher than our participation levels in the previous JNN
program.
|
·
|
Industrial: Orders in
the industrial market are cyclical. The $3.7 million increase in
industrial orders was attributable to orders for products used in a wide
variety of industrial applications, including industrial fabrication
applications, international test systems and food processing, cargo
screening and other industrial
applications.
|
·
|
Scientific: Orders in
the scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $1.7 million increase in
scientific orders was primarily the result of orders for products to
support a new accelerator project for fusion research at an international
scientific institute. This increase was partially offset by
decreases in orders for certain other scientific programs due to the
timing of orders for those
programs.
|
Incoming
order levels fluctuate significantly on a quarterly or annual basis, and a
particular quarter’s or year’s order rate may not be indicative of future order
levels. In addition, our sales are highly dependent upon manufacturing
scheduling and performance and, accordingly, it is not possible to accurately
predict when orders will be recognized as sales.
Backlog
As of March
28, 2008, we had an order backlog of $201.8 million compared to an order backlog
of $196.4 million as of September 28, 2007. Approximately $3.0 million of the
$5.4 million increase in backlog during the six months ended March 28,
2008 was due to orders at our recently acquired Malibu division. Because
our orders for government end-use products generally have much longer delivery
terms than our orders for commercial business (which require quicker
turn-around), our backlog is primarily composed of government orders. As a
result, we expect that our total backlog will not generally grow at the same
rate as our total sales, because the markets where we are expecting higher
growth (i.e.,
the medical and communications markets) are primarily commercial rather than
government.
Backlog
represents the cumulative balance, at a given point in time, of recorded
customer sales orders that have not yet been shipped or recognized as sales.
Backlog is increased when an order is received, and backlog is decreased when we
recognize sales. We believe backlog and orders information is helpful to
investors because this information may be indicative of future sales results.
Although backlog consists of firm orders for which goods and services are yet to
be provided, customers can, and sometimes
do, terminate or modify these orders. However, historically the amount of
modifications and terminations has not been material compared to total contract
volume.
Results
of Operations
We derive
our revenue primarily from the sale of microwave and radio frequency products,
including high-power microwave amplifiers, satellite communications amplifiers,
medical x-ray imaging subsystems, and other related products. Our products
generally have selling prices ranging from $2,000 to $100,000, with certain
limited products priced up to $1,000,000.
Cost of
goods sold generally includes costs for raw materials, manufacturing costs,
including allocation of overhead and other indirect costs, charges for reserves
for excess and obsolete inventory, warranty claims and losses on fixed
price contracts. Operating expenses generally consist of research and
development, selling and marketing and general and administrative
expenses.
Three Months Ended March 28, 2008
Compared to Three Months Ended March 30, 2007
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
|
Three
Months Ended
|
|
|
|
|
|
|
March
28, 2008
|
|
|
March
30, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
Amount
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Amount
|
|
Sales
|
|
$ |
94.8 |
|
|
|
100.0
|
% |
|
$ |
88.4 |
|
|
|
100.0
|
% |
|
$ |
6.4 |
|
Cost
of sales
|
|
|
66.7 |
|
|
|
70.4 |
|
|
|
60.7 |
|
|
|
68.7 |
|
|
|
6.0 |
|
Gross
profit
|
|
|
28.1 |
|
|
|
29.6 |
|
|
|
27.7 |
|
|
|
31.3 |
|
|
|
0.4 |
|
Research
and development
|
|
|
2.9 |
|
|
|
3.1 |
|
|
|
2.4 |
|
|
|
2.7 |
|
|
|
0.5 |
|
Selling
and marketing
|
|
|
5.3 |
|
|
|
5.6 |
|
|
|
4.8 |
|
|
|
5.4 |
|
|
|
0.5 |
|
General
and administrative
|
|
|
5.5 |
|
|
|
5.8 |
|
|
|
5.8 |
|
|
|
6.6 |
|
|
|
(0.3 |
) |
Amortization
of acquisition-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
intangibles
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.3 |
|
Net
loss on disposition of assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Operating
income
|
|
|
13.5 |
|
|
|
14.2 |
|
|
|
14.1 |
|
|
|
16.0 |
|
|
|
(0.6 |
) |
Interest
expense, net
|
|
|
4.8 |
|
|
|
5.1 |
|
|
|
5.3 |
|
|
|
6.0 |
|
|
|
(0.5 |
) |
Loss
on debt extinguishment
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
- |
|
|
|
0.0 |
|
|
|
0.4 |
|
Income
before taxes
|
|
|
8.3 |
|
|
|
8.7 |
|
|
|
8.8 |
|
|
|
10.0 |
|
|
|
(0.5 |
) |
Income
tax expense
|
|
|
2.1 |
|
|
|
2.2 |
|
|
|
3.1 |
|
|
|
3.5 |
|
|
|
(1.0 |
) |
Net
income
|
|
$ |
6.2 |
|
|
|
6.5
|
% |
|
$ |
5.8 |
|
|
|
6.6
|
% |
|
$ |
0.4 |
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$ |
15.8 |
|
|
|
16.7
|
% |
|
$ |
16.3 |
|
|
|
18.4
|
% |
|
$ |
(0.5 |
) |
Note: Totals
may not equal the sum of the component line items due to independent
rounding. Percentages are calculated based on rounded dollar amounts
presented.
|
(a)
|
EBITDA
represents earnings before provision for income taxes, net interest
expense and depreciation and amortization. For the reasons listed below,
we believe that GAAP-based financial information for leveraged businesses
such as ours should be supplemented by EBITDA so that investors better
understand our financial performance in connection with their analysis of
our business:
|
|
|
EBITDA
is a component of the measures used by our board of directors and
management team to evaluate our operating
performance;
|
|
|
our
senior credit facilities contain covenants that require us to maintain
certain interest expense coverage and leverage ratios that contain EBITDA
as a component, and our management team uses EBITDA to monitor compliance
with such covenants;
|
|
|
EBITDA
is a component of the measures used by our management team to make
day-to-day operating decisions;
|
|
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and therefore is a component
of the measures used by the management to facilitate internal comparisons
to competitors' results and our industry in general;
and
|
|
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
Other
companies may define EBITDA differently and, as a result, our measure of EBITDA
may not be directly comparable to EBITDA of other companies. Although we use
EBITDA as a financial measure to assess the performance of our business, the use
of EBITDA is limited because it does not include certain material costs, such as
interest and taxes, necessary to operate our business. When analyzing our
performance, EBITDA should be considered in addition to, and not as a substitute
for, net income, cash flows from operating activities or other statements of
operations or statements of cash flows data prepared in accordance with
GAAP.
For a
reconciliation of Net Income to EBITDA, see Note 11 of the accompanying
unaudited condensed consolidated financial statements.
