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 December 29, 2006

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

Commission file number: 000-51928

CPI INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of Incorporation or Organization)

75-3142681

(I.R.S. Employer Identification No.)

811 Hansen Way
Palo Alto, California 94303-1110
(650) 846-2900

(Address of Principal Executive Offices and Telephone Number,
Including Area Code)

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   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer   
o   Accelerated filer   o   Non-accelerated filer   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o   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: 16,261,173 shares of Common Stock, $.01 par value, at January 31, 2007.

 




CPI INTERNATIONAL, INC.

and subsidiaries

INDEX

Part I:   Financial Information

 

 

Item 1.

 

Financial Statements

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets

 

4

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

 

5

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

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

 

30

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4.

 

Controls and Procedures

 

43

Part II:  Other Information

 

 

Item 1.

 

Legal Proceedings

 

44

Item 1A.

 

Risk Factors

 

44

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

Item 3.

 

Defaults Upon Senior Securities

 

44

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

44

Item 5.

 

Other Information

 

44

Item 6.

 

Exhibits

 

44

 

2




CPI INTERNATIONAL, INC.

and subsidiaries

Cautionary Statements Regarding Forward-Looking Statements

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that relate to future events or our future financial performance. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from the results projected, expected or implied by the forward-looking statements. These risk factors include, without limitation, competition in our end markets; our significant amount of debt; changes or reductions in the U.S. defense budget; U.S. government contracts laws and regulations; changes in technology; the impact of unexpected costs; inability to obtain raw materials and components; and currency fluctuations. 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.

3




CPI INTERNATIONAL, INC.

and subsidiaries

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data – unaudited)

 

 

December 29,

 

September 29,

 

 

 

2006

 

2006

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

32,629

 

$

30,153

 

Restricted cash

 

1,951

 

1,746

 

Accounts receivable, net

 

40,744

 

43,628

 

Inventories

 

54,640

 

54,031

 

Deferred tax assets

 

11,884

 

11,520

 

Prepaid and other current assets

 

3,260

 

3,080

 

Total current assets

 

145,108

 

144,158

 

Property, plant, and equipment, net

 

65,120

 

63,851

 

Deferred debt issue costs, net

 

9,285

 

9,644

 

Intangible assets, net

 

74,878

 

75,489

 

Goodwill

 

147,459

 

147,489

 

Other long-term assets

 

976

 

1,128

 

Total assets

 

$

442,826

 

$

441,759

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

 

$

1,714

 

Accounts payable

 

15,707

 

19,101

 

Accrued expenses

 

27,936

 

23,269

 

Product warranty

 

5,842

 

5,958

 

Income taxes payable

 

9,105

 

10,693

 

Advance payments from customers

 

6,824

 

6,310

 

Total current liabilities

 

65,414

 

67,045

 

Deferred income taxes

 

29,977

 

29,933

 

Long-term debt, less current portion

 

241,794

 

245,067

 

Other long-term liabilities

 

51

 

41

 

Total liabilities

 

337,236

 

342,086

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock ($0.01 par value, 90,000,000 shares authorized; 16,086,445 and 16,049,577 shares issued and outstanding)

 

161

 

160

 

Additional paid-in capital

 

65,765

 

65,295

 

Accumulated other comprehensive income

 

290

 

679

 

Retained earnings

 

39,374

 

33,539

 

Total stockholders’ equity

 

105,590

 

99,673

 

Total liabilities and stockholders’ equity

 

$

442,826

 

$

441,759

 

 

See accompanying notes to the condensed consolidated financial statements.

4




CPI INTERNATIONAL, INC.

and subsidiaries

CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share and per share data — unaudited)

 

 

Quarter Ended

 

 

 

December 29,
2006

 

December 30,
2005

 

Sales

 

$

83,723

 

$

82,379

 

Cost of sales

 

57,142

 

57,171

 

Gross profit

 

26,581

 

25,208

 

Operating costs and expenses:

 

 

 

 

 

Research and development

 

1,891

 

1,910

 

Selling and marketing

 

4,829

 

5,024

 

General and administrative

 

4,404

 

7,302

 

Amortization of acquisition-related intangible assets

 

548

 

548

 

Net loss on disposition of fixed assets

 

18

 

65

 

Total operating costs and expenses

 

11,690

 

14,849

 

Operating income

 

14,891

 

10,359

 

Interest expense, net

 

5,339

 

