cpii_10q-1qfy09.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 January 2, 2009
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ________ to ________
Commission
file number: 000-51928
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.
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 ¨ Nox
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: 16,483,534 shares of Common
Stock, $0.01 par value, at February 2, 2009.
10-Q
REPORT
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;
the impact of a general slowdown in the global economy; our significant amount
of debt; changes or reductions in the United States defense budget; currency
fluctuations; goodwill impairment considerations; customer cancellations of
sales contracts; U.S. Government contracts laws and regulations; changes in
technology; the impact of unexpected costs; the impact of environmental laws and
regulations; 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.
(In
thousands, except per share data – unaudited)
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
28,045 |
|
|
$ |
28,670 |
|
Restricted
cash
|
|
|
1,323 |
|
|
|
776 |
|
Accounts
receivable, net
|
|
|
42,040 |
|
|
|
47,348 |
|
Inventories
|
|
|
65,867 |
|
|
|
65,488 |
|
Deferred
tax assets
|
|
|
13,556 |
|
|
|
11,411 |
|
Prepaid
and other current assets
|
|
|
4,171 |
|
|
|
3,823 |
|
Total
current assets
|
|
|
155,002 |
|
|
|
157,516 |
|
Property,
plant, and equipment, net
|
|
|
61,411 |
|
|
|
62,487 |
|
Deferred
debt issue costs, net
|
|
|
4,689 |
|
|
|
4,994 |
|
Intangible
assets, net
|
|
|
77,779 |
|
|
|
78,534 |
|
Goodwill
|
|
|
162,293 |
|
|
|
162,611 |
|
Other
long-term assets
|
|
|
3,856 |
|
|
|
806 |
|
Total
assets
|
|
$ |
465,030 |
|
|
$ |
466,948 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
3,000 |
|
|
$ |
1,000 |
|
Accounts
payable
|
|
|
18,033 |
|
|
|
21,109 |
|
Accrued
expenses
|
|
|
28,786 |
|
|
|
23,044 |
|
Product
warranty
|
|
|
3,990 |
|
|
|
4,159 |
|
Income
taxes payable
|
|
|
1,794 |
|
|
|
7,766 |
|
Advance
payments from customers
|
|
|
11,208 |
|
|
|
12,335 |
|
Total
current liabilities
|
|
|
66,811 |
|
|
|
69,413 |
|
Deferred
income taxes
|
|
|
26,851 |
|
|
|
27,321 |
|
Long-term
debt, less current portion
|
|
|
217,913 |
|
|
|
224,660 |
|
Other
long-term liabilities
|
|
|
4,714 |
|
|
|
1,689 |
|
Total
liabilities
|
|
|
316,289 |
|
|
|
323,083 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value, 90,000 shares authorized;
16,690 and 16,538 shares issued; 16,484
and 16,332 shares outstanding)
|
|
|
167 |
|
|
|
165 |
|
Additional
paid-in capital
|
|
|
72,916 |
|
|
|
71,818 |
|
Accumulated
other comprehensive loss
|
|
|
(5,688 |
) |
|
|
(1,809 |
) |
Retained
earnings
|
|
|
84,146 |
|
|
|
76,491 |
|
Treasury
stock, at cost (206 shares)
|
|
|
(2,800 |
) |
|
|
(2,800 |
) |
Total
stockholders’ equity
|
|
|
148,741 |
|
|
|
143,865 |
|
Total
liabilities and stockholders' equity
|
|
$ |
465,030 |
|
|
$ |
466,948 |
|
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)
|
|
Quarter Ended
|
|
|
|
January 2,
2009
|
|
|
December 28,
2007
|
|
Sales
|
|
$ |
77,146 |
|
|
$ |
85,910 |
|
Cost
of sales
|
|
|
57,230 |
|
|
|
61,774 |
|
Gross
profit
|
|
|
19,916 |
|
|
|
24,136 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,183 |
|
|
|
2,724 |
|
Selling
and marketing
|
|
|
4,989 |
|
|
|
5,172 |
|
General
and administrative
|
|
|
5,204 |
|
|
|
6,153 |
|
Amortization
of acquisition-related intangible assets
|
|
|
694 |
|
|
|
781 |
|
Net
loss on disposition of fixed assets
|
|
|
20 |
|
|
|
34 |
|
Total
operating costs and expenses
|
|
|
13,090 |
|
|
|
14,864 |
|
Operating
income
|
|
|
6,826 |
|
|
|
9,272 |
|
Interest
expense, net
|
|
|
4,455 |
|
|
|
4,812 |
|
Income
before income taxes
|
|
|
2,371 |
|
|
|
4,460 |
|
Income
tax (benefit) expense
|
|
|
(5,284 |
) |
|
|
1,950 |
|
Net
income
|
|
$ |
7,655 |
|
|
$ |
2,510 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Net
unrealized loss on cash flow hedges
|
|
|
(3,879 |
) |
|
|
(1,201 |
) |
Comprehensive
income
|
|
$ |
3,776 |
|
|
$ |
1,309 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share - Basic
|
|
$ |
0.47 |
|
|
$ |
0.15 |
|
Earnings
per share - Diluted
|
|
$ |
0.44 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
Shares
used to compute earnings per share - Basic
|
|
|
16,269 |
|
|
|
16,371 |
|
Shares
used to compute earnings per share - Diluted
|
|
|
17,388 |
|
|
|
17,832 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
(In
thousands – unaudited)
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
4,599 |
|
|
$ |
9,560 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(904 |
) |
|
|
(1,687 |
) |
Payment
of patent application fees
|
|
|
- |
|
|
|
(147 |
) |
Net
cash used in investing activities
|
|
|
(904 |
) |
|
|
(1,834 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
(4,750 |
) |
|
|
(1,000 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
423 |
|
|
|
210 |
|
Proceeds
from exercise of stock options
|
|
|
7 |
|
|
|
- |
|
Net
cash used in financing activities
|
|
|
(4,320 |
) |
|
|
(790 |
) |
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(625 |
) |
|
|
6,936 |
|
Cash
and cash equivalents at beginning of period
|
|
|
28,670 |
|
|
|
20,474 |
|
Cash
and cash equivalents at end of period
|
|
$ |
28,045 |
|
|
$ |
27,410 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,503 |
|
|
$ |
155 |
|
Cash
paid for income taxes, net of refunds
|
|
$ |
819 |
|
|
$ |
2,533 |
|
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, antenna systems 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 2009 comprises the 52-week period ending
October 2, 2009 and fiscal year 2008 comprised the 53-week period ending October
3, 2008. The first quarters of fiscal years 2009 and 2008 both include 13 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 January 2, 2009 and for the first quarter of fiscal year 2009 are
unaudited and reflect all normal recurring adjustments which are, in the opinion
of management, necessary for the fair presentation 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 October 3, 2008. The condensed
consolidated balance sheet as of October 3, 2008 has been derived from the
audited financial statements at that date. The results of operations for
the interim period ended January 2, 2009 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.
Foreign
Currency Translation
The functional currency of the
Company’s foreign subsidiaries is the U.S. dollar. Gains or losses resulting
from the translation into U.S. dollars of amounts denominated in foreign
currencies are included in the determination of net income or loss. Foreign
currency translation gains and losses are generally reported on a net basis in
the caption “general and administrative” in the consolidated statements of
operations, except for translation gains or losses on income tax-related assets
and liabilities, which are reported in “income tax expense” in the consolidated
statements of operations.
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)
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 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 greater than
one year in duration and include a significant 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.
Sales
under cost-reimbursement contracts, which are primarily for research and
development, are recorded as costs are incurred and include estimated earned
fees in the proportion that costs incurred to date bear to total estimated
costs. The fees under certain commercial and U.S. Government contracts may be
increased or decreased in accordance with cost or performance incentive
provisions that measure actual performance against established targets or other
criteria. Such incentive fee awards or penalties are included in revenue at the
time the amounts can be reasonably determined.
Revenue
is recorded net of taxes collected from customers that are remitted to
governmental authorities, with the collected taxes recorded as current
liabilities until remitted to the relevant government authority.
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)
2. Recently
Issued Accounting Standards
In
September 2006, the Financial Accounting Standards Board (“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. Effective October 4, 2008,
the Company adopted SFAS No. 157 for financial assets and liabilities
recognized at fair value on a recurring basis. The adoption of SFAS No. 157
did not have a significant impact on the Company’s consolidated financial
statements, and the resulting fair values calculated under SFAS No. 157
after adoption were not significantly different than the fair values that would
have been calculated under previous guidance. See Note 4 for further details on
the Company’s fair value measurements.
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 adopted SFAS No. 159 effective October 4, 2008. The
Company currently does not have any instruments for which it has elected the
fair value option under SFAS No. 159. Therefore, the adoption of SFAS No.
159 has not impacted the Company’s consolidated financial position, results of
operations or cash flows.
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.
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)
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), or 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, “Accounting for
Derivative Instruments and Hedging Activities,” 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 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 (“FSP”) No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets.” FSP No. 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 No. 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 No. FAS 142-3 also requires expanded
disclosure related to the determination of intangible asset useful lives. FSP
No. 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 No. 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
October 2008, FASB issued FSP No.132 (R)-1, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to require that an employer
disclose the following information about the fair value of plan assets: 1) the
level within the fair value hierarchy in which fair value measurements of plan
assets fall; 2) information about the inputs and valuation techniques used to
measure the fair value of plan assets; and 3) a reconciliation of beginning and
ending balances for fair value measurements of plan assets using significant
unobservable inputs. The final FSP will be effective for fiscal years
ending after December 15, 2009, with early application permitted. The Company
will be required to adopt FSP No.132 (R)-1 in its fiscal year 2010 commencing
October 3, 2009. At initial adoption, application of the FSP would not be
required for earlier periods that are presented for comparative purposes. The
Company is currently evaluating the potential impact of adopting this FSP on the
disclosures in 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:
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
Accounts
receivable
|
|
$ |
42,224 |
|
|
$ |
47,437 |
|
Less:
Allowance for doubtful accounts
|
|
|
(184 |
) |
|
|
(89 |
) |
Accounts
receivable, net
|
|
$ |
42,040 |
|
|
$ |
47,348 |
|
Inventories: The
following table provides details of inventories, net of reserves:
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
Raw
material and parts
|
|
$ |
40,094 |
|
|
$ |
40,187 |
|
Work
in process
|
|
|
18,284 |
|
|
|
17,622 |
|
Finished
goods
|
|
|
7,489 |
|
|
|
7,679 |
|
|
|
$ |
65,867 |
|
|
$ |
65,488 |
|
Reserve for excess, slow-moving and
obsolete inventory: The following table summarizes
the activity related to reserves for excess, slow-moving and obsolete inventory
during the first quarter of fiscal years 2009 and 2008:
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$ |
9,860 |
|
|
$ |
9,784 |
|
Inventory
provision, charged to cost of sales
|
|
|
259 |
|
|
|
200 |
|
Inventory
write-offs
|
|
|
(161 |
) |
|
|
(33 |
) |
Balance
at end of period
|
|
$ |
9,958 |
|
|
$ |
9,951 |
|
Reserve for loss
contracts: The following table summarizes the activity
related to reserves for loss contracts during the first quarter of fiscal years
2009 and 2008:
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Balance
at beginning of period
|
|
$ |
1,928 |
|
|
$ |
2,700 |
|
Provision
for loss contracts, charged to cost
of sales
|
|
|
479 |
|
|
|
746 |
|
Credit
to cost of sales upon revenue recognition
|
|
|
(685 |
) |
|
|
(1,012 |
) |
Balance
at end of period
|
|
$ |
1,722 |
|
|
$ |
2,434 |
|
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:
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Inventories
|
|
$ |
1,581 |
|
|
$ |
1,342 |
|
Accrued
expenses
|
|
|
141 |
|
|
|
1,092 |
|
|
|
$ |
1,722 |
|
|
$ |
2,434 |
|
Intangible Assets: The
following tables present the details of the Company’s total acquisition-related
intangible assets:
|
|
Weighted Average
|
|
|
January 2, 2009
|
|
|
October 3, 2008
|
|
|
|
Useful Life
(in years)
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
VED
Core Technology
|
|
50 |
|
|
$ |
30,700 |
|
|
$ |
(3,040 |
) |
|
$ |
27,660 |
|
|
$ |
30,700 |
|
|
$ |
(2,887 |
) |
|
$ |
27,813 |
|
VED
Application Technology
|
|
25 |
|
|
|
19,800 |
|
|
|
(3,911 |
) |
|
|
15,889 |
|
|
|
19,800 |
|
|
|
(3,713 |
) |
|
|
16,087 |
|
X-ray
Generator and Satcom
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
Technology
|
|
15 |
|
|
|
8,000 |
|
|
|
(2,641 |
) |
|
|
5,359 |
|
|
|
8,000 |
|
|
|
(2,508 |
) |
|
|
5,492 |
|
Antenna
and Telemetry Technology
|
|
25 |
|
|
|
5,300 |
|
|
|
(294 |
) |
|
|
5,006 |
|
|
|
5,300 |
|
|
|
(241 |
) |
|
|
5,059 |
|
Customer
backlog
|
|
1 |
|
|
|
580 |
|
|
|
(580 |
) |
|
|
- |
|
|
|
580 |
|
|
|
(580 |
) |
|
|
- |
|
Land
lease
|
|
46 |
|
|
|
11,810 |
|
|
|
(1,244 |
) |
|
|
10,566 |
|
|
|
11,810 |
|
|
|
(1,181 |
) |
|
|
10,629 |
|
Tradename
|
|
20
- Indefinite
|
|
|
|
7,600 |
|
|
|
(110 |
) |
|
|
7,490 |
|
|
|
7,600 |
|
|
|
(55 |
) |
|
|
7,545 |
|
Customer
list and programs
|
|
25 |
|
|
|
6,280 |
|
|
|
(1,017 |
) |
|
|
5,263 |
|
|
|
6,280 |
|
|
|
(950 |
) |
|
|
5,330 |
|
Noncompete
agreement
|
|
5 |
|
|
|
640 |
|
|
|
(241 |
) |
|
|
399 |
|
|
|
640 |
|
|
|
(208 |
) |
|
|
432 |
|
Patent
application fees
|
|
- |
|
|
|
147 |
|
|
|
- |
|
|
|
147 |
|
|
|
147 |
|
|
|
- |
|
|
|
147 |
|
|
|
|
|
|
$ |
90,857 |
|
|
$ |
(13,078 |
) |
|
$ |
77,779 |
|
|
$ |
90,857 |
|
|
$ |
(12,323 |
) |
|
$ |
78,534 |
|
Intangible assets, net as of
January 2, 2009 include a total of approximately $0.1 million of application
costs and associated legal costs incurred to obtain certain patents. Upon
obtaining these patents, they will be amortized on a straight-line basis and
charged to operations over their estimated useful lives, not to exceed 17
years.
