cpii_10q-3qfy08.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 June 27, 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: 16,393,356 shares of Common Stock,
$0.01 par value, at August 5, 2008.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
10-Q
REPORT
INDEX
|
4
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
7
|
|
|
|
39
|
|
|
|
62
|
|
|
|
64
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
|
|
66
|
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)
|
|
June
27,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,197 |
|
|
$ |
20,474 |
|
Restricted
cash
|
|
|
1,205 |
|
|
|
2,255 |
|
Accounts
receivable, net
|
|
|
48,379 |
|
|
|
52,589 |
|
Inventories
|
|
|
67,868 |
|
|
|
67,447 |
|
Deferred
tax assets
|
|
|
10,023 |
|
|
|
9,744 |
|
Prepaid
and other current assets
|
|
|
5,057 |
|
|
|
4,639 |
|
Total
current assets
|
|
|
158,729 |
|
|
|
157,148 |
|
Property,
plant, and equipment, net
|
|
|
63,487 |
|
|
|
66,048 |
|
Deferred
debt issue costs, net
|
|
|
5,362 |
|
|
|
6,533 |
|
Intangible
assets, net
|
|
|
79,355 |
|
|
|
81,743 |
|
Goodwill
|
|
|
162,392 |
|
|
|
161,573 |
|
Other
long-term assets
|
|
|
795 |
|
|
|
3,177 |
|
Total
assets
|
|
$ |
470,120 |
|
|
$ |
476,222 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
2,000 |
|
|
$ |
1,000 |
|
Accounts
payable
|
|
|
21,950 |
|
|
|
21,794 |
|
Accrued
expenses
|
|
|
26,373 |
|
|
|
26,349 |
|
Product
warranty
|
|
|
4,533 |
|
|
|
5,578 |
|
Income
taxes payable
|
|
|
7,594 |
|
|
|
8,748 |
|
Advance
payments from customers
|
|
|
12,184 |
|
|
|
12,132 |
|
Total
current liabilities
|
|
|
74,634 |
|
|
|
75,601 |
|
Deferred
income taxes
|
|
|
26,760 |
|
|
|
28,394 |
|
Long-term
debt, less current portion
|
|
|
228,642 |
|
|
|
245,567 |
|
Other
long-term liabilities
|
|
|
1,199 |
|
|
|
754 |
|
Total
liabilities
|
|
|
331,235 |
|
|
|
350,316 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value, 90,000 shares authorized;
16,511 and 16,370 shares issued; 16,375
and 16,370 shares outstanding)
|
|
|
165
|
|
|
|
164 |
|
Additional
paid-in capital
|
|
|
70,987 |
|
|
|
68,763 |
|
Accumulated
other comprehensive (loss) income
|
|
|
(997 |
) |
|
|
937 |
|
Retained
earnings
|
|
|
70,530 |
|
|
|
56,042 |
|
Treasury
stock, at cost (136 and 0 shares)
|
|
|
(1,800 |
) |
|
|
- |
|
Total
stockholders’ equity
|
|
|
138,885 |
|
|
|
125,906 |
|
Total
liabilities and stockholders' equity
|
|
$ |
470,120 |
|
|
$ |
476,222 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
(In
thousands, except per share data – unaudited)
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
Sales
|
|
$ |
90,734 |
|
|
$ |
87,318 |
|
|
$ |
271,448 |
|
|
$ |
259,485 |
|
Cost
of sales
|
|
|
63,502 |
|
|
|
58,667 |
|
|
|
192,014 |
|
|
|
176,548 |
|
Gross
profit
|
|
|
27,232 |
|
|
|
28,651 |
|
|
|
79,434 |
|
|
|
82,937 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,766 |
|
|
|
2,232 |
|
|
|
8,420 |
|
|
|
6,475 |
|
Selling
and marketing
|
|
|
5,012 |
|
|
|
4,911 |
|
|
|
15,512 |
|
|
|
14,539 |
|
General
and administrative
|
|
|
5,136 |
|
|
|
5,835 |
|
|
|
16,781 |
|
|
|
16,085 |
|
Amortization
of acquisition-related intangible assets
|
|
|
782 |
|
|
|
548 |
|
|
|
2,344 |
|
|
|
1,642 |
|
Net
loss on disposition of fixed assets
|
|
|
128 |
|
|
|
16 |
|
|
|
203 |
|
|
|
74 |
|
Total
operating costs and expenses
|
|
|
13,824 |
|
|
|
13,542 |
|
|
|
43,260 |
|
|
|
38,815 |
|
Operating
income
|
|
|
13,408 |
|
|
|
15,109 |
|
|
|
36,174 |
|
|
|
44,122 |
|
Interest
expense, net
|
|
|
4,627 |
|
|
|
5,143 |
|
|
|
14,244 |
|
|
|
15,757 |
|
Loss
on debt extinguishment
|
|
|
121 |
|
|
|
- |
|
|
|
514 |
|
|
|
- |
|
Income
before income taxes
|
|
|
8,660 |
|
|
|
9,966 |
|
|
|
21,416 |
|
|
|
28,365 |
|
Income
tax expense
|
|
|
2,836 |
|
|
|
1,835 |
|
|
|
6,928 |
|
|
|
8,639 |
|
Net
income
|
|
$ |
5,824 |
|
|
$ |
8,131 |
|
|
$ |
14,488 |
|
|
$ |
19,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) on cash flow hedges
|
|
|
1,268 |
|
|
|
820 |
|
|
|
(1,934 |
) |
|
|
414 |
|
Comprehensive
income
|
|
$ |
7,092 |
|
|
$ |
8,951 |
|
|
$ |
12,554 |
|
|
$ |
20,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Basic
|
|
$ |
0.36 |
|
|
$ |
0.50 |
|
|
$ |
0.88 |
|
|
$ |
1.22 |
|
Earnings
per share - Diluted
|
|
$ |
0.33 |
|
|
$ |
0.46 |
|
|
$ |
0.82 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute earnings per share - Basic
|
|
|
16,395 |
|
|
|
16,306 |
|
|
|
16,384 |
|
|
|
16,207 |
|
Shares
used to compute earnings per share - Diluted
|
|
|
17,669 |
|
|
|
17,796 |
|
|
|
17,719 |
|
|
|
17,696 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
(In
thousands – unaudited)
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
June
27,
|
|
June
29,
|
|
|
|
|
|
|
2008
|
|
2007
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
$ |
24,699
|
|
$ |
19,259
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
Capital
expenditures
|
|
(3,288)
|
|
|
(6,392)
|
|
Proceeds
from adjustment to acquisition purchase price
|
|
1,615
|
|
|
-
|
|
Capitalized
expenses relating to potential business acquisition
|
|
-
|
|
|
(395)
|
|
Payment
of patent application fees
|
|
(147)
|
|
|
-
|
|
|
Net
cash used in investing activities
|
|
(1,820)
|
|
|
(6,787)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
(1,800)
|
|
|
-
|
|
Repayments
of debt
|
|
(16,000)
|
|
|
(5,000)
|
|
Proceeds
from issuance of common stock to employees
|
|
639
|
|
|
520
|
|
Proceeds
from exercise of stock options
|
|
3
|
|
|
604
|
|
Excess
tax benefit on stock option exercises
|
|
2
|
|
|
671
|
|
|
Net
cash used in financing activities
|
|
(17,156)
|
|
|
(3,205)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
5,723
|
|
|
9,267
|
|
Cash
and cash equivalents at beginning of period
|
|
20,474
|
|
|
30,153
|
|
Cash
and cash equivalents at end of period
|
$ |
26,197
|
|
$ |
39,420
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures
|
|
|
|
|
|
|
Cash
paid for interest
|
$ |
10,020
|
|
$ |
11,562
|
|
Cash
paid for income taxes, net of refunds
|
$ |
9,846
|
|
$ |
12,799
|
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 third quarters of fiscal years 2008 and 2007 both
include 13 weeks. The first three quarters of fiscal years 2008 and 2007
both include 39 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 June 27, 2008 and for the three and nine months ended June 27,
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 June 27, 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 10, "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. The Company does not
believe the adoption of SFAS No. 160 will have a material impact on its
financial position or results of operations.
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.
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. The
Company will be required to adopt SFAS No. 161 in its
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)
second
quarter of fiscal year 2009 commencing January 3, 2009. This standard is not
expected to have a material effect on the Company's financial position or
results of operations, and will likely result in additional disclosures related
to the Company’s derivatives.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3 (“FSP FAS
142-3”), “Determination of the Useful Life of Intangible Assets.” FSP
FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” More specifically, FSP FAS 142-3 removes the requirement under
paragraph 11 of SFAS No. 142 to consider whether an intangible asset
can be renewed without substantial cost or material modifications to the
existing terms and conditions and instead, requires an entity to consider its
own historical experience in renewing similar arrangements. FSP FAS 142-3
also requires expanded disclosure related to the determination of intangible
asset useful lives. FSP FAS 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. The Company will be
required to adopt FSP FAS 142-3 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 May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with generally accepted accounting principles, or GAAP,
in the U.S. for non-governmental entities. SFAS No. 162 is
effective 60 days following the Securities and Exchange Commission's
(“SEC”) approval of the Public Company Accounting Oversight Board amendments to
AU Section 411, the meaning of "Present Fairly in Conformity with GAAP."
Any effect of applying the provisions of SFAS No. 162 is to be reported as
a change in accounting principle in accordance with SFAS No. 154,
"Accounting Changes and Error Corrections." The Company is currently evaluating
the impact that the adoption of SFAS No. 162, once effective, will have on its
financial position and results of operations.
In June
2008, the FASB Issued Emerging Issues Task Force (“EITF”) No. 08-3,
“Accounting by Lessees for Nonrefundable Maintenance Deposits.” EITF No.
08-3 requires that nonrefundable maintenance deposits paid by a lessee under an
arrangement accounted for as a lease be accounted for as a deposit asset until
the underlying maintenance is performed. When the underlying maintenance is
performed, the deposit may be expensed or capitalized in accordance with the
lessee’s maintenance accounting policy. If finalized, EITF No. 08-3 would be
effective for fiscal years beginning after December 15, 2008, including interim
periods within those fiscal years, and would be adopted by making a
cumulative-effect adjustment to beginning retained earnings in the period of
adoption. The Company will be required to adopt EITF No. 08-3 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.
