cpii_10q-1qfy10.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 1, 2010
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
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
or Other Jurisdiction of Incorporation or Organization)
|
75-3142681
(I.R.S.
Employer Identification No.)
|
811
Hansen Way, Palo Alto, California 94303
(Address
of Principal Executive Offices and Zip Code)
|
(650)
846-2900
(Registrant’s
telephone number, including area code)
|
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer
|
¨
|
Accelerated
filer
|
x
|
Non-accelerated filer
|
¨
(Do not check if a smaller reporting company)
|
Smaller
reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding for each of the registrant’s classes of Common
Stock, as of the latest practicable date: 16,633,630 shares of Common
Stock, $0.01 par value, at February 1, 2010.
10-Q
REPORT
INDEX
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4
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4
|
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4
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5
|
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6
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|
7
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33
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43
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44
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|
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45
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45
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45
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|
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45
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45
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45
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|
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45
|
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|
46
|
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.
and
Subsidiaries
(In
thousands, except per share data – unaudited)
|
|
January
1,
|
|
|
October
2,
|
|
|
|
2010
|
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
35,110 |
|
|
$ |
26,152 |
|
Restricted
cash
|
|
|
1,780 |
|
|
|
1,561 |
|
Accounts
receivable, net
|
|
|
40,159 |
|
|
|
45,145 |
|
Inventories
|
|
|
70,895 |
|
|
|
66,996 |
|
Deferred
tax assets
|
|
|
8,585 |
|
|
|
8,652 |
|
Prepaid
and other current assets
|
|
|
7,269 |
|
|
|
6,700 |
|
Total
current assets
|
|
|
163,798 |
|
|
|
155,206 |
|
Property,
plant, and equipment, net
|
|
|
56,725 |
|
|
|
57,912 |
|
Deferred
debt issue costs, net
|
|
|
3,282 |
|
|
|
3,609 |
|
Intangible
assets, net
|
|
|
74,682 |
|
|
|
75,430 |
|
Goodwill
|
|
|
162,225 |
|
|
|
162,225 |
|
Other
long-term assets
|
|
|
3,903 |
|
|
|
3,872 |
|
Total
assets
|
|
$ |
464,615 |
|
|
$ |
458,254 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
20,156 |
|
|
$ |
22,665 |
|
Accrued
expenses
|
|
|
22,084 |
|
|
|
19,015 |
|
Product
warranty
|
|
|
3,961 |
|
|
|
3,845 |
|
Income
taxes payable
|
|
|
4,383 |
|
|
|
4,305 |
|
Deferred
income taxes
|
|
|
212 |
|
|
|
- |
|
Advance
payments from customers
|
|
|
13,302 |
|
|
|
12,996 |
|
Total
current liabilities
|
|
|
64,098 |
|
|
|
62,826 |
|
Deferred
income taxes, non-current
|
|
|
24,342 |
|
|
|
24,726 |
|
Long-term
debt, less current portion
|
|
|
194,925 |
|
|
|
194,922 |
|
Other
long-term liabilities
|
|
|
2,071 |
|
|
|
2,227 |
|
Total
liabilities
|
|
|
285,436 |
|
|
|
284,701 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value, 90,000 shares authorized; 16,833 and 16,807 shares
issued; 16,627 and 16,601 shares outstanding)
|
|
|
168 |
|
|
|
168 |
|
Additional
paid-in capital
|
|
|
76,571 |
|
|
|
75,630 |
|
Accumulated
other comprehensive income
|
|
|
1,442 |
|
|
|
598 |
|
Retained
earnings
|
|
|
103,798 |
|
|
|
99,957 |
|
Treasury
stock, at cost (206 shares)
|
|
|
(2,800 |
) |
|
|
(2,800 |
) |
Total
stockholders’ equity
|
|
|
179,179 |
|
|
|
173,553 |
|
Total
liabilities and stockholders' equity
|
|
$ |
464,615 |
|
|
$ |
458,254 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
(In
thousands, except per share data – unaudited)
|
|
Quarter Ended
|
|
|
|
January 1,
2010
|
|
|
January 2,
2009
|
|
Sales
|
|
$ |
82,767 |
|
|
$ |
77,146 |
|
Cost
of sales
|
|
|
59,327 |
|
|
|
57,230 |
|
Gross
profit
|
|
|
23,440 |
|
|
|
19,916 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,556 |
|
|
|
2,183 |
|
Selling
and marketing
|
|
|
5,040 |
|
|
|
4,989 |
|
General
and administrative
|
|
|
5,525 |
|
|
|
5,224 |
|
Amortization
of acquisition-related intangible assets
|
|
|
687 |
|
|
|
694 |
|
Total
operating costs and expenses
|
|
|
13,808 |
|
|
|
13,090 |
|
Operating
income
|
|
|
9,632 |
|
|
|
6,826 |
|
Interest
expense, net
|
|
|
3,881 |
|
|
|
4,455 |
|
Income
before income taxes
|
|
|
5,751 |
|
|
|
2,371 |
|
Income
tax expense (benefit)
|
|
|
1,910 |
|
|
|
(5,284 |
) |
Net
income
|
|
$ |
3,841 |
|
|
$ |
7,655 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) on cash flow hedges and minimum pension
liability adjustment
|
|
|
844 |
|
|
|
(3,879 |
) |
Comprehensive
income
|
|
$ |
4,685 |
|
|
$ |
3,776 |
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - Basic
|
|
$ |
0.23 |
|
|
$ |
0.47 |
|
Earnings
per common share - Diluted
|
|
$ |
0.21 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
Shares
used to compute earnings per common share - Basic
|
|
|
16,452 |
|
|
|
16,269 |
|
Shares
used to compute earnings per common share - Diluted
|
|
|
17,630 |
|
|
|
17,363 |
|
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
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
9,564 |
|
|
$ |
4,599 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(811 |
) |
|
|
(904 |
) |
Net
cash used in investing activities
|
|
|
(811 |
) |
|
|
(904 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
- |
|
|
|
(4,750 |
) |
Proceeds
from issuance of common stock to employees
|
|
|
189 |
|
|
|
423 |
|
Proceeds
from exercise of stock options
|
|
|
14 |
|
|
|
7 |
|
Excess
tax benefit on stock option exercises
|
|
|
2 |
|
|
|
- |
|
Net
cash provided by (used in) financing activities
|
|
|
205 |
|
|
|
(4,320 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
8,958 |
|
|
|
(625 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
26,152 |
|
|
|
28,670 |
|
Cash
and cash equivalents at end of period
|
|
$ |
35,110 |
|
|
$ |
28,045 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,054 |
|
|
$ |
1,503 |
|
Cash
paid for income taxes, net of refunds
|
|
$ |
2,273 |
|
|
$ |
819 |
|
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 years 2010 and 2009 comprise the 52-week periods
ending October 1, 2010 and October 2, 2009, respectively. The first quarters of
both fiscal years 2010 and 2009 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 1, 2010 and for the first quarter of fiscal years 2010 and
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 2, 2009. The condensed consolidated balance sheet as
of October 2, 2009 has been derived from the audited financial statements at
that date. The results of operations and cash flows for the interim period ended
January 1, 2010 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.
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 revenue recognition;
inventory and inventory reserves; provision for 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.
Subsequent
Events
The
Company performs an evaluation of events that occur after a balance sheet date,
but before financial statements are issued or available to be issued, for
potential recognition or disclosure of such events in its financial statements.
The Company evaluated all events or transactions that occurred from January 2,
2010 through February 10, 2010, the date the Company issued these financial
statements. During this period, the Company did not have any material
recognizable or non-recognizable subsequent events.
2.
|
Recently
Issued Accounting Standards
|
In the
first quarter of fiscal year 2010, the Company adopted provisions of Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 820, “Fair Value Measurements and Disclosures,” that specified the way in
which fair value measurements should be made for non-financial assets and
non-financial liabilities that are not measured and recorded at fair value on a
recurring basis, and specified additional disclosures related to these fair
value measurements. The adoption of this new standard did not have a significant
impact on the Company’s consolidated results of operations, financial position
or cash flows.
In June
2008, the FASB issued an update to ASC 260, “Earnings Per Share,” which
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method. The update to ASC 260 requires unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) to be treated as participating securities and to be included in
the computation of earnings per share pursuant to the two-class
method. This guidance under ASC 260 is effective for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years. All prior-period earnings per share data presented shall be adjusted
retrospectively. The Company adopted the provisions of this guidance under
ASC 260 effective October 3, 2009 and has included the required disclosures in
Note 9. The adoption of this guidance did not have a material impact on the
Company’s computation of earnings per share.
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 October 2008, the FASB issued guidance codified
under ASC 715, “Compensation—Retirement Benefits,” which requires 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. At initial adoption, application of this
guidance would not be required for earlier periods that are presented for
comparative purposes. The Company adopted the provisions of this guidance under
ASC 715 effective October 3, 2009. The adoption did not have an impact on the
Company’s consolidated results of operations, financial position or cash
flows.
In April
2009, the FASB released an amendment to ASC 805, “Business Combinations,” which
requires an acquirer to recognize at fair value, at the acquisition date, an
asset acquired or a liability assumed that arises from a contingency if the
acquisition date fair value of that asset or liability can be determined during
the measurement period. If the acquisition date fair value cannot be determined
during the measurement period, an asset or liability shall be recognized at the
acquisition date if (1) information available before the end of the measurement
period indicates that it is probable that an asset existed or that a liability
had been incurred at the acquisition date, and (2) the amount of the asset or
liability can be reasonably estimated. The Company adopted the provisions of the
guidance under ASC 805 and its amendment effective October 3, 2009. The impact
of the adoption will depend on the nature of acquisitions completed in the
future.
In June
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-16, an update to
ASC 860, “Transfers and Servicing,” related to accounting for transfers of
financial assets. ASU 2009-16 was issued to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. ASU 2009-16 is effective for the first annual
reporting period that begins after November 15, 2009. The application of this
guidance will only apply and be effective should the Company transfer financial
assets on or after October 2, 2010. The adoption of ASU 2009-16 is not expected
to have a material effect on the Company’s consolidated results of operations,
financial position or cash flows.
In August
2009, the FASB issued ASU 2009-05, an update to ASC 820. This update provides
amendments to reduce potential ambiguity in financial reporting when measuring
the fair value of liabilities. Among other provisions, this update provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more of the valuation techniques described in
ASU 2009-05. The Company adopted the provisions of this guidance under ASU
2009-05 effective October 3, 2009. The adoption did not have an impact on the
Company’s consolidated results of operations, financial position or cash
flows.