6,064

 

Income before income taxes

 

9,552

 

4,295

 

Income tax expense

 

3,717

 

2,080

 

Net income

 

$

5,835

 

$

2,215

 

 

 

 

 

 

 

Other comprehensive income, net of tax Net unrealized loss on cash flow hedges

 

(389

)

(183

)

Comprehensive income

 

$

5,446

 

$

2,032

 

 

 

 

 

 

 

Earnings per share - Basic

 

$

0.36

 

$

0.17

 

Earnings per share - Diluted

 

$

0.33

 

$

0.15

 

 

 

 

 

 

 

Shares used to compute earnings per share - Basic

 

16,063,221

 

13,078,954

 

Shares used to compute earnings per share - Diluted

 

17,544,363

 

14,768,082

 

 

See accompanying notes to the condensed consolidated financial statements.

5




CPI INTERNATIONAL, INC.

and subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands — unaudited)

 

 

Quarter Ended

 

 

 

December 29,

 

December 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net cash provided by operating activities

 

$

10,042

 

$

198

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Expenses relating to sale of San Carlos property

 

 

(3

)

Capital expenditures

 

(2,871

)

(2,945

)

Net cash used in investing activities

 

(2,871

)

(2,948

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of debt

 

 

10,000

 

Repayments of debt

 

(5,000

)

 

Proceeds from issuance of common stock to employees

 

197

 

 

Proceeds from exercise of stock options

 

66

 

 

Stockholder distribution payments

 

 

(17,000

)

Excess tax benefit on stock option exercises

 

42

 

 

Net cash used in financing activities

 

(4,695

)

(7,000

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

2,476

 

(9,750

)

Cash and cash equivalents at beginning of period

 

30,153

 

26,511

 

Cash and cash equivalents at end of period

 

$

32,629

 

$

16,761

 

 

 

 

 

 

 

Supplemental cash flow disclosures

 

 

 

 

 

Cash paid for interest

 

$

961

 

$

1,810

 

Cash paid for taxes, net of refunds

 

$

5,150

 

$

2,554

 

 

See accompanying notes to the condensed consolidated financial statements.

6




CPI INTERNATIONAL, INC.

and subsidiaries

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All tabular dollar amounts in thousands except share and per share amounts)

1.                                      Organization and Basis of Presentation

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 subsidiaries on a consolidated basis.

The accompanying condensed consolidated financial statements represent the consolidated results and financial position of CPI International, which is controlled by affiliates of The Cypress Group (“Cypress”). CPI International, through its wholly owned subsidiary, CPI, develops, manufactures, and distributes microwave and power grid Vacuum Electron Devices (“VEDs”), microwave amplifiers, modulators and various other power supply equipment and devices. The Company has two reportable segments, VED and satcom equipment.

The condensed consolidated financial statements include those of the Company and its subsidiaries. Significant intercompany balances, transactions, and stockholdings have been eliminated in consolidation.

The Company’s fiscal year is the 52- or 53-week period that ends on the Friday nearest September 30. Fiscal year 2007 comprises the 52-week period ending September 28, 2007 and fiscal year 2006 comprised the 52-week period ended September 29, 2006. All period references are to the Company’s fiscal periods unless otherwise indicated. These interim financial statements should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended September 29, 2006.

On May 3, 2006, the Company completed the initial public offering of its common stock (see Note 4 for further disclosure).

2.                                      Supplemental Balance Sheet Information

Accounts Receivable: Accounts receivable are stated net of allowances for doubtful accounts of $0.2 million and $0.5 million at December 29, 2006 and September 29, 2006, respectively.

Inventories: The following table provides details of inventories, net of reserves:

 

December 29,

 

September 29,

 

 

 

2006

 

2006

 

Raw material and parts

 

$

34,427

 

$

35,160

 

Work in process

 

12,418

 

10,481

 

Finished goods

 

7,795

 

8,390

 

 

 

$

54,640

 

$

54,031

 

 

7




Reserve for excess, slow moving and obsolete inventory: The following table summarizes the activity related to reserves for excess, slow moving and obsolete inventory during the first quarter of fiscal years 2007 and 2006:

 

Quarter Ended

 

 

 

December 29,
2006

 

December 30,
2005

 

Balance at beginning of period

 

$

8,822

 

$

8,655

 

Inventory provision, charged to cost of sales

 

307

 

316

 

Inventory write-offs

 