Sales. Our sales by market for
the three months ended March 28, 2008 and March 30, 2007 are summarized as
follows (dollars in millions):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
March
28, 2008
|
|
|
March
30, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
Amount
|
|
|
%
of Sales
|
|
|
Amount
|
|
|
%
of Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
40.5 |
|
|
|
43
|
% |
|
$ |
36.3 |
|
|
|
41
|
% |
|
$ |
4.2 |
|
|
|
12
|
% |
Medical
|
|
|
17.1 |
|
|
|
18 |
|
|
|
17.0 |
|
|
|
19 |
|
|
|
0.1 |
|
|
|
1 |
|
Communications
|
|
|
27.6 |
|
|
|
29 |
|
|
|
27.0 |
|
|
|
31 |
|
|
|
0.6 |
|
|
|
2 |
|
Industrial
|
|
|
6.6 |
|
|
|
7 |
|
|
|
6.4 |
|
|
|
7 |
|
|
|
0.2 |
|
|
|
3 |
|
Scientific
|
|
|
3.0 |
|
|
|
3 |
|
|
|
1.7 |
|
|
|
2 |
|
|
|
1.3 |
|
|
|
76 |
|
Total
|
|
$ |
94.8 |
|
|
|
100
|
% |
|
$ |
88.4 |
|
|
|
100
|
% |
|
$ |
6.4 |
|
|
|
7
|
% |
In the
three months ended March 28, 2008, our new Malibu division generated sales
totaling $3.9 million, of which approximately one-third was in the radar market
and approximately two-thirds were in the communications market. As we
acquired Malibu in August 2007, sales from the Malibu division are not included
in our results for the three months ended March 30, 2007.
Sales for
the three months ended March 28, 2008 of $94.8 million were $6.4 million, or
approximately 7%, higher than sales of $88.4 million for the second quarter of
fiscal year 2007. Explanations for the sales increase or decrease by market for
the second quarter of fiscal year 2008 compared to the second quarter of fiscal
year 2007 are as follows:
·
|
Radar and Electronic
Warfare: The majority of our sales in the radar and electronic
warfare markets are for products for domestic and international defense
and government end uses. The timing of orders receipts and
subsequent shipments in these markets may vary from year to
year. On a combined basis, sales for these two markets
increased approximately 12% from $36.3 million in the second quarter of
fiscal year 2007 to $40.5 million in the second quarter of fiscal year
2008, primarily due to increased sales of radar products to support the
HAWK missile system and other military and weather radar systems, as well
as sales of radar products by our recently acquired Malibu
division.
|
·
|
Medical: Sales of our
medical products consist of sales for medical imaging applications, such
as x-ray imaging, PET and MRI, and for radiation therapy applications for
the treatment of cancer. Sales levels in this market were essentially
unchanged.
|
|
A
Russian tender program in which we participated in fiscal years 2006 and
2007 will not recur in fiscal year 2008. The $0.6 million decrease in
x-ray generator sales for this Russian tender program was offset by growth
in sales for x-ray generators for international customers. We are
beginning to see some softening in demand for x-ray generators for U.S.
customers due to the impact of the phasing in of the Deficit Reduction Act
of 2005 and currently challenging credit conditions.
In fiscal year 2007, demand for products for
MRI applications was very strong, as a large customer ordered a two-year
supply of these products in one fiscal year, and we shipped a significant
amount of these products during that fiscal year. As a result, in the
second quarter of fiscal year 2008, sales of products for MRI applications
decreased approximately $0.4
million.
|
·
|
Communications: The
2% increase in sales in the communications market was primarily the result
of sales of telemetry products by our recently acquired Malibu division,
as well as the start of our first production shipments for Increment One
of the WIN-T military communications program and increased sales of
satellite communications products for certain foreign broadcast network
applications and military communications programs. These increases were
partially offset by a decrease in sales of products for domestic
direct-to-home applications as well as certain military communications
programs, including the JNN program, for which we had strong sales in the
three months ended March 30, 2007. In the three months ended March 28,
2008, we shipped $1.7 million in products to support the WIN-T military
communications program as it began to ramp up for production. These sales
were offset by a $1.7 million decrease in sales of products to support its
predecessor, the JNN military communications program due to the completion
of that program. We expect that our overall participation levels in the
WIN-T program will be significantly higher than our participation levels
in the previous JNN program.
|
·
|
Industrial: Sales in the
industrial market are cyclical. The $0.2 million increase in industrial
sales was due to sales of products used in a wide variety of industrial
applications.
|
·
|
Scientific: Sales
in the scientific market are historically one-time projects and can
fluctuate significantly from period to period. The $1.3 million increase
in scientific sales was primarily the result of increased product
shipments for the Spallation Neutron Source at Oakridge National
Laboratory. We received approximately $5 million in orders for this
program in fiscal year 2007 and expect to complete our shipments of
products for this program in the second quarter of fiscal year
2009.
|
Gross Profit. Gross profit was
$28.1 million, or 29.6% of sales, for the three months ended March 28, 2008, a
$0.4 million increase from $27.7 million, or 31.3% of sales, for the three
months ended March 30, 2007. The favorable gross profit increase was
the result of the $6.4 million increase in sales volume for the three months
ended March 28, 2008 as compared to the corresponding period of fiscal year
2007, mostly offset by an increase in sales from engineering development
programs that generally have lower gross margins. The weakness of the U.S.
dollar for the three months ended March 28, 2008 as compared to the three months
ended March 30, 2007 caused a reduction in gross profit of approximately $0.3
million from the translation of Canadian dollar denominated manufacturing
expenses to U.S. dollars, net of currency hedging contracts. In addition to the
above, we are beginning to see additional pricing pressures for certain programs
and increases in material costs, both of which negatively impact gross
margins.
In fiscal year 2008, we
engaged in a higher level of new product and engineering development programs
than in fiscal year 2007 in order to continue to grow our business. These
programs typically result in lower gross margins and higher period-to-period
variability of our financial results. Notable new product and engineering
development programs currently include Increment One of the WIN-T military
communications program, the EarthCARE cloud-profiling program and products to
support the Active Denial System, counter-improvised explosive device
(“counter-IED”) systems, cargo screening programs, high-resolution nuclear
magnetic resonance (“NMR”) programs, next generation weather radar systems and
higher-power medical applications, as well as our recently acquired Malibu
division’s advanced antenna programs, including programs for phased array
systems, tactical common data links for UAVs and wideband ground antenna
systems.
Research and Development.
Research and development expenses were $2.9 million, or 3.1% of sales, for the
three months ended March 28, 2008, a $0.5 million increase from $2.4 million, or
2.7% of sales, for the three months ended March 30, 2007. The increase in
research and development expenses for the three months ended March 28, 2008
compared to the corresponding period of fiscal year 2007 was due primarily to
increased spending of $0.3 million on medical diagnostic imaging products and
$0.3 million in development expenses at our recently acquired Malibu division.
Total spending on research and development, including customer-sponsored
research and development, was $6.4 million and $4.2 million for the three months
ended March 28, 2008 and March 30, 2007, respectively. Customer-sponsored
research and development was $3.5 million and $1.8 million for the three months
ended March 28, 2008 and March 30, 2007, respectively.