The
amortization of intangible assets amounted to $0.7 million and $0.8 million for
the first quarter of fiscal years 2009 and 2008, respectively.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
The
estimated future amortization expense of intangible assets, excluding the
Company’s unamortized tradenames, is as follows:
Fiscal Year
|
|
Amount
|
|
2009
(remaining nine months)
|
|
|
2,271 |
|
2010
|
|
|
3,006 |
|
2011
|
|
|
3,006 |
|
2012
|
|
|
2,992 |
|
2013
|
|
|
2,900 |
|
Thereafter
|
|
|
60,402 |
|
|
|
$ |
74,577 |
|
Goodwill: The
following table sets forth the changes in goodwill by reportable segment during
the first quarter of fiscal year 2009:
|
|
Reportable Segments
|
|
|
|
VED
|
|
|
Satcom
|
|
|
Other
|
|
|
Total
|
|
Balance
at October 3, 2008
|
|
$ |
132,897 |
|
|
$ |
13,830 |
|
|
$ |
15,884 |
|
|
$ |
162,611 |
|
Purchase
accounting adjustment
|
|
|
(215 |
) |
|
|
(103 |
) |
|
|
- |
|
|
|
(318 |
) |
Balance
at January 2, 2009
|
|
$ |
132,682 |
|
|
$ |
13,727 |
|
|
$ |
15,884 |
|
|
$ |
162,293 |
|
The purchase accounting
adjustment represents the correction of income tax rates that were used to
establish Canadian deferred tax accounts for the Company's merger in
fiscal year 2004.
Product
Warranty: The following table summarizes the
activity related to product warranty during the first quarter of fiscal years
2009 and 2008:
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Beginning
accrued warranty
|
|
$ |
4,159 |
|
|
$ |
5,578 |
|
Actual
costs of warranty claims
|
|
|
(1,183 |
) |
|
|
(1,074 |
) |
Estimates
for product warranty, charged to cost of sales
|
|
|
1,014 |
|
|
|
872 |
|
Ending
accrued warranty
|
|
$ |
3,990 |
|
|
$ |
5,376 |
|
Accumulated Other Comprehensive
Loss: The following table provides the components
of accumulated other comprehensive loss in the condensed consolidated balance
sheets:
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
Unrealized
loss on cash flow hedges, net of tax
|
|
$ |
5,466 |
|
|
$ |
1,587 |
|
Unrealized
actuarial loss and prior service credit for pension
liability, net of tax
|
|
|
222 |
|
|
|
222 |
|
|
|
$ |
5,688 |
|
|
$ |
1,809 |
|
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)
4. Financial
Instruments
Effective
October 4, 2008, the Company adopted SFAS No. 157 for financial assets and
liabilities. SFAS No. 157 establishes a framework for measuring fair value
and expands disclosures about fair value measurements by establishing a fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and lowest priority to unobservable inputs
(Level 3 measurements). The three levels of the fair value hierarchy under
SFAS No. 157 are described below:
Level
1
|
Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
|
Level
2
|
Inputs
reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active
markets; inputs other than quoted prices that are observable for the asset
or the liability; or inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
|
Level
3
|
Unobservable
inputs reflecting the Company’s own assumptions incorporated in valuation
techniques used to determine fair value. These assumptions are required to
be consistent with market participant assumptions that are reasonably
available.
|
Under
SFAS No. 157, the fair value is the price that would be received to sell an
asset or paid to transfer a liability that assumes an orderly transaction in the
most advantageous market at the measurement date.
The
Company measures certain financial assets and liabilities at fair value on a
recurring basis, including cash equivalents, restricted cash, available-for-sale
securities and derivative instruments. As of January 2, 2009, financial assets
utilizing Level 1 inputs included cash equivalents such as money market and
overnight U.S. Government securities, and available-for-sale securities such as
mutual funds. Financial assets and liabilities utilizing Level 2 inputs included
restricted cash in the form of certificates of deposit, foreign currency
derivatives and interest rate swap derivatives. The Company does not have any
financial assets or liabilities requiring the use of Level 3
inputs.
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 sets forth financial instruments carried at fair value within
the SFAS No. 157 hierarchy as of January 2, 2009:
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
|
Significant
Other Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market and overnight U.S. Government securities1
|
|
$ |
22,837 |
|
|
$ |
22,837 |
|
|
$ |
- |
|
|
$ |
- |
|
Certificates
of deposit2
|
|
|
1,090 |
|
|
|
- |
|
|
|
1,090 |
|
|
|
|
|
Mutual
funds3
|
|
|
133 |
|
|
|
133 |
|
|
|
|
|
|
|
- |
|
Foreign
exchange forward derivatives4
|
|
|
274 |
|
|
|
- |
|
|
|
274 |
|
|
|
- |
|
Total
assets at fair value
|
|
$ |
24,334 |
|
|
$ |
22,970 |
|
|
$ |
1,364 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap derivative5
|
|
$ |
3,167 |
|
|
$ |
- |
|
|
$ |
3,167 |
|
|
$ |
- |
|
Foreign
exchange forward derivatives4
|
|
|
4,719 |
|
|
|
- |
|
|
|
4,719 |
|
|
|
- |
|
Total
liabilities at fair value
|
|
$ |
7,886 |
|
|
$ |
- |
|
|
$ |
7,886 |
|
|
$ |
- |
|
|
|
|
1
The money market and overnight U.S. Government securities are
classified as part of cash and cash equivalents in the condensed
consolidated balance sheet.
|
|
2
The certificates of deposit are classified as part of restricted
cash in the condensed consolidated balance
sheet.
|
|
3 The
mutual funds are classified as part of other long-term assets in the
condensed consolidated balance sheet.
|
|
4 The
foreign currency derivatives are classified as part of other long-term
assets and accrued expenses in the condensed consolidated balance
sheet.
|
|
5 The
interest rate swap derivatives are classified as part of accrued expenses
and other long-term liabilities in the condensed consolidated balance
sheet.
|
|
Investments
Other Than Derivatives
In
general, and where applicable, the Company uses quoted prices in active markets
for identical assets or liabilities to determine fair value. This pricing
methodology applies to the Company’s Level 1 investments such as money market,
U.S. Government securities and mutual funds.
If quoted
prices in active markets for identical assets or liabilities are not available
to determine fair value, then the Company would use quoted prices for similar
assets and liabilities or inputs other than the quoted prices that are
observable either directly or indirectly. These investments, such as
certificates of deposit, would be included in Level 2.
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)
Derivatives
The
Company executes foreign exchange forward contracts to purchase Canadian dollars
and holds a pay-fixed receive-variable interest rate swap contract, all executed
in the retail market with its relationship banks. For recognizing the most
appropriate value, the Company uses an in-exchange valuation premise that
considers the assumptions that market participants would use in pricing the
derivatives. The Company has elected to use the income approach and uses
observable (Level 2) market expectations at the measurement date and standard
valuation techniques to convert future amounts to a single present amount. Level
2 inputs for derivative valuations are midmarket quoted prices for similar
assets or liabilities in active markets and inputs other than quoted prices that
are observable for the asset or liability.
Key
inputs for currency derivatives are spot rates, forward rates, interest rates
and credit derivative rates. The spot rate for the Canadian dollar is the same
spot rate used for all balance sheet translations at the measurement date.
Forward premiums/discounts and interest rates are interpolated from commonly
quoted intervals. Once valued, each forward is identified as either an asset or
liability. Assets are further discounted using counterparty annual credit
default rates, and liabilities are valued using the Company’s credit as
reflected in the spread paid over LIBOR on the term loan under the Company’s
senior credit facilities.
Key
inputs for valuing the interest rate swap are the cash rates used for the very
short term (under 3 months), futures rates for up to three years and LIBOR swap
rates for periods beyond. These inputs are used to derive variable resets for
the swap as well as to discount future fixed and variable cash flows to present
value at measurement date. A credit spread is used to further discount each net
cash flow using counterparty credit default rates for assets and the Company’s
credit spread over LIBOR on the term loan under the Company’s senior credit
facilities for liabilities.
See
Note 6 for further information regarding the Company’s derivative
instruments.
Long-term
debt comprises the following:
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
Term
loan, expiring 2014
|
|
$ |
84,000 |
|
|
$ |
88,750 |
|
8%
Senior subordinated notes due 2012
|
|
|
125,000 |
|
|
|
125,000 |
|
Floating
rate senior notes due 2015, net
of issue discount of
$87 and $90
|
|
|
11,913 |
|
|
|
11,910 |
|
|
|
|
220,913 |
|
|
|
225,660 |
|
Less: Current
portion
|
|
|
3,000 |
|
|
|
1,000 |
|
Long-term
portion
|
|
$ |
217,913 |
|
|
$ |
224,660 |
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit
|
|
$ |
4,753 |
|
|
$ |
4,609 |
|
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)
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%.
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.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
The
Senior Credit Facilities contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of CPI International, CPI
or any of CPI’s subsidiaries to: sell assets; engage in mergers and
acquisitions; pay dividends and distributions or repurchase their capital stock;
incur additional indebtedness or issue equity interests; make investments and
loans; create liens or further negative pledges on assets; engage in certain
transactions with affiliates; enter into sale and leaseback transactions; amend
agreements or make prepayments relating to subordinated indebtedness; and amend
or waive provisions of charter documents in a manner materially adverse to the
lenders. CPI and its subsidiaries must comply with a maximum capital expenditure
limitation and a maximum total secured leverage ratio, each calculated on a
consolidated basis for CPI.
CPI made
repayments on the Term Loan of $4.75 million during the first quarter of fiscal
year 2009, $11.0 million during fiscal year 2008 and $250,000 during fiscal year
2007, leaving a principal balance of $84.0 million as of January 2,
2009.
At
January 2, 2009, the amount available for borrowing under the Revolver, after
taking into account the Company‘s outstanding letters of credit of $4.8 million,
was approximately $55.2 million.
8% Senior
Subordinated Notes due 2012 of CPI: As of January 2, 2009, CPI
had $125.0 million in aggregate principal amount of its 8% Senior
Subordinated Notes
due 2012 (the “8% Notes”). The 8% Notes have no sinking fund
requirements.
The 8%
Notes bear interest at the rate of 8.0% per year, payable on February 1 and
August 1 of each year. The 8% Notes will mature on February 1, 2012.
The 8% Notes are unsecured obligations, 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.
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
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.
See Note
12 “Subsequent Event” for a discussion of the repurchase of $3.0 million of the
8% Notes made in January 2009.
Floating Rate
Senior Notes due 2015 of CPI International: As of January 2, 2009, $12.0
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 $10.0 million and $58.0 million in fiscal
years 2008 and 2007, respectively. The FR Notes were originally issued at a 1%
discount and 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 February 1, 2009 is 8.875%
per annum. CPI International may, at its option, elect to pay interest through
the issuance of additional FR Notes for any interest payment date on or after
August 1, 2006 and on or before February 1, 2010. If CPI International
elects to pay interest through the issuance of additional FR Notes, the annual
interest rate on the FR Notes will increase by an additional 1% step-up, with
the step-up increasing by an 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.
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)
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
|
|
2008
|
|
|
102 |
% |
2009
|
|
|
101 |
% |
2010
and thereafter
|
|
|
100 |
% |
Upon a
change of control, as defined in the indenture governing the FR Notes, CPI
International may be required to purchase all or any part of the outstanding FR
Notes for a cash price equal to 101% of the principal amount, plus accrued and
unpaid interest thereon, if any, to the date of purchase.