(60

)

(28

)

Balance at end of period

 

$

9,069

 

$

8,943

 

 

Reserve for loss contracts and cost in excess of market inventory: The following table summarizes the activity related to reserves for loss contracts and cost in excess of market inventory during first quarter of fiscal years 2007 and 2006:

 

Quarter Ended

 

 

 

December 29,
2006

 

December 30,
2005

 

Balance at beginning of period

 

$

1,702

 

$

1,430

 

Provision for loss contracts and cost in excess of market inventory, charged to cost of sales

 

32

 

306

 

Credit to cost of sales upon revenue recognition

 

(101

)

(222

)

Balance at end of period

 

$

1,633

 

$

1,514

 

 

Product Warranty: The following table summarizes the activity related to product warranty during the first quarter of fiscal years 2007 and 2006:

 

Quarter Ended

 

 

 

December 29,
2006

 

December 30,
2005

 

Beginning accrued warranty

 

$

5,958

 

$

6,359

 

Accruals for product warranty, charged to cost of sales

 

1,211

 

1,048

 

Cost of warranty claims

 

(1,327

)

(1,217

)

Ending accrued warranty

 

$

5,842

 

$

6,190

 

 

8




Intangible Assets: The following tables present the details of the Company’s total acquisition-related intangible assets:

 

December 29, 2006

 

September 29, 2006

 

 

 

Cost

 

Accumulated 
Amortization

 

Net

 

Cost

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VED Core Technology

 

$

30,700

 

$

(1,813

)

$

28,887

 

$

30,700

 

$

(1,659

)

$

29,041

 

VED Application Technology

 

19,800

 

(2,328

)

17,472

 

19,800

 

(2,130

)

17,670

 

X-ray Generator and Satcom ApplicationTechnology

 

8,000

 

(1,574

)

6,426

 

8,000

 

(1,441

)

6,559

 

Customer backlog

 

17,450

 

(17,450

)

 

17,450

 

(17,450

)

 

Land lease

 

11,810

 

(769

)

11,041

 

11,810

 

(706

)

11,104

 

Tradename

 

5,800

 

 

5,800

 

5,800

 

 

5,800

 

Customer list and programs

 

5,700

 

(508

)

5,192

 

5,700

 

(451

)

5,249

 

Noncompete agreement

 

110

 

(50

)

60

 

110

 

(44

)

66

 

 

 

$

99,370

 

$

(24,492

)

$

74,878

 

$

99,370

 

$

(23,881

)

$

75,489

 

 

The estimated future amortization expense of purchased intangibles as of December 29, 2006, excluding the Company’s unamortized tradename, is as follows:

Fiscal Year

 

Amount

 

2007 (remaining nine months)

 

1,831

 

2008

 

2,441

 

2009

 

2,441

 

2010

 

2,419

 

2011

 

2,419

 

Thereafter

 

57,527

 

 

 

$

69,078

 

 

Goodwill: The following table presents goodwill by reportable segment at December 29, 2006 and September 29, 2006:

 

December 29,

 

September 29,

 

 

 

2006

 

2006

 

VED

 

$

133,607

 

$

133,637

 

Satcom Equipment

 

13,852

 

13,852

 

 

 

$

147,459

 

$

147,489

 

 

The decrease in goodwill from September 29, 2006 to December 29, 2006 was due to an adjustment for tax benefits realized from the exercise of fully vested stock options that were acquired in a business combination.

9




3.                                      Long-Term Debt

Long-term debt comprises the following:

 

December 29,

 

September 29,

 

 

 

2006

 

2006

 

 

 

 

 

 

 

Term loan, expiring 2010

 

$

37,500

 

$

42,500

 

8% Senior subordinated notes, due 2012

 

125,000

 

125,000

 

Floating rate senior notes, due 2015, net of issue discount of $706 and $719

 

79,294

 

79,281

 

 

 

241,794

 

246,781

 

Less: Current portion

 

 

1,714

 

Long-term portion

 

$

241,794

 

$

245,067

 

 