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
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605):
Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging
Issues Task Force.” This update provides application guidance on whether
multiple deliverables exist, how the deliverables should be separated and how
the consideration should be allocated to one or more units of accounting. This
update eliminates the residual method of allocation for multiple-deliverable
revenue arrangements, and requires that arrangement consideration be allocated
at the inception of an arrangement to all deliverables using the relative
selling price method. The selling price used for each deliverable will be
based on vendor-specific objective evidence, if available, third-party evidence
if vendor-specific objective evidence is not available, or estimated selling
price if neither vendor-specific or third-party evidence is available.
Additionally, ASU 2009-13 expands the disclosure requirements related to a
vendor’s multiple-deliverable revenue arrangements. ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 and early adoption is
permitted. The Company is currently evaluating the potential impact that this
update may have on its consolidated results of operations, financial position or
cash flows but does not expect it to have a material effect.
In
September 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements
That Include Software Elements,” which is included in the ASC 985, “Software.”
ASU 2009-14 amends previous software revenue recognition to exclude
(a) non-software components of tangible products and (b) software
components of tangible products that are sold, licensed, or leased with tangible
products when the software components and non-software components of the
tangible product function together to deliver the tangible product’s essential
functionality. ASU 2009-14 is effective for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and
shall be applied on a prospective basis. Earlier application is permitted as of
the beginning of an entity’s fiscal year. The Company is currently evaluating
the potential impact that this update may have on its consolidated results of
operations, financial position or cash flows but does not expect it to have a
material effect.
3. Supplemental
Balance Sheet Information
Accounts
Receivable: Accounts receivable are stated net of allowances
for doubtful accounts as follows:
|
|
January
1,
|
|
|
October
2,
|
|
|
|
2010
|
|
|
2009
|
|
Accounts
receivable
|
|
$ |
40,275 |
|
|
$ |
45,240 |
|
Less:
Allowance for doubtful accounts
|
|
|
(116 |
) |
|
|
(95 |
) |
Accounts
receivable, net
|
|
$ |
40,159 |
|
|
$ |
45,145 |
|
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)
Inventories: The
following table provides details of inventories:
|
|
January
1,
|
|
|
October
2,
|
|
|
|
2010
|
|
|
2009
|
|
Raw
material and parts
|
|
$ |
41,722 |
|
|
$ |
38,205 |
|
Work
in process
|
|
|
21,525 |
|
|
|
20,542 |
|
Finished
goods
|
|
|
7,648 |
|
|
|
8,249 |
|
|
|
$ |
70,895 |
|
|
$ |
66,996 |
|
Reserve for loss
contracts: The following table summarizes the activity
related to reserves for loss contracts:
|
|
Quarter Ended
|
|
|
|
January
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Balance
at beginning of period
|
|
$ |
4,068 |
|
|
$ |
1,928 |
|
Provision
for loss contracts, charged to cost of sales
|
|
|
1,111 |
|
|
|
479 |
|
Credit
to cost of sales upon revenue recognition
|
|
|
(668 |
) |
|
|
(685 |
) |
Balance
at end of period
|
|
$ |
4,511 |
|
|
$ |
1,722 |
|
Reserve
for loss contracts are reported in the condensed consolidated balance sheet in
the following accounts:
|
|
January
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Inventories
|
|
$ |
4,391 |
|
|
$ |
1,581 |
|
Accrued
expenses
|
|
|
120 |
|
|
|
141 |
|
|
|
$ |
4,511 |
|
|
$ |
1,722 |
|
Product
Warranty: The following table summarizes the
activity related to product warranty:
|
|
Quarter Ended
|
|
|
|
January
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Beginning
accrued warranty
|
|
$ |
3,845 |
|
|
$ |
4,159 |
|
Actual
costs of warranty claims
|
|
|
(1,170 |
) |
|
|
(1,183 |
) |
Estimates
for product warranty, charged to cost of sales
|
|
|
1,286 |
|
|
|
1,014 |
|
Ending
accrued warranty
|
|
$ |
3,961 |
|
|
$ |
3,990 |
|
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)
Accumulated Other Comprehensive
Income: The following table provides the
components of accumulated other comprehensive income in the condensed
consolidated balance sheets:
|
|
January
1,
|
|
|
October
2,
|
|
|
|
2010
|
|
|
2009
|
|
Unrealized
gain on cash flow hedges, net of tax
|
|
$ |
1,678 |
|
|
$ |
828 |
|
Unrealized
actuarial loss and prior service credit for pension
liability, net of tax
|
|
|
(236 |
) |
|
|
(230 |
) |
|
|
$ |
1,442 |
|
|
$ |
598 |
|
4. Financial
Instruments
FASB ASC
825 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
three levels of the fair value hierarchy under ASC 825 are described as
follows:
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.
|
Fair
value is the price that would be received upon sale of an asset or paid upon
transfer of a liability in an orderly transaction between market participants at
the measurement date and in the principal or most advantageous market for that
asset or liability. The fair value should be calculated based on assumptions
that market participants would use in pricing the asset or liability, not on
assumptions specific to the entity. In addition, the fair value of liabilities
should include consideration of non-performance risk, including the Company’s
own credit risk.
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 non-financial assets (including goodwill, intangible assets and
long-lived assets) and liabilities are measured at fair value on a non-recurring
basis; that is, the assets and liabilities are not measured at fair value on an
ongoing basis but are subject to fair value adjustments in certain circumstances
such as when they are deemed to be other-than-temporarily impaired. The fair
values of these non-financial assets and liabilities are determined based on
valuation techniques using the best information available, and may include
quoted market prices, market comparables, and discounted cash flow projections.
An impairment charge is recorded when the cost exceeds its fair value and this
condition is determined to be other-than-temporary. During the first quarter of
fiscal year 2010, no fair value adjustments or material fair value measurements
were required for the Company’s non-financial assets or
liabilities.
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 1, 2010, 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
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.
The
following tables set forth financial instruments carried at fair value within
the ASC 825 hierarchy:
|
|
Fair
Value Measurements at January 1, 2010 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
|
|
$ |
27,998 |
|
|
$ |
27,998 |
|
|
$ |
- |
|
|
$ |
- |
|
Mutual
funds2
|
|
|
163 |
|
|
|
163 |
|
|
|
- |
|
|
|
- |
|
Foreign
exchange forward derivatives3
|
|
|
3,143 |
|
|
|
- |
|
|
|
3,143 |
|
|
|
- |
|
Total
assets at fair value
|
|
$ |
31,304 |
|
|
$ |
28,161 |
|
|
$ |
3,143 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap derivative4
|
|
$ |
1,857 |
|
|
$ |
- |
|
|
$ |
1,857 |
|
|
$ |
- |
|
Total
liabilities at fair value
|
|
$ |
1,857 |
|
|
$ |
- |
|
|
$ |
1,857 |
|
|
$ |
- |
|
1
The money market and overnight U.S. Government securities are
classified as part of cash and cash equivalents and restricted cash in the
condensed consolidated balance sheet.
|
|
2
The mutual funds are classified as part of other long-term assets
in the condensed consolidated balance sheet.
|
|
3
The foreign currency derivatives are classified as part of prepaid
and other current assets in the condensed consolidated balance
sheet.
|
|
4
The interest rate swap derivatives are classified as part of
accrued expenses and other long-term liabilities in the condensed
consolidated balance sheet.
|
|
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)
|
|
Fair
Value Measurements at October 2, 2009 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
|
|
$ |
22,464 |
|
|
$ |
22,464 |
|
|
$ |
- |
|
|
$ |
- |
|
Mutual
funds2
|
|
|
152 |
|
|
|
152 |
|
|
|
- |
|
|
|
- |
|
Foreign
exchange forward derivatives3
|
|
|
3,467 |
|
|
|
- |
|
|
|
3,467 |
|
|
|
- |
|
Total
assets at fair value
|
|
$ |
26,083 |
|
|
$ |
22,616 |
|
|
$ |
3,467 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap derivative4
|
|
$ |
2,323 |
|
|
$ |
- |
|
|
$ |
2,323 |
|
|
$ |
- |
|
Total
liabilities at fair value
|
|
$ |
2,323 |
|
|
$ |
- |
|
|
$ |
2,323 |
|
|
$ |
- |
|
1
The money market and overnight U.S. Government securities are
classified as part of cash and cash equivalents and restricted cash in the
condensed consolidated balance sheet.
|
|
2
The mutual funds are classified as part of other long-term assets
in the condensed consolidated balance sheet.
|
|
3
The foreign currency derivatives are classified as part of prepaid
and other current assets in the condensed consolidated balance
sheet.
|
|
4
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 would be included in
Level 2.
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. To determine the most
appropriate value, the Company uses an in-exchange valuation premise which
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.
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)
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 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
the measurement date. A credit spread is used to further discount each net cash
flow using, for assets, counterparty credit default rates and, for liabilities,
the Company’s credit spread over LIBOR on the term loan under the Company’s
senior credit facilities.
See Note
5 for further information regarding the Company’s derivative
instruments.
Other
Financial Instruments
The
Company’s other financial instruments include cash, restricted cash, accounts
receivable, accounts payable and long-term debt. Except for long-term debt, the
carrying value of these financial instruments approximates fair values because
of their relatively short maturity.
The fair
values of the Company’s long-term debt were estimated using quoted market prices
where available. For long-term debt not actively traded, fair values were
estimated using discounted cash flow analyses, based on the Company’s current
estimated incremental borrowing rates for similar types of borrowing
arrangements. The estimated fair value of the Company’s long-term debt as of
January 1, 2010 and October 2, 2009 was $189.1 million and $188.5 million,
respectively, compared to the carrying value of $194.9 million.
5. Derivative
Instruments and Hedging Activities
Foreign Exchange
Forward Contracts: Although the majority of the Company’s revenue and
expense activities are transacted in U.S. dollars, the Company does transact
business in foreign countries. The Company’s primary foreign currency cash flows
are in Canada and several European countries. In an effort to reduce its foreign
currency exposure to Canadian dollar denominated expenses, the Company enters
into Canadian dollar forward contracts to hedge the Canadian dollar denominated
costs for its manufacturing operation in Canada. The Company does not engage in
currency speculation.