The
indenture governing the FR Notes contains certain covenants that, among other
things, limit the ability of CPI International and its restricted subsidiaries
(as defined in the indenture governing the FR Notes) to incur additional
indebtedness, sell assets, consolidate or merge with or into other companies,
pay dividends or repurchase or redeem capital stock or subordinated
indebtedness, make certain investments, issue capital stock of their
subsidiaries, incur liens and enter into certain types of transactions with
their affiliates.
Events of
default under the indenture governing the FR Notes include: failure to make
payments on the FR Notes when due; failure to comply with covenants in the
indenture governing the FR Notes; a 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.
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)
Debt
Maturities: As of January 2, 2009, maturities on
long-term debt were as follows:
Fiscal Year
|
|
Term
Loan
|
|
|
8% Senior
Subordinated Notes
|
|
|
Floating Rate
Senior Notes
|
|
|
Total
|
|
2009
(remaining nine months)
|
|
$ |
- |
|
|
$ |
3,000 |
|
|
$ |
- |
|
|
$ |
3,000 |
|
2010
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2011
|
|
|
84,000 |
|
|
|
- |
|
|
|
- |
|
|
|
84,000 |
|
2012
|
|
|
- |
|
|
|
122,000 |
|
|
|
- |
|
|
|
122,000 |
|
2013
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Thereafter
|
|
|
- |
|
|
|
- |
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
$ |
84,000 |
|
|
$ |
125,000 |
|
|
$ |
12,000 |
|
|
$ |
221,000 |
|
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 other
than the $3.0 million amount shown in fiscal year 2009 for the 8% Notes, which
was an optional repurchase made on January 20, 2009. See Note 12.
As of
January 2, 2009, 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 2009.
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.
6. Derivative
Financial Instruments
The
Company uses forward exchange contracts to hedge the foreign currency exposure
associated with forecasted manufacturing costs in Canada. As of January 2, 2009,
the Company had entered into Canadian dollar forward contracts as follows: for
the remainder of fiscal year 2009, approximately $37 million (Canadian
dollars), or approximately 90% of estimated Canadian dollar denominated expenses
at an average rate of approximately $0.94 U.S. dollar to Canadian dollar; for
the first half of fiscal year 2010, approximately $19 million (Canadian
dollars), or approximately 70% of estimated Canadian dollar denominated
expenses, at an average rate of $0.83 U.S. dollar to Canadian dollar. At January
2, 2009, the fair value of the short-term and long-term portions of foreign
currency forward contracts was a liability of $4.7 million (accrued expenses)
and an asset of $0.3 million (other long-term assets), respectively, and the
unrealized loss, net of related tax expense, was $3.5 million. At October 3,
2008, the fair value of the foreign currency forward contracts was a short-term
asset of $0.1 million (other current assets) and a short-term liability of $0.5
million (accrued expenses) and the unrealized loss, net of related tax expense,
was $0.4 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)
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. 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 loss in
operating earnings within the next five fiscal quarters. 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 expenses in the consolidated statements of
operations. The time value was not material for the first quarter of fiscal
years 2009 and 2008. 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 quarter of fiscal years
2009 and 2008. Realized gains and losses from foreign currency forward contracts
are recognized in cost of sales and general and administrative expenses in the
condensed consolidated statements of operations. Net income for the first
quarter of fiscal years 2009 and 2008 includes a recognized gain of $0.6 million
and $3,000, respectively, from foreign currency forward contracts.
The
Company also uses derivatives to hedge the interest rate exposure associated
with its long- term debt. During fiscal year 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 such that it is less
than the balance of its Term Loan under the Senior Credit Facilities discussed
in Note 5. The notional value of the 2007 Swap was $65.0 million at January 2,
2009 and represented approximately 77% of the aggregate Term Loan balance. The
Swap agreement is effective through June 30, 2011. Under the provisions of SFAS
No. 133, 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 January 2, 2009, the fair value of the
short-term and long-term portions of the 2007 Swap was a liability of $1.9
million (accrued expenses) and $1.2 million (other long-term liabilities),
respectively. At October 3, 2008, the fair value of the short-term and long-term
portions of the 2007 Swap was a liability of $1.1 million (accrued expenses) and
$0.8 million (other long-term liabilities), respectively. At January 2, 2009 and
October 3, 2008, the unrealized loss, net of tax, was $2.0 million and $1.2
million, respectively.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
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
January 2, 2009 were as follows:
|
|
|
|
2009
(remaining nine months)
|
|
$ |
1,532 |
|
2010
|
|
|
1,756 |
|
2011
|
|
|
676 |
|
2012
|
|
|
488 |
|
2013
|
|
|
419 |
|
Thereafter
|
|
|
2,896 |
|
Total
future minimum lease payments
|
|
$ |
7,767 |
|
Real
estate taxes, insurance, and maintenance are also obligations of the Company.
Rental expense under non-cancelable operating leases amounted to $0.7 million
and $0.6 million for the first quarter of fiscal years 2009 and 2008,
respectively. Assets subject to capital leases at January 2, 2009 and October 3,
2008 were not material.
Guarantees: The Company has
restricted cash of $1.3 million and $0.8 million as of January 2, 2009 and
October 3, 2008, 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
January 2, 2009, 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:
|
|
|
|
2009
(remaining nine months)
|
|
$ |
25,970 |
|
2010
|
|
|
2,234 |
|
2011
|
|
|
158 |
|
2012
|
|
|
12 |
|
2013
|
|
|
- |
|
Total
purchase commitments
|
|
$ |
28,374 |
|
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)
Contingent Earnout Consideration:
Under the terms of the purchase agreement for the acquisition of Malibu
Research, Inc. (Malibu) in August 2007, in addition to the $20.5 million of net
cash consideration paid for the acquisition, 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 January 2, 2009, 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. 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 has been reduced from
$14.0 million to $12.3 million based on the performance in the first earnout
period.
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. Management believes that the likelihood
of loss under these agreements is remote.
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. Except as noted below, 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.
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)
During
the first quarter of fiscal year 2009, the Company received a notice from a
customer purporting to terminate a sales contract due to alleged nonperformance.
The Company plans to contest this matter vigorously. The Company has recorded
certain costs in the fourth quarter of fiscal year 2008 as a result of the
termination, however at this time, the Company cannot estimate the range of any
further possible loss or gain with respect to this matter or whether an
unfavorable resolution of this matter would have a material adverse effect on
the Company's results of operations and cash flows.
8. Stock-based
Compensation Plans
Excluding
the increase of 1.4 million shares for which stockholder approval is being
sought, an aggregate of 0.3 million shares of the Company’s common stock
remained available for future grant as of January 2, 2009. Approximately 3.5
million options were outstanding as of January 2, 2009 under the Company’s
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 January 2, 2009, and changes during
the first quarter of fiscal year 2009 under the Company’s stock option
plans:
|
|
Outstanding 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 October 3, 2008
|
|
|
3,349,294 |
|
|
$ |
6.23 |
|
|
|
5.77 |
|
|
$ |
24,363 |
|
|
|
2,556,762 |
|
|
$ |
3.83 |
|
|
|
5.16 |
|
|
$ |
23,052 |
|
Granted
|
|
|
108,000 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,526 |
) |
|
|
4.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or cancelled
|
|
|
(3,349 |
) |
|
|
15.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 2, 2009
|
|
|
3,452,419 |
|
|
$ |
6.34 |
|
|
|
5.66 |
|
|
$ |
13,569 |
|
|
|
2,675,544 |
|
|
$ |
4.34 |
|
|
|
5.06 |
|
|
$ |
12,928 |
|
During
the first quarter of fiscal year 2009, the Company granted its officers 108,000
shares of stock options that are subject to time vesting and market performance
vesting conditions. All of such shares are broken up into two tranches
(each a "Tranche"), each consisting of one-half of the nonvested shares. The
nonvested shares in each Tranche become fully vested only if both the time
vesting conditions and the performance conditions are satisfied with respect to
such nonvested shares. The time vesting conditions with respect to 25% of
the nonvested shares in each Tranche generally will be satisfied on each
anniversary of the grant date. The market performance conditions of each Tranche
are based on specified price thresholds reached by the Company's common
stock. The nonvested shares in Tranche One are subject to a $13.50 stock
price threshold, and the nonvested shares in Tranche Two are subject to a $16.00
stock price threshold. In order for the market performance conditions to be
satisfied with respect to a Tranche, the average closing share price of the
Company's common stock must be at or above the applicable stock price threshold
amount for 20 consecutive trading days. The stock options have a term of 10
years at the grant date.
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $8.44 as of January 2,
2009, which would have been received by the option holders had all option
holders exercised their options and sold the shares received upon such exercises
as of that date. As of January 2, 2009, approximately 2.4 million exercisable
options were in-the-money.
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)
During
the first quarter of fiscal year 2009, cash received from option exercises was
approximately $6,592, and the total intrinsic value of options exercised was
$7,004. There were no options exercised during the first quarter of fiscal year
2008. As of January 2, 2009, there was approximately $4.2 million of total
unrecognized compensation costs related to nonvested stock options, which is
expected to be recognized over a weighted-average vesting period of 1.8
years.
Stock Purchase
Plan: Employees purchased approximately 48,000 shares in the
first quarter of fiscal year 2009 for $0.4 million under the 2006 Employee Stock
Purchase Plan (the “2006 ESPP”). As of January 2, 2009, there were no
unrecognized compensation costs related to rights to acquire stock under the
Company’s stock purchase plan.
Restricted Stock and Restricted Stock
Units: There were 235,879 and 117,154 shares outstanding of nonvested
restricted stock and restricted stock units granted to directors and employees
as of January 2, 2009 and October 3, 2008, respectively. The restricted stock
and restricted stock units generally vest over periods of one to four years.
Upon vesting, each restricted stock unit will automatically convert into one
share of common stock of CPI International.
A summary
of the status of the Company’s nonvested restricted stock and restricted stock
unit awards as of January 2, 2009 and October 3, 2008 and of changes during the
first quarter of fiscal year 2009 is presented below:
|
|
Number of
Shares
|
|
|
Weighted-Average Grant-Date Fair Value Per
Share
|
|
Nonvested
at October 3, 2008
|
|
|
117,154 |
|
|
$ |
15.28 |
|
Granted
|
|
|
138,900 |
|
|
|
8.89 |
|
Vested
|
|
|
(20,175 |
) |
|
|
16.79 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Nonvested
at January 2, 2009
|
|
|
235,879 |
|
|
$ |
11.39 |
|
During
the first quarter of fiscal year 2009, the Company granted its officers and
certain other employees, respectively, 36,000 and 102,900 restricted stock or
restricted stock units. The restricted stock and restricted stock units granted
to the Company’s officers are subject to time vesting and market performance
vesting conditions similar to those applicable to the stock option grants
described above, except the time vesting conditions with respect to 25% of the
nonvested shares will be satisfied on the third trading day following the
Company's issuance of its press release reporting first quarter financial
results in each of 2010, 2011, 2012 and 2013, but no later than the end of
February in each year. The restricted stock and restricted stock units
granted to certain other employees of the Company are only subject to time
vesting similar to that applicable to restricted stock and restricted stock
units granted to the Company’s officers.
Aggregate
intrinsic value of the nonvested restricted stock and restricted stock unit
awards at January 2, 2009 was $2.0 million. As of January 2, 2009, there was
$2.5 million of unrecognized compensation costs related to restricted stock and
restricted stock unit awards. The unrecognized compensation cost is expected to
be recognized over a weighted average period of
2.2 years.
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 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) or 123(R),
“Share-Based Payment,” 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 ESPP based on
estimated fair values.
The fair
value of each time-based option award is estimated on the date of grant using
the Black-Scholes model. The fair value of each market performance-based (or
combination of market performance- and time-based) option, restricted stock and
restricted stock unit award is estimated on the date of grant using the Monte
Carlo simulation technique in a risk-neutral framework.
The
Black-Scholes and the Monte Carlo simulation valuation models were 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. The Company currently does not intend to pay dividends and, accordingly,
no dividends have been assumed in its Black-Scholes calculation and Monte Carlo
simulation. Since the Company’s common stock has not been publicly traded for a
sufficient time period, the expected volatility used in prior periods was based
on expected volatilities of similar companies that have a longer history of
being publicly traded. Beginning with fiscal year 2009, the expected
volatility is based on a blend of expected volatilities of similar companies and
that of the Company based on its available historical data. 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 time-based
options granted is based on the simplified method for plain vanilla options in
accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107. In December 2007,
the SEC issued SAB No. 110, an amendment of SAB No. 107. SAB No. 110 states
that the staff will continue to accept, under certain circumstances, the
continued use of the simplified method beyond December 31, 2007.
Accordingly, the Company will continue to use the simplified method until it has
enough historical experience to provide a reasonable estimate of expected
term.
Assumptions
used in the Monte Carlo simulation model to estimate the fair value of time- and
market performance-based options first granted during the first quarter of
fiscal year 2009 are presented below.