Senior Credit Facility and Term Loan of CPI: In fiscal year 2004, CPI entered into a $130.0 million credit agreement, which was amended and restated on November 29, 2004, and further amended on February 16, 2005, April 13, 2005, and December 15, 2005 (the “Senior Credit Facility”). The Senior Credit Facility consists of a $40.0 million revolving commitment, with a sub-facility of $15.0 million for letters of credit and $5.0 million for swingline loans (“Revolver”), which expires on January 23, 2010, and a $90.0 million term loan (“Term Loan”), which expires on July 23, 2010. As of December 29, 2006, the Company had no outstanding borrowings under the Revolver and $37.5 million outstanding under the Term Loan, after taking into account a $5.0 million Term Loan repayment in December 2006 using available operating cash. The $5.0 million Term Loan repayment included a $1.7 million ECF (as defined below) payment, and an optional prepayment of $3.3 million. In December 2005, CPI borrowed $10.0 million on the Term Loan to pay a dividend to CPI International.  CPI International used the proceeds of that dividend to pay a portion of the special cash dividend of $17.0 million to its stockholders. Upon certain specified conditions, including compliance on a pro forma basis with the covenants in the Senior Credit Facility, CPI may seek commitments for a new class of term loans, not to exceed $65.0 million. The Senior Credit Facility is guaranteed by CPI International and all of CPI’s domestic subsidiaries and is secured by substantially all of their assets.

Any borrowings under the Revolver would currently bear interest at a rate equal to, at CPI’s option, LIBOR plus 2.75% per annum, or the Alternate Base Rate (“ABR”) plus 1.75% per annum. Available borrowings under the Revolver are reduced by any amounts secured through letters of credit; at December 29, 2006, the Company had letters of credit commitments for $3.8 million. The Term Loan borrowings currently bear interest at a rate equal to, at CPI’s option, LIBOR plus 2.25% per annum or the ABR plus 1.25% per annum, payable quarterly. The ABR is the greater of (a) the Prime Rate and (b) the Federal Funds Rate plus 0.50%. In addition to customary fronting and administrative fees under the Senior Credit Facility, CPI pays letter of credit participation fees equal to the applicable Revolver LIBOR margin per annum on the average daily amount of the letter of credit exposure, and a commitment fee of 0.50% per annum on the average daily unused amount of revolving commitment. As of December 29, 2006 (1) the Term Loan borrowing consisted of one tranche of $5.5 million and one tranche of $32.0 million with interest payable on January 11, 2007 and January 22, 2007, each at 7.6% per annum, and (2) a Revolving commitment of $3.8 million for letter of credit exposure, with letter of credit participation fees and fronting fees payable quarterly at a combined interest rate of 3.0% per annum.

10




The Senior Credit Facility requires 1.0% of the original Term Loan amount to be repaid annually in quarterly installments of 0.25% beginning June 30, 2004 and continuing for five years, with the remainder due in equal quarterly installments thereafter. CPI is required to prepay its outstanding loans, subject to certain exceptions and limitations, with net cash proceeds received from certain events, including, without limitation (1) all such proceeds received from certain asset sales by CPI International, CPI or any of CPI’s subsidiaries, (2) all such proceeds received from issuances of debt (other than certain specified permitted debt) or preferred stock by CPI International, CPI or any of CPI’s subsidiaries, (3) all such proceeds paid to CPI International, CPI or any of CPI’s subsidiaries from casualty and condemnation events in excess of amounts applied to replace, restore or reinvest in any properties for which proceeds were paid within a specified period and (4) 50% of such proceeds received from issuances of common equity by, or equity contributions to, CPI International.

CPI is also required to make an annual prepayment within 90 days after the end of each fiscal year based on a calculation of Excess Cash Flow, as defined in the Senior Credit Facility (“ECF”), multiplied by a factor of 25%, 50% or 75% depending on the leverage ratio at the end of the fiscal year, less optional prepayments made during the fiscal year. On December 30, 2004, CPI made an ECF payment of $3.9 million. The ECF payment was applied pro rata, in accordance with the provisions of the Senior Credit Facility, against the remaining scheduled installments of Term Loan principal due up to, but not including, the September 30, 2009 scheduled principal installment. The Company made an ECF payment of $1.7 million for the fiscal year ended September 29, 2006 in December 2006 and there is no expected ECF payment due for fiscal year 2007, primarily because of the $3.3 million optional prepayment that was made in December 2006.

CPI can make optional prepayments on the outstanding loans at any time without premium or penalty, except for customary “breakage” costs with respect to LIBOR loans. In March 2005, CPI made an optional prepayment of $5.7 million; in May 2006, CPI made additional optional prepayments of $47.5 million in the aggregate using proceeds from the initial public offering of CPI International’s common stock (the “IPO”); and in December 2006, CPI made an additional prepayment of $3.3 million. The optional prepayments were applied pro rata, in accordance with the provisions of the Senior Credit Facility, against the remaining scheduled installments of Term Loan principal due up to June 30, 2009, with the balance applied to scheduled installment amounts on or after September 30, 2009, in direct order of maturity.