Selling and Marketing. Selling
and marketing expenses were $5.3 million, or 5.6% of sales, for the three months
ended March 28, 2008, a $0.5 million increase from the $4.8 million, or 5.4% of
sales, for the three months ended March 30, 2007. The increase in selling and
marketing expenses for the three months ended March 28, 2008 compared to the
corresponding period of fiscal year 2007 reflects selling and marketing expenses
of $0.4 million at our recently acquired Malibu division and the unfavorable
impact of the weaker U.S. dollar on foreign-based expenses.
General and Administrative.
General and administrative expenses were $5.5 million, or 5.8% of sales, for the
three months ended March 28, 2008, a $0.3 million decrease from the $5.8
million, or 6.6% of sales, for the three months ended March 30, 2007. The
reduction in general and administrative expenses in the three months ended March
28, 2008 was primarily due to favorable foreign currency translation of $0.4
million and $0.3 million of expenses incurred in the prior fiscal period
associated with the evaluation of potential acquisition candidates that did not
recur in the current fiscal period, partially offset by $0.5 million of
administrative expenses for our recently acquired Malibu division. Foreign
currency translation gains and losses are a result of the effect of exchange
rate changes on certain foreign currency denominated balance sheet accounts
translated into U.S. dollars.
Amortization of Acquisition-Related
Intangibles. Amortization of acquisition-related intangibles consists of
purchase accounting charges for technology and other intangible assets.
Amortization of acquisition-related intangibles was $0.8 million for the three
months ended March 28, 2008 and $0.5 million for the three months ended March
30, 2007. The $0.3 million increase in amortization of
acquisition-related intangibles is due to amortization of intangible assets for
our recently acquired Malibu division.
Interest Expense, Net (“Interest
Expense”). Interest Expense was $4.8 million, or 5.1% of sales, for the
three months ended March 28, 2008, a $0.5 million decrease from the $5.3
million, or 6.0% of sales, for the three months ended March 30, 2007. The
reduction in interest expense for the three months ended March 28, 2008 was
primarily due to lower interest rates on our debt obligations during this period
compared to the corresponding period of fiscal year 2007. The reduction in
interest rates was
primarily
due to the refinancing of our senior credit facilities and redemption of a
portion of our floating rate senior notes during the fourth quarter of fiscal
year 2007.
Loss
on Debt Extinguishment. Loss on debt extinguishment of $0.4 million in
the three months ended March 28, 2008 resulted from the early redemption of $6.0
million of our floating rate senior notes in March 2008. The loss on
debt extinguishment consists of $0.3 million in non-cash write-offs of deferred
debt issue costs and issue discount costs and $0.1 million in cash payments for
call premiums.
Income Tax Expense. We
recorded income tax expense of $2.1 million and $3.1
million for the three months ended March 28, 2008 and March 30, 2007,
respectively. Our effective tax rate was approximately 26% for the three
months ended March 28, 2008 as compared to approximately 35% for the three
months ended March
30, 2007. The effective tax rate for the three months ended March
28, 2008 includes a discrete tax benefit of approximately $0.4 million that is
attributable to the fourth quarter of fiscal year 2007 relating to the
correction of an immaterial error in the computation of the warranty expense tax
deduction.
Net Income. Net income was
$6.2 million, or 6.5% of sales, for the three months ended March 28, 2008 as
compared to $5.8 million, or 6.6% of sales, in the three months ended March 30,
2007. The $0.4 million increase in net income for the three months
ended March 28, 2008 as compared to the corresponding period of fiscal year 2007
was primarily due to additional gross profit from the $6.4 million increase in
sales volume and lower income tax expense for the three months ended March 28,
2008, mostly offset by increased sales of products from engineering development
programs with lower gross margins in the three months ended March 28, 2008 and
higher operating expenses from the acquisition of Malibu.
EBITDA. EBITDA was $15.8
million, or 16.7% of sales, for the three months ended March 28, 2008 as
compared to $16.3 million, or 18.4% of sales, for the three months ended March
30, 2007. The $0.5 million decrease in EBITDA for the three months ended March
28, 2008 as compared to the corresponding period of fiscal year 2007 was
primarily due to increased sales of products from engineering development
programs with lower gross margins in the three months ended March 28,
2008. These decreases to EBITDA were mostly offset by additional
gross profit from the $6.4 million increase in sales volume.
Six
Months Ended March 28, 2008 Compared to Six Months Ended March 30,
2007
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
|
Six
Months Ended
|
|
|
|
|
|
|
March
28, 2008
|
|
|
March
30, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
Amount
|
|
|
%
of Sales
|
|
|
Amount
|
|
|
%
of Sales
|
|
|
Amount
|
|
Sales
|
|
$ |
180.7 |
|
|
|
100.0
|
% |
|
$ |
172.2 |
|
|
|
100.0
|
% |
|
$ |
8.5 |
|
Cost
of sales
|
|
|
128.5 |
|
|
|
71.1 |
|
|
|
117.9 |
|
|
|
68.5 |
|
|
|
10.6 |
|
Gross
profit
|
|
|
52.2 |
|
|
|
28.9 |
|
|
|
54.3 |
|
|
|
31.5 |
|
|
|
(2.1 |
) |
Research
and development
|
|
|
5.7 |
|
|
|
3.2 |
|
|
|
4.2 |
|
|
|
2.4 |
|
|
|
1.5 |
|
Selling
and marketing
|
|
|
10.5 |
|
|
|
5.8 |
|
|
|
9.6 |
|
|
|
5.6 |
|
|
|
0.9 |
|
General
and administrative
|
|
|
11.6 |
|
|
|
6.4 |
|
|
|
10.3 |
|
|
|
6.0 |
|
|
|
1.3 |
|
Amortization
of acquisition-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
intangibles
|
|
|
1.6 |
|
|
|
0.9 |
|
|
|
1.1 |
|
|
|
0.6 |
|
|
|
0.5 |
|
Net
loss on disposition of assets
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
- |
|
Operating
income
|
|
|
22.8 |
|
|
|
12.6 |
|
|
|
29.0 |
|
|
|
16.8 |
|
|
|
(6.2 |
) |
Interest
expense, net
|
|
|
9.6 |
|
|
|
5.3 |
|
|
|
10.6 |
|
|
|
6.2 |
|
|
|
(1.0 |
) |
Loss
on debt extinguishment
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
0.0 |
|
|
|
0.4 |
|
Income
before taxes
|
|
|
12.8 |
|
|
|
7.1 |
|
|
|
18.4 |
|
|
|
10.7 |
|
|
|
(5.6 |
) |
Income
tax expense
|
|
|
4.1 |
|
|
|
2.3 |
|
|
|
6.8 |
|
|
|
3.9 |
|
|
|
(2.7 |
) |
Net
income
|
|
$ |
8.7 |
|
|
|
4.8
|
% |
|
$ |
11.6 |
|
|
|
6.7
|
% |
|
$ |
(2.9 |
) |
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$ |
27.8 |
|
|
|
15.4
|
% |
|
$ |
33.4 |
|
|
|
19.4
|
% |
|
$ |
(5.6 |
) |
Note: Totals
may not equal the sum of the component line items due to independent rounding.
Percentages are calculated based on rounded dollar amounts
presented.