Contractual
term (in years)
|
|
|
10.00 |
|
Expected
volatility
|
|
|
51.50 |
% |
Risk-free
rate
|
|
|
3.53 |
% |
Dividend
yield
|
|
|
0 |
% |
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)
Assumptions
used in the Black-Scholes model to estimate the fair value of time-based option
grants during the first quarter of fiscal year 2008 are presented below. There
were no time-based options granted during the first quarter of fiscal year
2009.
Expected
term (in years)
|
|
|
6.25 |
|
Expected
volatility
|
|
|
41.20 |
% |
Risk-free
rate
|
|
|
3.82 |
% |
Dividend
yield
|
|
|
0 |
% |
The
weighted-average grant-date fair value of all the options granted during the
first quarter of fiscal years 2009 and 2008 was $5.61 and $7.83 per share,
respectively.
Based on
the 15% discount received by the employees, the weighted-average fair value of
shares issued under the 2006 ESPP was $1.54 and $2.61 per share during the first
quarter of fiscal years 2009 and 2008, respectively.
Assumptions
used in the Monte Carlo simulation model to estimate the fair value of time- and
market performance-based restricted stock and restricted stock units first
granted during the first quarter of fiscal year 2009 are presented
below.
Expected
volatility
|
|
|
51.50 |
% |
Risk-free
rate
|
|
|
3.54 |
% |
Dividend
yield
|
|
|
0 |
% |
The fair
value of each time-based restricted stock and restricted stock unit award is
calculated using the market price of the Company’s common stock on the date of
grant.
The
weighted-average estimated fair value of all restricted stock and restricted
stock units granted during the first quarter of fiscal years 2009 and 2008 was
$8.89 and $16.79 per share, respectively.
As
stock-based compensation expense recognized in the condensed consolidated
statement of operations for the first quarter of fiscal years 2009 and 2008 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.
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 summarizes stock-based compensation expense for the first
quarter of fiscal years 2009 and 2008, which was allocated as
follows:
|
|
Quarter Ended
|
|
|
|
January 2,
2009
|
|
|
December 28,
2007
|
|
Share-based
compensation cost recognized in the income
statement by caption:
|
|
|
|
|
|
|
Cost
of sales
|
|
$ |
117 |
|
|
$ |
80 |
|
Research
and development
|
|
|
42 |
|
|
|
31 |
|
Selling
and marketing
|
|
|
68 |
|
|
|
45 |
|
General
and administrative
|
|
|
394 |
|
|
|
268 |
|
|
|
$ |
621 |
|
|
$ |
424 |
|
|
|
|
|
|
|
|
|
|
Share-based
compensation cost capitalized in inventory
|
|
$ |
124 |
|
|
$ |
96 |
|
Share-based
compensation cost remaining in inventory at
end of period
|
|
$ |
83 |
|
|
$ |
64 |
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
418 |
|
|
$ |
337 |
|
Stock
purchase plan
|
|
|
35 |
|
|
|
37 |
|
Restricted
stock and units
|
|
|
168 |
|
|
|
50 |
|
|
|
$ |
621 |
|
|
$ |
424 |
|
The tax
benefit realized from option exercises and restricted stock vesting totaled
approximately $0.1 million during the first quarter of fiscal year 2009. There
were no options exercised or restricted stock vested and hence no tax benefit
realized during the first quarter of fiscal year 2008.
The
income tax benefit of $5.3 million for the first quarter of fiscal year 2009 and
income tax expense of $1.9 million for the first quarter of fiscal year 2008
reflect estimated federal, foreign, and state taxes. The effective tax rate for
the first quarter of fiscal year 2009 was a negative 223% and diverged from the
federal and state statutory rate primarily due to two discrete tax benefits: (1)
$5.1 million relating to adjustments to the FIN 48 position for the outstanding
audit by the Canada Revenue Agency (“CRA”), and (2) $0.6 million for an
adjustment to Canadian deferred tax accounts. The effective tax rate for the
first quarter of fiscal year 2008 was 43.7% and diverged from the federal and
state statutory rate primarily due to foreign currency translation losses on
Canadian income tax liabilities and an increase in tax expense for uncertain tax
positions. The
income tax benefit in the first quarter of fiscal year 2009 included a favorable
impact of $0.5 million from the translation of Canadian denominated tax
liabilities; the income tax expense in the first quarter of fiscal year 2008
included an unfavorable impact of $0.1 million from the translation of Canadian
denominated tax liabilities.
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)
On
December 15, 2008, the Treasury Department announced that the Fifth Protocol
("Protocol") to the U.S.-Canada Income Tax Treaty ("Treaty") entered into force.
The new treaty mandates arbitration for the resolution of double taxation
disputes that are not settled through the competent authority process. As a
result, the Company’s tax position related to the issues raised in the
outstanding tax audit by the CRA has become more favorable, and the Company
recorded income tax benefits of $5.1 million in the first quarter of fiscal year
2009. This tax benefit was recorded through a $3.0 million reduction of Canadian
tax contingency reserves,
inclusive of interest, and the recognition of a $2.8 million income
tax receivable in the U.S., partially
offset by a $0.7 million increase in deferred tax liabilities.
The
Company also recorded a $0.6 million reduction in its Canadian deferred tax
accounts to reflect lower corporate tax rates in Canada. This adjustment should
have been recorded in the first quarter of fiscal year 2008 rather than in the
first quarter of fiscal year 2009 and is deemed immaterial to the Company’s
results of operations and financial condition in the current period as well as
the prior affected periods.
The
Company is subject to U.S. federal, state and foreign income and franchise tax
in various jurisdictions. Generally, fiscal years 2004 to 2007 remain open to
examination by the various taxing jurisdictions and 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.
The
Company accounts for uncertainty in income taxes in accordance with FASB
Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109.” As a result, the Company applies
a more-likely-than-not recognition threshold for all income tax uncertainties.
FIN 48 only allows the recognition of those tax benefits that have a greater
than 50% likelihood of being sustained upon examination by the taxing
authorities. The total unrecognized tax benefit, which excludes any related
interest accruals, was $3.4 million as of January 2, 2009. Of the total
unrecognized tax benefit balance, $2.3 million of unrecognized tax benefits
would reduce the effective tax rate if recognized as of January 2, 2009.
Estimated interest and penalties related to the underpayment of income taxes are
classified as a component of tax expense in the statement of operations and
totaled to a benefit of approximately $1.3 million for the first quarter of
fiscal year 2009,
primarily as a result of the favorable impact of the new U.S.-Canada income tax
treaty on the Company’s tax contingency reserves. Accrued interest and
penalties, net of interest benefits accrued on receivables anticipated as a
result of the change in the U.S.-Canada treaty, were approximately $0.4 million
as of January 2, 2009. The Company had minimal penalties accrued in income tax
expense.
The
Company believes that it is reasonably possible that, in the next
12 months, the amount of unrecognized tax benefits related to the
resolution of federal, state and foreign matters could be reduced by
$1.4 million as audits close and statutes expire.
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)
10. Earnings
Per Share
Basic
earnings per share are computed using the weighted-average number of common
shares outstanding during the period excluding outstanding nonvested restricted
shares subject to forfeiture. Diluted earnings per share are computed using the
weighted-average number of common and dilutive potential common equivalent
shares outstanding during the period. Potential common equivalent shares consist
of common stock issuable upon exercise of stock options and nonvested restricted
shares using the treasury stock method.
The
following table is a reconciliation of the shares used to calculate basic and
diluted earnings per share (in thousands):
|
|
Quarter Ended
|
|
|
|
January 2,
2009
|
|
|
December 28,
2007
|
|
Weighted
average common shares outstanding -- Basic
|
|
|
16,269 |
|
|
|
16,371 |
|
Effect
of dilutive stock options and nonvested restricted stock awards and
units
|
|
|
1,119 |
|
|
|
1,461 |
|
Weighted
average common shares outstanding -- Diluted
|
|
|
17,388 |
|
|
|
17,832 |
|
The
calculation of diluted net income per share excludes all anti-dilutive shares.
For the first quarter of fiscal years 2009 and 2008, the number of anti-dilutive
shares, as calculated based on the weighted average closing price of the
Company’s common stock for the periods, was approximately 0.9 million and
0.5 million shares, respectively.
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 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’s 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:
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Sales
from external customers
|
|
|
|
|
|
|
VED
|
|
$ |
55,628 |
|
|
$ |
63,990 |
|
Satcom
equipment
|
|
|
17,451 |
|
|
|
17,575 |
|
Other
|
|
|
4,067 |
|
|
|
4,345 |
|
|
|
$ |
77,146 |
|
|
$ |
85,910 |
|
Intersegment
product transfers
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
5,365 |
|
|
$ |
5,861 |
|
Satcom
equipment
|
|
|
9 |
|
|
|
49 |
|
|
|
$ |
5,374 |
|
|
$ |
5,910 |
|
Capital
expenditures
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
865 |
|
|
$ |
842 |
|
Satcom
equipment
|
|
|
11 |
|
|
|
444 |
|
Other
|
|
|
28 |
|
|
|
401 |
|
|
|
$ |
904 |
|
|
$ |
1,687 |
|
EBITDA
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
10,351 |
|
|
$ |
13,640 |
|
Satcom
equipment
|
|
|
1,363 |
|
|
|
1,721 |
|
Other
|
|
|
(2,190 |
) |
|
|
(3,439 |
) |
|
|
$ |
9,524 |
|
|
$ |
11,922 |
|
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
Total
assets
|
|
|
|
|
|
|
VED
|
|
$ |
327,520 |
|
|
$ |
324,483 |
|
Satcom
equipment
|
|
|
47,580 |
|
|
|
48,219 |
|
Other
|
|
|
89,930 |
|
|
|
94,246 |
|
|
|
$ |
465,030 |
|
|
$ |
466,948 |
|
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:
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Net
income
|
|
$ |
7,655 |
|
|
$ |
2,510 |
|
Depreciation
and amortization
|
|
|
2,698 |
|
|
|
2,650 |
|
Interest
expense, net
|
|
|
4,455 |
|
|
|
4,812 |
|
Income
tax (benefit) expense
|
|
|
(5,284 |
) |
|
|
1,950 |
|
EBITDA
|
|
$ |
9,524 |
|
|
$ |
11,922 |
|
Net
property, plant and equipment by geographic area were as follows:
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
United
States
|
|
$ |
47,736 |
|
|
$ |
48,593 |
|
Canada
|
|
|
13,631 |
|
|
|
13,843 |
|
Other
|
|
|
44 |
|
|
|
51 |
|
|
|
$ |
61,411 |
|
|
$ |
62,487 |
|
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:
|
|
January
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
United
States
|
|
$ |
114,297 |
|
|
$ |
114,297 |
|
Canada
|
|
|
47,996 |
|
|
|
48,314 |
|
|
|
$ |
162,293 |
|
|
$ |
162,611 |
|
Geographic sales by customer
location were as follows for external customers:
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
United
States
|
|
$ |
49,096 |
|
|
$ |
54,523 |
|
All
foreign countires
|
|
|
28,050 |
|
|
|
31,387 |
|
Total
sales
|
|
$ |
77,146 |
|
|
$ |
85,910 |
|
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 first quarter of fiscal years 2009 and 2008. Direct sales to the U.S.
Government were $11.2 million and $14.8 million for the first quarter of fiscal
years 2009 and 2008, respectively. Accounts receivable from this customer
represented 11% and 17% of consolidated accounts receivable as of January 2,
2009 and October 3, 2008, respectively.