The Senior Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of CPI International, CPI and CPI’s domestic subsidiaries to: sell assets; engage in mergers and acquisitions; pay dividends and distributions or repurchase their capital stock; incur additional indebtedness or issue equity interests; make investments and loans; create liens or further negative pledges on assets; engage in certain transactions with affiliates; enter into sale and leaseback transactions; amend agreements or make prepayments relating to subordinated indebtedness; and amend or waive provisions of charter documents in a manner materially adverse to the lenders. CPI and CPI’s subsidiaries must comply with: a minimum interest coverage ratio; a maximum total leverage ratio; a minimum fixed charge coverage ratio; and a maximum capital expenditures limitation, each calculated on a consolidated basis for CPI and CPI’s subsidiaries. CPI International must also comply with a minimum interest coverage ratio, a minimum fixed charge coverage ratio and a maximum leverage ratio, each calculated on a consolidated basis for CPI International and its subsidiaries. As of December 29, 2006, CPI and CPI International were in compliance with all Senior Credit Facility financial covenants.

11




Subject in certain cases to applicable notice provisions and grace periods, events of default under the Senior Credit Facility include, among other things: failure to make payments when due; breaches of representations and warranties in the documents governing the Senior Credit Facility; non-compliance by CPI International, CPI and/or CPI’s subsidiaries with certain covenants; failure by CPI International, CPI and/or CPI’s subsidiaries to pay certain other indebtedness or to observe any other covenants or agreements that would allow acceleration of such indebtedness, collectively in excess of $5.0 million at any time; events of bankruptcy or insolvency of CPI International, CPI and/or CPI’s subsidiaries; certain uninsured and unstayed judgments of $5.0 million or more against CPI International; impairment of the security interests in the collateral or the guarantees under the Senior Credit Facility; and a change in control, as defined in the documents governing the Senior Credit Facility.

8% Senior subordinated notes of CPI:  In connection with a business combination on January 23, 2004, CPI issued $125.0 million in aggregate principal amount of its 8% Senior Subordinated Notes (the “8% Notes”). The 8% Notes have no sinking fund requirements.

The 8% Notes bear interest at the rate of 8.0% per year, payable on February 1 and August 1 of each year. The 8% Notes will mature on February 1, 2012. The 8% Notes are unsecured obligations, jointly and severally guaranteed by CPI International and each of CPI’s domestic subsidiaries. The payment of all obligations relating to the 8% Notes are subordinated in right of payment to the prior payment in full in cash or cash equivalents of all senior debt (as defined in the indenture governing the 8% Notes) of CPI, including debt under the Senior Credit Facility. Each guarantee of the 8% Notes is and will be subordinated to guarantor senior debt (as defined in the indenture governing the 8% Notes) on the same basis as the 8% Notes are subordinated to CPI’s senior debt.

At any time or from time to time on or after February 1, 2008, CPI, at its option, may redeem the 8% Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning on February 1 of the years indicated below:

Year

 

Optional
Redemption
Price

 

2008

 

104

%

2009

 

102

%

2010 and thereafter

 

100

%

 

At any time on or prior to February 1, 2008, the 8% Notes may also be redeemed or purchased (by CPI or any other person) in whole but not in part, at CPI’s option, upon the occurrence of a change of control (as defined in the indenture governing the 8% Notes) at a price equal to 100% of the principal amount of the 8% Notes, plus a “make-whole” premium (as defined in the indenture governing the 8% Notes) to the redemption price on February 1, 2008, and accrued and unpaid interest, if any, to, the date of redemption or purchase.  Upon a change of control, CPI may be required to purchase all or any part of the 8% Notes for a cash price equal to 101% of the principal amount, plus accrued and unpaid interest thereon, if any, to the date of purchase.

12




The indenture governing the 8% Notes contains a number of covenants that, among other things, restrict, subject to certain exceptions, the ability of CPI and its restricted subsidiaries (as defined in the indenture governing the 8% Notes) to incur additional indebtedness, sell assets, consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock or subordinated indebtedness, make certain investments, issue capital stock of their subsidiaries, incur liens and enter into certain types of transactions with their affiliates.