(a)
|
EBITDA
represents earnings before provision for income taxes, net interest
expense and depreciation and amortization. For the reasons listed below,
we believe that GAAP-based financial information for leveraged businesses
such as ours should be supplemented by EBITDA so that investors
better understand our financial performance in connection with their
analysis of our business:
|
|
|
EBITDA
is a component of the measures used by our board of directors and
management team to evaluate our operating
performance;
|
|
|
our
senior credit facilities contain covenants that require us to maintain
certain interest expense coverage and leverage ratios that contain EBITDA
as a component, and our management team uses EBITDA to monitor compliance
with such covenants;
|
|
|
EBITDA
is a component of the measures used by our management team to make
day-to-day operating decisions;
|
|
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and therefore is a component
of the measures used by the management to facilitate internal comparisons
to competitors' results and our industry in general;
and
|
|
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
|
Other
companies may define EBITDA differently and, as a result, our measure of
EBITDA may not be directly comparable to EBITDA of other companies.
Although we use EBITDA as a financial measure to assess the performance of
our business, the use of EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to operate
our business. When analyzing our performance, EBITDA should be considered
in addition to, and not as a substitute for, net income, cash flows from
operating activities or other statements of operations or statements of
cash flows data prepared in accordance with
GAAP.
|
For a
reconciliation of EBITDA to Net Income, see Note 11 of the accompanying
unaudited condensed consolidated financial statements.
Sales. Our sales by market for
the six months ended March 28, 2008 and March 30, 2007 are summarized as follows
(dollars in millions):
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
March
28, 2008
|
|
|
March
30, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
Amount
|
|
|
%
of Sales
|
|
|
Amount
|
|
|
%
of Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
75.9 |
|
|
|
42
|
% |
|
$ |
70.3 |
|
|
|
40
|
% |
|
$ |
5.6 |
|
|
|
8
|
% |
Medical
|
|
|
32.7 |
|
|
|
18 |
|
|
|
34.1 |
|
|
|
20 |
|
|
|
(1.4 |
) |
|
|
(4 |
) |
Communications
|
|
|
54.4 |
|
|
|
30 |
|
|
|
53.1 |
|
|
|
31 |
|
|
|
1.3 |
|
|
|
2 |
|
Industrial
|
|
|
12.1 |
|
|
|
7 |
|
|
|
11.4 |
|
|
|
7 |
|
|
|
0.7 |
|
|
|
6 |
|
Scientific
|
|
|
5.6 |
|
|
|
3 |
|
|
|
3.3 |
|
|
|
2 |
|
|
|
2.3 |
|
|
|
70 |
|
Total
|
|
$ |
180.7 |
|
|
|
100
|
% |
|
$ |
172.2 |
|
|
|
100
|
% |
|
$ |
8.5 |
|
|
|
5
|
% |
In the
six months ended March 28, 2008, our new Malibu division generated sales
totaling $8.3 million, of which approximately 40 percent was in the radar market
and approximately 60 percent was in the communications market. As we
acquired Malibu in August 2007, sales from the Malibu division are not included
in our results for the first six months of fiscal year 2007.
Sales for
the six months ended March 28, 2008 of $180.7 million were $8.5 million, or 5%,
higher than sales of $172.2 million for the corresponding period of fiscal year
2007. Explanations for the sales increase or decrease by market are
as follows:
·
|
Radar and Electronic
Warfare: The majority of our sales in the radar and electronic
warfare markets are for products for domestic and international defense
and government end uses. The timing of orders receipts and subsequent
shipments in these markets may vary from year to year. On a
combined basis, sales for these two markets increased approximately 8%
from $70.3 million in the six months ended March 30, 2007 to $75.9 million
in the corresponding period of fiscal year 2008. The increase in sales was
due primarily to sales of radar products by our recently acquired Malibu
division and increased sales to support the HAWK missile system and other
radar systems.
|
·
|
Medical: Sales of our
medical products consist of sales for medical imaging applications, such
as x-ray imaging, PET and MRI, and for radiation therapy applications for
the treatment of cancer. The 4% decrease in sales of our medical products
was primarily due to decreased sales of our products used in radiation
therapy and decreased sales of our products used in MRI applications. The
decrease in sales of radiation therapy products was primarily in the first
quarter of fiscal year 2008. As expected, we received our annual large
order for these radiation therapy products from a significant customer in
the second quarter of fiscal year 2008.
In fiscal year 2007, demand for products for
MRI applications was very strong, as a large customer ordered a two-year
supply of these products in that year, and we shipped a significant
amount of these products during that fiscal year. As a result, in the
first six months of fiscal year 2008, sales of products for MRI
applications decreased approximately $1.0
million.
|
|
A Russian tender program in which we
participated in fiscal years 2006 and 2007 will not recur in fiscal year
2008. The decrease in x-ray generator sales for this Russian tender
program was offset by growth in sales for x-ray generators for
international customers. We are beginning to see some softening in demand
for x-ray generators for U.S. customers due the impact of the phasing in
of the Deficit Reduction Act of 2005 and currently challenging credit
conditions, and sales of x-ray generators for U.S. customers in the first
six months of fiscal year 2008 were $0.7 million lower than in the first
six months of fiscal year
2007.
|
·
|
Communications: The
2% increase in sales in the communications market was primarily the result
of sales of telemetry products by our recently acquired Malibu division,
as well as the start of our first production shipments for Increment One
of the WIN-T military communications program and increased sales of
satellite communications products for certain foreign broadcast network
applications and military communications programs. These increases were
partially offset by a decrease in sales of products for certain military
communications programs, including the JNN program, certain foreign
broadcast network applications and domestic direct-to-home applications
for which we had strong sales in the first six months of fiscal year
2007.
In
the six months ended March 28, 2008, the $1.7 million increase in sales of
products to support the WIN-T military communications program as it began
to ramp up for production was offset by a $2.4 million decrease in sales
of products to support its predecessor, the JNN military communications
program. We expect that our overall participation levels in the WIN-T
program will be significantly higher than our participation levels in the
previous JNN program.
|
·
|
Industrial: Sales in the
industrial market are cyclical. The $0.7 million increase in
industrial sales was due to sales of products used a wide variety of
industrial applications.
|
·
|
Scientific: Sales
in the scientific market are historically one-time projects and can
fluctuate significantly from period to period. The $2.3 million increase
in scientific sales was primarily the result of increased product
shipments for the Spallation Neutron Source at Oakridge National
Laboratory. We received approximately $5 million in orders for this
program in fiscal year 2007 and expect to complete our shipments of
products for this program in the second quarter of fiscal year
2009.
|
Gross Profit. Gross profit was
$52.2 million, or 28.9% of sales, for the six months ended March 28, 2008, a
$2.1 million decrease from $54.3 million, or 31.5% of sales, in the six months
ended March 30, 2007. For the six months ended March 28, 2008 as compared to the
corresponding period of fiscal year 2007, gross profit was unfavorably impacted
by an increase in the sales of products from engineering development programs
that generally have lower gross margins and the impact of the weaker U.S. dollar
in the first six months of fiscal year 2008 as compared to the comparable period
in fiscal year 2007, partially offset by gross profit resulting from the $8.5
million increase in sales volume. The weakness of the U.S. dollar for the six
months ended March 28, 2008 as compared to the six months ended March 30, 2007
caused a reduction in gross profit of approximately $0.7 million from the
translation of Canadian dollar denominated manufacturing expenses to U.S.
dollars, net of currency hedging contracts. In addition to the
above, we are beginning to see additional pricing pressures for certain programs
and increases in material costs, both of which negatively impact gross
margins.