12. Subsequent
Event
On
January 20, 2009, the Company repurchased $3.0 million aggregate principal
amount of its $125.0 million aggregate principal amount outstanding 8% Notes at
a discount of 8.5 percent to par value. The Company paid approximately $2.9
million, including accrued interest of $0.1 million, for the repurchase and
realized a net gain of approximately $0.2 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)
13. Supplemental
Guarantors Condensed Consolidating Financial Information
(Unaudited)
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 January 2, 2009
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
136 |
|
|
$ |
15,164 |
|
|
$ |
1,998 |
|
|
$ |
10,747 |
|
|
$ |
- |
|
|
$ |
28,045 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
1,190 |
|
|
|
133 |
|
|
|
- |
|
|
|
1,323 |
|
Accounts
receivable, net
|
|
|
- |
|
|
|
15,672 |
|
|
|
12,804 |
|
|
|
13,564 |
|
|
|
- |
|
|
|
42,040 |
|
Inventories
|
|
|
- |
|
|
|
43,471 |
|
|
|
6,966 |
|
|
|
16,496 |
|
|
|
(1,066 |
) |
|
|
65,867 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
12,709 |
|
|
|
2 |
|
|
|
845 |
|
|
|
- |
|
|
|
13,556 |
|
Intercompany
receivable
|
|
|
- |
|
|
|
21,743 |
|
|
|
2,474 |
|
|
|
2,723 |
|
|
|
(26,940 |
) |
|
|
- |
|
Prepaid
and other current assets
|
|
|
18 |
|
|
|
2,937 |
|
|
|
328 |
|
|
|
888 |
|
|
|
- |
|
|
|
4,171 |
|
Total
current assets
|
|
|
154 |
|
|
|
111,696 |
|
|
|
25,762 |
|
|
|
45,396 |
|
|
|
(28,006 |
) |
|
|
155,002 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
44,790 |
|
|
|
2,954 |
|
|
|
13,667 |
|
|
|
- |
|
|
|
61,411 |
|
Deferred
debt issue costs, net
|
|
|
380 |
|
|
|
4,309 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,689 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
56,248 |
|
|
|
14,015 |
|
|
|
7,516 |
|
|
|
- |
|
|
|
77,779 |
|
Goodwill
|
|
|
- |
|
|
|
93,375 |
|
|
|
20,973 |
|
|
|
47,945 |
|
|
|
- |
|
|
|
162,293 |
|
Other
long-term assets
|
|
|
- |
|
|
|
3,428 |
|
|
|
292 |
|
|
|
136 |
|
|
|
- |
|
|
|
3,856 |
|
Intercompany
notes receivable
|
|
|
- |
|
|
|
1,035 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,035 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
187,520 |
|
|
|
105,275 |
|
|
|
- |
|
|
|
- |
|
|
|
(292,795 |
) |
|
|
- |
|
Total
assets
|
|
$ |
188,054 |
|
|
$ |
420,156 |
|
|
$ |
63,996 |
|
|
$ |
114,660 |
|
|
$ |
(321,836 |
) |
|
$ |
465,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
- |
|
|
$ |
3,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,000 |
|
Accounts
payable
|
|
|
11 |
|
|
|
9,966 |
|
|
|
2,334 |
|
|
|
5,722 |
|
|
|
- |
|
|
|
18,033 |
|
Accrued
expenses
|
|
|
449 |
|
|
|
22,260 |
|
|
|
2,380 |
|
|
|
3,697 |
|
|
|
- |
|
|
|
28,786 |
|
Product
warranty
|
|
|
- |
|
|
|
1,914 |
|
|
|
538 |
|
|
|
1,538 |
|
|
|
- |
|
|
|
3,990 |
|
Income
taxes payable
|
|
|
- |
|
|
|
82 |
|
|
|
186 |
|
|
|
1,526 |
|
|
|
- |
|
|
|
1,794 |
|
Advance
payments from customers
|
|
|
- |
|
|
|
7,111 |
|
|
|
2,661 |
|
|
|
1,436 |
|
|
|
- |
|
|
|
11,208 |
|
Intercompany
payable
|
|
|
26,940 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(26,940 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
27,400 |
|
|
|
44,333 |
|
|
|
8,099 |
|
|
|
13,919 |
|
|
|
(26,940 |
) |
|
|
66,811 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
21,789 |
|
|
|
- |
|
|
|
5,062 |
|
|
|
- |
|
|
|
26,851 |
|
Intercompany
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,035 |
|
|
|
(1,035 |
) |
|
|
- |
|
Long-term
debt, less current portion
|
|
|
11,913 |
|
|
|
206,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
217,913 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
1,592 |
|
|
|
- |
|
|
|
3,122 |
|
|
|
- |
|
|
|
4,714 |
|
Total
liabilities
|
|
|
39,313 |
|
|
|
273,714 |
|
|
|
8,099 |
|
|
|
23,138 |
|
|
|
(27,975 |
) |
|
|
316,289 |
|
Common
stock
|
|
|
167 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
167 |
|
Parent
investment
|
|
|
- |
|
|
|
50,721 |
|
|
|
43,167 |
|
|
|
58,222 |
|
|
|
(152,110 |
) |
|
|
- |
|
Additional
paid-in capital
|
|
|
72,916 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
72,916 |
|
Accumulated
other comprehensive loss
|
|
|
(5,688 |
) |
|
|
(5,688 |
) |
|
|
- |
|
|
|
(1,053 |
) |
|
|
6,741 |
|
|
|
(5,688 |
) |
Retained
earnings
|
|
|
84,146 |
|
|
|
101,409 |
|
|
|
12,730 |
|
|
|
34,353 |
|
|
|
(148,492 |
) |
|
|
84,146 |
|
Treasury
stock
|
|
|
(2,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,800 |
) |
Total
stockholders’ equity
|
|
|
148,741 |
|
|
|
146,442 |
|
|
|
55,897 |
|
|
|
91,522 |
|
|
|
(293,861 |
) |
|
|
148,741 |
|
Total
liabilities and stockholders' equity
|
|
$ |
188,054 |
|
|
$ |
420,156 |
|
|
$ |
63,996 |
|
|
$ |
114,660 |
|
|
$ |
(321,836 |
) |
|
$ |
465,030 |
|
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 October 3, 2008
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
84 |
|
|
$ |
26,272 |
|
|
$ |
493 |
|
|
$ |
1,821 |
|
|
$ |
- |
|
|
$ |
28,670 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
629 |
|
|
|
147 |
|
|
|
- |
|
|
|
776 |
|
Accounts
receivable, net
|
|
|
- |
|
|
|
22,453 |
|
|
|
12,353 |
|
|
|
12,542 |
|
|
|
- |
|
|
|
47,348 |
|
Inventories
|
|
|
- |
|
|
|
42,066 |
|
|
|
6,759 |
|
|
|
17,653 |
|
|
|
(990 |
) |
|
|
65,488 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
10,853 |
|
|
|
2 |
|
|
|
556 |
|
|
|
- |
|
|
|
11,411 |
|
Intercompany
receivable
|
|
|
- |
|
|
|
8,523 |
|
|
|
5,135 |
|
|
|
13,454 |
|
|
|
(27,112 |
) |
|
|
- |
|
Prepaid
and other current assets
|
|
|
- |
|
|
|
2,370 |
|
|
|
632 |
|
|
|
821 |
|
|
|
- |
|
|
|
3,823 |
|
Total
current assets
|
|
|
84 |
|
|
|
112,537 |
|
|
|
26,003 |
|
|
|
46,994 |
|
|
|
(28,102 |
) |
|
|
157,516 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
45,556 |
|
|
|
3,047 |
|
|
|
13,884 |
|
|
|
- |
|
|
|
62,487 |
|
Deferred
debt issue costs, net
|
|
|
392 |
|
|
|
4,602 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,994 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
56,700 |
|
|
|
14,168 |
|
|
|
7,666 |
|
|
|
- |
|
|
|
78,534 |
|
Goodwill
|
|
|
- |
|
|
|
93,375 |
|
|
|
20,973 |
|
|
|
48,263 |
|
|
|
- |
|
|
|
162,611 |
|
Other
long-term assets
|
|
|
- |
|
|
|
383 |
|
|
|
287 |
|
|
|
136 |
|
|
|
- |
|
|
|
806 |
|
Intercompany
notes receivable
|
|
|
- |
|
|
|
1,035 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,035 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
182,869 |
|
|
|
101,193 |
|
|
|
- |
|
|
|
- |
|
|
|
(284,062 |
) |
|
|
- |
|
Total
assets
|
|
$ |
183,345 |
|
|
$ |
415,381 |
|
|
$ |
64,478 |
|
|
$ |
116,943 |
|
|
$ |
(313,199 |
) |
|
$ |
466,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
- |
|
|
$ |
1,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,000 |
|
Accounts
payable
|
|
|
272 |
|
|
|
10,893 |
|
|
|
2,116 |
|
|
|
7,828 |
|
|
|
- |
|
|
|
21,109 |
|
Accrued
expenses
|
|
|
186 |
|
|
|
14,905 |
|
|
|
3,143 |
|
|
|
4,810 |
|
|
|
- |
|
|
|
23,044 |
|
Product
warranty
|
|
|
- |
|
|
|
2,002 |
|
|
|
538 |
|
|
|
1,619 |
|
|
|
- |
|
|
|
4,159 |
|
Income
taxes payable
|
|
|
- |
|
|
|
1,280 |
|
|
|
213 |
|
|
|
6,273 |
|
|
|
- |
|
|
|
7,766 |
|
Advance
payments from customers
|
|
|
- |
|
|
|
7,624 |
|
|
|
3,132 |
|
|
|
1,579 |
|
|
|
- |
|
|
|
12,335 |
|
Intercompany
payable
|
|
|
27,112 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,112 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
27,570 |
|
|
|
37,704 |
|
|
|
9,142 |
|
|
|
22,109 |
|
|
|
(27,112 |
) |
|
|
69,413 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
21,922 |
|
|
|
- |
|
|
|
5,399 |
|
|
|
- |
|
|
|
27,321 |
|
Intercompany
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,035 |
|
|
|
(1,035 |
) |
|
|
- |
|
Long-term
debt, less current portion
|
|
|
11,910 |
|
|
|
212,750 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
224,660 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
1,213 |
|
|
|
- |
|
|
|
476 |
|
|
|
- |
|
|
|
1,689 |
|
Total
liabilities
|
|
|
39,480 |
|
|
|
273,589 |
|
|
|
9,142 |
|
|
|
29,019 |
|
|
|
(28,147 |
) |
|
|
323,083 |
|
Common
stock
|
|
|
165 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
165 |
|
Parent
investment
|
|
|
- |
|
|
|
50,020 |
|
|
|
43,167 |
|
|
|
58,114 |
|
|
|
(151,301 |
) |
|
|
- |
|
Additional
paid-in capital
|
|
|
71,818 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
71,818 |
|
Accumulated
other comprehensive loss
|
|
|
(1,809 |
) |
|
|
(1,809 |
) |
|
|
- |
|
|
|
(283 |
) |
|
|
2,092 |
|
|
|
(1,809 |
) |
Retained
earnings
|
|
|
76,491 |
|
|
|
93,581 |
|
|
|
12,169 |
|
|
|
30,093 |
|
|
|
(135,843 |
) |
|
|
76,491 |
|
Treasury
stock
|
|
|
(2,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,800 |
) |
Total
stockholders’ equity
|
|
|
143,865 |
|
|
|
141,792 |
|
|
|
55,336 |
|
|
|
87,924 |
|
|
|
(285,052 |
) |
|
|
143,865 |
|
Total
liabilities and stockholders' equity
|
|
$ |
183,345 |
|
|
$ |
415,381 |
|
|
$ |
64,478 |
|
|
$ |
116,943 |
|
|
$ |
(313,199 |
) |
|
$ |
466,948 |
|
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 January 2, 2009
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
46,215 |
|
|
$ |
19,707 |
|
|
$ |
31,723 |
|
|
$ |
(20,499 |
) |
|
$ |
77,146 |
|
Cost
of sales
|
|
|
- |
|
|
|
36,267 |
|
|
|
16,613 |
|
|
|
24,773 |
|
|
|
(20,423 |
) |
|
|
57,230 |
|
Gross
profit
|
|
|
- |
|
|
|
9,948 |
|
|
|
3,094 |
|
|
|
6,950 |
|
|
|
(76 |
) |
|
|
19,916 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
684 |
|
|
|
- |
|
|
|
1,499 |
|
|
|
- |
|
|
|
2,183 |
|
Selling
and marketing
|
|
|
- |
|
|
|
1,742 |
|
|
|
1,247 |
|
|
|
2,000 |
|
|
|
- |
|
|
|
4,989 |
|
General
and administrative
|
|
|
- |
|
|
|
3,714 |
|
|
|
1,023 |
|
|
|
467 |
|
|
|
- |
|
|
|
5,204 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
390 |
|
|
|
153 |
|
|
|
151 |
|
|
|
- |
|
|
|
694 |
|
Net
loss on disposition of assets
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
20 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
6,546 |
|
|
|
2,423 |
|
|
|
4,121 |
|
|
|
- |
|
|
|
13,090 |
|
Operating
income
|
|
|
- |
|
|
|
3,402 |
|
|
|
671 |
|
|
|
2,829 |
|
|
|
(76 |
) |
|
|
6,826 |
|
Interest
expense (income), net
|
|
|
278 |
|
|
|
4,153 |
|
|
|
(5 |
) |
|
|
29 |
|
|
|
- |
|
|
|
4,455 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(278 |
) |
|
|
(751 |
) |
|
|
676 |
|
|
|
2,800 |
|
|
|
(76 |
) |
|
|
2,371 |
|
Income
tax (benefit) expense
|
|
|
(105 |
) |
|
|
(3,834 |
) |
|
|
115 |
|
|
|
(1,460 |
) |
|
|
- |
|
|
|
(5,284 |
) |
Equity
in income of subsidiaries
|
|
|
7,828 |
|
|
|
4,745 |
|
|
|
- |
|
|
|
- |
|
|
|
(12,573 |
) |
|
|
- |
|
Net
income
|
|
$ |
7,655 |
|
|
$ |
7,828 |
|
|
$ |
561 |
|
|
$ |
4,260 |
|
|
$ |
(12,649 |
) |
|
$ |
7,655 |
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
For
the Three Months Ended December 28, 2007
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
49,763 |
|
|
$ |
19,826 |
|
|
$ |
34,838 |
|
|
$ |
(18,517 |
) |
|
$ |
85,910 |
|
Cost
of sales
|
|
|
- |
|
|
|
37,432 |
|
|
|
16,585 |
|
|
|
26,227 |
|
|
|
(18,470 |
) |
|
|
61,774 |
|
Gross
profit
|
|
|
- |
|
|
|
12,331 |
|
|
|
3,241 |
|
|
|
8,611 |
|
|
|
(47 |
) |
|
|
24,136 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
892 |
|
|
|
149 |
|
|
|
1,683 |
|
|
|
- |
|
|
|
2,724 |
|
Selling
and marketing
|
|
|
- |
|
|
|
1,923 |
|
|
|
1,012 |
|
|
|
2,237 |
|
|
|
- |
|
|
|
5,172 |
|
General
and administrative
|
|
|
- |
|
|
|
3,718 |
|
|
|
1,070 |
|
|
|
1,365 |
|
|
|
- |
|
|
|
6,153 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
568 |
|
|
|
62 |
|
|
|
151 |
|
|
|
- |
|
|
|
781 |
|
Net
loss on disposition of assets
|
|
|
- |
|
|
|
22 |
|
|
|
2 |
|
|
|
10 |
|
|
|
- |
|
|
|
34 |
|
Total
operating costs and expenses
|
|
|
- |
|
|
|
7,123 |
|
|
|
2,295 |
|
|
|
5,446 |
|
|
|
- |
|
|
|
14,864 |
|
Operating
income
|
|
|
- |
|
|
|
5,208 |
|
|
|
946 |
|
|
|
3,165 |
|
|
|