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)
3. |
Supplemental Balance Sheet
Information |
Accounts
Receivable: Accounts receivable are stated net of allowances
for doubtful accounts as follows:
|
|
June
27,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
Accounts
receivable
|
|
$ |
48,477 |
|
|
$ |
52,678 |
|
Less:
Allowance for doubtful accounts
|
|
|
(98 |
) |
|
|
(89 |
) |
Accounts
receivable, net
|
|
$ |
48,379 |
|
|
$ |
52,589 |
|
Inventories: The
following table provides details of inventories, net of reserves:
|
|
June
27,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
Raw
material and parts
|
|
$ |
39,168 |
|
|
$ |
40,725 |
|
Work
in process
|
|
|
20,899 |
|
|
|
18,168 |
|
Finished
goods
|
|
|
7,801 |
|
|
|
8,554 |
|
|
|
$ |
67,868 |
|
|
$ |
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:
|
|
Nine Months Ended
|
|
|
|
June
27,
|
|
|
June
29,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of fiscal year
|
|
$ |
9,784 |
|
|
$ |
8,822 |
|
Inventory
provision, charged to cost of sales
|
|
|
988 |
|
|
|
803 |
|
Inventory
write-offs
|
|
|
(1,619 |
) |
|
|
(710 |
) |
Balance
at end of period
|
|
$ |
9,153 |
|
|
$ |
8,915 |
|
Reserve for loss
contracts: The following table summarizes the activity
related to reserves for loss contracts:
|
|
Nine Months Ended
|
|
|
|
June
27,
|
|
|
June
29,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of fiscal year
|
|
$ |
2,700 |
|
|
$ |
1,702 |
|
Provision
for loss contracts, charged to cost of sales
|
|
|
1,932 |
|
|
|
970 |
|
Reduction
upon revenue recognition
|
|
|
(2,702 |
) |
|
|
(1,202 |
) |
Balance
at end of period
|
|
$ |
1,930 |
|
|
$ |
1,470 |
|
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 are reported in the condensed consolidated balance sheet in
the following accounts:
|
|
June
27,
|
|
|
June
29,
|
|
|
|
2008
|
|
|
2007
|
|
Inventories
|
|
$ |
1,112 |
|
|
$ |
1,294 |
|
Accrued
expenses
|
|
|
818 |
|
|
|
176 |
|
|
|
$ |
1,930 |
|
|
$ |
1,470 |
|
Intangible Assets: The
following tables present the details of the Company’s total intangible
assets:
|
|
Weighted Average Useful Life
(in years)
|
|
|
June 27, 2008
|
|
|
September 28, 2007
|
|
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
VED
Core Technology
|
|
|
50
|
|
|
$ |
30,700 |
|
|
$ |
(2,734 |
) |
|
$ |
27,966 |
|
|
$ |
30,700 |
|
|
$ |
(2,273 |
) |
|
$ |
28,427 |
|
VED
Application Technology
|
|
|
25
|
|
|
|
19,800 |
|
|
|
(3,515 |
) |
|
|
16,285 |
|
|
|
19,800 |
|
|
|
(2,921 |
) |
|
|
16,879 |
|
X-ray
Generator and Satcom
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Technology
|
|
|
15
|
|
|
|
8,000 |
|
|
|
(2,374 |
) |
|
|
5,626 |
|
|
|
8,000 |
|
|
|
(1,974 |
) |
|
|
6,026 |
|
Antenna
and Telemetry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
25
|
|
|
|
5,300 |
|
|
|
(188 |
) |
|
|
5,112 |
|
|
|
5,300 |
|
|
|
(29 |
) |
|
|
5,271 |
|
Customer
backlog
|
|
|
1
|
|
|
|
580 |
|
|
|
(513 |
) |
|
|
67 |
|
|
|
580 |
|
|
|
(78 |
) |
|
|
502 |
|
Land
lease
|
|
|
46
|
|
|
|
11,810 |
|
|
|
(1,118 |
) |
|
|
10,692 |
|
|
|
11,810 |
|
|
|
(928 |
) |
|
|
10,882 |
|
Tradename
|
|
Indefinite
|
|
|
|
7,600 |
|
|
|
- |
|
|
|
7,600 |
|
|
|
7,600 |
|
|
|
- |
|
|
|
7,600 |
|
Customer
list and programs
|
|
|
25
|
|
|
|
6,280 |
|
|
|
(884 |
) |
|
|
5,396 |
|
|
|
6,280 |
|
|
|
(684 |
) |
|
|
5,596 |
|
Noncompete
agreement
|
|
|
5
|
|
|
|
640 |
|
|
|
(176 |
) |
|
|
464 |
|
|
|
640 |
|
|
|
(80 |
) |
|
|
560 |
|
Patent
application fees
|
|
|
-
|
|
|
|
147 |
|
|
|
- |
|
|
|
147 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
$ |
90,857 |
|
|
$ |
(11,502 |
) |
|
$ |
79,355 |
|
|
$ |
90,710 |
|
|
$ |
(8,967 |
) |
|
$ |
81,743 |
|
Intangible
assets, net as of June 27, 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, these costs 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 $2.5 million for
the three and nine months ended June 27, 2008, respectively, and $0.6 million
and $1.8 million for the corresponding periods 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)
The
estimated future amortization expense of intangible assets, excluding the
Company’s unamortized tradenames, is as follows:
Fiscal Year
|
|
Amount
|
|
2008
(remaining three months)
|
|
$ |
769 |
|
2009
|
|
|
2,808 |
|
2010
|
|
|
2,786 |
|
2011
|
|
|
2,786 |
|
2012
|
|
|
2,772 |
|
Thereafter
|
|
|
59,834 |
|
|
|
$ |
71,755 |
|
Goodwill: The
following table sets forth the changes in goodwill by reportable
segment:
|
|
VED
|
|
|
Satcom
|
|
|
Other
|
|
|
Total
|
|
Balance
at September 28, 2007
|
|
$ |
132,897 |
|
|
$ |
13,830 |
|
|
$ |
14,846 |
|
|
$ |
161,573 |
|
Malibu
purchase price and allocation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
925 |
|
|
|
925 |
|
Other
adjustments
|
|
|
- |
|
|
|
- |
|
|
|
(106 |
) |
|
|
(106 |
) |
Balance
at June 27, 2008
|
|
$ |
132,897 |
|
|
$ |
13,830 |
|
|
$ |
15,665 |
|
|
$ |
162,392 |
|
During the first nine
months of fiscal year 2008, the Company finalized the purchase price valuation
and allocation associated with its acquisition of Malibu Research Associates,
Inc. in August 2007, resulting in a $0.9 million increase in goodwill. See
Note 4 for details. Other adjustments primarily represent the change in
Malibu goodwill recognized in connection with the filing of the 2007 income tax
return during the third quarter of fiscal year 2008.
Product
Warranty: The following table summarizes the
activity related to product warranty:
|
|
Nine Months Ended
|
|
|
|
June
27,
|
|
|
June
29,
|
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of fiscal year
|
|
$ |
5,578 |
|
|
$ |
5,958 |
|
Estimates
for product warranty, charged to cost of sales
|
|
|
2,171 |
|
|
|
3,801 |
|
Actual
costs of warranty claims
|
|
|
(3,216 |
) |
|
|
(4,232 |
) |
Balance
at end of period
|
|
$ |
4,533 |
|
|
$ |
5,527 |
|
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 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. The remaining $1.8 million, including interest,
held in the indemnity escrow account is available to cover potential
indemnification claims asserted prior to January 1, 2009.
During
the third quarter of fiscal year 2008, Malibu’s income tax return for its short
fiscal period ended immediately preceding the closing date of the acquisition
was finalized, resulting in a decrease in the assumed income tax payable and an
offsetting reduction to goodwill of approximately $0.1 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 (“Financial Earnout”); and a discretionary earnout of
up to $1.0 million contingent upon achievement of certain succession planning
goals by June 30, 2010. As of June 27, 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.
Preliminary calculations of the first year’s Financial Earnout as of June 27,
2008 indicate that no earnout was earned for the first
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)
earnout period,
and the maximum potential Financial Earnout that could be earned over the three
years following the acquisition is reduced from $14.0 million to $12.3
million.
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 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
|
|
$ |
(3,854 |
) |
Property,
plant and equipment
|
|
|
719 |
|
Deferred
tax liabilities
|
|
|
(703 |
) |
Identifiable
intangible assets
|
|
|
8,790 |
|
Goodwill
|
|
|
15,781 |
|
|
|
$ |
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:
|
|
June
27,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
Term
loan, expiring 2014
|
|
$ |
91,750 |
|
|
$ |
99,750 |
|
8%
Senior subordinated notes due 2012
|
|
|
125,000 |
|
|
|
125,000 |
|
Floating
rate senior notes due 2015, net of issue discount of $108 and
$183
|
|
|
13,892 |
|
|
|
21,817 |
|
|
|
|
230,642 |
|
|
|
246,567 |
|
Less: Current
portion
|
|
|
2,000 |
|
|
|
1,000 |
|
Long-term
portion
|
|
$ |
228,642 |
|
|
$ |
245,567 |
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit
|
|
$ |
4,986 |
|
|
$ |
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 $8.0 million during the first nine months of
fiscal year 2008 and $250,000 during the fourth quarter of fiscal year 2007,
leaving a principal balance of $91.75 million as of June 27, 2008. The $8.0
million Term Loan repayment during the first nine months of fiscal year 2008
comprised the scheduled amortization payment of $250,000 for the first quarter
of fiscal year 2008 and an optional prepayment of $7.75 million. A portion of
the optional prepayment was applied against the scheduled amortization payment
due for the second and third quarters of fiscal year 2008. Another portion of
the optional prepayment will be applied against the scheduled amortization
payment due for the fourth quarter of fiscal year 2008 and those scheduled
amortization payments due through fiscal year 2014.
At June
27, 2008, the amount available for borrowing under the Revolver, after taking
into account the Company‘s outstanding letters of credit of $5.0 million, was
approximately $55.0 million.
See Note
13 “Subsequent Event” for a discussion of the additional $2.0 million prepayment
of the Term Loan made in July 2008.
8% Senior
Subordinated Notes due 2012 of CPI: As of June 27, 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.
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 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, 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 June 27, 2008, $14.0
million of aggregate principal amount remained outstanding under CPI
International’s Floating Rate Senior Notes due 2015 (the “FR Notes”) after
giving effect to the redemption of $6.0 million and $2.0 million in the second
and third quarters of fiscal year 2008, respectively. 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 8.9% 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,
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)
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 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.
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)
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 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 June 27, 2008, maturities on
long-term debt were as follows:
Fiscal Year
|
|
Term
Loan
|
|
|
8% Senior
Subordinated Notes
|
|
|
Floating Rate
Senior Notes
|
|
|
Total
|
|
2008
(remaining three months)
|
|
$ |
2,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,000 |
|
2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2010
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2011
|
|
|
89,750 |
|
|
|
- |
|
|
|
- |
|
|
|
89,750 |
|
2012
|
|
|
- |
|
|
|
125,000 |
|
|
|
- |
|
|
|
125,000 |
|
Thereafter
|
|
|
- |
|
|
|
- |
|
|
|
14,000 |
|
|
|
14,000 |
|
|
|
$ |
91,750 |
|
|
$ |
125,000 |
|
|
$ |
14,000 |
|
|
$ |
230,750 |
|
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 $2.0
million amount shown for fiscal year 2008 for the Term Loan is an optional
prepayment made on July 30, 2008. See Note 13.
As of
June 27, 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 and fiscal year
2009.
Loss on debt
extinguishment: The redemption of $8.0 million in aggregate principal
amount of the FR Notes in the second and third quarters of fiscal year 2008, as
discussed above, resulted in a loss on debt extinguishment of approximately $0.5
million, including non-cash write-offs of $0.3 million of unamortized debt issue
costs and issue discount costs and $0.2 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.
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 uses forward exchange contracts to hedge the foreign currency exposure
associated with forecasted manufacturing costs in Canada. As of June 27, 2008,
the Company had outstanding forward contract commitments to purchase $17.0
million Canadian dollars. The last forward contract expires on December 29,
2008. At June 27, 2008 and September 28, 2007, the fair value of foreign
currency forward contracts was a net asset of $0.2 million and $1.3 million,
respectively, and the unrealized gain, net of related tax expense, was $0.2
million and $1.2 million, respectively.
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 three 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
three 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 nine months ended June 27, 2008 includes a recognized
loss of $0.1 million and gain of $0.3 million, respectively, from foreign
currency forward contracts. Net income in the three and nine months ended June
29, 2007 includes a recognized loss from foreign currency forward contracts of
$0.2 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 $80.0 million at June 27, 2008 and
represented approximately 87% 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 June 27, 2008, the fair value of the short-term and
long-term portions of the 2007 Swap was a liability of $1.0 million (accrued
expenses) and $0.7 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 June
27, 2008 and September 28, 2007, the unrealized loss, net of tax, was $1.0
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 June
27, 2008 were as follows:
|
|
|
|
2008
(remaining three months)
|
|
$ |
573 |
|
2009
|
|
|
1,966 |
|
2010
|
|
|
1,657 |
|
2011
|
|
|
552 |
|
2012
|
|
|
456 |
|
Thereafter
|
|
|
3,094 |
|
|
|
$ |
8,298 |
|
Real
estate taxes, insurance, and maintenance are also obligations of the Company.
Rental expense under non-cancelable operating leases amounted to $0.5 million
and $1.7 million for the three and nine months ended June 27, 2008,
respectively, and to $0.5 million and $1.4 million for the corresponding periods
of fiscal year 2007. Assets subject to capital leases at June 27, 2008 and
September 28, 2007 were not material.
Guarantees: The Company has
restricted cash of $1.2 million and $2.3 million as of June 27, 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
June 27, 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 three months)
|
|
$ |
24,328 |
|
2009
|
|
|
11,939 |
|
2010
|
|
|
1,350 |
|
2011
|
|
|
419 |
|
|
|
$ |
38,036 |
|
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 Financial
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 up to $1.0 million contingent upon achievement of certain succession
planning goals by June 30, 2010. Preliminary calculations of the
first year’s Financial Earnout as of June 27,
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
indicate that no earnout was earned for the first earnout period, and
the maximum potential Financial Earnout that could be earned over the three
years following the acquisition is reduced from $14.0 million to $12.3
million.
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 June 27, 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
Repurchase Program
|
On May
28, 2008, the Company announced that its board of directors authorized the
Company to implement a program to repurchase up to $12.0 million of the
Company's common stock from time to time, funded entirely from cash on hand.