In fiscal
year 2008, we engaged in a higher level of new product and engineering
development programs than in fiscal year 2007 in order to continue to grow our
business. These programs typically result in lower gross margins and
higher period-to-period variability of our financial results. Notable
new
product
and engineering development programs currently include Increment One of the
WIN-T military communications program, the EarthCARE cloud-profiling program and
products to support the Active Denial System, counter-IED systems, cargo
screening programs, high-resolution NMR programs, next generation weather radar
systems and higher-power medical applications, as well as our recently acquired
Malibu division’s advanced antenna programs, including programs for phased array
systems, tactical common data links for UAVs and wideband ground antenna
systems.
Research and Development. Research and development expenses were $5.7
million, or 3.2% of sales, for the six months ended March 28, 2008, a $1.5
million increase from $4.2 million, or 2.4% of sales, for the six months ended
March 30, 2007. The increase in research and development expenses for
the six months ended March 28, 2008 compared to the corresponding period of
fiscal year 2007 was due primarily to planned expenditures of $0.9 million on
the Army's WIN-T program, and increased spending of $0.4 million on medical
diagnostic imaging products and $0.4 million in development costs at our
recently acquired Malibu division. Total spending on research and development,
including company-sponsored amounts charged to research and development, and
customer-sponsored amounts charged to cost of sales, increased to $12.9 million,
or 7.1% of sales, in the first six months of fiscal year 2008 from $7.5
million, or 4.4% of sales, in the first six months of fiscal year 2007.
Customer-sponsored research and development was $7.2 million and $3.3 million
for the six months ended March 28, 2008 and March 30, 2007,
respectively.
Selling and Marketing. Selling
and marketing expenses were $10.5 million, or 5.8% of sales, for the six months
ended March 28, 2008, a $0.9 million increase from the $9.6 million, or 5.6% of
sales, for the six months ended March 30, 2007. The increase in
selling and marketing expenses for the six months ended March 28, 2008 compared
to the corresponding period of fiscal year 2007 reflects selling and marketing
expenses of $0.5 million at our recently acquired Malibu division, as well as
the unfavorable impact of the weaker U.S. dollar on foreign-based
expenses.
General and Administrative.
General and administrative expenses were $11.6 million, or 6.4% of sales, for
the six months ended March 28, 2008, a $1.3 million increase from the $10.3
million, or 6.0% of sales, for the six months ended March 30, 2007. The increase
in general and administrative expenses in the six months ended March 28, 2008
was primarily due to $1.2 million of expenses for our recently acquired Malibu
division, $0.3 million less of favorable foreign currency translation and higher
stock compensation expense of $0.3 million, partially offset by lower expenses
of $0.5 million associated with the evaluation of potential acquisition
candidates in fiscal year 2007. Foreign currency translation gains and losses
are a result of the effect of exchange rate changes on certain foreign currency
denominated balance sheet accounts translated into U.S. dollars.
Amortization of Acquisition-Related
Intangibles. Amortization of acquisition-related intangibles consists of
purchase accounting charges for technology and other intangible assets.
Amortization of acquisition-related intangibles was $1.6 million for the six
months ended March 28, 2008 and $1.1 million for the six months ended March 30,
2007. The $0.5 million increase in amortization of
acquisition-related intangibles is due to amortization of intangible assets for
our recently acquired Malibu division.
Interest Expense, Net (“Interest
Expense”). Interest Expense of $9.6 million for the six months ended
March 28, 2008 was $1.0 million lower than interest expense of $10.6 million for
the six months ended March 30, 2007. The reduction in interest expense for the
six months ended March 28, 2008 was primarily due to lower interest rates on our
debt obligations during the 2008 period compared to the corresponding period of
fiscal year 2007. The reduction in interest rates was primarily due
to the refinancing of our senior credit facilities and redemption of a portion
of our floating rate senior notes during the fourth quarter of fiscal year
2007.
Loss on Debt Extinguishment.
Loss on debt extinguishment of $0.4 million in the six months ended March 28,
2008 resulted from the early redemption of $6.0 million of our floating rate
senior notes in March 2008. The loss on debt extinguishment consists
of $0.3 million in non-cash write-offs of deferred debt issue costs and issue
discount costs and $0.1 million in cash payments for call premiums.
Income Tax Expense. We
recorded income tax expense of $4.1 million and $6.8 million for the six months
ended March 28, 2008 and March 30, 2007, respectively. Our effective tax rate
was approximately 32% for the six months ended March 28, 2008 as compared to
approximately 37% for the corresponding period of fiscal year 2007. The lower
effective income tax rate in the six months ended March 28, 2008 is primarily
due to a discrete tax benefit in the six months ended March 28, 2008 of $0.4
million related to the correction of an immaterial error that arose in the
fourth quarter of fiscal year 2007, and also due to lower Canadian statutory
income tax rates in the six months ended March 28, 2008.
Income
tax expense for the six months ended March 28, 2008 includes a tax benefit of
approximately $0.4 million that is attributable to the fourth quarter of fiscal
year 2007 relating to the correction of an error in the computation of the
warranty expense tax deduction in a foreign tax jurisdiction. Our estimated
effective income tax rate for the second half of fiscal year 2008 is expected to
be approximately 37%.
Net Income. Net income was
$8.7 million, or 4.8% of sales, for the six months ended March 28, 2008 as
compared to $11.6 million, or 6.7% of sales, in the six months ended March 30,
2007. The $2.9 million decrease in net income for the six months
ended March 28, 2008 as compared to the corresponding period of fiscal year 2007
was primarily due to increased sales of products from engineering development
programs with lower gross margins in the six months ended March 28, 2008,
increased spending on research and development, and the unfavorable impact from
the translation of Canadian dollar denominated expenses to the U.S. dollar.
These decreases to net income were partially offset by additional gross profit
resulting from the $8.5 million increase in sales volume and lower interest
expense in the six months ended March 28, 2008.
EBITDA. EBITDA was $27.8
million, or 15.4% of sales, for the six months ended March 28, 2008 as compared
to $33.4 million, or 19.4% of sales, for the six months ended March 30, 2007.
The $5.6 million decrease in EBITDA for the six months ended March 28, 2008 as
compared to the corresponding period of fiscal year 2007 was primarily due to
increased sales of products from engineering development programs with lower
gross margins in the six months ended March 28, 2008, increased spending on
research and development, and the unfavorable impact from the translation of
Canadian dollar denominated expenses to the U.S. dollar. These
decreases to EBITDA were partially offset by additional gross profit resulting
from the $8.5 million increase in sales volume.