(47 |
) |
|
|
9,272 |
|
Interest
expense (income), net
|
|
|
545 |
|
|
|
4,285 |
|
|
|
(20 |
) |
|
|
2 |
|
|
|
- |
|
|
|
4,812 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(545 |
) |
|
|
923 |
|
|
|
966 |
|
|
|
3,163 |
|
|
|
(47 |
) |
|
|
4,460 |
|
Income
tax (benefit) expense
|
|
|
(207 |
) |
|
|
741 |
|
|
|
254 |
|
|
|
1,162 |
|
|
|
- |
|
|
|
1,950 |
|
Equity
in income of subsidiaries
|
|
|
2,848 |
|
|
|
2,666 |
|
|
|
- |
|
|
|
- |
|
|
|
(5,514 |
) |
|
|
- |
|
Net
income
|
|
$ |
2,510 |
|
|
$ |
2,848 |
|
|
$ |
712 |
|
|
$ |
2,001 |
|
|
$ |
(5,561 |
) |
|
$ |
2,510 |
|
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 Three Months Ended January 2, 2009
|
|
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
|
|
$ |
(378 |
) |
|
$ |
2,477 |
|
|
$ |
1,505 |
|
|
$ |
995 |
|
|
$ |
- |
|
|
$ |
4,599 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(835 |
) |
|
|
- |
|
|
|
(69 |
) |
|
|
- |
|
|
|
(904 |
) |
Payment
of patent application fees
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
- |
|
|
|
(835 |
) |
|
|
- |
|
|
|
(69 |
) |
|
|
- |
|
|
|
(904 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
- |
|
|
|
(4,750 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,750 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
423 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
423 |
|
Proceeds
from exercise of stock options
|
|
|
7 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7 |
|
Intercompany
dividends |
|
|
- |
|
|
|
(8,000 |
) |
|
|
- |
|
|
|
8,000 |
|
|
|
- |
|
|
|
- |
|
Net
cash provided by (used in) financing activities
|
|
|
430 |
|
|
|
(12,750 |
) |
|
|
- |
|
|
|
8,000 |
|
|
|
- |
|
|
|
(4,320 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
52 |
|
|
|
(11,108 |
) |
|
|
1,505 |
|
|
|
8,926 |
|
|
|
- |
|
|
|
(625 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
84 |
|
|
|
26,272 |
|
|
|
493 |
|
|
|
1,821 |
|
|
|
- |
|
|
|
28,670 |
|
Cash
and cash equivalents at end of period
|
|
$ |
136 |
|
|
$ |
15,164 |
|
|
$ |
1,998 |
|
|
$ |
10,747 |
|
|
$ |
- |
|
|
$ |
28,045 |
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For
the Three Months Ended December 28, 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
|
|
$ |
(198 |
) |
|
$ |
7,103 |
|
|
$ |
421 |
|
|
$ |
2,234 |
|
|
$ |
- |
|
|
$ |
9,560 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(1,384 |
) |
|
|
(34 |
) |
|
|
(269 |
) |
|
|
- |
|
|
|
(1,687 |
) |
Payment
of patent application fees
|
|
|
- |
|
|
|
- |
|
|
|
(147 |
) |
|
|
- |
|
|
|
- |
|
|
|
(147 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(1,384 |
) |
|
|
(181 |
) |
|
|
(269 |
) |
|
|
- |
|
|
|
(1,834 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
- |
|
|
|
(1,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,000 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
210 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
210 |
|
Net
cash provided by (used in) financing activities
|
|
|
210 |
|
|
|
(1,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(790 |
) |
Net
increase in cash and cash equivalents
|
|
|
12 |
|
|
|
4,719 |
|
|
|
240 |
|
|
|
1,965 |
|
|
|
- |
|
|
|
6,936 |
|
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
|
|
$ |
1,390 |
|
|
$ |
21,237 |
|
|
$ |
1,198 |
|
|
$ |
3,585 |
|
|
$ |
- |
|
|
$ |
27,410 |
|
Our
fiscal years are the 52- or 53-week periods that end on the Friday nearest
September 30. Fiscal year 2009 comprises the 52-week period ending October 2,
2009, and fiscal year 2008 comprised the 53-week period ended October 3, 2008.
The first quarters of fiscal years 2009 and 2008 both include 13 weeks. The
following discussion should be read in conjunction with the accompanying
unaudited condensed consolidated financial statements, and the notes thereto, of
CPI International, Inc.
Overview
CPI
International, Inc., headquartered in Palo Alto, California, is the parent
company of Communications & Power Industries, a provider of microwave, radio
frequency, power and control solutions for critical defense, communications,
medical, scientific and other applications. Communications & Power
Industries develops, manufactures and distributes products used to generate,
amplify and transmit high-power/high-frequency microwave and radio frequency
signals and/or provide power and control for various applications. End-use
applications of these systems include the transmission of radar signals for
navigation and location; transmission of deception signals for electronic
countermeasures; transmission and amplification of voice, data and video signals
for broadcasting, Internet and other types of commercial and military
communications; providing power and control for medical diagnostic imaging; and
generating microwave energy for radiation therapy in the treatment of cancer and
for various industrial and scientific applications.
Unless
the context otherwise requires, “CPI International” means CPI International,
Inc., and “CPI” means Communications & Power Industries, Inc. CPI is a
direct subsidiary of CPI International. CPI International is a holding company
with no operations of its own. The terms “we,” “us,” “our” and the “Company”
refer to CPI International and its direct and indirect subsidiaries on a
consolidated basis.
Orders
We sell
our products into five end markets: radar and electronic warfare, medical,
communications, industrial and scientific.
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 first quarter of fiscal years 2009 and 2008 are
summarized as follows (dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
January
2, 2009
|
|
|
December
28, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
32.0 |
|
|
|
47
|
% |
|
$ |
33.9 |
|
|
|
38
|
% |
|
$ |
(1.9 |
) |
|
|
(6 |
)
% |
Medical
|
|
|
10.4 |
|
|
|
16 |
|
|
|
11.7 |
|
|
|
13 |
|
|
|
(1.3 |
) |
|
|
(11 |
) |
Communications
|
|
|
17.4 |
|
|
|
26 |
|
|
|
30.0 |
|
|
|
33 |
|
|
|
(12.6 |
) |
|
|
(42 |
) |
Industrial
|
|
|
6.4 |
|
|
|
10 |
|
|
|
7.6 |
|
|
|
9 |
|
|
|
(1.2 |
) |
|
|
(16 |
) |
Scientific
|
|
|
0.8 |
|
|
|
1 |
|
|
|
6.7 |
|
|
|
7 |
|
|
|
(5.9 |
) |
|
|
(88 |
) |
Total
|
|
$ |
67.0 |
|
|
|
100
|
% |
|
$ |
89.9 |
|
|
|
100
|
% |
|
$ |
(22.9 |
) |
|
|
(25 |
)
% |
In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the tactical common data link (“TCDL”) products at our
Malibu division, which we acquired in August 2007. TCDL products support
intelligence, surveillance and reconnaissance (“ISR”) applications. Previously,
orders and sales of our TCDL products were included in our radar and electronic
warfare market. We are now reporting these orders and sales in our
communications market, which we believe is the more appropriate category for
these products. We reclassified previously reported orders and sales information
to properly reflect TCDL products as an increase in the communications market
and a corresponding decrease in the radar and electronic warfare market. For the
first quarter of fiscal year 2008, the order amount reclassified was $3.7
million. The table above reflects this change.
In the
first quarter of fiscal year 2009, our defense markets, which include our radar
and electronic warfare markets, were negatively impacted by ongoing delays in
the receipt of orders. We believe that these delays are resulting in a decrease
in demand for our products to support defense programs. We expect the delays in
the receipt of defense orders to continue for the foreseeable
future.
Our
commercial markets, which include our medical, commercial communications,
industrial and scientific markets, were negatively impacted in the first quarter
of fiscal year 2009 by the weakening of the U.S. and foreign economies. Many of
the commercial programs in which we participate depend on customers upgrading
their current equipment or expanding their infrastructures. With the recent
softening of global economies, we believe that many of our customers have
delayed, reduced or cancelled their upgrade or expansion plans. We believe that
the weakening global economies are resulting in a near-term decrease in demand
for our products to support commercial programs.
Orders
for first quarter of fiscal year 2009 of $67.0 million were $22.9 million, or
approximately 25%, lower than orders of $89.9 million for the first fiscal
quarter of fiscal year 2008. Explanations for the order increase or decrease by
market for the first quarter of fiscal year 2009 compared to the first quarter
of fiscal year 2008 are as follows:
·
|
Radar and Electronic
Warfare: The majority of our products in the radar and
electronic warfare markets are for domestic and international defense and
government end uses. Orders in these markets are characterized by many
smaller orders in the $0.5 million to $3.0 million range by product or
program, and the timing of these orders may vary from year to year. On a
combined basis, orders for the radar and electronic warfare markets
decreased approximately 6% from an aggregate of $33.9 million in the first
quarter of fiscal year 2008 to an aggregate of $32.0 million in the first
quarter of fiscal year 2009. The decrease in orders for these combined
markets resulted primarily from a decrease in demand for products to
support various domestic radar programs and the timing of orders for
products to support electronic warfare programs; there were no significant
changes to any particular large defense program in comparison to the first
quarter of fiscal year 2008.
|
·
|
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”) applications, and for radiation therapy
applications for the treatment of cancer. The 11% decrease in medical
orders resulted primarily from a decrease in demand from original
equipment manufacturers for products used in x-ray imaging applications.
We believe that this decrease is due to the weakening of global
economies.
|
·
|
Communications: The
42% decrease in communications orders was primarily attributable to
decreases in orders to support commercial communications applications,
including international satellite news gathering and direct-to-home
broadcast applications; we believe that these decreases were largely due
to the weakening of global economies. Delays in the timing of telemetry
orders received by our Malibu division also contributed to the decrease in
communications orders; we expect to receive a number of the delayed
telemetry orders in fiscal year 2009. These decreases were partially
offset by an increase in orders for military communications programs,
which is a relatively new sector of the overall communications market for
us. We expect our participation in military communications programs to
continue to grow.
|
·
|
Industrial: Orders in
the industrial market are cyclical and are often tied to the state of the
economy. The $1.2 million decrease in industrial orders was primarily
attributable to decreases in orders for products used in industrial
fabrication applications and industrial heating
applications.
|
·
|
Scientific: Orders in
the scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $5.9 million decrease in
scientific orders was primarily the result of the receipt of a $5.6
million order in the first quarter of fiscal year 2008 for products to
support a new accelerator project for fusion research at an international
scientific institute. This order was not expected to, and did not, repeat
in the first quarter of fiscal year
2009.
|
Incoming
order levels can 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 January 2, 2009, we had an order
backlog of $191.3 million compared to an order backlog of $201.3 million as of
December 28, 2008. 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 that 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.