Repurchases made under the program are subject to the terms and limitations of
Company's debt covenants, as well as market conditions and share price, and will
be made at management's discretion in open market trades, through block trades
or in privately negotiated transactions. The program may be modified or
terminated by the Company's board of directors at any time. During the three
months ended June 27, 2008, the Company repurchased 136,215 shares recorded as
treasury stock, at an average per share price of $13.17, plus brokerage
commissions of $0.04 per share, for an aggregate cost of $1.8
million.
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)
9.
|
Stock-based
Compensation Plans
|
As of
June 27, 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 were
outstanding, under its various equity plans. Awards are subject to terms and
conditions as determined by the Company’s Board of Directors.
Stock Options: The following
table summarizes stock option activity as of June 27, 2008, and changes during
the nine months ended June 27, 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
|
|
|
(599 |
) |
|
|
4.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or cancelled
|
|
|
(4,400 |
) |
|
|
16.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 27, 2008
|
|
|
3,374,832 |
|
|
$ |
6.29 |
|
|
|
6.04 |
|
|
$ |
25,131 |
|
|
|
2,565,069 |
|
|
$ |
3.83 |
|
|
|
5.41 |
|
|
$ |
23,774 |
|
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $12.91 as of June 27, 2008,
that would have been received by the option holders had all option holders
exercised their options as of that date. As of June 27, 2008, 2,417,394
exercisable options were in-the-money.
During
the three and nine months ended June 27, 2008, cash received from option
exercises was approximately $2,600, and the total intrinsic value of options
exercised was $5,500. During the three and nine months ended June 29, 2007, cash
received from option exercises was approximately $0.1 million and $0.6 million,
respectively, and the total intrinsic value of options exercised was $0.5
million and $3.2 million, respectively. As of June 27, 2008, there was
approximately $4.6 million of total unrecognized compensation costs related to
nonvested stock options, which is expected to be recognized over a
weighted-average vesting period of 1.9 years.
Stock Purchase
Plan: Employees purchased 25,946 shares for $0.2 million and
52,689 shares for $0.6 million in the three and nine months ended June 27, 2008,
respectively, under the 2006 Employee Stock Purchase Plan (the “2006 ESPP”). As
of June 27, 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 June 27, 2008 there were outstanding 119,554 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.
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)
A summary
of the status of the Company’s nonvested restricted stock and restricted stock
unit awards as of June 27, 2008, and changes during the nine 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
|
|
|
(5,848 |
) |
|
|
17.60 |
|
Forfeited
|
|
|
(525 |
) |
|
|
16.79 |
|
Nonvested
at June 27, 2008
|
|
|
119,554 |
|
|
$ |
15.31 |
|
Aggregate
intrinsic value of the nonvested restricted stock and restricted stock unit
awards at June 27, 2008 was $1.5 million. As of June 27, 2008, there was $1.6
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 2.0 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 nine months ended June 27,
2008 and June 29, 2007, which was allocated as follows:
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)
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
Share-based
compensation cost recognized in the income statement by
caption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
116 |
|
|
$ |
75 |
|
|
$ |
307 |
|
|
$ |
196 |
|
|
Research
and development
|
|
|
43 |
|
|
|
25 |
|
|
|
112 |
|
|
|
68 |
|
|
Selling
and marketing
|
|
|
61 |
|
|
|
28 |
|
|
|
165 |
|
|
|
87 |
|
|
General
and administrative
|
|
|
374 |
|
|
|
209 |
|
|
|
984 |
|
|
|
538 |
|
|
|
|
$ |
594 |
|
|
$ |
337 |
|
|
$ |
1,568 |
|
|
$ |
889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation cost capitalized in inventory
|
|
$ |
120 |
|
|
$ |
78 |
|
|
$ |
335 |
|
|
$ |
206 |
|
Share-based
compensation cost remaining in inventory at end of period
|
|
$ |
74 |
|
|
$ |
39 |
|
|
$ |
74 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
421 |
|
|
$ |
277 |
|
|
$ |
1,153 |
|
|
$ |
712 |
|
|
Restricted
stock and restricted stock units
|
|
|
134 |
|
|
|
27 |
|
|
|
301 |
|
|
|
85 |
|
|
Stock
purchase plan
|
|
|
39 |
|
|
|
33 |
|
|
|
114 |
|
|
|
92 |
|
|
|
|
$ |
594 |
|
|
$ |
337 |
|
|
$ |
1,568 |
|
|
$ |
889 |
|
The tax
benefit realized from option exercises and restricted stock vesting totaled
approximately $3,000 and $22,000 during the three and nine months ended June 27,
2008, respectively. The tax benefit realized from option exercises and
restricted stock vesting totaled approximately $0.1 million and $1.1 million
during the three and nine months ended June 29, 2007, respectively.
There
were no stock options granted during the three months ended June 27, 2008. The
weighted-average estimated fair value of stock options granted during the nine
months ended June 27, 2008 was $7.83 per share. The weighted-average estimated
fair value of stock options granted during the three and nine months ended June
29, 2007 was $10.71 and $7.75 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)
|
|
|
*
|
|
|
|
6.25 |
|
|
|
6.25 |
|
|
|
6.00
– 6.25 |
|
Expected
volatility
|
|
|
*
|
|
|
|
49.33 |
% |
|
|
41.20 |
% |
|
|
49.33 |
% |
Risk-free
rate
|
|
|
*
|
|
|
|
4.69 |
% |
|
|
3.82 |
% |
|
|
4.56%
– 4.71 |
% |
Dividend
yield |
|
|
|
*
|
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
*
No new stock options were granted during the three months ended June 27,
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 SEC Staff Accounting Bulletin (“SAB”)
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)
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 $1.50 and $2.14 per share during the three
and nine months ended June 27, 2008, respectively, and $2.88 and $2.33 per share
during the three and nine months ended June 29, 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 $15.22 and $17.09 per share during the nine months ended June
27, 2008 and June 29, 2007, respectively. There were no restricted stock or
restricted stock units granted during the three months ended June 27, 2008 and
June 29, 2007.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the three and nine months ended June 27, 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 $6.9 million and $8.6 million for
the nine months ended June 27, 2008 and June 29, 2007, respectively. The
Company’s effective tax rate was approximately 32% for the nine months ended
June 27, 2008 as compared to approximately 30% for the corresponding period of
fiscal year 2007.
Income
tax expense for the three and nine months ended June 27, 2008 includes a
reduction to the Company’s annual tax rate of approximately 1% to reflect a
change in estimate for Canadian tax credits. Income tax expense for the nine
months ended June 27, 2008 also 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 in a foreign tax jurisdiction.
Income
tax expense for the three and nine months ended June 29, 2007 includes a
discrete tax benefit of $1.8 million related to the filing of amended income tax
returns for prior years to reflect a change in estimate with regard to reporting
Canadian income earned in the U.S.
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, excluding any related interest accrual, was $5.9 million and $4.9
million as of June 27, 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
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
reporting date. Of the total unrecognized tax benefit balance, $4.8 million
and $4.4 million would reduce the effective tax rate if recognized as of
June 27, 2008 and September 29, 2007, respectively. The Company’s policy to
classify interest and penalties on unrecognized tax benefits as a component of
income tax expense in the statements of operations and comprehensive income did
not change upon the adoption of FIN No. 48. As of June 27, 2008 and
September 29, 2007, the Company had accrued $1.7 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 taxing
jurisdictions. 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.
11. 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 and nonvested restricted stock units 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
|
|
|
Nine Months Ended
|
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
Weighted
average common shares outstanding -- Basic
|
|
|
16,395 |
|
|
|
16,306 |
|
|
|
16,384 |
|
|
|
16,207 |
|
Effect
of dilutive stock options and nonvested restricted stock awards and
units
|
|
|
1,274 |
|
|
|
1,490 |
|
|
|
1,335 |
|
|
|
1,489 |
|
Weighted
average common shares outstanding -- Diluted
|
|
|
17,669 |
|
|
|
17,796 |
|
|
|
17,719 |
|
|
|
17,696 |
|
The
calculation of diluted net income per share excludes all anti-dilutive shares.
For the three and nine months ended June 27, 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 0.8 million
shares, respectively. For the three and nine months ended June 29, 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 0.5
million shares.
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
|
|
|
Nine
Months Ended
|
|
|
|
|
June
27,
|
|
|
June
29,
|
|
|
June
27,
|
|
|
June
29,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Sales
to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
68,770 |
|
|
$ |
70,651 |
|
|
$ |
206,504 |
|
|
$ |
209,842 |
|
|
Satcom
equipment
|
|
|
18,550 |
|
|
|
16,667 |
|
|
|
53,259 |
|
|
|
49,643 |
|
|
Other
|
|
|
3,414 |
|
|
|
- |
|
|
|
11,685 |
|
|
|
- |
|
|
|
|
$ |
90,734 |
|
|
$ |
87,318 |
|
|
$ |
271,448 |
|
|
$ |
259,485 |
|
Intersegment
product transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
7,799 |
|
|
$ |
6,903 |
|
|
$ |
20,947 |
|
|
$ |
16,608 |
|
|
Satcom
equipment
|
|
|
9 |
|
|
|
1 |
|
|
|
72 |
|
|
|
10 |
|
|
|
|
$ |
7,808 |
|
|
$ |
6,904 |
|
|
$ |
21,019 |
|
|
$ |
16,618 |
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
529 |
|
|
$ |
1,009 |
|
|
$ |
1,873 |
|
|
$ |
6,240 |
|
|
Satcom
equipment
|
|
|
- |
|
|
|
13 |
|
|
|
654 |
|
|
|
35 |
|
|
Other
|
|
|
201 |
|
|
|
24 |
|
|
|
761 |
|
|
|
117 |
|
|
|
|
$ |
730 |
|
|
$ |
1,046 |
|
|
$ |
3,288 |
|
|
$ |
6,392 |
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
17,548 |
|
|
$ |
19,231 |
|
|
$ |
49,835 |
|
|
$ |
54,747 |
|
|
Satcom
equipment
|
|
|
1,332 |
|
|
|
1,842 |
|
|
|
3,709 |
|
|
|
4,460 |
|
|
Other
|
|
|
(2,814 |
) |
|
|
(3,739 |
) |
|
|
(9,713 |
) |
|
|
(8,478 |
) |
|
|
|
$ |
16,066 |
|
|
$ |
17,334 |
|
|
$ |
43,831 |
|
|
$ |
50,729 |
|
|
|
|
June
27,
|
|
|
September
28,
|
|
|
|
|
2008
|
|
|
2007
|
|
Total
assets
|
|
|
|
|
|
|
|
VED
|
|
$ |
326,311 |
|
|
$ |
335,926 |
|
|
Satcom
equipment
|
|
|
49,583 |
|
|
|
49,266 |
|
|
Other
|
|
|
92,712 |
|
|
|
91,030 |
|
|
|
|
$ |
468,606 |
|
|
$ |
476,222 |
|
EBITDA
represents earnings before net interest expense, provision for income taxes 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;
|
|
•
|
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;
|
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)
|
•
|
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
|
|
|
Nine Months Ended
|
|
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
Net
income
|
|
$ |
5,824 |
|
|
$ |
8,131 |
|
|
$ |
14,488 |
|
|
$ |
19,726 |
|
|
Depreciation
and amortization
|
|
|
2,779 |
|
|
|
2,225 |
|
|
|
8,171 |
|
|
|
6,607 |
|
|
Interest
expense, net
|
|
|
4,627 |
|
|
|
5,143 |
|
|
|
14,244 |
|
|
|
15,757 |
|
|
Income
tax expense
|
|
|
2,836 |
|
|
|
1,835 |
|
|
|
6,928 |
|
|
|
8,639 |
|
EBITDA
|
|
$ |
16,066 |
|
|
$ |
17,334 |
|
|
$ |
43,831 |
|
|
$ |
50,729 |
|
Net
property, plant and equipment by geographic area was as follows:
|
|
June
27,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
United
States
|
|
$ |
49,414 |
|
|
$ |
51,704 |
|
Canada
|
|
|
14,019 |
|
|
|
14,308 |
|
Other
|
|
|
54 |
|
|
|
36 |
|
|
|
$ |
63,487 |
|
|
$ |
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:
|
|
June
27,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
United
States
|
|
$ |
114,078 |
|
|
$ |
113,310 |
|
Canada
|
|
|
48,314 |
|
|
|
48,263 |
|
|
|
$ |
162,392 |
|
|
$ |
161,573 |
|
The
increase in goodwill from September 28, 2007 to June 27, 2008 was primarily due
to a purchase price valuation and allocation adjustment associated with the
acquisition of Malibu. See Note 4.