Liquidity
and Capital Resources
Overview
Our
liquidity is affected by many factors, some of which are based on normal ongoing
operations of our business and others that are related to uncertainties in the
markets in which we compete and other global economic factors. We have
historically financed, and intend to continue to finance, our capital and
working capital requirements, including debt service and internal growth,
through a combination of cash flows from our operations and borrowings under our
senior credit facilities. Our primary uses of cash are cost of sales, operating
expenses, debt service and capital expenditures.
Cash
and Working Capital
The
following summarizes our cash and cash equivalents and working capital (in
thousands):
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,241 |
|
|
$ |
20,474 |
|
Working
capital
|
|
|
81,745 |
|
|
|
81,547 |
|
We invest
cash balances in excess of operating requirements in overnight U.S. Government
securities and money market accounts. In addition to the above cash and cash
equivalents, we had restricted cash of $1.8 million as of March 28, 2008,
consisting primarily of bank guarantees from customer advance payments to our
international subsidiaries. The bank guarantees become unrestricted cash when
performance under the sales or supply contract is complete.
The
significant factors underlying the $0.2 million net decrease in cash and cash
equivalents during the six months ended March 28, 2008 were the repayment of
$4.0 million of the outstanding balance on our senior term loan, the redemption
of $6.0 million in principal amount of our floating rate senior notes and
capital expenditures of $2.6 million, partially offset by net cash provided
by our operating activities of $10.4 million and a purchase price
adjustment of $1.6 million for the Malibu acquisition.
We had
total principal amount of debt outstanding of $236.75 million and
$246.75 million as of March 28, 2008 and September 28, 2007,
respectively. As of March 28, 2008, we had borrowing availability of
$54.1 million under the revolver under our senior credit
facilities.
As of
April 1, 2008, after giving effect to an optional prepayment of 2.0 million on
our senior term loan on such date, we had $234.75 million in total
principal amount of debt outstanding,
Historical
Operating, Investing and Financing Activities
Operating
Activities
During
the six months ended March 28, 2008 and March 30, 2007, we funded our operating
activities through cash generated internally.
Operating
activities provided cash of $10.4 million in the six months ended March 28,
2008, which was attributable to net income of $8.7 million and depreciation,
amortization and other non-cash charges of $6.2 million, partially offset by
$4.5 million for cash used for working capital. The primary uses of cash for
working capital in the first six months of fiscal year 2008 were for reduction
in income taxes payable of $3.6 million and a decrease in accrued expenses,
including product warranty reserve, of $2.8 million, partially offset by $1.9
million decrease in accounts receivable.
Operating
activities provided cash of $6.3 million in the six months ended March 30, 2007,
which was attributable to net income of $11.6 million and depreciation,
amortization and other non-cash charges of $5.4 million, partially offset by
$10.7 million for cash used for working capital. The primary uses of cash for
working capital in the first six months of fiscal year 2007 were for reduction
in income taxes payable of $4.6 million due primarily to income tax payments
from the taxable gain on the sale of our San Carlos property in fiscal year
2006, and increases in accounts receivable of $3.3 million and inventories of
$2.8 million due to the timing of customer shipments.
Investing
Activities
For the
six months ended March 28, 2008, net cash used in investing activities was
$1.1 million, compared to $5.5 million for the six month ended March
30, 2007.
Investing
activities for the six months ended March 28, 2008 consisted primarily of $2.6
million capital expenditures and $0.1 million payment of patent application
fees. The amount of cash used in investing activities was partially offset by
cash received as a result of a $1.6 million adjustment to the purchase price of
Malibu based on the actual working capital of Malibu as of the acquisition
closing date.
Investing
activities for the six months ended March 30, 2007 consisted primarily of $5.4
million capital expenditures and $0.1 million of capitalized expenses relating
to a potential business acquisition. Capital expenditures in the first six
months of fiscal year 2007 included $3.5 million for a building expansion
project for our Canadian manufacturing facility.
Financing
Activities
For the
six months ended March 28, 2008, net cash used in financing activities was
$9.6 million, compared to $3.4 million for the six month ended March
30, 2007.
Net cash
used in financing activities for the six months ended March 28, 2008 consisted
primarily of a redemption of $6.0 million in principal amount of our floating
rate senior notes and a term loan repayment of $4.0 million. The $4.0
million term loan repayment during the first six months of fiscal year 2008
comprised the scheduled amortization payment of $250,000 for each of the first
and second quarters of fiscal year 2008 and an optional prepayment of $3.5
million. The cash used in financing activities for the first six months of
fiscal year 2008 was partially offset by $0.4 million in proceeds from employee
stock purchases.
Financing
activities for the six months ended March 30, 2007 consisted primarily of a $5.0
million term loan repayment in December 2006 using available operating cash,
partially offset by proceeds of $0.5 million from the exercise of stock options
and $0.4 million from employee stock purchases, and $0.7 million of excess tax
benefits from stock option exercises. The $5.0 million term loan repayment
included a $1.7 million required annual excess cash flow prepayment for fiscal
year 2006 and an optional prepayment of $3.3 million.
If the
leverage ratio under our amended and restated senior credit facilities exceeds
3.5:1 at the end of any fiscal year, then we are required to make an annual
prepayment within 90 days after the end of the fiscal year based on a
calculation of excess cash flow, as defined in the senior credit facilities,
multiplied by a factor of 50%, less any optional prepayments made during the
fiscal year. There was no excess cash flow payment due for fiscal year 2007,
and, therefore, no excess cash flow payment was made in the six months ended
March 28, 2008.
Our
continuing operations typically do not have large recurring capital expenditure
requirements. Capital expenditures are generally made to replace existing
assets, increase productivity, facilitate cost reductions or meet regulatory
requirements. Total capital expenditures for the six month ended March 28, 2008
were $2.6 million. We expect total fiscal year 2008 capital expenditures to
be approximately $5.0 to $6.0 million.
Recently
Released Accounting Pronouncements
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued
FASB Interpretation (“FIN”) No. 48, “Accounting for Income Tax Uncertainties.”
FIN No. 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by the taxing authority. The recently issued literature also provides guidance
on the derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties. FIN No. 48 also
includes guidance concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with any recorded
income tax uncertainties. Effective September 29, 2007, we adopted FIN No. 48.
The adoption of FIN No. 48 did not have any impact on our financial position,
net income or prior year financial statements. See Note 9, "Income Taxes,"
to the consolidated condensed financial statements included in this Form 10-Q
for further discussion.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value under other accounting
pronouncements that permit or require fair value measurements, changes the
methods used to measure fair value and expands disclosures about fair value
measurements. In particular, disclosures are required to provide information on:
the extent to which fair value is used to measure assets and liabilities; the
inputs used to develop measurements; and the effect of certain of the
measurements on earnings (or changes in net assets). SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007 for financial assets and
liabilities and for fiscal years beginning after November 15, 2008 for
non-financial assets and liabilities. Early adoption, as of the beginning of an
entity’s fiscal year, is also permitted, provided interim financial statements
have not yet been issued. We will be required to adopt SFAS No. 157 in our
fiscal year 2009 commencing October 4, 2008 for financial assets and liabilities
and in our fiscal year 2010 commencing October 2, 2009 for non-financial assets
and liabilities. We are currently
evaluating the potential impact, if any, that the adoption of this new standard
will have on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS No. 159
is to provide opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS No. 159 also establishes
presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. We will be required to adopt SFAS No. 159 in our fiscal year 2009
commencing October 4, 2008 and are currently evaluating the impact, if any, that
the adoption of this new standard will have on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statement—amendments of ARB No. 51.” SFAS No. 160
states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS No.