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 Canadian dollar forward contracts in effect as of January 1, 2010 have
durations of 5 to 17 months. These contracts are designated as a cash flow hedge
and are considered highly effective, as defined by FASB ASC 815. Unrealized
gains and losses from foreign exchange forward contracts are included in
accumulated other comprehensive income in the condensed consolidated balance
sheets. At January 1, 2010, the unrealized gain, net of tax of $1.6 million, was
$2.8 million. The Company anticipates recognizing the entire unrealized gain or
loss in operating earnings within the next four 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 income.
The time value was not material for the first quarter of fiscal years 2010 and
2009. If the transaction being hedged fails to occur, or if a portion of any
derivative is ineffective, then the Company immediately recognizes the gain or
loss on the associated financial instrument in general and administrative in the
condensed consolidated statements of income. The gain recognized in general and
administrative due to hedge ineffectiveness was insignificant for the first
quarter of fiscal year 2010. No ineffective amounts were recognized due to hedge
ineffectiveness in the first quarter of fiscal year 2009.
As of
January 1, 2010, the Company had entered into Canadian dollar forward contracts
for approximately $27.2 million (Canadian dollars), or approximately 74% of
estimated Canadian dollar denominated expenses for January 2010 through
September 2010, at an average rate of approximately 0.84 U.S. dollar to Canadian
dollar.
Interest Rate
Contracts: The Company also uses derivative instruments in order to
manage interest costs and risk 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 its senior
credit facilities. The notional value of the 2007 Swap was $45.0 million at
January 1, 2010 and represented approximately 68% of the aggregate term loan
balance. The Swap agreement is effective through June 30, 2011. Under the
provisions of ASC 815, 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. At January 1, 2010, the unrealized loss,
net of tax of $0.7 million, was $1.2 million. The interest rate swap gain or
loss is included in the assessment of hedge effectiveness. Gains and losses
representing hedge ineffectiveness are immediately recognized in interest
expense, net in the consolidated statements of income.
See Note
4, Financial Instruments, for further information regarding the Company’s
derivative instruments.
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 the fair value of derivative instruments designated
as cash flow hedges at January 1, 2010:
|
Asset
Derivatives |
|
Liability
Derivatives |
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Derivatives
designated as hedging instruments under SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
Prepaid
and other current assets
|
|
$ |
- |
|
Accrued
expenses
|
|
$ |
(1,539 |
) |
Interest
rate contracts
|
Other
long-term assets
|
|
|
- |
|
Other
long-term liabilities
|
|
|
(318 |
) |
|
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
Prepaid
and other current assets
|
|
|
3,143 |
|
Accrued
expenses
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives designated as hedging instruments under SFAS No.
133 |
|
$ |
3,143 |
|
|
|
$ |
(1,857 |
) |
As of
January 1, 2010, all of the Company’s derivative instruments were classified as
hedging instruments under ASC 815.
The
following table summarizes the effect of derivative instruments on the condensed
consolidated statements of income and comprehensive income for the first quarter
of fiscal year 2010:
Derivatives
in Statement 133 Cash Flow Hedging Relationships
|
|
Amount
of
Gain
(Loss) Recognized
in
OCI on Derivative
(Effective
Portion)
|
|
Location
of
Gain
(Loss) Reclassified from Accumulated
OCI
into Income
(Effective
Portion)
|
|
Amount
of
Gain
(Loss) Reclassified from Accumulated OCI into Income
(Effective
Portion)
|
|
Location
of
Gain
(Loss) Recognized in Income on Derivative (Ineffective and Excluded
Portion)
|
|
Amount
of Gain (Loss) Recognized in Income on Derivative (Ineffective and
Excluded Portion )
|
Interest
rate contracts
|
|
$ |
(84 |
) |
Interest
expense, net
|
|
$ |
(550 |
) |
Interest
expense, net
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
|
|
752 |
|
Cost
of sales
|
|
|
(75 |
) |
General
and administrative
|
|
|
2 |
|
(a)
|
|
|
|
|
|
Research
and development
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
22 |
|
|
|
|
|
|
|
Total
|
|
$ |
668 |
|
|
|
$ |
(547 |
) |
|
|
$ |
(8 |
) |
|
|
|
(a)
The amount of gain recognized in income represents a $5
gain related to the ineffective portion of the hedging relationships,
net of $3 loss related to the amount excluded from the
assessment of hedge effectiveness.
|
As a
result of the use of derivative instruments, the Company is exposed to the risk
that counterparties to derivative contracts will fail to meet their contractual
obligations. The Company does not hold collateral or other security from its
counterparties supporting its derivative instruments. To mitigate the
counterparty credit risk, the Company has a policy of only entering into
contracts with carefully selected major financial institutions based upon their
credit ratings and other factors. The Company regularly reviews its credit
exposure balances as well as the creditworthiness of its
counterparties.
In
addition, the Company’s interest rate swap contract is subject to an
International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA
Master Agreement”). The ISDA Master Agreement allows for the aggregation of the
market exposures and termination of all transactions between the Company and its
counterparties in the event a default (as defined in the ISDA Master Agreement)
occurs in respect of either party.
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)
When the
Company’s derivatives are in a net asset position, such as the case with the
Company’s forward foreign exchange contract derivatives at January 1, 2010, the
Company is exposed to credit loss from nonperformance by the counterparty. If
the counterparty fails to perform, credit risk with such counterparty is equal
to the extent of the fair value gain in the derivative. At January 1, 2010, the
Company’s interest rate contract derivatives were in a liability position, and
the Company, therefore, was not exposed to the interest rate contract
counterparty credit risk.
6. 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 1, 2010 were as follows:
|
|
|
|
2010
(remaining nine months)
|
|
$ |
1,442 |
|
2011
|
|
|
792 |
|
2012
|
|
|
610 |
|
2013
|
|
|
451 |
|
2014
|
|
|
325 |
|
Thereafter
|
|
|
2,602 |
|
|
|
$ |
6,222 |
|
Real
estate taxes, insurance, and maintenance are also obligations of the Company.
Rental expense under non-cancelable operating leases amounted to $0.7 million
for the first quarter of fiscal years 2010 and 2009. Assets subject to capital
leases at January 1, 2010 and October 2, 2009 were not material.
Guarantees: The Company has
restricted cash of $1.8 million and $1.6 million as of January 1, 2010 and
October 2, 2009, 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.
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)
Purchase commitments: As of
January 1, 2010, 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:
|
|
|
|
2010
(remaining nine months)
|
|
$ |
29,766 |
|
2011
|
|
|
5,314 |
|
2012
|
|
|
213 |
|
2013
|
|
|
- |
|
2014
|
|
|
- |
|
|
|
$ |
35,293 |
|
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 could also be
required to pay a potential earnout to the former stockholders of Malibu of up
to $7.7 million, which is primarily contingent upon the achievement of certain
financial objectives over the three years following the acquisition (“Financial
Earnout”). In addition, a discretionary earnout of up to $1.0 million contingent
upon achievement of certain succession planning goals by June 30, 2010 may
apply. As of January 1, 2010, 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 and second earnout periods, therefore, the
maximum potential Financial Earnout that could be earned over the 3 years
following the acquisition has been reduced from the original potential total of
$14.0 million to $7.7 million based on the performance in the first and second
earnout periods. Based on its current financial forecasts for Malibu, the
Company expects that no earnout will ultimately be payable for the third earnout
period.
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.
During
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 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 consolidated results of operations and
cash flows.
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. Stock-based
Compensation Plans
Stock Options: The following
table summarizes the status of the Company’s stock option awards as of January
1, 2010 and October 2, 2009 and of changes during the first quarter of fiscal
year 2010 under the Company’s stock option plans:
|
|
Oustanding Options
|
|
|
Exercisable Options
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Remaining Contractual Term
(Years)
|
|
|
Aggregate Intrinsic Value
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Remaining Contractual Term
(Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance
at October 2, 2009
|
|
|
3,382,763 |
|
|
$ |
6.38 |
|
|
|
4.95 |
|
|
$ |
20,362 |
|
|
|
2,845,996 |
|
|
$ |
4.73 |
|
|
|
4.43 |
|
|
$ |
20,227 |
|
Granted
|
|
|
108,000 |
|
|
|
9.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,073 |
) |
|
|
4.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or cancelled
|
|
|
(9,250 |
) |
|
|
16.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2010
|
|
|
3,478,440 |
|
|
$ |
6.46 |
|
|
|
4.86 |
|
|
$ |
25,930 |
|
|
|
2,954,106 |
|
|
$ |
5.13 |
|
|
|
4.30 |
|
|
$ |
25,194 |
|
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $13.24 as of January 1,
2010, 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 1, 2010, approximately 2.5 million exercisable
options were in-the-money.
During
the first quarter of fiscal year 2010, cash received from option exercises was
approximately $13,500, and the total intrinsic value of options exercised was
$21,697. 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. As of January 1, 2010, there was approximately $3.0
million of total unrecognized compensation costs related to nonvested stock
options, which is expected to be recognized over a weighted-average vesting
period of 1.5 years.
Stock Purchase
Plan: Employees purchased approximately 17,000 shares in the
first quarter of fiscal year 2010 for $0.2 million and 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 1, 2010, 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 337,523 and 218,298 shares outstanding of nonvested
restricted stock and restricted stock units granted to directors and employees
as of January 1, 2010 and October 2, 2009, 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.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
A summary
of the status of the Company’s nonvested restricted stock and restricted stock
unit awards as of January 1, 2010 and October 2, 2009 and of changes during the
first quarter of fiscal year 2010 is presented below:
|
|
Number of Shares
|
|
|
Weighted-Average Grant-Date Fair Value Per
Share
|
|
Nonvested
at October 2, 2009
|
|
|
218,298 |
|
|
$ |
11.27 |
|
Granted
|
|
|
140,800 |
|
|
$ |
9.66 |
|
Vested
|
|
|
(19,525 |
) |
|
$ |
16.79 |
|
Forfeited
|
|
|
(2,050 |
) |
|
$ |
10.76 |
|
Nonvested
at January 1, 2010
|
|
|
337,523 |
|
|
$ |
10.28 |
|
During
the first quarter of fiscal year 2010, the Company granted 104,800 restricted
stock units with time vesting criteria to certain of its non-executive employees
and 36,000 restricted stock units with performance vesting criteria to its
executive officers.
Aggregate
intrinsic value of the nonvested restricted stock and restricted stock unit
awards at January 1, 2010 and October 2, 2009 was $4.5 million and
$2.5 million, respectively. As of January 1, 2010, there was $2.9 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 2.1 years.
The
Company settles stock option exercises, restricted stock awards and restricted
stock units with newly issued common shares.