Geographic
sales by customer location were as follows for external customers:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
|
June 27,
2008
|
|
|
June 29,
2007
|
|
United
States
|
|
$ |
58,131 |
|
|
$ |
50,896 |
|
|
$ |
174,860 |
|
|
$ |
152,977 |
|
All
foreign countries
|
|
|
32,603 |
|
|
|
36,422 |
|
|
|
96,588 |
|
|
|
106,508 |
|
|
|
$ |
90,734 |
|
|
$ |
87,318 |
|
|
$ |
271,448 |
|
|
$ |
259,485 |
|
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 nine months ended June 27, 2008 and in the
corresponding periods of fiscal year 2007. Direct sales to the U.S. Government
were $18.2 million and $49.2 million for the three and nine months ended June
27, 2008, respectively, and $14.6 million and $43.6 million for the three and
nine months ended June 29, 2007, respectively. Accounts receivable from this
customer represented 18% and 15% of consolidated accounts receivable as of June
27, 2008 and September 28, 2007, respectively.
13. Subsequent
Event
On July
30, 2008, the Company made another optional prepayment of $2.0 million on its
Term Loan, further reducing the balance of the Term Loan to $89.75 million. The
$2.0 million prepayment brings the total Term Loan repayments made in fiscal
year 2008 to $10.0 million, including those that were applied against the
scheduled amortization payments for the first three quarters of fiscal year
2008. Including the July 30, 2008 $2.0 million Term Loan prepayment and the
redemption of $8.0 million in aggregate principal amount of CPI International’s
FR Notes made in the second and third quarters of fiscal year 2008, the Company
has made an aggregate of $18.0 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)
14. 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 June 27, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
193 |
|
|
$ |
23,128 |
|
|
$ |
859 |
|
|
$ |
2,017 |
|
|
$ |
- |
|
|
$ |
26,197 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
1,023 |
|
|
|
182 |
|
|
|
- |
|
|
|
1,205 |
|
Accounts
receivable, net
|
|
|
- |
|
|
|
23,455 |
|
|
|
10,791 |
|
|
|
14,133 |
|
|
|
- |
|
|
|
48,379 |
|
Inventories
|
|
|
- |
|
|
|
43,212 |
|
|
|
8,079 |
|
|
|
17,617 |
|
|
|
(1,040 |
) |
|
|
67,868 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
9,415 |
|
|
|
- |
|
|
|
608 |
|
|
|
- |
|
|
|
10,023 |
|
Prepaid
and other current assets
|
|
|
- |
|
|
|
3,481 |
|
|
|
922 |
|
|
|
654 |
|
|
|
- |
|
|
|
5,057 |
|
Intercompany
receivable
|
|
|
- |
|
|
|
12,715 |
|
|
|
5,404 |
|
|
|
9,240 |
|
|
|
(27,359 |
) |
|
|
- |
|
Total
current assets
|
|
|
193 |
|
|
|
115,406 |
|
|
|
27,078 |
|
|
|
44,451 |
|
|
|
(28,399 |
) |
|
|
158,729 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
46,248 |
|
|
|
3,171 |
|
|
|
14,068 |
|
|
|
- |
|
|
|
63,487 |
|
Deferred
debt issue costs, net
|
|
|
470 |
|
|
|
4,892 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,362 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
57,152 |
|
|
|
14,386 |
|
|
|
7,817 |
|
|
|
- |
|
|
|
79,355 |
|
Goodwill
|
|
|
- |
|
|
|
92,498 |
|
|
|
21,631 |
|
|
|
48,263 |
|
|
|
- |
|
|
|
162,392 |
|
Other
long-term assets
|
|
|
- |
|
|
|
417 |
|
|
|
278 |
|
|
|
100 |
|
|
|
- |
|
|
|
795 |
|
Intercompany
notes receivable
|
|
|
- |
|
|
|
1,035 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,035 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
180,237 |
|
|
|
100,320 |
|
|
|
- |
|
|
|
- |
|
|
|
(280,557 |
) |
|
|
- |
|
Total
assets
|
|
$ |
180,900 |
|
|
$ |
417,968 |
|
|
$ |
66,544 |
|
|
$ |
114,699 |
|
|
$ |
(309,991 |
) |
|
$ |
470,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
- |
|
|
$ |
2,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,000 |
|
Accounts
payable
|
|
|
253 |
|
|
|
11,367 |
|
|
|
2,634 |
|
|
|
7,696 |
|
|
|
- |
|
|
|
21,950 |
|
Accrued
expenses
|
|
|
511 |
|
|
|
17,683 |
|
|
|
3,093 |
|
|
|
5,086 |
|
|
|
- |
|
|
|
26,373 |
|
Product
warranty
|
|
|
- |
|
|
|
2,154 |
|
|
|
503 |
|
|
|
1,876 |
|
|
|
- |
|
|
|
4,533 |
|
Income
taxes payable
|
|
|
- |
|
|
|
1,904 |
|
|
|
164 |
|
|
|
5,526 |
|
|
|
- |
|
|
|
7,594 |
|
Advance
payments from customers
|
|
|
- |
|
|
|
6,476 |
|
|
|
4,299 |
|
|
|
1,409 |
|
|
|
- |
|
|
|
12,184 |
|
Intercompany
payable
|
|
|
27,359 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,359 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
28,123 |
|
|
|
41,584 |
|
|
|
10,693 |
|
|
|
21,593 |
|
|
|
(27,359 |
) |
|
|
74,634 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
21,472 |
|
|
|
- |
|
|
|
5,288 |
|
|
|
- |
|
|
|
26,760 |
|
Intercompany
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,035 |
|
|
|
(1,035 |
) |
|
|
- |
|
Long-term
debt, less current portion
|
|
|
13,892 |
|
|
|
214,750 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
228,642 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
1,002 |
|
|
|
- |
|
|
|
197 |
|
|
|
- |
|
|
|
1,199 |
|
Total
liabilities
|
|
|
42,015 |
|
|
|
278,808 |
|
|
|
10,693 |
|
|
|
28,113 |
|
|
|
(28,394 |
) |
|
|
331,235 |
|
Common
stock
|
|
|
165 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
165 |
|
Additional
paid-in capital
|
|
|
70,987 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
70,987 |
|
Parent
investment
|
|
|
- |
|
|
|
52,808 |
|
|
|
43,824 |
|
|
|
58,030 |
|
|
|
(154,662 |
) |
|
|
- |
|
Accumulated
other comprehensive (loss) income
|
|
|
(997 |
) |
|
|
(997 |
) |
|
|
- |
|
|
|
(89 |
) |
|
|
1,086 |
|
|
|
(997 |
) |
Retained
earnings
|
|
|
70,530 |
|
|
|
87,349 |
|
|
|
12,027 |
|
|
|
28,645 |
|
|
|
(128,021 |
) |
|
|
70,530 |
|
Treasury
stock
|
|
|
(1,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,800 |
) |
Total
stockholders’ equity
|
|
|
138,885 |
|
|
|
139,160 |
|
|
|
55,851 |
|
|
|
86,586 |
|
|
|
(281,597 |
) |
|
|
138,885 |
|
Total
liabilities and stockholders' equity
|
|
$ |
180,900 |
|
|
$ |
417,968 |
|
|
$ |
66,544 |
|
|
$ |
114,699 |
|
|
$ |
(309,991 |
) |
|
$ |
470,120 |
|
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
|
|
|
- |
|
|
|
23,312 |
|
|
|
2,076 |
|
|
|
2,736 |
|
|
|
(28,124 |
) |
|
|
- |
|
Prepaid
and other current assets
|
|
|
- |
|
|
|
3,250 |
|
|
|
545 |
|
|
|
844 |
|
|
|
- |
|
|
|
4,639 |
|
Total
current assets
|
|
|
1,378 |
|
|
|
122,158 |
|
|
|
23,435 |
|
|
|
38,979 |
|
|
|
(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
|
|
|
174,333 |
|
|
|
64,641 |
|
|
|
- |
|
|
|
- |
|
|
|
(238,974 |
) |
|
|
- |
|
Total
assets
|
|
$ |
176,506 |
|
|
$ |
419,446 |
|
|
$ |
39,130 |
|
|
$ |
109,951 |
|
|
$ |
(268,811 |
) |
|
$ |
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 |
|
|
|
16,684 |
|
|
|
3,991 |
|
|
|
5,270 |
|
|
|
- |
|
|
|
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 |
|
|
|
39,060 |
|
|
|
12,397 |
|
|
|
23,516 |
|
|
|
(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 |
|
|
|
286,190 |
|
|
|
12,397 |
|
|
|
30,288 |
|
|
|
(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
|
|
|
937 |
|
|
|
886 |
|
|
|
- |
|
|
|
155 |
|
|
|
(1,041 |
) |
|
|
937 |
|
Retained
earnings
|
|
|
56,042 |
|
|
|
71,665 |
|
|
|
7,566 |
|
|
|
21,762 |
|
|
|
(100,993 |
) |
|
|
56,042 |
|
Total
stockholders’ equity
|
|
|
125,906 |
|
|
|
133,256 |
|
|
|
26,733 |
|
|
|
79,663 |
|
|
|
(239,652 |
) |
|
|
125,906 |
|
Total
liabilities and stockholders' equity
|
|
$ |
176,506 |
|
|
$ |
419,446 |
|
|
$ |
39,130 |
|
|
$ |
109,951 |
|
|
$ |
(268,811 |
) |
|
$ |
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 June 27, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
56,694 |
|
|
$ |
18,355 |
|
|
$ |
34,492 |
|
|
$ |
(18,807 |
) |
|
$ |
90,734 |
|
Cost
of sales
|
|
|
- |
|
|
|
39,343 |
|
|
|
15,562 |
|
|
|
27,127 |
|
|
|
(18,530 |
) |
|
|
63,502 |
|
Gross
profit
|
|
|
- |
|
|
|
17,351 |
|
|
|
2,793 |
|
|
|
7,365 |
|
|
|
(277 |
) |
|
|
27,232 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
817 |
|
|
|
5 |
|
|
|
1,944 |
|
|
|
- |
|
|
|
2,766 |
|
Selling
and marketing
|
|
|
- |
|
|
|
1,838 |
|
|
|
1,000 |
|
|
|
2,174 |
|
|
|
- |
|
|
|
5,012 |
|
General
and administrative
|
|
|
- |
|
|
|
3,472 |
|
|
|
1,077 |
|
|
|
587 |
|
|
|
- |
|
|
|
5,136 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
334 |
|
|
|
296 |
|
|
|
152 |
|
|
|
- |
|
|
|
782 |
|
Net
loss on disposition of fixed assets
|
|
|
- |
|
|
|
128 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
128 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
6,589 |
|
|
|
2,378 |
|
|
|
4,857 |
|
|
|
- |
|
|
|
13,824 |
|
Operating
income
|
|
|
- |
|
|
|
10,762 |
|
|
|
415 |
|
|
|
2,508 |
|
|
|
(277 |
) |
|
|
13,408 |
|
Interest
expense (income), net
|
|
|
357 |
|
|
|
4,266 |
|
|
|
(10 |
) |
|
|
14 |
|
|
|
- |
|
|
|
4,627 |
|
Loss
on debt extinguishment
|
|
|
121 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
121 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(478 |
) |
|
|
6,496 |
|
|
|
425 |
|
|
|
2,494 |
|
|
|
(277 |
) |
|
|
8,660 |
|
Income
tax (benefit) expense
|
|
|
(181 |
) |
|
|
2,592 |
|
|
|
106 |
|
|
|
319 |
|
|
|
- |
|
|
|
2,836 |
|
Equity
in income of subsidiaries
|
|
|
6,121 |
|
|
|
2,217 |
|
|
|
- |
|
|
|
- |
|
|
|
(8,338 |
) |
|
|
- |
|
Net
income
|
|
$ |
5,824 |
|
|
$ |
6,121 |
|
|
$ |
319 |
|
|
$ |
2,175 |
|
|
$ |
(8,615 |
) |
|
$ |
5,824 |
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For
the Three Months Ended June 29, 2007
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
55,453 |
|
|
$ |
15,073 |
|
|
$ |
37,186 |
|
|
$ |
(20,394 |
) |
|
$ |
87,318 |
|
Cost
of sales
|
|
|
- |
|
|
|
38,210 |
|
|
|
12,660 |
|
|
|
28,182 |
|
|
|
(20,385 |
) |
|
|
58,667 |
|
Gross
profit
|
|
|
- |
|
|
|
17,243 |
|
|
|
2,413 |
|
|
|
9,004 |
|
|
|
(9 |
) |
|
|
28,651 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
716 |
|
|
|
- |
|
|
|
1,516 |
|
|
|
- |
|
|
|
2,232 |
|
Selling
and marketing
|
|
|
- |
|
|
|
2,019 |
|
|
|
924 |
|
|
|
1,968 |
|
|
|
- |
|
|
|
4,911 |
|
General
and administrative
|
|
|
- |
|
|
|
3,453 |
|
|
|
246 |
|
|
|
2,136 |
|
|
|
- |
|
|
|
5,835 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
334 |
|
|
|
62 |
|
|
|
152 |
|
|
|
- |
|
|
|
548 |
|
Net
loss on disposition of fixed assets
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
15 |
|
|
|
- |
|
|
|
16 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