Events of default under the indenture governing the 8% Notes include: failure to make payments on the 8% Notes when due; failure to comply with covenants in the indenture governing the 8% Notes; a default under certain other indebtedness of CPI or any of its restricted subsidiaries that is caused by a failure to make payments on such indebtedness or that results in the acceleration of the maturity of such indebtedness; the existence of certain final judgments or orders against CPI or any of the restricted subsidiaries; and the occurrence of certain insolvency or bankruptcy events.

Floating rate senior notes of CPI International: On February 22, 2005, CPI International issued $80.0 million in principal amount of its Floating Rate Senior Notes (“FR Notes”). The FR Notes were issued at a 1% discount. The proceeds from the issuance of FR Notes were used to make a distribution to stockholders of CPI International of approximately $75.8 million and to pay fees and expenses of approximately $3.5 million associated with the issuance of FR Notes. The FR Notes have no sinking fund requirements.

The FR Notes require interest payments at an annual interest rate, reset at the beginning of each semi-annual period, equal to the then six-month LIBOR plus 5.75%, payable semiannually on February 1 and August 1 of each year. The interest rate on the semi-annual interest payment due February 1, 2007 is approximately 11.30% per annum. CPI International may, at its option, elect to pay interest through the issuance of additional FR Notes for any interest payment date on or before February 1, 2010. If CPI International elects to pay interest through the issuance of additional FR Notes, the annual interest rate on the FR Notes will increase by an additional 1% step-up, with the step-up increasing by an additional 1% for each interest payment made through the issuance of additional FR Notes (up to a maximum of 4%). The FR Notes will mature on February 1, 2015.

The FR Notes are general unsecured obligations of CPI International. The FR Notes are not guaranteed by any of CPI International’s subsidiaries but are structurally subordinated to all existing and future indebtedness and other liabilities of CPI International’s subsidiaries. The FR Notes are senior in right of payment to CPI International’s existing and future indebtedness that is expressly subordinated to the FR Notes.

Because CPI International is a holding company with no operations of its own, CPI International relies on distributions from CPI to satisfy its obligations under the FR Notes. The Senior Credit Facility and the indenture governing the 8% Notes restrict CPI’s ability to make distributions to CPI International. The Senior Credit Facility prohibits CPI from making distributions to CPI International unless there is no default under the Senior Credit Facility and CPI International and CPI satisfy certain leverage ratios. The indenture governing the 8% Notes prohibits CPI from making distributions to CPI International unless, among other things, there is no default under the indenture and the amount of the proposed dividend plus all previous Restricted Payments (as defined in the indenture governing the 8% Notes) does not exceed a specified amount.

13




At any time or from time to time CPI International, at its option, may redeem the Notes in whole or in part at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon, if any, to the redemption date, if redeemed during the 12-month period beginning on February 1 of the years indicated below:

 

Optional

 

 

 

Redemption 

 

Year

 

Price

 

2007

 

103

%

2008

 

102

%

2009

 

101

%

2010 and thereafter

 

100

%

 

Upon a change of control, as defined in the indenture governing the FR Notes, CPI International may be required to purchase all or any part of the outstanding FR Notes for a cash price equal to 101% of the principal amount, plus accrued and unpaid interest thereon, if any, to the date of purchase.

The indenture governing the FR Notes contains certain covenants that, among other things, limit the ability of CPI International and its restricted subsidiaries (as defined in the indenture governing the FR Notes) to incur additional indebtedness, sell assets, consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock or subordinated indebtedness, make certain investments, issue capital stock of their subsidiaries, incur liens and enter into certain types of transactions with their affiliates.

Events of default under the indenture governing the FR Notes include: failure to make payments on the FR Notes when due; failure to comply with covenants in the indenture governing the FR Notes; a default under certain other indebtedness of CPI International or any of its restricted subsidiaries that is caused by a failure to make payments on such indebtedness or that results in the acceleration of the maturity of such indebtedness; the existence of certain final judgments or orders against CPI International or any of the restricted subsidiaries; and the occurrence of certain insolvency or bankruptcy events.