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
January
2,
2009
|
|
|
December
28,
2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
Sales
|
|
$ |
77.1 |
|
|
|
100.0
|
% |
|
$ |
85.9 |
|
|
|
100.0
|
% |
|
$ |
(8.8 |
) |
Cost
of sales
|
|
|
57.2 |
|
|
|
74.2 |
|
|
|
61.8 |
|
|
|
71.9 |
|
|
|
(4.6 |
) |
Gross
profit
|
|
|
19.9 |
|
|
|
25.8 |
|
|
|
24.1 |
|
|
|
28.1 |
|
|
|
(4.2 |
) |
Research
and development
|
|
|
2.2 |
|
|
|
2.9 |
|
|
|
2.7 |
|
|
|
3.1 |
|
|
|
(0.5 |
) |
Selling
and marketing
|
|
|
5.0 |
|
|
|
6.5 |
|
|
|
5.2 |
|
|
|
6.1 |
|
|
|
(0.2 |
) |
General
and administrative
|
|
|
5.2 |
|
|
|
6.7 |
|
|
|
6.2 |
|
|
|
7.2 |
|
|
|
(1.0 |
) |
Amortization
of acquisition-related
intangibles
|
|
|
0.7 |
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
(1.0 |
) |
Net
loss on disposition of fixed assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Operating
income
|
|
|
6.8 |
|
|
|
8.8 |
|
|
|
9.3 |
|
|
|
10.8 |
|
|
|
(2.5 |
) |
Interest
expense, net
|
|
|
4.5 |
|
|
|
5.8 |
|
|
|
4.8 |
|
|
|
5.6 |
|
|
|
(0.3 |
) |
Income
before taxes
|
|
|
2.4 |
|
|
|
3.1 |
|
|
|
4.5 |
|
|
|
5.2 |
|
|
|
(2.1 |
) |
Income
tax (benefit) expense
|
|
|
(5.3 |
) |
|
|
(6.9 |
) |
|
|
1.9 |
|
|
|
2.2 |
|
|
|
(7.2 |
) |
Net
income
|
|
$ |
7.7 |
|
|
|
10.0
|
% |
|
$ |
2.5 |
|
|
|
2.9
|
% |
|
$ |
5.2 |
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$ |
9.5 |
|
|
|
12.3
|
% |
|
$ |
11.9 |
|
|
|
13.9
|
% |
|
$ |
(2.4 |
) |
|
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 covenants that require us to maintain
certain interest expense coverage and leverage ratios that contain EBITDA
as a component, and our management team uses EBITDA to monitor compliance
with such covenants;
|
|
•
|
EBITDA
is a component of the measures used by our management team to make
day-to-day operating decisions;
|
|
•
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and therefore is a component
of the measures used by the management to facilitate internal comparisons
to competitors' results and our industry in general;
and
|
|
•
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
|
Other
companies may define EBITDA differently and, as a result, our measure of
EBITDA may not be directly comparable to EBITDA of other companies.
Although we use EBITDA as a financial measure to assess the performance of
our business, the use of EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to operate
our business. When analyzing our performance, EBITDA should be considered
in addition to, and not as a substitute for, net income, cash flows from
operating activities or other statements of operations or statements of
cash flows data prepared in accordance with
GAAP.
|
|
For a reconciliation
of Net Income to EBITDA, see Note 11 of the accompanying
unaudited condensed consolidated financial
statements.
|
Sales: Our sales by market for
the first quarter of fiscal years 2009 and 2008 are summarized as follows
(dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
January
2, 2009
|
|
|
December
28, 2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
28.0 |
|
|
|
36
|
% |
|
$ |
33.9 |
|
|
|
39
|
% |
|
$ |
(5.9 |
) |
|
|
(17 |
)
% |
Medical
|
|
|
15.8 |
|
|
|
21 |
|
|
|
15.6 |
|
|
|
18 |
|
|
|
0.2 |
|
|
|
1 |
|
Communications
|
|
|
26.2 |
|
|
|
34 |
|
|
|
28.3 |
|
|
|
33 |
|
|
|
(2.1 |
) |
|
|
(7 |
) |
Industrial
|
|
|
5.5 |
|
|
|
7 |
|
|
|
5.6 |
|
|
|
7 |
|
|
|
(0.1 |
) |
|
|
(2 |
) |
Scientific
|
|
|
1.6 |
|
|
|
2 |
|
|
|
2.5 |
|
|
|
3 |
|
|
|
(0.9 |
) |
|
|
(36 |
) |
Total
|
|
$ |
77.1 |
|
|
|
100
|
% |
|
$ |
85.9 |
|
|
|
100
|
% |
|
$ |
(8.8 |
) |
|
|
(10 |
)
% |
In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the TCDL products at our Malibu division. Previously, orders
and sales of our TCDL products were included in our radar and electronic warfare
market. We are now reporting these orders and sales in our communications
market, which we believe is the more appropriate category for these products. We
reclassified previously reported orders and sales information to properly
reflect TCDL products as an increase in the communications market and a
corresponding decrease in the radar and electronic warfare market. For the first
quarter of fiscal year 2008, the sales amount reclassified was $1.4 million. The
table above reflects this change.
Sales for
first quarter of fiscal year 2009 of $77.1 million were $8.8 million, or
approximately 10%, lower than sales of $85.9 million for the first fiscal
quarter of fiscal year 2008. Explanations for the sales increase or decrease by
market for the first quarter of fiscal year 2009 as compared to the first
quarter of fiscal year 2008 are as follows:
·
|
Radar and Electronic
Warfare: The majority of our products in the radar and
electronic warfare markets are 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 decreased approximately 17% from $33.9
million in the first quarter of fiscal year 2008 to $28.0 million in the
first quarter of fiscal year 2009, primarily due to an expected $2.1
million decrease in shipments of products to support the Aegis weapons
system and decreases in sales of several other radar and electronic
warfare programs due to the timing of order receipts for those
programs.
|
|
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
funded new ship builds for the Aegis weapons program for U.S. and
international military customers. We have now completed supplying our
products required to support these funded new ship builds, and, as a
result, we expect the near-term demand to be primarily for spare and
repair products and the near-term sales to be roughly half of the
approximately $20 million fiscal year 2008 sales level. We expect demand
for our products to increase again in several years as the new ships are
commissioned, deployed and added to the installed base, after which they
also will require spare and repair products. |
·
|
Medical: Sales of our
medical products consist of sales for medical imaging applications, such
as x-ray imaging, PET and MRI applications, and for radiation therapy
applications for the treatment of cancer. Sales of our medical products in
the first quarter of fiscal year 2009 were essentially unchanged in
comparison to the first quarter of fiscal year 2008. During the first
quarter of fiscal year 2009, decreases in sales of products to support PET
and MRI applications and decreases in sales of x-ray generators due, in
part, to the weakening of global economies, were partially offset by
increased sales of products to support radiation therapy
applications.
|
·
|
Communications: The
7% decrease in sales in the communications market was primarily
attributable to decreases in sales to support certain commercial
communications applications, including domestic and international
direct-to-home broadcast applications. These decreases were partially
offset by an increase in sales of products for military communications
programs, which is a relatively new sector of the overall communications
market for us. We expect our participation in military communications
programs to continue to grow.
|
·
|
Industrial: Sales in the
industrial market are cyclical are often tied to the state of the economy.
Sales of industrial products in the first quarter of fiscal year 2009 were
essentially unchanged in comparison to the first quarter of fiscal year
2008.
|
·
|
Scientific: Sales
in the scientific market are historically one-time projects and can
fluctuate significantly from period to period. The $0.9 million decrease
in scientific sales was primarily the result of decreased product
shipments for the Spallation Neutron Source at Oakridge National
Laboratory and certain other scientific programs due to the timing of
those programs. 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 fiscal year
2009.
|
Gross Profit. Gross profit was
$19.9 million, or 25.8% of sales, for the first quarter of fiscal year 2009 as
compared to $24.1 million, or 28.1% of sales, for the first quarter of fiscal
year 2008. Lower shipment volume was the primary reason for lower gross profit
for the first quarter of fiscal year 2009 as compared to the first quarter of
fiscal year 2008.
Research and Development.
Research and development expenses were $2.2 million, or 2.9% of sales, for the
first quarter of fiscal year 2009, a $0.5 million decrease from $2.7 million, or
3.1% of sales, for the first quarter of fiscal year 2008. The decrease in
research and development for the first quarter of fiscal year 2009 compared to
the first quarter of fiscal year 2008 was due primarily to development efforts
on the Army's Warfighter Information Network-Tactical (WIN-T) program having
been substantially completed by the second quarter of fiscal year
2008.
Total
spending on research and development, including customer-sponsored research and
development, was as follows (in millions):
|
|
Quarter Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Company
sponsored
|
|
$ |
2.2 |
|
|
$ |
2.7 |
|
Customer
sponsored, charged to cost of sales
|
|
|
3.2 |
|
|
|
3.8 |
|
|
|
$ |
5.4 |
|
|
$ |
6.5 |
|
Selling and Marketing. Selling
and marketing expenses were $5.0 million, or 6.5% of sales, for the first
quarter of fiscal year 2009, a $0.2 million decrease from the $5.2 million, or
6.1% of sales, for the first quarter of fiscal year 2008. Selling and marketing
expenses for the first quarter of fiscal year 2009 compared to the first quarter
of fiscal year 2008 include approximately $0.1 million of favorable impact from
currency translation of our foreign-based expenses.
General and Administrative.
General and administrative expenses were $5.2 million, or 6.7% of sales, for the
first quarter of fiscal year 2009, a $1.0 million decrease from the $6.2
million, or 7.2% of sales, for the first quarter of fiscal year 2008. The
decrease in general and administrative expenses in the first quarter of fiscal
year 2009 was primarily due to the favorable impact from foreign currency
translation gains of $0.5 million and lower expenses related to cost reduction
activities. The foreign currency translation impact was a gain of approximately
$0.4 million for the first quarter of fiscal year 2009, compared to a loss of
approximately $0.1 million for the first quarter of fiscal year
2008.
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 $0.7 million for the first
quarter of fiscal year 2009 and $0.8 million for the first quarter of fiscal
year 2008. The $0.1 million dollar decrease in amortization of
acquisition-related intangibles for the first quarter of fiscal year 2009
compared to the first quarter of fiscal year 2008 was primarily due to completed
amortization of customer backlog at our recently acquired Malibu division in
fiscal year 2008.
Interest Expense, net (“Interest
Expense”). Interest Expense was $4.5 million, or 5.8% of sales, for the
first quarter of fiscal year 2009, a $0.3 million decrease from the $4.8
million, or 5.6% of sales, for the first quarter of fiscal year 2008. The
reduction in interest expense for the first quarter of fiscal year 2008 was
primarily due to repayments of debt over the past year which resulted in lower
outstanding debt obligations during the first quarter of fiscal year 2009
compared to the first quarter of fiscal year 2008.
Income Tax (Benefit) Expense.
We recorded an income tax benefit of $5.3 million for the first quarter of
fiscal year 2009 and an income tax expense of $1.9 million for the first quarter
of fiscal year 2008. The first quarter of fiscal year 2009 included two
significant discrete tax benefits: (1) $5.1 million relating to an outstanding
audit by the Canada Revenue Agency (“CRA”), and (2) $0.6 million for an
adjustment to Canadian deferred tax accounts.
In
December 2008, a new tax treaty protocol between Canada and the U.S. became
effective. The new treaty requires mandatory arbitration for the resolution of
double taxation disputes not settled through the competent authority process. As
a result of this new treaty, our tax position on an outstanding audit by the CRA
has become more favorable, and we reduced our tax contingency reserve in Canada
by $3.0 million, and established an income tax receivable and recognized an
income tax benefit in the U.S for $2.8 million. The tax
benefit was partially offset by an increase in deferred tax liabilities of $0.7
million.
In
December 2007, the Canadian government enacted a tax reduction law which lowered
the general corporate income tax rates for calendar years 2008 and beyond. For
financial reporting purposes, a reduction in future income tax rates results in
a reduction of future tax benefits on deferred tax accounts and should be
reported in the same accounting period when the tax law was enacted. As a result
of the reduction in future Canadian corporate income tax rates, we reduced our
deferred tax accounts in first quarter of fiscal year 2009 and recorded a tax
benefit of $0.6 million. This adjustment should have been recorded in the first
quarter of fiscal year 2008 rather than in the first quarter of fiscal year
2009. Management has evaluated the impact of this adjustment on the financial
statements and has determined that it is an immaterial error.
Excluding these two
non-recurring tax benefits discussed above, income tax expense for the first
quarter of fiscal year 2009 was $0.4 million, which included a favorable impact
of $0.5 million from the translation of Canadian denominated tax liabilities.
Excluding both the two non-recurring tax benefits, and the favorable translation
impact, income tax expense was approximately $0.9 million, representing an
effective income tax rate of 37%.
Our
estimated effective income tax rate for the remainder of fiscal year 2009 is
expected to be approximately 36% to 37%.
Net Income. Net income was
$7.7 million, or 10.0% of sales, for the first quarter of fiscal year 2009 as
compared to $2.5 million, or 2.9% of sales, in the first quarter of fiscal year
2008. The increase in net income in the first quarter of fiscal year 2009 as
compared to the first quarter of fiscal year 2008 was primarily due to discrete
income tax benefits of $5.7 million for reduction in reserve requirements
related to the CRA audit and deferred tax benefits from the reduction in
Canadian tax rates. The foregoing was partially offset by lower gross profit due
to the reduction in sales volume.
EBITDA. EBITDA was $9.5
million, or 12.3% of sales, for the first quarter of fiscal year 2009 as
compared to $11.9 million, or 13.9% of sales, for the first quarter of fiscal
year 2008. The decrease in EBITDA in the first quarter of fiscal year 2009 as
compared to the first quarter of fiscal year 2008 was due primarily to lower
gross profit due to the reduction in sales volume, partially offset by lower
spending for administrative expenses and research and development.
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.