6,523 |
|
|
|
1,232 |
|
|
|
5,787 |
|
|
|
- |
|
|
|
13,542 |
|
Operating
income
|
|
|
- |
|
|
|
10,720 |
|
|
|
1,181 |
|
|
|
3,217 |
|
|
|
(9 |
) |
|
|
15,109 |
|
Interest
expense (income), net
|
|
|
1,950 |
|
|
|
3,198 |
|
|
|
(15 |
) |
|
|
10 |
|
|
|
- |
|
|
|
5,143 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(1,950 |
) |
|
|
7,522 |
|
|
|
1,196 |
|
|
|
3,207 |
|
|
|
(9 |
) |
|
|
9,966 |
|
Income
tax (benefit) expense
|
|
|
(765 |
) |
|
|
1,448 |
|
|
|
321 |
|
|
|
831 |
|
|
|
- |
|
|
|
1,835 |
|
Equity
in income of subsidiaries
|
|
|
9,316 |
|
|
|
3,242 |
|
|
|
- |
|
|
|
- |
|
|
|
(12,558 |
) |
|
|
- |
|
Net
income
|
|
$ |
8,131 |
|
|
$ |
9,316 |
|
|
$ |
875 |
|
|
$ |
2,376 |
|
|
$ |
(12,567 |
) |
|
$ |
8,131 |
|
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 Nine Months Ended June 27, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
166,793 |
|
|
$ |
59,306 |
|
|
$ |
103,820 |
|
|
$ |
(58,471 |
) |
|
$ |
271,448 |
|
Cost
of sales
|
|
|
- |
|
|
|
119,652 |
|
|
|
50,038 |
|
|
|
80,433 |
|
|
|
(58,109 |
) |
|
|
192,014 |
|
Gross
profit
|
|
|
- |
|
|
|
47,141 |
|
|
|
9,268 |
|
|
|
23,387 |
|
|
|
(362 |
) |
|
|
79,434 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
2,438 |
|
|
|
426 |
|
|
|
5,556 |
|
|
|
- |
|
|
|
8,420 |
|
Selling
and marketing
|
|
|
- |
|
|
|
5,831 |
|
|
|
3,187 |
|
|
|
6,494 |
|
|
|
- |
|
|
|
15,512 |
|
General
and administrative
|
|
|
- |
|
|
|
11,007 |
|
|
|
3,165 |
|
|
|
2,609 |
|
|
|
- |
|
|
|
16,781 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
1,002 |
|
|
|
889 |
|
|
|
453 |
|
|
|
- |
|
|
|
2,344 |
|
Net
loss on disposition of fixed assets
|
|
|
- |
|
|
|
172 |
|
|
|
12 |
|
|
|
19 |
|
|
|
- |
|
|
|
203 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
20,450 |
|
|
|
7,679 |
|
|
|
15,131 |
|
|
|
- |
|
|
|
43,260 |
|
Operating
income
|
|
|
- |
|
|
|
26,691 |
|
|
|
1,589 |
|
|
|
8,256 |
|
|
|
(362 |
) |
|
|
36,174 |
|
Interest
expense (income), net
|
|
|
1,414 |
|
|
|
12,865 |
|
|
|
(47 |
) |
|
|
12 |
|
|
|
- |
|
|
|
14,244 |
|
Loss
on debt extinguishment
|
|
|
514 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
514 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(1,928 |
) |
|
|
13,826 |
|
|
|
1,636 |
|
|
|
8,244 |
|
|
|
(362 |
) |
|
|
21,416 |
|
Income
tax (benefit) expense
|
|
|
(732 |
) |
|
|
6,074 |
|
|
|
225 |
|
|
|
1,361 |
|
|
|
- |
|
|
|
6,928 |
|
Equity
in income of subsidiaries
|
|
|
15,684 |
|
|
|
7,932 |
|
|
|
- |
|
|
|
- |
|
|
|
(23,616 |
) |
|
|
- |
|
Net
income
|
|
$ |
14,488 |
|
|
$ |
15,684 |
|
|
$ |
1,411 |
|
|
$ |
6,883 |
|
|
$ |
(23,978 |
) |
|
$ |
14,488 |
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For
the Nine Months Ended June 29, 2007
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
163,484 |
|
|
$ |
46,004 |
|
|
$ |
105,872 |
|
|
$ |
(55,875 |
) |
|
$ |
259,485 |
|
Cost
of sales
|
|
|
- |
|
|
|
113,916 |
|
|
|
38,367 |
|
|
|
80,863 |
|
|
|
(56,598 |
) |
|
|
176,548 |
|
Gross
profit
|
|
|
- |
|
|
|
49,568 |
|
|
|
7,637 |
|
|
|
25,009 |
|
|
|
723 |
|
|
|
82,937 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
2,261 |
|
|
|
- |
|
|
|
4,214 |
|
|
|
- |
|
|
|
6,475 |
|
Selling
and marketing
|
|
|
- |
|
|
|
6,003 |
|
|
|
2,622 |
|
|
|
5,914 |
|
|
|
- |
|
|
|
14,539 |
|
General
and administrative
|
|
|
- |
|
|
|
11,546 |
|
|
|
968 |
|
|
|
3,571 |
|
|
|
- |
|
|
|
16,085 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
1,002 |
|
|
|
187 |
|
|
|
453 |
|
|
|
- |
|
|
|
1,642 |
|
Net
loss on disposition of fixed assets
|
|
|
- |
|
|
|
18 |
|
|
|
- |
|
|
|
56 |
|
|
|
- |
|
|
|
74 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
20,830 |
|
|
|
3,777 |
|
|
|
14,208 |
|
|
|
- |
|
|
|
38,815 |
|
Operating
income
|
|
|
- |
|
|
|
28,738 |
|
|
|
3,860 |
|
|
|
10,801 |
|
|
|
723 |
|
|
|
44,122 |
|
Interest
expense (income), net
|
|
|
6,070 |
|
|
|
9,817 |
|
|
|
(30 |
) |
|
|
(100 |
) |
|
|
- |
|
|
|
15,757 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(6,070 |
) |
|
|
18,921 |
|
|
|
3,890 |
|
|
|
10,901 |
|
|
|
723 |
|
|
|
28,365 |
|
Income
tax (benefit) expense
|
|
|
(2,331 |
) |
|
|
6,669 |
|
|
|
1,058 |
|
|
|
3,243 |
|
|
|
- |
|
|
|
8,639 |
|
Equity
in income of subsidiaries
|
|
|
23,465 |
|
|
|
11,213 |
|
|
|
- |
|
|
|
- |
|
|
|
(34,678 |
) |
|
|
- |
|
Net
income
|
|
$ |
19,726 |
|
|
$ |
23,465 |
|
|
$ |
2,832 |
|
|
$ |
7,658 |
|
|
$ |
(33,955 |
) |
|
$ |
19,726 |
|
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 Nine Months Ended June 27, 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
|
|
$ |
(2,127 |
) |
|
$ |
25,560 |
|
|
$ |
271 |
|
|
$ |
995 |
|
|
$ |
- |
|
|
$ |
24,699 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(2,467 |
) |
|
|
(223 |
) |
|
|
(598 |
) |
|
|
- |
|
|
|
(3,288 |
) |
Proceeds
from adjustment to acquisition purchase price
|
|
|
- |
|
|
|
1,615 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,615 |
|
Payment
of patent application fees
|
|
|
- |
|
|
|
- |
|
|
|
(147 |
) |
|
|
- |
|
|
|
- |
|
|
|
(147 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(852 |
) |
|
|
(370 |
) |
|
|
(598 |
) |
|
|
- |
|
|
|
(1,820 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of treasury stock
|
|
|
(1,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,800 |
) |
Repayments
of debt
|
|
|
(8,000 |
) |
|
|
(8,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16,000 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
639 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
639 |
|
Proceeds
from exercise of stock options
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3 |
|
Excess
tax benefit on stock option exercises
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Intercompany
dividends
|
|
|
10,100 |
|
|
|
(10,100 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash provided by (used in) financing activities
|
|
|
942 |
|
|
|
(18,098 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(17,156 |
) |
Net
(decrease) increase in cash and cash equivalents
|
|
|
(1,185 |
) |
|
|
6,610 |
|
|
|
(99 |
) |
|
|
397 |
|
|
|
- |
|
|
|
5,723 |
|
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
|
|
$ |
193 |
|
|
$ |
23,128 |
|
|
$ |
859 |
|
|
$ |
2,017 |
|
|
$ |
- |
|
|
$ |
26,197 |
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For
the Nine Months Ended June 29, 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
|
|
$ |
(619 |
) |
|
$ |
14,898 |
|
|
$ |
872 |
|
|
$ |
4,108 |
|
|
$ |
- |
|
|
$ |
19,259 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(2,423 |
) |
|
|
(24 |
) |
|
|
(3,945 |
) |
|
|
- |
|
|
|
(6,392 |
) |
Capitalized
expenses relating to potential business acquisition
|
|
|
- |
|
|
|
(395 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(395 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(2,818 |
) |
|
|
(24 |
) |
|
|
(3,945 |
) |
|
|
- |
|
|
|
(6,787 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
- |
|
|
|
(5,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,000 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
520 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
520 |
|
Proceeds
from exercise of stock options
|
|
|
604 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
604 |
|
Excess
tax benefit on stock option exercises
|
|
|
- |
|
|
|
671 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
671 |
|
Intercompany
dividends
|
|
|
2,800 |
|
|
|
(2,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash provided by (used in) financing activities
|
|
|
3,924 |
|
|
|
(7,129 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,205 |
) |
Net
increase in cash and cash equivalents
|
|
|
3,305 |
|
|
|
4,951 |
|
|
|
848 |
|
|
|
163 |
|
|
|
- |
|
|
|
9,267 |
|
Cash
and cash equivalents at beginning of period
|
|
|
139 |
|
|
|
28,299 |
|
|
|
290 |
|
|
|
1,425 |
|
|
|
- |
|
|
|
30,153 |
|
Cash
and cash equivalents at end of period
|
|
$ |
3,444 |
|
|
$ |
33,250 |
|
|
$ |
1,138 |
|
|
$ |
1,588 |
|
|
$ |
- |
|
|
$ |
39,420 |
|
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, Inc., 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
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. 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. The remaining $1.8 million, including interest, held in
the indemnity escrow account is available to cover potential indemnification
claims asserted prior to January 1, 2009.
During
the third quarter of fiscal year 2008, Malibu’s income tax return for its short
fiscal period ended immediately preceding the closing date of the acquisition
was finalized, resulting in a decrease in the assumed income tax payable and an
offsetting adjustment to goodwill of approximately $0.1 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 (“Financial Earnout”); and a discretionary earnout of up to $1.0
million contingent upon achievement of certain succession planning goals.
Preliminary calculations of the first year’s Financial Earnout as of June 27,
2008 indicate that no earnout was earned for the first earnout period,
and the maximum potential Financial Earnout that could be earned over the three
years following the acquisition is reduced from $14.0 million to $12.3
million.
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 nine months ended June 27, 2008 and June 29, 2007 are
summarized as follows (dollars in millions):
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
June
27, 2008
|
|
|
June
29, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
109.3 |
|
|
|
39
|
% |
|
$ |
109.4 |
|
|
|
40
|
% |
|
$ |
(0.1 |
) |
|
|
(0 |
)
% |
Medical
|
|
|
48.3 |
|
|
|
17 |
|
|
|
53.9 |
|
|
|
20 |
|
|
|
(5.6 |
) |
|
|
(10 |
) |
Communications
|
|
|
92.8 |
|
|
|
33 |
|
|
|
81.7 |
|
|
|
31 |
|
|
|
11.1 |
|
|
|
14 |
|
Industrial
|
|
|
19.8 |
|
|
|
8 |
|
|
|
16.1 |
|
|
|
6 |
|
|
|
3.7 |
|
|
|
23 |
|
Scientific
|
|
|
9.7 |
|
|
|
3 |
|
|
|
8.3 |
|
|
|
3 |
|
|
|
1.4 |
|
|
|
17 |
|
|
|
$ |
279.9 |
|
|
|
100
|
% |
|
$ |
269.4 |
|
|
|
100
|
% |
|
$ |
10.5 |
|
|
|
4
|
% |
In the
nine months ended June 27, 2008, our new Malibu division received orders
totaling $13.8 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 nine months ended June 29, 2007.