Debt Maturities: As of December 29, 2006, maturities on long-term debt were as follows:

 

 

 

 

 

8% Senior

 

 

 

 

 

Term

 

Floating Rate

 

Subordinated

 

 

 

Fiscal Year

 

Loan

 

Senior Notes

 

Notes

 

Total

 

2007

 

$

 

$

 

$

 

$

 

2008

 

 

 

 

 

2009

 

 

 

 

 

2010

 

37,500

 

 

 

37,500

 

2011

 

 

 

 

 

Thereafter

 

 

80,000

 

125,000

 

205,000

 

 

 

$

37,500

 

$

80,000

 

$

125,000

 

$

242,500

 

 

14




4.                                      Stockholders’ Equity

Common and Preferred Stock: On April 7, 2006, the Company amended and restated its certificate of incorporation to provide for 90,000,000 authorized shares of Common Stock, par value $0.01 per share, and 10,000,000 authorized shares of Preferred Stock, par value $0.01 per share. The holder of each share of Common Stock has the right to one vote. The board of directors has the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. As of December 29, 2006 and September 29, 2006, there were no shares of Preferred Stock outstanding.

On April 7, 2006, in connection with the amendment and restatement of its certificate of incorporation, the Company also effected a 3.059-to-1 stock split of its outstanding shares of common stock as of such date. All share and per share amounts in the accompanying condensed consolidated financial statements and accompanying notes have been retroactively restated to reflect this stock split.

On May 3, 2006, the Company completed the IPO of its common stock. The Company sold 2,941,200 shares of common stock and the selling stockholders sold 4,117,670 shares, at an initial public offering price to the public of $18.00 per share, resulting in proceeds to the Company of approximately $47.3 million, net of IPO transaction costs of approximately $5.6 million. The Company used the net proceeds to repay $47.3 million of the Term Loan under the Senior Credit Facility.

5.                                      Share-based Compensation Plans

The Company has four stock plans: the 2006 Equity and Performance Incentive Plan (the “2006 Plan”), the 2006 Employee Stock Purchase Plan (the “2006 ESPP”), the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2000 Stock Option Plan (the “2000 Plan”).

2006 Plan: The 2006 Plan provides for an aggregate of up to 1,400,000 shares of CPI International’s common stock to be available for awards, plus the number of shares subject to awards granted under the 2004 Plan and the 2000 Plan that are forfeited, expire or are cancelled after the effective date of the 2006 Plan. All of the Company’s employees (including officers), directors, and consultants are eligible for awards under the 2006 Plan. The 2006 Plan is administered by the Compensation Committee of the Board of Directors (“Compensation Committee”) and awards may consist of options, stock appreciation rights, restricted stock, other stock unit awards, performance awards, dividend equivalents or any combination of the foregoing. The exercise price for stock options generally cannot be less than 100% of the fair market value of the shares on the date of grant.

2006 ESPP: The 2006 ESPP permits eligible employees to purchase common stock at a discounted price. An aggregate of 760,000 shares of common stock is reserved for issuance under this plan. The stock purchase plan is administered by the Compensation Committee of the board of directors. Employees participating in the plan may purchase stock for their accounts according to a price formula set by the Compensation Committee, as administrator, before the applicable offering period, which cannot exceed 24 months. The price per share will equal a fixed percentage (which may not be lower than 85%) of the fair market value of a share of common stock on the last day of the purchase period in the offering, or the lower of (1) a fixed percentage (not to be less than 85%) of the fair market value of a share of common stock on the date of commencement of participation in the offering and (2) a fixed percentage (not to be less than 85%) of the fair market value of a share of common stock on the date of purchase. The initial 2006 ESPP offering period began on July 1, 2006; the participants’ purchase price for CPI

15




International, Inc. common stock will be 85% of the closing market price on the last trading day of each quarter. Under the 2006 ESPP, the Company issued 13,387 and 14,954 shares at a discounted purchase price of $12.75 and $11.19 per share in January 2007 and October 2006, respectively.

2004 Plan: No further options are available for issuance under the 2004 Plan. The Company issued both time and performance stock option awards under the 2004 Plan. All stock option grants under the 2004 Plan were issued at exercise prices equal to or greater than the estimated market price of the Company’s common stock at option grant date.

2000 Plan: No further options are available for issuance under the 2000 Plan. In accordance with the terms of the stock option agreements, the unvested stock options outstanding under the 2000 Plan became fully vested in February 2004 in connection with a business combination. The 2000 Plan option holders were offered the opportunity to either roll over their stock options from the predecessor company into options to purchase common stock of CPI International or exercise their stock options. Management elected to roll over options to purchase 912,613 shares of common stock at prices ranging from $0.20 to $0.74 per share.