Valuation
and Expense Information
The fair
value of the Company’s time-based option awards 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 awards is estimated on the date of
grant using the Monte Carlo simulation technique in a risk-neutral
framework.
Stock Options. Assumptions
used in the Black-Scholes model to estimate the fair value of time-based option
grants during the first quarter of fiscal year 2010 are presented
below.
Expected
term (in years)
|
|
|
7.79 |
|
Expected
volatility
|
|
|
60.50 |
% |
Risk-free
rate
|
|
|
3.00 |
% |
Dividend
yield
|
|
|
0 |
% |
There
were no time-based options granted during the first quarter of fiscal year
2009.
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)
There
were no time- and market performance-based options granted during the first
quarter of fiscal year 2010. Assumptions used in the Monte Carlo simulation
model to estimate the fair value of time- and market performance-based options
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 |
% |
The
weighted-average grant-date fair value of all the options granted during the
first quarter of fiscal years 2010 and 2009 was $6.25 and $5.61 per share,
respectively.
Stock Purchase Plan. Based on
the 15% discount received by the employees, the weighted-average fair value of
shares issued under the 2006 ESPP was $1.99 and $1.54 per share during the first
quarter of fiscal years 2010 and 2009, respectively.
Restricted Stock and Restricted
Stock Units. The fair value of each
time-based restricted stock and restricted stock unit award and each of
performance-based restricted stock unit award is calculated using the market
price of the Company’s common stock on the date of grant. The fair value of each
performance-based restricted stock unit award assumes that the relevant
performance criteria will be met and the target payout level will be achieved.
Compensation cost is adjusted for subsequent changes in the outcome of
performance-related conditions until the award vests.
There
were no time- and market performance-based restricted stock and restricted stock
units granted during the first quarter of fiscal year 2010. 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 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
weighted-average estimated fair value of all restricted stock and restricted
stock units granted during the first quarter of fiscal years 2010 and 2009 was
$9.66 and $8.89 per share, respectively.
As
stock-based compensation expense recognized in the condensed consolidated
statements of income and comprehensive income for the first quarter of fiscal
years 2010 and 2009 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. FASB ASC 718, “Compensation—Stock
Compensation,” 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 2010 and 2009, which was allocated as
follows:
|
|
Quarter Ended
|
|
|
|
January 1,
2010
|
|
|
January 2,
2009
|
|
Share-based
compensation cost recognized in the income
statement by caption:
|
|
|
|
|
Cost
of sales
|
|
$ |
133 |
|
|
$ |
117 |
|
Research
and development
|
|
|
49 |
|
|
|
42 |
|
Selling
and marketing
|
|
|
73 |
|
|
|
68 |
|
General
and administrative
|
|
|
475 |
|
|
|
394 |
|
|
|
$ |
730 |
|
|
$ |
621 |
|
|
|
|
|
|
|
|
|
|
Share-based
compensation cost capitalized in inventory
|
|
$ |
141 |
|
|
$ |
124 |
|
Share-based
compensation cost remaining in inventory at end of
period
|
|
$ |
94 |
|
|
$ |
83 |
|
|
|
|
|
|
|
|
|
|
Share-based
compensation expense by type of award:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
$ |
456 |
|
|
$ |
418 |
|
Restricted
stock and units
|
|
|
241 |
|
|
|
168 |
|
Stock
purchase plan
|
|
|
33 |
|
|
|
35 |
|
|
|
$ |
730 |
|
|
$ |
621 |
|
The tax
benefit realized from option exercises and restricted stock vesting totaled
approximately $0.1 million during the first quarter of fiscal years 2010 and
2009.
The
income tax expense of $1.9 million for the first quarter of fiscal year 2010 and
income tax benefit of $5.3 million for the first quarter of fiscal year 2009
reflect estimated federal, foreign and state taxes. The effective tax rate for
the first quarter of fiscal year 2010 was 33.2%. 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 recording two significant
discrete tax benefits: (1) $5.1 million relating to adjustments to the Company’s
position with regard to an outstanding audit by the Canada Revenue Agency
(“CRA”), and (2) $0.6 million for adjustments to Canadian deferred tax accounts
that should have been recorded in the first quarter of fiscal year
2008.
The
Company files U.S. federal income tax returns, as well as income tax returns in,
California and other U.S. states, Canada and other foreign jurisdictions.
Generally, fiscal years 2005 to 2008 remain open to examination by the various
taxing jurisdictions. The Company has not been audited for U.S. federal income
tax matters. The Company has income tax audits in progress in Canada and in
several international jurisdictions in which it operates. The years under
examination by the Canadian taxing authorities are fiscal years 2001 and
2002.
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 total
unrecognized tax benefit, which excludes any related interest accruals, was $3.4
million as of January 1, 2010. Of the total unrecognized tax benefit balance,
$2.5 million of unrecognized tax benefits would reduce the effective tax rate if
recognized as of January 1, 2010. Estimated interest and penalties related to
the underpayment of income taxes are classified as a component of tax expense in
the condensed consolidated statement of income and comprehensive income and
totaled approximately $0.1 million for the first quarter of fiscal year 2010.
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 $0.6 million as of January 1, 2010. 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 $2.7 million as audits close, statutes
expire and tax payments are made. Any prospective adjustments to the Company’s
unrecognized tax benefits will be recorded as an increase or decrease to income
tax expense and cause a corresponding change to the Company’s effective tax
rate. Accordingly, the Company’s effective tax rate could fluctuate materially
from period to period.
Earnings
per share is computed using the two-class method, which is an earnings
allocation method for computing earnings per share that treats a participating
security as having rights to earnings that would otherwise have been available
to common stockholders. Certain of the Company’s stock-based compensation awards
pay nonforfeitable dividends to the participants during the vesting period and,
as such, are deemed participating securities. Basic earnings per share are
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing net income available to common stockholders by
the weighted average number of common shares outstanding that are increased for
additional shares that would be outstanding if potentially dilutive
non-participating securities were converted to common shares, pursuant to the
treasury stock method.
CPI
INTERNATIONAL, INC.
and
Subsidiaries
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(All
tabular dollar amounts in thousands except share and per share
amounts)
Earnings
per share for the respective periods were calculated as follows (amounts and
shares in thousands, except per share data):
|
|
Quarter Ended
|
|
|
|
January 1,
2010
|
|
|
January 2,
20091
|
|
Basic
Earnings per Share
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,841 |
|
|
$ |
7,655 |
|
Income
allocated to participating securities
|
|
|
(57 |
) |
|
|
(72 |
) |
Net
income available to common shareholders
|
|
$ |
3,784 |
|
|
$ |
7,583 |
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
16,452 |
|
|
|
16,269 |
|
Net
income per common share - Basic
|
|
$ |
0.23 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,841 |
|
|
$ |
7,655 |
|
Income
allocated to participating securities
|
|
|
(57 |
) |
|
|
(72 |
) |
Net
income available to common shareholders
|
|
$ |
3,784 |
|
|
$ |
7,583 |
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
16,452 |
|
|
|
16,269 |
|
Effect
of dilutive stock options
|
|
|
1,178 |
|
|
|
1,094 |
|
Diluted
weighted averages common shares outstanding
|
|
|
17,630 |
|
|
|
17,363 |
|
Net
income per common share - Diluted
|
|
$ |
0.21 |
|
|
$ |
0.44 |
|
|
|
|
1
Restated in accordance with ASC 260.
|
|
|
|
|
|
|
|
|
The
calculation of diluted net income per share excludes all anti-dilutive shares
from stock options. For the first quarter of fiscal years 2010 and 2009, the
number of anti-dilutive stock options, as calculated based on the weighted
average closing price of the Company’s common stock for the periods, was
approximately 0.9 million and 0.8 million shares,
respectively.
10. Segments,
Geographic and Customer Information
The
Company’s reportable segments are VED and satcom equipment. The VED segment
develops, manufactures and distributes high-power/high-frequency microwave and
radio frequency signal components. The satcom equipment segment manufactures and
supplies high-power amplifiers and networks for satellite communication uplink
and industrial applications. Segment information reported below is consistent
with the manner in which it is reviewed and evaluated by the Company’s chief
operating decision maker (“CODM”), its chief executive officer, and is based on
the nature of the Company’s operations and products offered to
customers.
Amounts
not reported as VED or satcom equipment are reported as Other. In accordance
with quantitative and qualitative guidelines established by FASB ASC 280,
“Segment Reporting.” 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, unmanned aerial vehicles (“UAVs”) 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
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Sales
from external customers
|
|
|
|
|
|
|
VED
|
|
$ |
59,077 |
|
|
$ |
55,628 |
|
Satcom
equipment
|
|
|
20,127 |
|
|
|
17,451 |
|
Other
|
|
|
3,563 |
|
|
|
4,067 |
|
|
|
$ |
82,767 |
|
|
$ |
77,146 |
|
Intersegment
product transfers
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
6,113 |
|
|
$ |
5,365 |
|
Satcom
equipment
|
|
|
- |
|
|
|
9 |
|
|
|
$ |
6,113 |
|
|
$ |
5,374 |
|
EBITDA
|
|
|
|
|
|
|
|
|
VED
|
|
$ |
12,719 |
|
|
$ |
10,351 |
|
Satcom
equipment
|
|
|
2,728 |
|
|
|
1,363 |
|
Other
|
|
|
(3,080 |
) |
|
|
(2,190 |
) |
|
|
$ |
12,367 |
|
|
$ |
9,524 |
|
EBITDA is
the measure used by the CODM to evaluate segment profit or loss. EBITDA
represents earnings before net interest expense, provision for income taxes and
depreciation and amortization. The Company believes that EBITDA is a more
meaningful representation of segment operating performance for leveraged
businesses like its own and therefore uses this metric as its internal measure
of profitability. For the reasons listed below, the Company believes EBITDA
provides investors better understanding of 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
Company’s Senior Credit Facilities contain a covenant that requires the
Company to maintain a senior secured leverage ratio that contains EBITDA
as a component, and the Company’s management team uses EBITDA to monitor
compliance with this covenant;
|
|
•
|
EBITDA
is a component of the measures used by the Company’s management team to
make day-to-day operating
decisions;
|
|
•
|
EBITDA
facilitates comparisons between the Company’s operating results and those
of competitors with different capital structures and, therefore, is a
component of the measures used by the Company’s management to facilitate
internal comparisons to competitors’ results and the Company’s industry in
general; and
|
|
•
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by the Company of certain targets that contain EBITDA as a
component.