160 applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. We will be required to adopt SFAS No. 160 in
our fiscal year 2010 commencing October 3, 2009 and are currently evaluating the
impact, if any, that the adoption of this new standard will have on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No.
141(R)”), “Business Combinations,” which replaces SFAS No. 141.
SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non controlling interest in the acquiree
and the goodwill acquired. The Statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008. We will be required to adopt
SFAS No. 141(R) in our fiscal year 2010 commencing October 3, 2009 and are
currently evaluating the impact, if any, that the adoption of this new standard
will have on our consolidated financial statements.
In March 2008,
the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161
requires enhanced disclosures about an entity’s derivative instruments and
hedging activities including: (1) how and why an entity uses derivative
instruments; (2) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations; and
(3) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with earlier application encouraged. We
will be required to adopt SFAS No. 161 in our second quarter of fiscal year 2009
commencing January 3, 2009 and are currently evaluating the impact, if any, that
the adoption of this new standard will have on our consolidated financial
statements.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles, or GAAP, in the United States of America, which
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon various factors and information available to us at the time that these
estimates, judgments and assumptions are made. These factors and information may
include, but are not limited to, history and prior experience, experience of
other enterprises in the same industry, new related events, current economic
conditions and information from third party professionals. The estimates,
judgments and assumptions we make can affect the reported amounts
of assets and liabilities as of the date of the financial statements,
as well as the reported amounts of revenues and expenses during the
periods
presented. To the extent there are material differences between these estimates,
judgments or assumptions and actual results, our financial statements will be
affected.
We
believe the following critical accounting policies are the most significant to
the presentation of our financial statements and require the most subjective and
complex judgments. These matters, and the judgments and uncertainties affecting
them, are also essential to understanding our reported and future operating
results.
Revenue
recognition
We
generally recognize revenue upon shipment of product, following receipt of
written purchase orders, when the price is fixed or determinable, title has
transferred and collectibility is reasonably assured. Value of sales under the
percentage of completion method of accounting is determined on the basis of
costs incurred and estimates of costs at completion, which require management
estimates of future costs. Changes in estimated costs at completion over time
could have a material impact on our operating results.
Inventory
reserves
We assess
the valuation of inventory and periodically write down the value for estimated
excess and obsolete inventory based upon actual usage and estimates about future
demand. The excess balance determined by this analysis becomes the basis for our
excess inventory charge. Management personnel play a key role in our excess
inventory review process by providing updated sales forecasts, managing product
rollovers and working with manufacturing to maximize recovery of excess
inventory. If our estimates regarding demand are inaccurate or changes in
technology affect demand for certain products in an unforeseen manner, we may
incur losses or gains in excess of our established markdown reserve that could
be material.
Management
also reviews the carrying value of inventory for lower of cost or market on an
individual product or contract basis. A loss reserve is charged to cost of sales
if the estimated product cost or the contract cost at completion is in excess of
net realizable value (selling price less estimated cost of disposal). If the
actual contract cost at completion is different than originally estimated, then
a loss or gain provision adjustment would be recorded that could have a material
impact on our operating results.
Product
warranty
Our
products are generally warranted for a variety of periods, typically one to
three years or a predetermined product usage life. A provision for estimated
future costs of repair, replacement or customer accommodations is reflected in
the consolidated condensed financial statements included in this report. We
assess the adequacy of our preexisting warranty liabilities and adjust the
balance based on actual experience and changes in future expectations. The
determination of product warranty reserves requires us to make estimates of
product return rates and expected cost to repair or replace the products under
warranty. If actual repair and replacement costs differ significantly from our
estimates, then adjustments to recognize additional cost of sales may be
required.
Business
combination and related goodwill and intangibles
We
account for business combinations using the purchase method of accounting
pursuant to SFAS No. 141, "Business Combinations." Intangible assets
acquired in a purchase method business
combination
are recognized and reported apart from goodwill, pursuant to the criteria
specified by SFAS No. 141.
Accounting
for business combinations requires the allocation of purchase price to
identifiable tangible and intangible assets and liabilities based upon their
fair value. The allocation of purchase price is a matter of judgment and
requires the use of estimates and fair value assumptions. The allocation of
purchase price to finite-lived assets can have a significant impact on operating
results because finite-lived assets are depreciated or amortized over their
remaining useful lives.
The
values assigned to acquired identifiable intangible assets for technology were
determined based on the excess earnings method of the income approach. This
method determines fair market value using estimates and judgments regarding the
expectations of future after-tax cash flows from those assets over their lives,
including the probability of expected future contract renewals and sales, all of
which are discounted to their present value.
Recoverability
of long-lived assets
We
account for goodwill and other intangible assets in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires
that goodwill and identifiable intangible assets with indefinite useful lives be
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
We amortize identifiable intangible assets on a straight-line basis over their
useful lives of up to 50 years.
We assess
the recoverability of the carrying value of goodwill and other intangible assets
with indefinite useful lives at least annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be fully
recoverable. Recoverability of goodwill is measured at the reporting unit level
(our six divisions) based on a two-step approach. First, the carrying amount of
the reporting unit is compared to the fair value as estimated by the future net
discounted cash flows expected to be generated by the reporting unit. To the
extent that the carrying value of the reporting unit exceeds the fair value of
the reporting unit, a second step is performed, wherein the reporting unit's
assets and liabilities are valued. The implied fair value of goodwill is
calculated as the fair value of the reporting unit in excess of the fair value
of all non-goodwill assets and liabilities allocated to the reporting unit. To
the extent the reporting unit's carrying value of goodwill exceeds its implied
fair value, impairment exists and must be
recognized. This process requires the use of discounted cash flow models that
utilize estimates of future revenue and expenses as well as the selection of
appropriate discount rates. There is inherent uncertainty in these estimates,
and changes in these factors over time could result in an impairment
charge.
At March
28, 2008 and September 28, 2007, the carrying amount of goodwill and other
intangible assets, net was $242.7 million and $243.3 million, respectively.
As of March 28, 2008, no significant changes in the underlying business
assumptions or circumstances that drive the impairment analysis led us to
believe that goodwill might have been impaired. We will continue to evaluate the
need for impairment if changes in circumstances or available information
indicate that impairment may have occurred, and at least annually in the fourth
quarter.