Orders
for the nine months ended June 27, 2008 of $279.9 million were $10.5 million, or
4%, higher than orders of $269.4 million for the corresponding period of fiscal
year 2007. Explanations for the order increase or decrease by market
for the nine months ended June 27, 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 for
the nine months ended June 29, 2007 and the nine months ended June 27,
2008 were approximately equal, totaling an aggregate of $109.4 million and
$109.3 million, respectively. In the nine months ended June 27, 2008,
radar orders received by our recently acquired Malibu division and
increased demand for radar products to support the HAWK missile system
were partially offset by decreased demand for radar products to support
the Aegis weapons system, continued delays in the placement of defense
orders and an expected decrease in orders to support the EarthCARE
cloud-profiling radar program due to the timing of that
program.
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
near-term 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, delays in the receipt of orders for radar and electronic
warfare programs have subsequently impacted the timing of our sales for
these programs. 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. The 10% decrease in medical orders was attributable
to the timing of a Russian tender program and orders for MRI products, and
was partially offset by an increase in orders for x-ray generators from
one large customer and other international customers, as well as an
increase in orders for products for radiation therapy
applications.
A Russian tender program in which we
participated in fiscal years 2006 and 2007 will not recur in fiscal year
2008. In the nine months ended June 29, 2007, we received approximately
$5.0 million of the fiscal year’s $5.8 million in orders for the Russian
tender program; we received no such orders in the nine months ended June
27, 2008.
|
|
In
addition, 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 nine months ended
June 27, 2008, orders for products for MRI applications decreased
approximately $6.7 million as compared to the corresponding period of
fiscal year 2007.
|
|
|
Communications: The
14% 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
$12 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
now-completed Joint Network Node (“JNN”) military
communications program, for which we had strong demand in the nine
months ended June 29, 2007, and a decrease in orders for
direct-to-home broadcast applications due to order timing.
In the nine months ended June 27, 2008, as
the WIN-T program began to ramp up for production, orders to support the
predecessor JNN program decreased $4.3 million due to 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 $1.4 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.
|
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 June 27, 2008, we had an order backlog of $205.8 million compared to an order
backlog of $196.4 million as of September 28, 2007. Approximately $1.8 million
of the $9.4 million increase in backlog during the nine months ended June 27,
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.
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 June 27, 2008
Compared to Three Months Ended June 29, 2007
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
|
Three
Months Ended
|
|
|
|
|
|
|
June
27, 2008
|
|
|
June
29, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
Sales
|
|
$ |
90.7 |
|
|
|
100.0
|
% |
|
$ |
87.3 |
|
|
|
100.0
|
% |
|
$ |
3.4 |
|
Cost
of sales
|
|
|
63.5 |
|
|
|
70.0 |
|
|
|
58.7 |
|
|
|
67.2 |
|
|
|
4.8 |
|
Gross
profit
|
|
|
27.2 |
|
|
|
30.0 |
|
|
|
28.7 |
|
|
|
32.9 |
|
|
|
(1.5 |
) |
Research
and development
|
|
|
2.8 |
|
|
|
3.1 |
|
|
|
2.2 |
|
|
|
2.5 |
|
|
|
0.6 |
|
Selling
and marketing
|
|
|
5.0 |
|
|
|
5.5 |
|
|
|
4.9 |
|
|
|
5.6 |
|
|
|
0.1 |
|
General
and administrative
|
|
|
5.1 |
|
|
|
5.6 |
|
|
|
5.8 |
|
|
|
6.6 |
|
|
|
(0.7 |
) |
Amortization
of acquisition-related intangibles
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.3 |
|
Net
loss on disposition of assets
|
|
|
0.1 |
|
|
|
0 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Operating
income
|
|
|
13.4 |
|
|
|
14.8 |
|
|
|
15.1 |
|
|
|
17.3 |
|
|
|
(1.7 |
) |
Interest
expense, net
|
|
|
4.6 |
|
|
|
5.1 |
|
|
|
5.1 |
|
|
|
5.8 |
|
|
|
(0.5 |
) |
Loss
on debt extinguishment
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Income
before taxes
|
|
|
8.7 |
|
|
|
9.6 |
|
|
|
10.0 |
|
|
|
11.5 |
|
|
|
(1.3 |
) |
Income
tax expense
|
|
|
2.8 |
|
|
|
3.1 |
|
|
|
1.8 |
|
|
|
2.1 |
|
|
|
1.0 |
|
Net
income
|
|
$ |
5.8 |
|
|
|
6.4
|
% |
|
$ |
8.1 |
|
|
|
9.3
|
% |
|
$ |
(2.3 |
) |
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$ |
16.1 |
|
|
|
17.8
|
% |
|
$ |
17.3 |
|
|
|
19.8
|
% |
|
$ |
(1.2 |
) |
|
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 net interest expense, provision for income
taxes 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 a covenant that requires us to maintain a
senior secured leverage ratio that contains EBITDA as a component, and our
management team uses EBITDA to monitor compliance with such
covenant;
|
|
•
|
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 12 of the accompanying
unaudited condensed consolidated financial statements.
Sales. Our sales by market for
the three months ended June 27, 2008 and June 29, 2007 are summarized as follows
(dollars in millions):
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
27, 2008
|
|
|
June
29, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
38.2 |
|
|
|
42
|
% |
|
$ |
36.5 |
|
|
|
42
|
% |
|
$ |
1.7 |
|
|
|
5
|
% |
Medical
|
|
|
16.8 |
|
|
|
19 |
|
|
|
18.0 |
|
|
|
21 |
|
|
|
(1.2 |
) |
|
|
(7 |
) |
Communications
|
|
|
28.0 |
|
|
|
31 |
|
|
|
27.3 |
|
|
|
31 |
|
|
|
0.7 |
|
|
|
3 |
|
Industrial
|
|
|
5.8 |
|
|
|
6 |
|
|
|
4.7 |
|
|
|
5 |
|
|
|
1.1 |
|
|
|
23 |
|
Scientific
|
|
|
1.9 |
|
|
|
2 |
|
|
|
0.8 |
|
|
|
1 |
|
|
|
1.1 |
|
|
|
138 |
|
|
|
$ |
90.7 |
|
|
|
100
|
% |
|
$ |
87.3 |
|
|
|
100
|
% |
|
$ |
3.4 |
|
|
|
4
|
% |
In the
three months ended June 27, 2008, our new Malibu division generated sales
totaling $3.4 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 June 29, 2007.
Sales for
the three months ended June 27, 2008 of $90.7 million were $3.4 million, or
approximately 4%, higher than sales of $87.3 million for the third quarter of
fiscal year 2007. Explanations for the sales increase or decrease by market for
the third quarter of fiscal year 2008 compared to the third 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 5% from $36.5 million in the three months ended
June 29, 2007 to $38.2 million in the three months ended June 27, 2008,
primarily due to increased sales of products to support military radar
systems, including the HAWK missile system, 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 decreased 7%,
primarily due to a Russian tender program in which we participated in
fiscal years 2006 and 2007 that will not recur in fiscal year 2008. In the
three months ended June 29, 2007, we shipped $2.9 million of x-ray
generators for this program; we made no such shipments in the three months
ended June 27, 2008. These sales decreases were partially
offset by an increase in sales of x-ray generators to one large customer
and other international customers, as well as an increase in sales of
products for radiation therapy
applications. |
|
|
Communications: The
3% 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 recently begun production shipments for Increment One of
the WIN-T military communications program. These increases were partially
offset by a decrease in sales of products for another military
communications program and certain broadcast applications.
In the three months ended June 27, 2008, we
shipped $2.3 million in products to support the WIN-T military
communications program as it began to ramp up for production. These sales
were partially offset by an approximately $1 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 $1.1 million increase in industrial
sales was due to sales of products used in a wide variety of industrial
applications, including industrial fabrication applications and domestic
and international test systems.
|
|
|
Scientific: Sales
in the scientific market are historically one-time projects and can
fluctuate significantly from period to period. The $1.1 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
$27.2 million, or 30.0% of sales, for the three months ended June 27, 2008, a
$1.5 million decrease from $28.7 million, or 32.9% of sales, for the three
months ended June 29, 2007. The lower gross profit for the three
months ended June 27, 2008 as compared to the corresponding period of fiscal
year 2007 was primarily the result of the sales mix of lower margin products and
the currency impact from the weakness of the U.S. dollar, partially offset by
additional gross profit from the $3.4 million increase in sales
volume. The sales mix of lower margin products was primarily due to
an increase in sales from new products and engineering development programs that
generally have lower gross margins, including sales from our recently acquired
Malibu division’s advanced antenna programs. The weakness of the U.S. dollar for
the three months ended June 27, 2008 as compared to the corresponding period of
fiscal year 2007 caused a reduction in gross profit of approximately $1.0
million from the translation of Canadian dollar denominated manufacturing
expenses to U.S. dollars, net of currency hedging contracts.
Research and Development.
Research and development expenses were $2.8 million, or 3.1% of sales, for the
three months ended June 27, 2008, a $0.6 million increase from $2.2 million, or
2.5% of sales, for the three months ended June 29, 2007. The increase in
research and development expenses for the three months ended June 27, 2008
compared to the corresponding period of fiscal year 2007 was due
primarily
to increased spending on medical diagnostic imaging products. Total spending on
research and development was as follows (dollars in millions):
|
|
Three Months Ended
|
|
|
|
June
27,
|
|
|
June
29,
|
|
|
|
2008
|
|
|
2007
|
|
Company
funded costs
|
|
$ |
2.8 |
|
|
$ |
2.2 |
|
Customer
funded costs, charged to cost of sales
|
|
|
2.2 |
|
|
|
1.7 |
|
|
|
$ |
5.0 |
|
|
$ |
3.9 |
|
Selling and Marketing. Selling
and marketing expenses were $5.0 million, or 5.5% of sales, for the three months
ended June 27, 2008, a $0.1 million increase from the $4.9 million, or 5.6% of
sales, for the three months ended June 29, 2007. The increase in selling and
marketing expenses for the three months ended June 27, 2008 compared to the
corresponding period of fiscal year 2007 primarily reflects $0.2 million of
selling and marketing expenses at our recently acquired Malibu
division.
General and Administrative.
General and administrative expenses were $5.1 million, or 5.6% of sales, for the
three months ended June 27, 2008, a $0.7 million decrease from the $5.8 million,
or 6.6% of sales, for the three months ended June 29, 2007. The reduction in
general and administrative expenses in the three months ended June 27, 2008 was
primarily due to favorable foreign currency translation of $0.6 million and
lower accrual for management incentive bonuses of $0.4 million, partially offset
by $0.4 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 June 27, 2008 and $0.5 million for the three months ended June 29,
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 $4.6 million for the three months ended
June 27, 2008, a $0.5 million decrease from the $5.1 million for the three
months ended June 29, 2007. The reduction in interest expense for the three
months ended June 27, 2008 was primarily due to lower interest rates on our debt
obligations during this period compared to the corresponding period of fiscal
year 2007 and the redemption of a portion of our floating rate senior notes
during the fourth quarter of fiscal year 2007. The reduction in interest rates
was primarily due to the refinancing of our senior credit facilities during the
fourth quarter of fiscal year 2007.
Loss on Debt Extinguishment.
Loss on debt extinguishment of $0.1 million for the three months ended June 27,
2008 resulted from the redemption of $2.0 million of our floating rate senior
notes in June 2008. The loss on debt extinguishment consists of
$84,000 in non-cash write-offs of deferred debt issue costs and issue discount
costs and $37,000 in cash payments for call premiums.
Income Tax Expense. We
recorded income tax expense of $2.8 million and $1.8 million for the three
months ended June 27, 2008 and June 29, 2007, respectively. Our effective
tax rate was approximately 33% for the three months ended June 27, 2008 as
compared to approximately 18% for the three months ended June 29, 2007.