|
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)
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 or superior to, operating income,
net income, cash flows from operating activities or other statements of income
or statements of cash flows data prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). Operating income by the Company’s
reportable segments was as follows:
|
|
Quarter Ended
|
|
|
|
January
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Operating
income
|
|
|
|
|
|
|
VED
|
|
$ |
11,232 |
|
|
$ |
8,923 |
|
Satcom
equipment
|
|
|
2,549 |
|
|
|
1,172 |
|
Other
|
|
|
(4,149 |
) |
|
|
(3,269 |
) |
|
|
$ |
9,632 |
|
|
$ |
6,826 |
|
The
following table reconciles net income to EBITDA:
|
|
Quarter Ended
|
|
|
|
January
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Net
income
|
|
$ |
3,841 |
|
|
$ |
7,655 |
|
Depreciation
and amortization
|
|
|
2,735 |
|
|
|
2,698 |
|
Interest
expense, net
|
|
|
3,881 |
|
|
|
4,455 |
|
Income
tax expense (benefit)
|
|
|
1,910 |
|
|
|
(5,284 |
) |
EBITDA
|
|
$ |
12,367 |
|
|
$ |
9,524 |
|
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)
11. Supplemental
Guarantors Condensed Consolidating Financial Information
(Unaudited)
Issued on
January 23, 2004, CPI’s 8% Senior Subordinated Notes due 2012 (“8% Notes”), the
current balance of which is $117.0 million, 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 1, 2010
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
82 |
|
|
$ |
18,413 |
|
|
$ |
845 |
|
|
$ |
15,770 |
|
|
$ |
- |
|
|
$ |
35,110 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
1,687 |
|
|
|
93 |
|
|
|
- |
|
|
|
1,780 |
|
Accounts
receivable, net
|
|
|
- |
|
|
|
15,164 |
|
|
|
10,576 |
|
|
|
14,419 |
|
|
|
- |
|
|
|
40,159 |
|
Inventories
|
|
|
- |
|
|
|
43,548 |
|
|
|
8,083 |
|
|
|
19,866 |
|
|
|
(602 |
) |
|
|
70,895 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
8,566 |
|
|
|
2 |
|
|
|
17 |
|
|
|
- |
|
|
|
8,585 |
|
Intercompany
receivable
|
|
|
- |
|
|
|
18,156 |
|
|
|
8,027 |
|
|
|
- |
|
|
|
(26,183 |
) |
|
|
- |
|
Prepaid
and other current assets
|
|
|
25 |
|
|
|
5,664 |
|
|
|
494 |
|
|
|
1,086 |
|
|
|
- |
|
|
|
7,269 |
|
Total
current assets
|
|
|
107 |
|
|
|
109,511 |
|
|
|
29,714 |
|
|
|
51,251 |
|
|
|
(26,785 |
) |
|
|
163,798 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
41,083 |
|
|
|
2,997 |
|
|
|
12,645 |
|
|
|
- |
|
|
|
56,725 |
|
Deferred
debt issue costs, net
|
|
|
330 |
|
|
|
2,952 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,282 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
54,439 |
|
|
|
13,331 |
|
|
|
6,912 |
|
|
|
- |
|
|
|
74,682 |
|
Goodwill
|
|
|
- |
|
|
|
93,307 |
|
|
|
20,973 |
|
|
|
47,945 |
|
|
|
- |
|
|
|
162,225 |
|
Other
long-term assets
|
|
|
- |
|
|
|
3,676 |
|
|
|
227 |
|
|
|
- |
|
|
|
- |
|
|
|
3,903 |
|
Intercompany
notes receivable
|
|
|
- |
|
|
|
1,035 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,035 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
217,182 |
|
|
|
111,142 |
|
|
|
- |
|
|
|
- |
|
|
|
(328,324 |
) |
|
|
- |
|
Total
assets
|
|
$ |
217,619 |
|
|
$ |
417,145 |
|
|
$ |
67,242 |
|
|
$ |
118,753 |
|
|
$ |
(356,144 |
) |
|
$ |
464,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
- |
|
|
$ |
9,254 |
|
|
$ |
1,726 |
|
|
$ |
9,176 |
|
|
$ |
- |
|
|
$ |
20,156 |
|
Accrued
expenses
|
|
|
336 |
|
|
|
16,675 |
|
|
|
1,714 |
|
|
|
3,359 |
|
|
|
- |
|
|
|
22,084 |
|
Product
warranty
|
|
|
- |
|
|
|
1,952 |
|
|
|
524 |
|
|
|
1,485 |
|
|
|
- |
|
|
|
3,961 |
|
Income
taxes payable
|
|
|
- |
|
|
|
1,398 |
|
|
|
177 |
|
|
|
2,808 |
|
|
|
- |
|
|
|
4,383 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
212 |
|
|
|
- |
|
|
|
212 |
|
Advance
payments from customers
|
|
|
- |
|
|
|
6,869 |
|
|
|
4,891 |
|
|
|
1,542 |
|
|
|
- |
|
|
|
13,302 |
|
Intercompany
payable
|
|
|
26,179 |
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
(26,183 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
26,515 |
|
|
|
36,148 |
|
|
|
9,032 |
|
|
|
18,586 |
|
|
|
(26,183 |
) |
|
|
64,098 |
|
Deferred
income taxes, non-current
|
|
|
- |
|
|
|
20,331 |
|
|
|
- |
|
|
|
4,011 |
|
|
|
- |
|
|
|
24,342 |
|
Intercompany
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,035 |
|
|
|
(1,035 |
) |
|
|
- |
|
Long-term
debt, less current portion
|
|
|
11,925 |
|
|
|
183,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
194,925 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
1,561 |
|
|
|
36 |
|
|
|
474 |
|
|
|
- |
|
|
|
2,071 |
|
Total
liabilities
|
|
|
38,440 |
|
|
|
241,040 |
|
|
|
9,068 |
|
|
|
24,106 |
|
|
|
(27,218 |
) |
|
|
285,436 |
|
Common
stock
|
|
|
168 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
168 |
|
Parent
investment
|
|
|
- |
|
|
|
53,028 |
|
|
|
43,167 |
|
|
|
58,759 |
|
|
|
(154,954 |
) |
|
|
- |
|
Additional
paid-in capital
|
|
|
76,571 |
|
|
|
- |
|
|
|
- |
|
|
|
(8,211 |
) |
|
|
8,211 |
|
|
|
76,571 |
|
Accumulated
other comprehensive loss
|
|
|
1,442 |
|
|
|
1,442 |
|
|
|
- |
|
|
|
590 |
|
|
|
(2,032 |
) |
|
|
1,442 |
|
Retained
earnings
|
|
|
103,798 |
|
|
|
121,635 |
|
|
|
15,007 |
|
|
|
43,509 |
|
|
|
(180,151 |
) |
|
|
103,798 |
|
Treasury
stock, at cost
|
|
|
(2,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,800 |
) |
Total
stockholders’ equity
|
|
|
179,179 |
|
|
|
176,105 |
|
|
|
58,174 |
|
|
|
94,647 |
|
|
|
(328,926 |
) |
|
|
179,179 |
|
Total
liabilities and stockholders' equity
|
|
$ |
217,619 |
|
|
$ |
417,145 |
|
|
$ |
67,242 |
|
|
$ |
118,753 |
|
|
$ |
(356,144 |
) |
|
$ |
464,615 |
|
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 2, 2009
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
10 |
|
|
$ |
15,055 |
|
|
$ |
759 |
|
|
$ |
10,328 |
|
|
$ |
- |
|
|
$ |
26,152 |
|
Restricted
cash
|
|
|
- |
|
|
|
- |
|
|
|
1,467 |
|
|
|
94 |
|
|
|
- |
|
|
|
1,561 |
|
Accounts
receivable, net
|
|
|
- |
|
|
|
18,456 |
|
|
|
12,581 |
|
|
|
14,108 |
|
|
|
- |
|
|
|
45,145 |
|
Inventories
|
|
|
- |
|
|
|
41,877 |
|
|
|
7,622 |
|
|
|
18,117 |
|
|
|
(620 |
) |
|
|
66,996 |
|
Deferred
tax assets
|
|
|
- |
|
|
|
8,494 |
|
|
|
2 |
|
|
|
156 |
|
|
|
- |
|
|
|
8,652 |
|
Intercompany
receivable
|
|
|
- |
|
|
|
9,033 |
|
|
|
6,751 |
|
|
|
10,534 |
|
|
|
(26,318 |
) |
|
|
- |
|
Prepaid
and other current assets
|
|
|
- |
|
|
|
5,396 |
|
|
|
475 |
|
|
|
829 |
|
|
|
- |
|
|
|
6,700 |
|
Total
current assets
|
|
|
10 |
|
|
|
98,311 |
|
|
|
29,657 |
|
|
|
54,166 |
|
|
|
(26,938 |
) |
|
|
155,206 |
|
Property,
plant and equipment, net
|
|
|
- |
|
|
|
42,048 |
|
|
|
3,001 |
|
|
|
12,863 |
|
|
|
- |
|
|
|
57,912 |
|
Deferred
debt issue costs, net
|
|
|
344 |
|
|
|
3,265 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,609 |
|
Intangible
assets, net
|
|
|
- |
|
|
|
54,891 |
|
|
|
13,477 |
|
|
|
7,062 |
|
|
|
- |
|
|
|
75,430 |
|
Goodwill
|
|
|
- |
|
|
|
93,307 |
|
|
|
20,973 |
|
|
|
47,945 |
|
|
|
- |
|
|
|
162,225 |
|
Other
long-term assets
|
|
|
- |
|
|
|
3,645 |
|
|
|
227 |
|
|
|
- |
|
|
|
- |
|
|
|
3,872 |
|
Intercompany
notes receivable
|
|
|
- |
|
|
|
1,035 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,035 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
211,575 |
|
|
|
114,416 |
|
|
|
- |
|
|
|
- |
|
|
|
(325,991 |
) |
|
|
- |
|
Total
assets
|
|
$ |
211,929 |
|
|
$ |
410,918 |
|
|
$ |
67,335 |
|
|
$ |
122,036 |
|
|
$ |
(353,964 |
) |
|
$ |
458,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
(1 |
) |
|
$ |
11,100 |
|
|
$ |
2,730 |
|
|
$ |
8,836 |
|
|
$ |
- |
|
|
$ |
22,665 |
|