At March
28, 2008 and September 28, 2007, the carrying amount of property, plant and
equipment was $64.8 million and $66.0 million, respectively. We assess
the recoverability of property, plant and equipment to be held and used by a
comparison of the carrying amount of an asset or group of
A
prolonged general economic downturn and, specifically, a prolonged downturn in
the defense, communications or medical markets, or technological changes, as
well as other market factors could intensify competitive pricing pressure,
create an imbalance of industry supply and demand, or otherwise diminish volumes
or profits. Such events, combined with changes in interest rates, could
adversely affect our estimates of future net cash flows to be generated by our
long-lived assets. Consequently, it is possible that our future operating
results could be materially and adversely affected by additional impairment
charges related to the recoverability of our long-lived assets.
Accounting
for stock-based compensation
At the
beginning of fiscal year 2006, we adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123R"), and Staff Accounting Bulletin
(“SAB”) No. 107, "Share-Based Payment," for our existing stock option plans
under the prospective method. Under the prospective method, only new awards (or
awards modified, repurchased, or cancelled after the effective date) are
accounted for under the provisions of SFAS No. 123R. Previously, we applied
the intrinsic-value method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Under the intrinsic-value method, compensation expense
was recorded only if the market price of the stock exceeded the stock option
exercise price at the measurement date. We will continue to account for stock
option awards outstanding at September 30, 2005 on a graded vesting basis
using the intrinsic-value method of measuring equity share options.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable and requires the input of subjective
assumptions, including the expected stock price volatility and estimated option
life. For purposes of this valuation model, no dividends have been
assumed.
In
accordance with SFAS No. 123R, prior to becoming a public entity in
April 2006, we used the minimum value method to determine a calculated
value, rather than a fair value, of share awards. Under the
minimum value method, stock price volatility was assumed to be zero. The
estimated fair value (or calculated value, as applicable) of our stock-based
awards, less expected forfeitures, is amortized over the awards' vesting period
on a straight-line basis for awards granted after the adoption of SFAS
No. 123R. Since our common stock has not been publicly traded for a
sufficient time period, the expected volatility is based on expected
volatilities of similar companies that have a longer history of being publicly
traded. The risk-free rates are based on the U.S. Treasury yield in effect at
the time of the grant. Since our historical data is limited, the expected life
of options granted is based on the simplified method for plain vanilla options
in accordance with SAB No. 107. In
December 2007, the Securities and Exchange Commission issued SAB No. 110,
an amendment of SAB No. 107. SAB No. 110 states that the staff will continue to
accept, under certain circumstances, the continued use of the simplified method
beyond December 31, 2007. Accordingly, we will continue to use the
simplified method until we have enough historical experience to provide a
reasonable estimate of expected term. For the
three and six months ended March 28, 2008, we recognized $0.6 million and
$1.0 million, respectively, in stock-based compensation expense. For the
three and six months ended March 30, 2007, we recognized $0.3 million and
$0.5 million, respectively, in stock-based compensation
expense.
Income
taxes
We must
make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of tax credits, tax benefits and deductions and in the calculation
of certain tax assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and financial statement
purposes. Significant changes to these estimates may result in an increase or
decrease to our tax provision in a subsequent period.
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. In the first
quarter of fiscal year 2008, we adopted FIN No. 48 and related guidance.
See Note 9 to the consolidated condensed financial statements included in this
Form 10-Q for further discussion. FIN No. 48 requires that we recognize
liabilities for uncertain tax positions based on the two-step process prescribed
within the interpretation. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that
is more than 50% likely of being realized upon ultimate settlement. It is
inherently difficult and subjective to estimate such amounts, as this requires
us to determine the probability of various possible outcomes. We reevaluate
these uncertain tax positions on a quarterly basis. This evaluation is based on
factors including, but not limited to, changes in facts or circumstances,
changes in tax law, effectively settled issues under audit, and new audit
activity. Such a change in recognition or measurement would result in the
recognition of a tax benefit or an additional charge to the tax
provision.
2008 and represented approximately 89% of the
aggregate term loan balance. The swap agreement is effective through
June 30, 2011. Under the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, this arrangement
was initially designated and qualified as an effective cash flow hedge of
interest rate risk related to the term loan under our senior credit facilities
which permitted recording the fair value of the swap and corresponding
unrealized gain or loss to accumulated other comprehensive income in the
consolidated balance sheets. At March 28, 2008, the unrealized loss, net of tax,
on the swap was $2.1 million.
As of
March 28, 2008, we entered into Canadian dollar forward contracts for
approximately $19.2 million (Canadian dollars), or approximately 70% of
estimated Canadian dollar denominated expenses for April 2008 through
September 2008, at an average rate of approximately $0.98 U.S. dollar to
Canadian dollar. We estimate the impact of a 1 cent change in the U.S. dollar to
Canadian dollar exchange
rate (without giving effect to our Canadian dollar forward contracts) to be
approximately $0.4 million annually to our net income or approximately
2.2 cents to basic earnings per share and 2.0 cents to diluted
earnings per share.
Net
income for the three and six months ended March 28, 2008 includes a recognized
gain from foreign currency forward contracts of $0.4 million. Net income for the
three and six months ended March 30, 2007 includes a recognized gain from
foreign currency forward contracts of $0.1 million. At March 28, 2008 and
September 28, 2007, the unrealized gain, net of tax, on Canadian dollar
forward contracts was $5,000 and $1.2 million, respectively.
Management,
including our principal executive officer and principal financial officer, has
evaluated, as of the end of the period covered by this report, the effectiveness
of the design and operation of our disclosure controls and procedures with
respect to the information generated for use in this report. Based upon, and as
of the date of that evaluation, the principal executive officer and principal
financial officer concluded that the disclosure controls and procedures were
effective to provide reasonable assurances that information required to be
disclosed in the reports filed or submitted
under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.
There
have been no changes in our internal control over financial reporting that
occurred during the most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
None.
For a discussion of risk factors, see
"Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year
ended September 28, 2007. There have been no material changes from the risk
factors disclosed in the "Risk Factors" section of our 2007 Form
10-K.
None.
None.
At an
Annual Meeting of Stockholders held on February 26, 2008, the following
proposals were presented for a vote of the stockholders of the
Company:
Proposal
No. 1: The election of the following two directors to serve for a three-year
term ending at the 2011 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified.
|
|
|
|
|
|
|
Michael
Targoff
|
|
|
14,002,823 |
|
|
|
1,958,641 |
|
William
P. Rutledge
|
|
|
15,728,762 |
|
|
|
232,702 |
|
The term
of office for the following directors continued after the Annual Meeting: O. Joe
Caldarelli, Michael F. Finley, Jeffrey Hughes and Stephen R.
Larson.
Proposal
No. 2: The ratification of the appointment of KPMG LLP as the Company’s
independent registered public accounting firm for fiscal year 2008.
|
|
|
|
For
|
|
|
15,799,572 |
|
Against
|
|
|
101,592 |
|
Abstain
|
|
|
60,300 |
|
None.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
32.1
|
Certifications
of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
Certifications
of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CPI INTERNATIONAL,
INC.
Dated:
May 7, 2008
|
/s/ JOEL A. LITTMAN
|
|
Joel
A. Littman
Chief
Financial Officer, Treasurer and Secretary
(Duly
Authorized Officer and Chief Financial
Officer)
|