We believe that we have the financial
resources to meet our business requirements, including capital expenditures and
working capital requirements, for the next 12 months.
Cash
and Working Capital
The
following summarizes our cash and cash equivalents and working capital (in
millions):
|
|
Janaury
2,
|
|
|
October
3,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
and cash equivalents
|
|
$ |
28.0 |
|
|
$ |
28.7 |
|
Working
capital
|
|
$ |
88.2 |
|
|
$ |
88.1 |
|
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 $1.3 million as of January 2, 2009,
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 net decrease in cash and cash equivalents
during the first quarter of fiscal year 2008 were the repayment of $4.75 million
of the outstanding balance of our senior term loan and capital expenditures of
$0.9 million, partially offset by net cash provided by our operating activities
of $4.6 million and proceeds of $0.4 million from employee stock
purchases.
As of
January 2, 2009, we had $221.0 million in total principal amount of debt
outstanding, compared to $225.75 million as of October 3, 2008. As of
January 2, 2009, we had borrowing availability of $55.2 million under the
revolver under our senior credit facilities.
As of
January 20, 2009, after giving effect to an optional repurchase of $3.0 million
of our 8% senior subordinated notes on such date, we had $218.0 million in
total principal amount of debt outstanding.
As more
fully described below, our most significant debt covenant compliance requirement
is maintaining a secured leverage ratio of 3.75:1. Our current secured leverage
ratio is approximately 1:1. With this low secured leverage ratio, we do not
anticipate any need to restructure our debt or reenter the capital markets until
fiscal year 2011 when our Senior Credit Facilities will mature unless we
refinance our $125 million 8% Senior Subordinated Notes due 2012 prior to July
31, 2011.
Historical
Operating, Investing and Financing Activities
In
summary, our cash flows were as follows (in millions):
|
|
Quarter
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Net
cash provided by operating activities
|
|
$ |
4.6 |
|
|
$ |
9.6 |
|
Net
cash used in investing activities
|
|
|
(0.9 |
) |
|
|
(1.9 |
) |
Net
cash used in financing activities
|
|
|
(4.3 |
) |
|
|
(0.8 |
) |
Net
(decrease) increase in cash and cash equivalents
|
|
$ |
(0.6 |
) |
|
$ |
6.9 |
|
Operating
Activities
During
the first quarter of fiscal years 2009 and 2008, we funded our operating
activities through cash generated internally. Cash provided by operating
activities is net income adjusted for certain non-cash items and changes to
working capital items.
Net cash
provided by operating activities of $4.6 million in the first quarter of fiscal
year 2009 was attributable to net income of $7.7 million, depreciation,
amortization and other non-cash charges of $2.7 million, partially offset
by $5.8 million net cash used for working capital. The primary working capital
uses of cash in the first quarter of fiscal year 2009 were decreases in net
income tax payable, accounts payable and advances from customers. Net income tax
payable decreased due to a favorable adjustment to our deferred tax accounts as
a result of reduction in Canadian corporate income tax rates. Accounts payable
decreased due to lower volume related primarily to seasonality. Advances from
customers decreased due to the timing of customer payments and recoupment from
our advance payments. These uses of cash were significantly offset by a
decrease in accounts receivable resulting primarily from the decreased sales
volume during the first quarter of fiscal year 2009.
Net cash
provided by operating activities of $9.6 million in the first quarter of fiscal
year 2008 was attributable to net income of $2.5 million, depreciation,
amortization and other non-cash charges of $3.3 million, and net cash inflow
from working capital of $3.8 million. The primary working capital sources of
cash in the first quarter of fiscal year 2008 were a decrease in accounts
receivable and an increase in accrued liabilities. Accounts receivables
decreased due to improved collection of trade receivables and as a result
of decreased sales volume. The increase in accrued expenses was primarily due to
accrual of interest on loans, partially offset by a decrease in accrued payroll
due to timing. These sources of cash were significantly offset by a decrease in
advance payments from customers and an increase in inventories. Advances
from customers decreased due to the timing of customer payments and recoupment
from our advance payments. Inventories increased due to selective increases of
certain inventories to meet anticipated customer delivery
requirements.
Investing
Activities
Investing
activities for the first quarter of fiscal year 2009 consisted of $0.9 million
capital expenditures.
Investing
activities for the first quarter of fiscal year 2008 consisted of $1.7 million
capital expenditures and $0.1 million payment of patent application
fees.
Financing
Activities
Net cash
used in financing activities for the first quarter of fiscal year 2009 consisted
primarily of senior term loan repayment of $4.75 million, partially offset
by $0.4 million in proceeds from employee stock purchases.
Net cash
used in financing activities for the first quarter of fiscal year 2008 consisted
of a term loan repayment of $1.0 million, partially offset by $0.2 million
in proceeds from employee stock purchases.
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 2008,
and, therefore, no excess cash flow payment was made in the first quarter of
fiscal year 2009.
On May
28, 2008, we announced that our board of directors authorized us to implement a
program to repurchase up to $12.0 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 fiscal year 2008, we repurchased 206,243 shares at an average per share
price of $13.54, plus average brokerage commissions of $0.04 per share, for an
aggregate cost of $2.8 million. During the first quarter of fiscal year 2009, we
did not repurchase any shares of common stock under the program. Repurchased
shares have been recorded as treasury shares and will be held until our board of
directors designates that these shares be retired or used for other
purposes.
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 first quarter of fiscal year
2009 were $0.9 million. In the remainder of fiscal year 2009, ongoing
capital expenditures are expected to be approximately $3.0 to
$4.0 million.
Recently
Released Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“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. Effective October 4, 2008, we
adopted SFAS No. 157 for financial assets and liabilities recognized at
fair value on a recurring basis. The adoption of SFAS No. 157 did not have
a significant impact on our consolidated financial statements, and the resulting
fair values calculated under SFAS No. 157 after adoption were not
significantly different than the fair values that would have been calculated
under previous guidance. See Note 4 to the condensed consolidated financial
statements included in this Form 10-Q for further details on our fair value
measurements.
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 adopted SFAS No. 159 effective October 4, 2008. We currently
do not have any instruments for which it has elected the fair value option under
SFAS No. 159. Therefore, the adoption of SFAS No. 159 has not impacted our
consolidated financial position, results of operations or cash
flows.
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), or 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 (“FSP”) No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets.” FSP No. 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 No. 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 No. FAS 142-3 also requires expanded
disclosure related to the determination of intangible asset useful lives. FSP
No. FAS 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. We will be required to adopt FSP No. 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
October 2008, FASB issued FSP No.132 (R)-1, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits,” to require that an employer
disclose the following information about the fair value of plan assets: 1) the
level within the fair value hierarchy in which fair value measurements of plan
assets fall; 2) information about the inputs and valuation techniques used to
measure the fair value of plan assets; and 3) a reconciliation of beginning and
ending balances for fair value measurements of plan assets using significant
unobservable inputs. The final FSP will be effective for fiscal years
ending after December 15, 2009, with early application permitted. We will be
required to adopt FSP No.132 (R)-1 in our fiscal year 2010 commencing October 3,
2009. At initial adoption, application of the FSP would not be required for
earlier periods that are presented for comparative purposes. We are currently
evaluating the potential impact of adopting this FSP on our disclosures in our
consolidated financial statements.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles, or GAAP, in the United States of America, which
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon various factors and information available to us at the time that these
estimates, judgments and assumptions are made. These factors and information may
include, but are not limited to, history and prior experience, experience of
other enterprises in the same industry, new related events, current economic
conditions and information from third-party professionals. The estimates,
judgments and assumptions we make can affect the reported amounts
of assets and liabilities as of the date of the financial statements,
as well as the reported amounts of revenues and expenses during the periods
presented. To the extent there are material differences between these estimates,
judgments or assumptions and actual results, our financial statements will be
affected.
We
believe the following critical accounting policies are the most significant to
the presentation of our financial statements and require the most subjective and
complex judgments. These matters, and the judgments and uncertainties affecting
them, are also essential to understanding our reported and future operating
results.
Revenue
recognition
We
generally recognize revenue upon shipment of product, following receipt of
written purchase orders, when the price is fixed or determinable, title has
transferred and collectibility is reasonably assured. Revenue recognized 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.
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
January 2, 2009 and October 3, 2008, the carrying amount of goodwill and other
intangible assets, net was $240.1 million and $241.1 million, respectively.
As of January 2, 2009, 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.
Our
market capitalization has historically exceeded our net asset value, although
recently it has been particularly volatile. Our market capitalization has
dropped below our net asset value in certain days of the past few months
largely, we believe, as a result of the recent global economic downturn and
volatility in the financial markets. If our stock price continuously falls below
our net asset value per share, the decline in our market capitalization could
trigger the requirement of performing the impairment test on goodwill later in
fiscal year 2009, which could result in an impairment of our
goodwill.
At
January 2, 2009 and October 3, 2008, the carrying amount of property, plant and
equipment was $61.4 million and $62.5 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 assets to the future
net undiscounted cash flows expected to be generated by the asset or group of
assets. If such assets are considered impaired, then the impairment recognized
is measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. This process requires the use of cash flow models that
utilize estimates of future revenue and expenses. There is inherent uncertainty
in these estimates, and changes in these factors over time could result in an
impairment charge.
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 any impairment charges
related to the recoverability of our long-lived assets.
Accounting
for stock-based compensation
We
account for stock-based compensation in accordance with SFAS No. 123
(revised 2004) or 123(R), "Share-Based Payment." Under the fair value
recognition provisions of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period, which is generally the
vesting period.
The fair
value of each time-based option award is estimated on the date of grant using
the Black-Scholes model. The fair value of each market performance-based (or
combination of market performance- and time-based) option, restricted stock and
restricted stock unit award is estimated on the date of grant using the Monte
Carlo simulation technique in a risk-neutral framework. The Black-Scholes and
the Monte Carlo simulation valuation models were developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable and require the input of subjective assumptions, including the
expected stock price volatility and estimated option life. For purposes of these
valuation models, 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 or a blend of our expected
volatility based on available historical data and those of similar companies.
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. In the first quarter of fiscal
years 2009 and 2008, we recognized $0.6 million and $0.4 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.
We must
assess the likelihood that we will be able to recover our deferred tax assets.
If recovery is not more likely than not, we must increase our provision for
taxes by recording a valuation allowance against the deferred tax assets that we
estimate will not ultimately be recoverable. We believe that all of the deferred
tax assets recorded on our consolidated balance sheets will ultimately be
recovered. However, should there be a change in our ability to recover our
deferred tax assets, our tax provision would increase in the period in which we
determined that the recovery was not more likely than not.
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 FASB Interpretation (“FIN”) No. 48
and related guidance. See Note 9 to consolidated condensed financial statements
of 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 January 20, 2009, we had fixed rate senior subordinated
notes of $122.0 million due in 2012, bearing interest at 8% per year and
variable rate debt consisting of $12.0 million floating rate senior notes
due in 2015 and a $84.00 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
(British Bankers’ Association)
interest and pay 4.77% fixed rate interest. Net interest positions are
settled quarterly. We have structured the swap with decreasing notional amounts
such that it is less than the balance of the term loan. The notional value of
the swap was $65.0 million at January 2, 2009 and represented approximately
77% 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. The interest rate swap gain or loss is included in the assessment of
hedge effectiveness. At January 2, 2009, the fair value of the short-term and
long-term portions of the 2007 Swap was a liability of $1.9 million (accrued
expenses) and $1.2 million (other long-term liabilities), respectively. At
January 2, 2009, the unrealized loss, net of tax, on the swap was $2.0
million.
We performed a sensitivity analysis to
assess the potential loss in future earnings that a 10% increase in the variable
portion of 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 an increase of future interest expense
of approximately $50,000.
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 first
quarter of fiscal years 2009 and 2008.
As of
January 2, 2009, we had entered into Canadian dollar forward contracts as
follows: for the remainder of fiscal year 2009, approximately $37 million
(Canadian dollars), or approximately 90% of estimated Canadian dollar
denominated expenses at an average rate of approximately $0.94 U.S. dollar to
Canadian dollar; for the first half of fiscal year 2010, approximately $19
million (Canadian dollars), or approximately 70% of estimated Canadian dollar
denominated expenses, at an average rate of $0.83 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 cents to basic and diluted earnings per share.
Net
income for the first quarter of fiscal year 2009 includes a recognized gain of
$0.6 million from foreign currency forward contracts. At January 2, 2009, the
fair value of the short-term and long-term portions of foreign currency forward
contracts was a liability of $4.7 million (accrued expenses) and an asset of
$0.3 million (other long-term assets), respectively, and the unrealized loss,
net of tax, was $3.5 million.
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 October 3, 2008. There
have been no material changes from the risk factors
disclosed in the "Risk Factors" section of our 2008 Form 10-K.
None.
None.
None.
None.
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31.1 |
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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.
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31.2 |
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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.
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32.1 |
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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.
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32.2 |
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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.
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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:
February 11, 2009
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/s/ JOEL A. LITTMAN |
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Joel
A. Littman
Chief
Financial Officer, Treasurer and Secretary
(Duly
Authorized Officer and Chief Financial
Officer)
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