Accrued
expenses
|
|
|
137 |
|
|
|
13,293 |
|
|
|
1,634 |
|
|
|
3,951 |
|
|
|
- |
|
|
|
19,015 |
|
Product
warranty
|
|
|
- |
|
|
|
1,893 |
|
|
|
452 |
|
|
|
1,500 |
|
|
|
- |
|
|
|
3,845 |
|
Income
taxes payable
|
|
|
- |
|
|
|
1,683 |
|
|
|
151 |
|
|
|
2,471 |
|
|
|
- |
|
|
|
4,305 |
|
Advance
payments from customers
|
|
|
- |
|
|
|
7,389 |
|
|
|
4,368 |
|
|
|
1,239 |
|
|
|
- |
|
|
|
12,996 |
|
Intercompany
payable
|
|
|
26,318 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(26,318 |
) |
|
|
- |
|
Total
current liabilities
|
|
|
26,454 |
|
|
|
35,358 |
|
|
|
9,335 |
|
|
|
17,997 |
|
|
|
(26,318 |
) |
|
|
62,826 |
|
Deferred
income taxes, non-current
|
|
|
- |
|
|
|
20,342 |
|
|
|
- |
|
|
|
4,384 |
|
|
|
- |
|
|
|
24,726 |
|
Intercompany
notes payable
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,035 |
|
|
|
(1,035 |
) |
|
|
- |
|
Long-term
debt, less current portion
|
|
|
11,922 |
|
|
|
183,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
194,922 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
1,720 |
|
|
|
36 |
|
|
|
471 |
|
|
|
- |
|
|
|
2,227 |
|
Total
liabilities
|
|
|
38,376 |
|
|
|
240,420 |
|
|
|
9,371 |
|
|
|
23,887 |
|
|
|
(27,353 |
) |
|
|
284,701 |
|
Common
stock
|
|
|
168 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
168 |
|
Parent
investment
|
|
|
- |
|
|
|
52,241 |
|
|
|
43,167 |
|
|
|
58,615 |
|
|
|
(154,023 |
) |
|
|
- |
|
Additional
paid-in capital
|
|
|
75,630 |
|
|
|
- |
|
|
|
- |
|
|
|
(211 |
) |
|
|
211 |
|
|
|
75,630 |
|
Accumulated
other comprehensive gain (loss)
|
|
|
598 |
|
|
|
598 |
|
|
|
- |
|
|
|
(223 |
) |
|
|
(375 |
) |
|
|
598 |
|
Retained
earnings
|
|
|
99,957 |
|
|
|
117,659 |
|
|
|
14,797 |
|
|
|
39,968 |
|
|
|
(172,424 |
) |
|
|
99,957 |
|
Treasury
stock
|
|
|
(2,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,800 |
) |
Total
stockholders’ equity
|
|
|
173,553 |
|
|
|
170,498 |
|
|
|
57,964 |
|
|
|
98,149 |
|
|
|
(326,611 |
) |
|
|
173,553 |
|
Total
liabilities and stockholders' equity
|
|
$ |
211,929 |
|
|
$ |
410,918 |
|
|
$ |
67,335 |
|
|
$ |
122,036 |
|
|
$ |
(353,964 |
) |
|
$ |
458,254 |
|
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 INCOME
For
the Three Months Ended January 1, 2010
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI
Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$ |
- |
|
|
$ |
47,936 |
|
|
$ |
17,419 |
|
|
$ |
37,119 |
|
|
$ |
(19,707 |
) |
|
$ |
82,767 |
|
Cost
of sales
|
|
|
- |
|
|
|
36,880 |
|
|
|
14,783 |
|
|
|
27,389 |
|
|
|
(19,725 |
) |
|
|
59,327 |
|
Gross
profit
|
|
|
- |
|
|
|
11,056 |
|
|
|
2,636 |
|
|
|
9,730 |
|
|
|
18 |
|
|
|
23,440 |
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
- |
|
|
|
557 |
|
|
|
20 |
|
|
|
1,979 |
|
|
|
- |
|
|
|
2,556 |
|
Selling
and marketing
|
|
|
- |
|
|
|
1,593 |
|
|
|
1,173 |
|
|
|
2,274 |
|
|
|
- |
|
|
|
5,040 |
|
General
and administrative
|
|
|
1 |
|
|
|
3,323 |
|
|
|
987 |
|
|
|
1,214 |
|
|
|
- |
|
|
|
5,525 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
390 |
|
|
|
146 |
|
|
|
151 |
|
|
|
- |
|
|
|
687 |
|
Total
operating costs and expenses
|
|
|
1 |
|
|
|
5,863 |
|
|
|
2,326 |
|
|
|
5,618 |
|
|
|
- |
|
|
|
13,808 |
|
Operating
income
|
|
|
(1 |
) |
|
|
5,193 |
|
|
|
310 |
|
|
|
4,112 |
|
|
|
18 |
|
|
|
9,632 |
|
Interest
expense, net
|
|
|
216 |
|
|
|
3,638 |
|
|
|
(1 |
) |
|
|
28 |
|
|
|
- |
|
|
|
3,881 |
|
(Loss)
income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
equity in income of subsidiaries
|
|
|
(217 |
) |
|
|
1,555 |
|
|
|
311 |
|
|
|
4,084 |
|
|
|
18 |
|
|
|
5,751 |
|
Income
tax (benefit) expense
|
|
|
(82 |
) |
|
|
1,348 |
|
|
|
101 |
|
|
|
543 |
|
|
|
- |
|
|
|
1,910 |
|
Equity
in income of subsidiaries
|
|
|
3,976 |
|
|
|
3,769 |
|
|
|
- |
|
|
|
- |
|
|
|
(7,745 |
) |
|
|
- |
|
Net
income
|
|
$ |
3,841 |
|
|
$ |
3,976 |
|
|
$ |
210 |
|
|
$ |
3,541 |
|
|
$ |
(7,727 |
) |
|
$ |
3,841 |
|
CONDENSED
CONSOLIDATING STATEMENT OF INCOME
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
|
|
|
- |
|
|
|
3,730 |
|
|
|
1,023 |
|
|
|
471 |
|
|
|
- |
|
|
|
5,224 |
|
Amortization
of acquisition-related intangible assets
|
|
|
- |
|
|
|
390 |
|
|
|
153 |
|
|
|
151 |
|
|
|
- |
|
|
|
694 |
|
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 |
|
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 1, 2010
|
|
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
|
|
$ |
(131 |
) |
|
$ |
3,972 |
|
|
$ |
187 |
|
|
$ |
5,536 |
|
|
$ |
- |
|
|
$ |
9,564 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(616 |
) |
|
|
(101 |
) |
|
|
(94 |
) |
|
|
- |
|
|
|
(811 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
(616 |
) |
|
|
(101 |
) |
|
|
(94 |
) |
|
|
- |
|
|
|
(811 |
) |
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock to employees
|
|
|
189 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
189 |
|
Proceeds
from exercise of stock options
|
|
|
14 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
Excess
tax benefit on stock option exercises
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
Net
cash provided by financing activities
|
|
|
203 |
|
|
|
2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
205 |
|
Net
increase in cash and cash equivalents
|
|
|
72 |
|
|
|
3,358 |
|
|
|
86 |
|
|
|
5,442 |
|
|
|
- |
|
|
|
8,958 |
|
Cash
and cash equivalents at beginning of period
|
|
|
10 |
|
|
|
15,055 |
|
|
|
759 |
|
|
|
10,328 |
|
|
|
- |
|
|
|
26,152 |
|
Cash
and cash equivalents at end of period
|
|
$ |
82 |
|
|
$ |
18,413 |
|
|
$ |
845 |
|
|
$ |
15,770 |
|
|
$ |
- |
|
|
$ |
35,110 |
|
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 |
) |
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 / debt
|
|
|
- |
|
|
|
(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 |
|
Our fiscal years are the 52- or
53-week periods that end on the Friday nearest September 30. Fiscal years 2010
and 2009 comprise the 52-week period ending October 1, 2010 and October 2, 2009,
respectively. The first
quarters of both fiscal years 2010 and 2009 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, 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, transmit and receive 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: defense (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 2010 and 2009 are
summarized as follows (dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
January
1,
2010
|
|
|
January
2,
2009
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
33.5 |
|
|
|
36
|
% |
|
$ |
32.0 |
|
|
|
47
|
% |
|
$ |
1.5 |
|
|
|
5
|
% |
Medical
|
|
|
15.6 |
|
|
|
17 |
|
|
|
10.4 |
|
|
|
16 |
|
|
|
5.2 |
|
|
|
50 |
|
Communications
|
|
|
35.1 |
|
|
|
38 |
|
|
|
17.4 |
|
|
|
26 |
|
|
|
17.7 |
|
|
|
102 |
|
Industrial
|
|
|
3.8 |
|
|
|
4 |
|
|
|
6.4 |
|
|
|
10 |
|
|
|
(2.6 |
) |
|
|
(41 |
) |
Scientific
|
|
|
4.7 |
|
|
|
5 |
|
|
|
0.8 |
|
|
|
1 |
|
|
|
3.9 |
|
|
|
490 |
|
Total
|
|
$ |
92.7 |
|
|
|
100
|
% |
|
$ |
67.0 |
|
|
|
100
|
% |
|
$ |
25.7 |
|
|
|
38
|
% |
Our
commercial markets, which include our medical, commercial communications,
industrial and scientific markets, were negatively impacted in 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 softening of global
economies, many of our customers delayed, reduced or cancelled their upgrade or
expansion plans. We believe that the weak global economies resulted in a
near-term decrease in demand for our products to support commercial programs in
fiscal year 2009, but conditions in these markets have since shown
improvement.