The effective tax rate for the three months ended June 27, 2008 includes a
reduction to our annual tax rate of approximately 1% to reflect a change in
estimate for
Canadian
tax credits. The effective tax rate for the three months ended June 29,
2007 includes a discrete tax benefit of $1.8 million related to the filing of
amended income tax returns for prior years to reflect a change in estimate with
regard to reporting Canadian income earned in the U.S.
Net Income. Net income was
$5.8 million, or 6.4% of sales, for the three months ended June 27, 2008 as
compared to $8.1 million, or 9.3% of sales, in the three months ended June 29,
2007. The $2.3 million decrease in net income for the three months
ended June 27, 2008 as compared to the corresponding period of fiscal year 2007
was primarily due to the unfavorable sales mix resulting from increased sales of
products from engineering programs with lower gross margins, higher income tax
expense resulting from a $1.8 million discrete tax benefit in the third quarter
of fiscal year 2007 and incremental operating expenses for the recently acquired
Malibu division for the three months ended June 27, 2008, partially offset by
additional gross profit from the increase in sales volume for the three months
ended June 27, 2008. The unfavorable currency impact from Canadian
dollar denominated manufacturing expenses was mostly offset by the favorable
impact of foreign currency translation gains and losses for the three months
ended June 27, 2008 as compared to the three months ended June 29,
2007.
EBITDA. EBITDA was $16.1
million, or 17.8% of sales, for the three months ended June 27, 2008 as compared
to $17.3 million, or 19.8% of sales, for the three months ended June 29, 2007.
The $1.2 million decrease in EBITDA for the three months ended June 27, 2008 as
compared to the corresponding period of fiscal year 2007 was primarily due to
the unfavorable sales mix resulting from increased sales of products from
engineering programs with lower gross margins and incremental operating expenses
for the recently acquired Malibu division for the three months ended June 27,
2008, partially offset by additional gross profit from the increase in sales
volume for the three months ended June 27, 2008.
Nine
Months Ended June 27, 2008 Compared to Nine Months Ended June 29,
2007
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
|
Nine
Months Ended
|
|
|
|
|
|
|
June
27, 2008
|
|
|
June
29, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
Sales
|
|
$ |
271.4 |
|
|
|
100.0
|
% |
|
$ |
259.5 |
|
|
|
100.0
|
% |
|
$ |
11.9 |
|
Cost
of sales
|
|
|
192.0 |
|
|
|
70.7 |
|
|
|
176.5 |
|
|
|
68.0 |
|
|
|
15.5 |
|
Gross
profit
|
|
|
79.4 |
|
|
|
29.3 |
|
|
|
82.9 |
|
|
|
31.9 |
|
|
|
(3.5 |
) |
Research
and development
|
|
|
8.4 |
|
|
|
3.1 |
|
|
|
6.5 |
|
|
|
2.5 |
|
|
|
1.9 |
|
Selling
and marketing
|
|
|
15.5 |
|
|
|
5.7 |
|
|
|
14.5 |
|
|
|
5.6 |
|
|
|
1.0 |
|
General
and administrative
|
|
|
16.8 |
|
|
|
6.2 |
|
|
|
16.1 |
|
|
|
6.2 |
|
|
|
0.7 |
|
Amortization
of acquisition-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
intangibles
|
|
|
2.3 |
|
|
|
0.8 |
|
|
|
1.6 |
|
|
|
0.6 |
|
|
|
0.7 |
|
Net
loss on disposition of assets
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.1 |
|
Operating
income
|
|
|
36.2 |
|
|
|
13.3 |
|
|
|
44.1 |
|
|
|
17.0 |
|
|
|
(7.9 |
) |
Interest
expense, net
|
|
|
14.2 |
|
|
|
5.2 |
|
|
|
15.8 |
|
|
|
6.1 |
|
|
|
(1.6 |
) |
Loss
on debt extinguishment
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
0.5 |
|
Income
before taxes
|
|
|
21.4 |
|
|
|
7.9 |
|
|
|
28.4 |
|
|
|
10.9 |
|
|
|
(7.0 |
) |
Income
tax expense
|
|
|
6.9 |
|
|
|
2.5 |
|
|
|
8.6 |
|
|
|
3.3 |
|
|
|
(1.7 |
) |
Net
income
|
|
$ |
14.5 |
|
|
|
5.3
|
% |
|
$ |
19.7 |
|
|
|
7.6
|
% |
|
$ |
(5.2 |
) |
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$ |
43.8 |
|
|
|
16.1
|
% |
|
$ |
50.7 |
|
|
|
19.5
|
% |
|
$ |
(6.9 |
) |
|
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 net interest expense, provision for income
taxes 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 a covenant that requires us to maintain a
senior secured leverage ratio that contains EBITDA as a component, and our
management team uses EBITDA to monitor compliance with such
covenant;
|
|
•
|
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 12 of the accompanying
unaudited condensed consolidated financial statements.
Sales. Our sales by market for
the nine months ended June 27, 2008 and June 29, 2007 are summarized as follows
(dollars in millions):
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
June
27, 2008
|
|
|
June
29, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
114.1 |
|
|
|
42
|
% |
|
$ |
106.7 |
|
|
|
41
|
% |
|
$ |
7.4 |
|
|
|
7
|
% |
Medical
|
|
|
49.5 |
|
|
|
18 |
|
|
|
52.1 |
|
|
|
20 |
|
|
|
(2.6 |
) |
|
|
(5 |
) |
Communications
|
|
|
82.5 |
|
|
|
30 |
|
|
|
80.5 |
|
|
|
31 |
|
|
|
2.0 |
|
|
|
2 |
|
Industrial
|
|
|
17.9 |
|
|
|
7 |
|
|
|
16.1 |
|
|
|
6 |
|
|
|
1.8 |
|
|
|
11 |
|
Scientific
|
|
|
7.4 |
|
|
|
3 |
|
|
|
4.1 |
|
|
|
2 |
|
|
|
3.3 |
|
|
|
80 |
|
|
|
$ |
271.4 |
|
|
|
100
|
% |
|
$ |
259.5 |
|
|
|
100
|
% |
|
$ |
11.9 |
|
|
|
5
|
% |
In the
nine months ended June 27, 2008, our new Malibu division generated sales
totaling $11.7 million, of which approximately 40% was in the radar market and
approximately 60% 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 nine months of fiscal year 2007.
Sales for
the nine months ended June 27, 2008 of $271.4 million were $11.9 million, or 5%,
higher than sales of $259.5 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 7%
from $106.7 million in the nine months ended June 29, 2007 to $114.1
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 5% decrease in sales of our medical products
was primarily due to a Russian tender program in which we participated in
fiscal years 2006 and 2007 that will not recur in fiscal year 2008. In the
nine months ended June 29, 2007, we shipped approximately $3.7 million of
the fiscal year’s $5.9 million in sales for the Russian tender program; we
made no such sales in the nine months ended June 27, 2008.
In
addition, in fiscal year 2007, a large customer ordered a two-year supply
of products for MRI applications in one fiscal year, resulting in
unusually strong demand for these products, and we shipped a significant
amount of these products during that fiscal year. As a result, in the nine
months ended June 27, 2008, sales of products for MRI applications were
solid but decreased approximately $1.6 million.
We
are seeing 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. Sales
of x-ray generators for U.S. customers in the nine months ended June 27,
2008 were $0.8 million lower than in nine months ended June 29,
2007.
These
decreases were partially offset by an increase in sales of x-ray
generators for one large customer and other international
customers.
|
|
|
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. These increases were
partially offset by a decrease in sales of products for certain military
communications programs, including the now-completed JNN program, and
certain broadcast network applications for which we had strong sales in
the first nine months of fiscal year 2007.
In the nine months ended June 27, 2008, the
$3.9 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 $3.4 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 $1.8 million increase in
industrial sales was due to sales of products used in a wide variety of
industrial applications, including industrial fabrication applications and
domestic and international test
systems.
|
|
|
Scientific: Sales
in the scientific market are historically one-time projects and can
fluctuate significantly from period to period. The $3.3 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
$79.4 million, or 29.3% of sales, for the nine months ended June 27, 2008, a
$3.5 million decrease from $82.9 million, or 31.9% of sales, in the nine months
ended June 29, 2007. For the nine months ended June 27, 2008 as compared to the
corresponding period of fiscal year 2007, gross profit was unfavorably impacted
by the sales mix of lower margin products and the currency impact from the
weakness of the U.S. dollar, partially offset by additional gross profit from
the $11.9 million increase in sales volume. The sales mix of lower
margin products was primarily due to an increase in sales from new products and
engineering development programs. The weakness of the U.S. dollar for the nine
months ended June 27, 2008 as compared to the corresponding period of fiscal
year 2007 caused a reduction in gross profit of approximately $1.7 million from
the translation of Canadian dollar denominated manufacturing expenses to U.S.
dollars, net of currency hedging contracts.
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.
Research and Development.
Research and development expenses were $8.4 million, or 3.1% of sales, for the
nine months ended June 27, 2008, a $1.9 million increase from $6.5 million, or
2.5% of sales, for the nine months ended June 29, 2007. The increase
in research and development expenses for the nine months ended June 27, 2008
compared to the corresponding period of fiscal year 2007 was due primarily to
expenditures of $1.0 million on the Army's WIN-T program, increased spending of
$0.7 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 was as follows (dollars in millions):
|
|
Nine Months Ended
|
|
|
|
June
27,
|
|
|
June
29,
|
|
|
|
2008
|
|
|
2007
|
|
Company
funded costs
|
|
$ |
8.4 |
|
|
$ |
6.5 |
|
Customer
funded costs, charged to cost of sales
|
|
$ |
9.5 |
|
|
$ |
5.0 |
|
|
|
$ |
17.9 |
|
|
$ |
11.5 |
|
Selling and Marketing. Selling
and marketing expenses were $15.5 million, or 5.7% of sales, for the nine months
ended June 27, 2008, a $1.0 million increase from the $14.5 million, or 5.6% of
sales, for the nine months ended June 29, 2007. The increase in
selling and marketing expenses for the nine months ended June 27, 2008 compared
to the corresponding period of fiscal year 2007 reflects selling and marketing
expenses of $0.7 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 $16.8 million, or 6.2% of sales, for
the nine months ended June 27, 2008, a $0.7 million increase from the $16.1
million, or 6.2% of sales, for the nine months ended June 29, 2007. The increase
in general and administrative expenses in the nine months ended June 27, 2008
was primarily due to $1.4 million of expenses for our recently acquired Malibu
division and $0.7 million of expenses for a new enterprise resource planning
system at our Beverly Microwave Division, partially offset by lower accrual for
management incentive bonuses of $0.9 million, favorable foreign currency
translation of $0.3 million and 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 $2.3 million for the nine
months ended June 27, 2008 and $1.6 million for the nine months ended June 29,
2007. The $0.7 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 $14.2 million for the nine months ended
June 27, 2008 was $1.6 million lower than interest expense of $15.8 million for
the nine months ended June 29, 2007. The reduction in interest expense for the
nine months ended June 27, 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 and redemption of a portion of our floating rate senior notes
during the fourth quarter of fiscal year 2007. The reduction in interest rates
was primarily due to the refinancing of our senior credit facilities during the
fourth quarter of fiscal year 2007.
Loss on Debt Extinguishment.
Loss on debt extinguishment of $0.5 million in the nine months ended June 27,
2008 resulted from the redemption of $6.0 million of our floating rate senior
notes in March 2008 and $2.0 million in June 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 $0.2 million in cash payments for call
premiums.
Income Tax Expense. We
recorded income tax expense of $6.9 million and $8.6 million for the nine months
ended June 27, 2008 and June 29, 2007, respectively. Our effective tax rate was
approximately 32% for the nine months ended June 27, 2008 as compared to
approximately 30% for the corresponding period of fiscal year 2007. The
effective income tax rate in the nine months ended June 27, 2008 includes a
discrete tax benefit of $0.4 million that is attributable to the fourth quarter
of fiscal year 2007 related to the correction of an immaterial error in the
computation of the warranty expense tax deduction in a foreign tax
jurisdiction. The effective tax rate for the nine months ended June 29,
2007 includes a discrete tax benefit of $1.8 million that was recorded in the
third quarter of fiscal year 2007 related to the filing of amended income tax
returns for prior years to reflect a change in estimate with regard to reporting
Canadian income earned in the U.S.
Our
estimated effective income tax rate for the fourth quarter of fiscal year 2008
is expected to be approximately 36%.