Orders of
$92.7 million for the first quarter of fiscal year 2010 were $25.7 million, or
approximately 38%, higher than orders of $67.0 million for the first quarter of
fiscal year 2009. Explanations for the order increase or decrease by market for
the first quarter of fiscal year 2010 compared to the first quarter of fiscal
year 2009 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 increased
approximately 5% from an aggregate of $32.0 million in the first quarter
of fiscal year 2009 to an aggregate of $33.5 million in the first quarter
of fiscal year 2010. The increase in orders for these combined markets
resulted primarily from an increase in demand for products to support
various weather radar programs and the Aegis weapons system. These
increases were partially offset by decreases in orders to support various
other radar and electronic warfare programs, in part due to the timing of
those programs.
|
·
|
Medical: Orders for our
medical products consist of orders for medical imaging applications, such
as x-ray imaging, magnetic resonance imaging (“MRI”) and positron emission
tomography (“PET”) applications, and for radiation therapy applications
for the treatment of cancer. The 50% increase in medical orders resulted
from demand increasing for products to support MRI applications and demand
improving to more normal levels for products to support x-ray imaging
applications.
|
·
|
Communications: Orders
for our communications products consist of orders for commercial
communications applications and military communications applications. The
102% increase in communications orders was due in equal part to increases
in orders to support commercial communications applications, such as
high-capacity broadband systems, and increases in orders to support
various military communications applications. Military communications is a
relatively new sector of the overall communications market for us, and we
expect our participation in military communications programs to continue
to grow.
|
·
|
Industrial: Orders in
the industrial market are cyclical and are generally tied to the state of
the economy. The $2.6 million decrease in industrial orders was primarily
due to the timing of orders for products used in instrumentation
applications.
|
·
|
Scientific: Orders in
the scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $3.9 million increase in
scientific orders was primarily the result of the receipt of orders for
products to support fusion research at domestic scientific
laboratories.
|
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 1, 2010,
we had an order backlog of $236.6 million compared to an order backlog of $191.3
million as of January 2, 2009. 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 $200,000, with certain
limited products priced up to $1,000,000.
Cost of
goods sold generally includes costs for raw materials, manufacturing costs,
including allocation of overhead and other indirect costs, charges for reserves
for excess and obsolete inventory, warranty claims and losses on fixed price
contracts. Operating expenses generally consist of research and development,
selling and marketing and general and administrative expenses.
Three Months Ended January 1, 2010
Compared to Three Months Ended January 2, 2009
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
January
1,
2010
|
|
|
January
2,
2009
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
Sales
|
|
$ |
82.8 |
|
|
|
100.0
|
% |
|
$ |
77.1 |
|
|
|
100.0
|
% |
|
$ |
5.7 |
|
Cost
of sales
|
|
|
59.3 |
|
|
|
71.6 |
|
|
|
57.2 |
|
|
|
74.2 |
|
|
|
2.1 |
|
Gross
profit
|
|
|
23.4 |
|
|
|
28.3 |
|
|
|
19.9 |
|
|
|
25.8 |
|
|
|
3.5 |
|
Research
and development
|
|
|
2.6 |
|
|
|
3.1 |
|
|
|
2.2 |
|
|
|
2.9 |
|
|
|
0.4 |
|
Selling
and marketing
|
|
|
5.0 |
|
|
|
6.0 |
|
|
|
5.0 |
|
|
|
6.5 |
|
|
|
- |
|
General
and administrative
|
|
|
5.5 |
|
|
|
6.6 |
|
|
|
5.2 |
|
|
|
6.7 |
|
|
|
0.3 |
|
Amortization
of acquisition-related
intangibles
|
|
|
0.7 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.9 |
|
|
|
- |
|
Operating
income
|
|
|
9.6 |
|
|
|
11.6 |
|
|
|
6.8 |
|
|
|
8.8 |
|
|
|
2.8 |
|
Interest
expense, net
|
|
|
3.9 |
|
|
|
4.7 |
|
|
|
4.5 |
|
|
|
5.8 |
|
|
|
(0.6 |
) |
Income
before taxes
|
|
|
5.8 |
|
|
|
7.0 |
|
|
|
2.4 |
|
|
|
3.1 |
|
|
|
3.4 |
|
Income
tax expense (benefit)
|
|
|
1.9 |
|
|
|
2.3 |
|
|
|
(5.3 |
) |
|
|
(6.9 |
) |
|
|
7.2 |
|
Net
income
|
|
$ |
3.8 |
|
|
|
4.6
|
% |
|
$ |
7.7 |
|
|
|
10.0
|
% |
|
$ |
(3.9 |
) |
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$ |
12.4 |
|
|
|
15.0
|
% |
|
$ |
9.5 |
|
|
|
12.3
|
% |
|
$ |
2.9 |
|
|
|
|
Note: Totals
may not equal the sum of the components 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 U.S. generally accepted accounting principles (“GAAP”) based
financial information for leveraged businesses such as ours should be
supplemented by EBITDA so that investors better understand our financial
performance in connection with their analysis of our
business:
|
|
•
|
EBITDA
is a component of the measures used by our board of directors and
management team to evaluate our operating
performance;
|
|
•
|
our
senior credit facilities contain a covenant that requires us to maintain a
senior secured leverage ratio that contains EBITDA as a component, and our
management team uses EBITDA to monitor compliance with this
covenant;
|
|
•
|
EBITDA
is a component of the measures used by our management team to make
day-to-day operating decisions;
|
|
•
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and, therefore, is a
component of the measures used by the management to facilitate internal
comparisons to competitors’ results and our industry in general;
and
|
|
•
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
|
Other
companies may define EBITDA differently and, as a result, our measure of
EBITDA may not be directly comparable to EBITDA of other companies.
Although we use EBITDA as a financial measure to assess the performance of
our business, the use of EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to operate
our business. When analyzing our performance, EBITDA should be considered
in addition to, and not as a substitute for or superior to, net income,
cash flows from operating activities or other statements of income or
statements of cash flows data prepared in accordance with
GAAP.
|
|
For
a reconciliation of Net Income to EBITDA, see Note 10 of the accompanying
unaudited condensed consolidated financial
statements.
|
Sales: : Our sales by market for the
first quarter of fiscal years 2010 and 2009 are summarized as follows (dollars
in millions):
|
|
Quarter
Ended
|
|
|
|
|
|
|
|
|
|
January
1,
2010
|
|
|
January
2,
2009
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar
and Electronic Warfare
|
|
$ |
28.2 |
|
|
|
34
|
% |
|
$ |
28.0 |
|
|
|
36
|
% |
|
$ |
0.2 |
|
|
|
1
|
% |
Medical
|
|
|
19.4 |
|
|
|
23 |
|
|
|
15.8 |
|
|
|
21 |
|
|
|
3.6 |
|
|
|
23 |
|
Communications
|
|
|
28.7 |
|
|
|
35 |
|
|
|
26.2 |
|
|
|
34 |
|
|
|
2.5 |
|
|
|
9 |
|
Industrial
|
|
|
5.2 |
|
|
|
6 |
|
|
|
5.5 |
|
|
|
7 |
|
|
|
(0.3 |
) |
|
|
(5 |
) |
Scientific
|
|
|
1.3 |
|
|
|
2 |
|
|
|
1.6 |
|
|
|
2 |
|
|
|
(0.3 |
) |
|
|
(18 |
) |
Total
|
|
$ |
82.8 |
|
|
|
100
|
% |
|
$ |
77.1 |
|
|
|
100
|
% |
|
$ |
5.7 |
|
|
|
7
|
% |
Sales of
$82.8 million for the first quarter of fiscal year 2010 were $5.7 million, or
approximately 7%, higher than sales of $77.1 million for the first quarter of
fiscal year 2009. Explanations for the sales increase or decrease by market for
the first quarter of fiscal year 2010 as compared to the first quarter of fiscal
year 2009 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 totaled $28.2 million in the first quarter of fiscal year
2010, essentially unchanged from the $28.0 million in the first quarter of
fiscal year 2009.
|
·
|
Medical: Sales of our
medical products consist of sales for medical imaging applications, such
as x-ray imaging, MRI and PET applications, and for radiation therapy
applications for the treatment of cancer. The 23% increase in sales of our
medical products in the first quarter of fiscal year 2010 was primarily
due to sales increasing for products to support MRI applications and sales
improving to more normal levels for products to support x-ray imaging
applications.
|
·
|
Communications: Sales of
our communications products consist of sales for commercial communications
applications and military communications applications. The 9% increase in
sales in the communications market was due to increases in sales to
support a variety of commercial and military communications applications.
Military communications is a relatively new sector of the overall
communications market for us, and we expect our participation in military
communications programs to continue to
grow.
|
·
|
Industrial: Sales in the
industrial market are cyclical and are generally tied to the state of the
economy. The $0.3 million decrease in sales of industrial products in the
first quarter of fiscal year 2010 was primarily due to decreases in sales
to support semiconductor wafer fabrication applications, and was partially
offset by an increase in sales to support cargo screening
applications.
|
·
|
Scientific: Sales in the
scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $0.3 million decrease in
scientific sales was primarily the result of decreased product shipments
for the Spallation Neutron Source at Oakridge National Laboratory. We
received approximately $5 million in orders for this program in fiscal
year 2007 and completed our shipments of products for this program in
fiscal year 2009.
|
Gross Profit. Gross profit was
$23.4 million, or 28.3% of sales, for the first quarter of fiscal year 2010 as
compared to $19.9 million, or 25.8% of sales, for the first quarter of fiscal
year 2009. The $3.5 million increase in gross profit for the first quarter of
fiscal year 2010 as compared to the first quarter of fiscal year 2009 was due to
higher shipment volume and improved operating efficiencies from the higher
volume.
Research and Development.
Research and development expenses were $2.6 million, or 3.1% of sales, for the
first quarter of fiscal year 2010, a $0.4 million increase from $2.2 million, or
2.9% of sales, for the first quarter of fiscal year 2009. The increase in
research and development for the first quarter of fiscal year 2010 compared to
the first quarter of fiscal year 2009 was due primarily to development efforts
on broadband communication products for commercial and military
applications.
Total
spending on research and development, including customer-sponsored research and
development, was as follows (in millions):
|
|
Quarter Ended
|
|
|
|
January
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Company
sponsored
|
|
$ |
2.6 |
|
|
$ |
2.2 |
|
Customer
sponsored, charged to cost of sales
|
|
|
3.7 |
|
|
|
3.2 |
|
|
|
$ |
6.3 |
|
|
$ |
5.4 |
|
Selling and Marketing. Selling
and marketing expenses were $5.0 million, or 6.0% of sales, for the first
quarter of fiscal year 2010, and $5.0 million, or 6.5% of sales, for the first
quarter of fiscal year 2009. There was no significant change in selling and
marketing expenses for the first fiscal quarters of 2009 and 2010.
General and Administrative.
General and administrative expenses were $5.5 million, or 6.6% of sales, for the
first quarter of fiscal year 2010, a $0.3 million increase from the $5.2
million, or 6.7% of sales, for the first quarter of fiscal year 2009. The
increase in general and administrative expenses in the first quarter of fiscal
year 2010 was primarily due to the unfavorable impact from foreign currency
translation.
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 years 2010 and 2009.
Interest Expense, net (“Interest
Expense”). Interest Expense was $3.9 million, or 4.7% of sales, for the
first quarter of fiscal year 2010, a $0.6 million decrease from the $4.5
million, or 5.8% of sales, for the first quarter of fiscal year 2009. The
reduction in interest expense for the first quarter of fiscal year 2010 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 2010
compared to the first quarter of fiscal year 2009.
Income Tax Expense (Benefit).
We recorded an income tax expense of $1.9 million for the first quarter of
fiscal year 2010 and an income tax benefit of $5.3 million for the first quarter
of fiscal year 2009. Our estimated effective income tax rate for fiscal year
2010 is expected to be approximately 36%.
The first
quarter of fiscal year 2009 included two significant discrete tax benefits which
totaled $5.7 million. The change in our position with regard to an outstanding
audit by the Canada Revenue Agency (“CRA”) resulted in a $5.1 million tax
benefit and a Canadian tax law change resulted in a $0.6 million tax benefit
from the adjustment of deferred tax accounts.
Net Income. Net income was
$3.8 million, or 4.6% of sales, for the first quarter of fiscal year 2010 as
compared to $7.7 million, or 10.0% of sales, in the first quarter of fiscal year
2009. The $3.9 million decrease in net income in the first quarter of fiscal
year 2010 as compared to the first quarter of fiscal year 2009 was primarily due
to discrete income tax benefits of $5.7 million that were recorded in the first
quarter of fiscal year 2009; partially offset by higher gross profit from the
increase in sales volume and improved operating efficiencies from the higher
volume; and lower interest expense in the first quarter of fiscal year
2010.
EBITDA. EBITDA was $12.4
million, or 15.0% of sales, for the first quarter of fiscal year 2010 as
compared to $9.5 million, or 12.3% of sales, for the first quarter of fiscal
year 2009. The $2.9 million increase in EBITDA in the first quarter of fiscal
year 2010 as compared to the first quarter of fiscal year 2009 was due primarily
to higher gross profit from the increase in sales volume and improved operating
efficiencies from the higher volume.
Liquidity
and Capital Resources
Overview
Our
liquidity is affected by many factors, some of which are based on normal ongoing
operations of our business and others that are related to uncertainties in the
markets in which we compete and other global economic factors. We have
historically financed, and intend to continue to finance, our capital and
working capital requirements including debt service and internal growth, through
a combination of cash flows from our operations and borrowings under our senior
credit facilities. Our primary uses of cash are cost of sales, operating
expenses, debt service and capital expenditures.
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):
|
|
January
1,
|
|
|
October
2,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
and cash equivalents
|
|
$ |
35.1 |
|
|
$ |
26.2 |
|
Working
capital
|
|
$ |
99.7 |
|
|
$ |
92.4 |
|
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 have restricted cash of $1.8 million as of January 1, 2010,
consisting primarily of bank guarantees from customer advance payments to our
international subsidiaries. The bank guarantees become unrestricted cash when
performance under the sales contract is complete.
The
significant factors underlying the net increase in cash and cash equivalents
during the first quarter of fiscal year 2010 were the net cash provided by our
operating activities of $9.6 million and proceeds of $0.2 million from
employee stock purchases, partially offset by capital expenditures of $0.8
million.
As of
January 1, 2010 and October 2, 2009, we had $195.0 million in total
principal amount of debt outstanding. As of January 1, 2010, we had borrowing
availability of $55.1 million under the revolver under our senior credit
facilities.
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 0.55:1. Our senior credit facilities will mature in the
fourth quarter of fiscal year 2011 unless we refinance our 8% senior
subordinated notes due 2012 prior to July 31, 2011. We anticipate reentering the
capital markets prior to July 2011.
Historical
Operating, Investing and Financing Activities
In
summary, our cash flows were as follows (in millions):
|
|
Quarter
Ended
|
|
|
|
January
1,
|
|
|
January
2,
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash provided by operating activities
|
|
$ |
9.6 |
|
|
$ |
4.6 |
|
Net
cash used in investing activities
|
|
|
(0.8 |
) |
|
|
(0.9 |
) |
Net
cash provided by (used in) financing activities
|
|
|
0.2 |
|
|
|
(4.3 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
9.0 |
|
|
$ |
(0.6 |
) |
Operating
Activities
During
the first quarter of fiscal years 2010 and 2009, 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 $9.6 million in the first quarter of fiscal
year 2010 was attributable to net income of $3.8 million, depreciation,
amortization and other non-cash charges of $4.5 million and net cash provided by
working capital of $1.3 million. The primary working capital sources of cash in
the first quarter of fiscal year 2010 were a decrease in accounts receivable and
an increase in accrued expenses. The decrease in accounts receivable resulted
primarily from the decreased sales volume during the first quarter of fiscal
year 2010 as compared to the fourth quarter of fiscal year 2009, while the
increase in accrued expenses was primarily due to an increase in interest
payable related to the timing of interest payments on our debt. The
aforementioned working capital sources of cash were partially offset by an
increase in inventories and a decrease in accounts payable. The increase in
inventories resulted from increased purchases in anticipation of higher sales
volume for the remaining quarters of fiscal year 2010. Accounts payable
decreased mainly due to timing of payments to trade
vendors.
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.
Investing
Activities
Investing
activities for the first quarter of fiscal years 2010 and 2009 comprised $0.8
million and $0.9 million, respectively, of capital expenditures.
Financing
Activities
Net cash
provided by financing activities for the first quarter of fiscal year 2010 was
attributable to $0.2 million in proceeds from employee stock
purchases.
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.
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 2009, and therefore, no excess cash flow payment was
made in the first quarter of fiscal year 2010.
Contractual
Obligations
The
following table summarizes our significant contractual obligations as of January
1, 2010 and the effect that such obligations are expected to have on our
liquidity and cash flows in future periods (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
Total
|
|
|
2010
(remaining
nine months)
|
|
|
|
2011 - 2012 |
|
|
|
2013 - 2014 |
|
|
Thereafter
|
|
Operating
leases
|
|
$ |
6,222 |
|
|
$ |
1,442 |
|
|
$ |
1,402 |
|
|
$ |
776 |
|
|
$ |
2,602 |
|
Purchase
commitments
|
|
|
35,293 |
|
|
|
29,766 |
|
|
|
5,527 |
|
|
|
- |
|
|
|
- |
|
Debt
obligations
|
|
|
195,000 |
|
|
|
- |
|
|
|
183,000 |
|
|
|
- |
|
|
|
12,000 |
|
Interest
on debt obligations
|
|
|
28,151 |
|
|
|
10,253 |
|
|
|
16,058 |
|
|
|
1,581 |
|
|
|
259 |
|
Uncertain
tax positions
|
|
|
2,747 |
|
|
|
2,747 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
cash obligations
|
|
$ |
267,413 |
|
|
$ |
44,208 |
|
|
$ |
205,987 |
|
|
$ |
2,357 |
|
|
$ |
14,861 |
|
Standby
letters of credit
|
|
$ |
4,943 |
|
|
$ |
4,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amounts for debt obligations and interest on debt obligations assume (1) that
the respective debt instruments will be outstanding until their scheduled
maturity dates, except for the term loan under our senior credit facilities,
which is assumed to mature on the earlier date of August 1, 2011 as prescribed
in the senior credit facilities agreement, (2) that interest rates in effect on
January 1, 2010 remain constant for future periods, and (3) a debt level based
on mandatory repayments according to the contractual amortization
schedule.
The
expected timing of payment amounts of the obligations in the above table is
estimated based on current information; timing of payments and actual amounts
paid may be different.
As of
January 1, 2010, there were no material changes to our other contractual
obligations from what we disclosed in our Annual Report on Form 10-K for the
fiscal year ended October 2, 2009. See also Note 6 of the accompanying unaudited
condensed consolidated financial statements for details on certain of our
commitments and contingencies.
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
2010 were $0.8 million. Total capital expenditures for fiscal year 2010 are
expected to be approximately $4.0 to $5.0 million.
Recent
Accounting Pronouncements
See Note
2 to the accompanying unaudited condensed consolidated financial statements for
information regarding the effect of new accounting pronouncements on our
financial statements.
Critical
Accounting Policies and Estimates
Our
Critical Accounting Policies and Estimates have not changed from those reported
in Management’s Discussion and Analysis of Financial Condition and Results of
Operations in our Form 10-K for the fiscal year ended October 2,
2009.
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 1, 2010, we had fixed rate senior subordinated
notes of $117.0 million due in 2012, bearing interest at 8% per year, variable
rate debt consisting of $12.0 million floating rate senior notes due in 2015,
and a $66.0 million term loan under our 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. In September 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 $45.0 million at January 1, 2010 and represented
approximately 68% of the aggregate term loan balance. The swap agreement is
effective through June 30, 2011. Under the provisions of Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815,
“Derivatives and Hedging,” 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 condensed consolidated balance sheets. The interest
rate swap gain or loss is included in the assessment of hedge effectiveness. At
January 1, 2010, the fair value of the short-term and long-term portions of the
swap was a liability of $1.5 million (accrued expenses) and $0.3 million (other
long-term liabilities), respectively.
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 would
result in an immaterial increase in future interest expense.
Foreign
currency exchange risk
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 FASB ASC 815. 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 general and administrative in the condensed consolidated
statements of income. The gain recognized in general and administrative due to
hedge ineffectiveness was insignificant for the first quarter of fiscal year
2010. No ineffective amounts were recognized due to hedge ineffectiveness in the
first quarter of fiscal year 2009.
As of
January 1, 2010, we had entered into Canadian dollar forward contracts for
approximately $27.2 million (Canadian dollars), or approximately 74% of our
estimated Canadian dollar denominated expenses for January 2010 through
September 2010, at an average rate of approximately $0.84 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 annually to basic and diluted earnings per
share.
At
January 1, 2010, the fair value of foreign currency forward contracts was a
short-term asset of $3.1 million (prepaid and other current
assets).
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 2, 2009. There have been no
material changes from the risk factors
disclosed in the “Risk Factors” section of our 2009 Form 10-K.
None.
None.
None.
None.
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
|
31.2 |
|
Certification
of Chief Financial Officer pursuant to Rule 13a-15(e) and Rule 15d-15(e),
promulgated under the Securities Exchange Act of 1934, as
amended.
|
|
32.1 |
|
Certifications
of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2 |
|
Certifications
of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CPI
INTERNATIONAL, INC.
Dated: February 10,
2010
|
/s/ JOEL A. LITTMAN
|
|
Joel
A. Littman
Chief
Financial Officer, Treasurer and Secretary
(Duly
Authorized Officer and Chief Financial
Officer)
|