Net Income. Net income was
$14.5 million, or 5.3% of sales, for the nine months ended June 27, 2008 as
compared to $19.7 million, or 7.6% of sales, in the nine months ended June 29,
2007. Lower net income for the nine months ended June 27, 2008 was
primarily due to higher income tax expense resulting primarily from a $1.8
million discrete tax benefit in fiscal year 2007, the unfavorable sales mix
resulting primarily from increased sales of products from engineering
development programs with lower gross margins, incremental operating expenses
for the recently acquired Malibu division, higher research and development
expenses and the unfavorable impact from the weakness of the U.S. dollar,
partially offset by additional gross profit from the increase in sales volume
and lower income tax expense and interest expense.
EBITDA. EBITDA was $43.8
million, or 16.1% of sales, for the nine months ended June 27, 2008 as compared
to $50.7 million, or 19.5% of sales, for the nine months ended June 29,
2007. Lower EBITDA for the nine months ended June 27, 2008 was
primarily due to the unfavorable sales mix resulting from increased sales of
products from engineering programs with lower gross margins, incremental operating
expenses for the recently acquired Malibu division, higher research and
development expenses and the unfavorable impact from the weakness of the U.S.
dollar, partially offset by additional gross profit from the 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
|
|
$ |
26,197 |
|
|
$ |
20,474 |
|
Working
capital
|
|
|
84,095 |
|
|
|
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 $1.2 million as of June 27, 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 $5.7 million net increase in cash and cash
equivalents during the nine months ended June 27, 2008 were the net cash
provided by our operating activities of $24.7 million, a purchase price
adjustment of $1.6 million for the Malibu acquisition and $0.6 million proceeds
from employee stock purchases, partially offset by repayment of $8.0 million of
the outstanding balance on our senior term loan, the redemption of $8.0 million
in principal amount of our floating rate senior notes, capital expenditures of
$3.3 million and purchase of treasury stock for $1.8 million.
We had
total principal amount of debt outstanding of $230.75 million and
$246.75 million as of June 27, 2008 and September 28, 2007,
respectively. As of June 27, 2008, we had borrowing availability of
$55.0 million under the revolver under our senior credit
facilities.
As of
July 30, 2008, after giving effect to an additional optional prepayment of $2.0
million on our senior term loan on such date, we had $228.75 million in
total principal amount of debt outstanding.
Historical
Operating, Investing and Financing Activities
Operating
Activities
During
the nine months ended June 27, 2008 and June 29, 2007, we funded our operating
activities through cash generated internally.
Operating
activities provided cash of $24.7 million in the nine months ended June 27,
2008, which was attributable to net income of $14.5 million, depreciation,
amortization and other non-cash charges of $9.9 million, and $0.3 million cash
provided by working capital items. The primary items providing cash from working
capital in the first nine months of fiscal year 2008 were for $4.2 million
decrease in accounts receivable and the release of $1.0 million restricted cash,
partially offset by $1.5 million of prepaid income tax and $1.0 million
decreases in each of income tax payable, product warranty and accrued
expenses.
Operating
activities provided cash of $19.3 million in the nine months ended June 29,
2007, which was attributable to net income of $19.7 million and depreciation,
amortization and other non-cash charges of $8.8 million, partially offset by
$9.2 million for cash used for working capital. The primary uses of cash for
working capital in the nine months ended June 29, 2007 were for increases in
inventories of $6.3 million, accounts receivable of $3.0 million due to the
timing of customer shipments, and reduction in income taxes payable of $3.9
million due primarily to income tax payments from the taxable gain on the sale
of our San Carlos property in fiscal year 2006. The total amount of cash used
for working capital was partially offset by increases in accounts payable and
accrued expenses of $4.3 million.
Investing
Activities
For the
nine months ended June 27, 2008, net cash used in investing activities was
$1.8 million, compared to $6.8 million for the nine months ended June
29, 2007.
Investing
activities for the nine months ended June 27, 2008 consisted primarily of $3.3
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.
The
primary investing activities for the nine months ended June 29, 2007 was for
$6.4 million capital expenditures, which included $3.7 million incurred for the
building expansion of our Canadian manufacturing facility.
Financing
Activities
For the
nine months ended June 27, 2008, net cash used in financing activities was
$17.2 million, compared to $3.2 million for the nine months ended June
29, 2007.
Net cash
used in financing activities for the nine months ended June 27, 2008 consisted
primarily of $1.8 million treasury stock purchases under the stock repurchase
program discussed below, redemption of $8.0 million in principal amount of our
floating rate senior notes and term loan repayments
aggregating $8.0 million. The $8.0 million term loan repayments
during the first nine months of fiscal year 2008 comprised the scheduled
amortization payment of $250,000 for the first quarter of fiscal year 2008 and
optional prepayments aggregating $7.75 million. The cash used in financing
activities for the first nine
months of
fiscal year 2008 was partially offset by $0.6 million in proceeds from employee
stock purchases.
Financing
activities for the nine months ended June 29, 2007 consisted primarily of a $5.0
million term loan repayment in December 2006 using available operating cash,
partially offset by proceeds of $1.1 million from the stock option exercises and
shares purchases under our employee stock purchase plan, 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 nine months ended
June 27, 2008.
On May
28, 2008, we announced that our board of directors authorized us to implement a
program to repurchase up to $12 million of our common stock from time to time,
funded entirely from cash on hand. Repurchases made under the program are
subject to the terms and limitations of our debt covenants, as well as market
conditions and share price, and will be made at management's discretion in open
market trades, through block trades or in privately negotiated transactions. The
program may be modified or terminated by our board of directors at any time.
During the three months ended June 27, 2008, we repurchased 136,215 shares
recorded as treasury stock, at an average per share price of $13.17, plus
brokerage commissions of $0.04 per share, for an aggregate cost of $1.8
million.
Capital
Expenditures
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 nine months ended June 27, 2008
were $3.3 million. We expect total fiscal year 2008 capital expenditures to
be approximately $4.0 to $5.0 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 10, "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. We do not believe the adoption
of SFAS No. 160 will have a material impact on our financial position or results
of operations.
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.
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. This
standard is not expected to have a material effect on our financial position or
results of operations, and will likely result in additional disclosures related
to our derivatives.
In April 2008,
the FASB issued FASB Staff Position No. FAS 142-3 (“FSP FAS 142-3”),
“Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets.” More specifically,
FSP FAS 142-3 removes the requirement under paragraph 11 of
SFAS No. 142 to consider whether an intangible asset can be renewed without
substantial cost or material modifications to the existing terms and conditions
and instead, requires an entity to consider its own historical experience in
renewing similar arrangements. FSP FAS 142-3 also requires expanded
disclosure related to the determination of intangible asset useful lives. FSP
FAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. We will be required to adopt FSP FAS
142-3 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 May 2008,
the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with generally accepted accounting principles, or GAAP,
in the United States of America for non-governmental entities.
SFAS No. 162 is effective 60 days following the Securities and
Exchange Commission's (“SEC”) approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, the meaning of "Present
Fairly in Conformity with GAAP." Any effect of applying the provisions of SFAS
No. 162 is to be reported as a change in accounting principle in accordance
with SFAS No. 154, "Accounting Changes and Error Corrections." We are
currently evaluating the impact that the adoption of SFAS No. 162, once
effective, will have on our financial position and results of
operations.
In June 2008, the FASB
Issued Emerging Issues Task Force (“EITF”) No. 08-3, “Accounting by Lessees
for Nonrefundable Maintenance Deposits.” EITF No. 08-3 requires that
nonrefundable maintenance deposits paid by a lessee under an arrangement
accounted for as a lease be accounted for as a deposit asset until the
underlying maintenance is performed. When the underlying maintenance is
performed, the deposit may be expensed or capitalized in accordance with the
lessee’s maintenance accounting policy. If finalized, EITF No. 08-3 would be
effective for fiscal years beginning after December 15, 2008, including interim
periods within those fiscal years, and would be adopted by making a
cumulative-effect adjustment to beginning retained earnings in the period of
adoption. We will be required to adopt EITF No. 08-3 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.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with GAAP in the
U.S., 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
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 June
27, 2008 and September 28, 2007, the carrying amount of goodwill and other
intangible assets, net was $241.7 million and $243.3 million, respectively.
As of June 27, 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 June
27, 2008 and September 28, 2007, the carrying amount of property, plant and
equipment was $63.5 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 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, 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 nine months
ended June 27, 2008, we recognized $0.6 million and $1.6 million,
respectively, in stock-based compensation expense. For the three and nine months
ended June 29, 2007, we recognized $0.4 million and $0.9 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 10 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.
We do not
use market risk sensitive instruments for trading or speculative
purposes.
Interest
rate risk
Our
exposure to market risk for changes in interest rates relates primarily to our
long-term debt. As of June 27, 2008, we had fixed rate senior subordinated notes
of $125.0 million due in 2012, bearing interest at 8% per year and variable
rate debt consisting of $14.0 million floating rate senior notes due in
2015 and a $91.75 million term loan under our amended and restated senior
credit facilities due in 2014. Our variable rate debt is subject to changes in
the prime rate and the LIBOR rate.
We use
derivative instruments from time to time in order to manage interest costs and
risk associated with our long-term debt. On September 21, 2007, we entered
into an interest rate swap contract to receive three-month USD-LIBOR-BBA
interest and pay 4.77% fixed rate interest. Net interest positions are settled
quarterly. We have structured the swap with decreasing notional amounts to match
the expected pay down of the term loan. The notional value of the swap was
$80.0 million at June 27, 2008 and represented approximately 87% 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 June 27, 2008, the unrealized loss, net of tax, on the swap was $1.0
million.
We
performed a sensitivity analysis to assess the potential loss in future earnings
that a 10% increase in interest rates over a one-year period would have on our
floating rate senior notes and term loan under our senior credit facilities. The
impact was determined based on the hypothetical change from the end of period
market rates over a period of one year and results in a net decrease of future
annual earnings of approximately $0.1 million.
Although
the majority of our revenue and expense activities are transacted in U.S.
dollars, we do transact business in foreign countries. Our primary foreign
currency cash flows are in Canada and several European countries. In an effort
to reduce our foreign currency exposure to Canadian dollar denominated expenses,
we enter into Canadian dollar forward contracts to hedge the Canadian dollar
denominated costs for our manufacturing operation in Canada. Our Canadian dollar
forward contracts are designated as a cash flow hedge and are considered highly
effective, as defined by SFAS No. 133. The unrealized gains and losses from
foreign exchange forward contracts are included in "accumulated other
comprehensive income" in the consolidated balance sheets. If the transaction
being hedged fails to occur, or if a portion of any derivative is ineffective,
then we promptly recognize 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 three
and nine months ended June 27, 2008 and June 29, 2007.
As of
June 27, 2008, we entered into Canadian dollar forward contracts for
approximately $17.0 million (Canadian dollars), or approximately 68% of
estimated Canadian dollar denominated expenses for July 2008 through
December 2008, at an average rate of approximately $0.975 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 $0.3 million annually to our net income or approximately
2.0 cents to basic earnings per share and 1.9 cents to diluted
earnings per share.
Net
income for the three and nine months ended June 27, 2008 includes a recognized
loss of $0.1 million and gain of $0.3 million, respectively, from foreign
currency forward contracts. Net income for the three and nine months ended June
29, 2007 includes a recognized loss from foreign currency forward contracts of
$0.2 million. At June 27, 2008 and September 28, 2007, the unrealized gain,
net of tax, on Canadian dollar forward contracts was $0.2 million 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.
The table
below shows our repurchase of the Company's common stock during the three months
ended June 27, 2008:
|
|
Total
Number of Shares Purchased
|
|
|
Average Price Paid per
Share1
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs
(in thousands)2
|
|
March
29-April 25, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
April
26-May 23, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
May
24-June 27, 2008
|
|
|
136,215 |
|
|
$ |
13.17 |
|
|
|
136,215 |
|
|
$ |
10,200 |
|
|
|
|
|
136,215 |
|
|
$ |
13.17 |
|
|
|
136,215 |
|
|
$ |
10,200 |
|
1
Excludes brokerage commission of $0.04 per share.
|
|
2 On
May 28, 2008, the Company announced the approval of its common stock
repurchase program, which authorizes the Company to repurchase up to $12.0
million of its common stock from time to time. The program may be modified
or terminated by the Company’s board of directors at any
time.
|
|
None.
None.
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:
August 6, 2008
|
/s/ JOEL A. LITTMAN
|
|
Joel
A. Littman
Chief
Financial Officer, Treasurer and Secretary
(Duly
Authorized Officer and Chief Financial
Officer)
|