Stock Options: A summary of the Company’s stock option activity as of December 29, 2006, and changes during the fiscal quarter then ended is presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Average 

 

 

 

 

 

 

 

Weighted 

 

Remaining 

 

Aggregate 

 

 

 

Number of

 

Average

 

Contractual 

 

Intrinsic 

 

 

 

Shares

 

Exercise Price

 

Term (Years)

 

Value

 

Outstanding at September 29, 2006

 

3,163,057

 

$

4.51

 

 

 

 

 

Granted

 

285,000

 

14.22

 

 

 

 

 

Exercised

 

(21,914

)

3.03

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

Outstanding at December 29, 2006

 

3,426,143

 

$

5.33

 

7.25

 

$

34,009

 

Vested and expected to vest

 

3,380,178

 

$

5.21

 

7.22

 

$

33,922

 

Exercisable at December 29, 2006

 

2,323,919

 

$

2.85

 

6.67

 

$

28,230

 

 

The grant date fair value of awards granted during the first quarter of fiscal year 2007 was estimated as of the date of grant using the Black-Scholes options pricing model, assuming no expected dividends and the following assumptions:

Expected term (in years)

 

6.25

 

Expected volatility

 

49.33

%

Risk-free rate

 

4.56

%

Grant date fair value

 

$

7.66

 

 

Since the Company’s common stock has not been publicly traded for a sufficient time period, the expected volatility is based on expected volatilities of similar companies that have a longer history of

16




being publicly traded. The expected life of options granted is based on the simplified method for plain vanilla options in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 107. The risk-free rates are based on the U.S. Treasury yield in effect at the time of the grant.

The total intrinsic value of options exercised was $0.2 million during first quarter of fiscal year 2007. There were no options granted or exercised during the first quarter of fiscal year 2006.

Outstanding and exercisable options presented by exercise price as of December 29, 2006 are as follows:

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted-Average

 

 

 

Weighted-Average 

 

 

 

Number of 

 

Remaining

 

Number of

 

Remaining

 

 

 

Options

 

Contractual Life 

 

Options

 

Contractual Life 

 

Exercise 
Price

 

Outstanding

 

(Years)

 

Exercisable

 

(Years)

 

$                             0.20

 

695,126

 

6.20

 

695,126

 

6.20

 

$                             0.74

 

194,292

 

3.68

 

194,292

 

3.68

 

$                             1.08

 

8,079

 

7.10

 

8,079

 

7.10

 

$                             4.32

 

1,864,578

 

7.25

 

1,352,824

 

7.27

 

$                             6.61

 

54,480

 

7.75

 

54,480

 

7.75

 

$                             6.98

 

30,588

 

8.20

 

19,118

 

8.20

 

$                           14.22

 

285,000

 

9.94

 

 

 

$                           18.00

 

294,000

 

9.33

 

 

 

 

 

3,426,143

 

7.25

 

2,323,919

 

6.67

 

 

As of December 29, 2006, there was approximately $4.5 million of total unrecognized compensation costs related to nonvested stock options, which is expected to be recognized over a weighted-average vesting period of 2.7 years.

Restricted Stock Awards: There were 9,999 shares of restricted stock outstanding as of December 29, 2006 and September 29, 2006. The restricted stock awards vest over periods of one to three years and have a 10 year contractual life.

17




A summary of the status of the Company’s nonvested restricted stock awards as of December 29, 2006, and changes during the fiscal quarter then ended is presented below:

 

 

 

Weighted-

 

 

 

 

 

Average Grant-

 

 

 

Number of 

 

Date 

 

 

 

Shares

 

Fair Value

 

Nonvested at September 29, 2006

 

9,999

 

$

18.00

 

Granted

 

 

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at December 29, 2006

 

9,999

 

$

18.00

 

 

As of December 29, 2006, there was $0.1 million of total unrecognized compensation costs related to nonvested restricted stock awards, which is expected to be recognized over a weighted average vesting period of 1.2 years.

Share-Based Compensation Cost: There was no unrecognized compensation cost relating to stock options outstanding at the beginning of fiscal year 2006 and no stock options were granted during the first quarter of fiscal year 2006. Therefore, there was no share-based compensation cost in the first quarter of fiscal year 2006.  Total share-based compensation cost for the Company’s stock plans in first quarter of fiscal year 2007 comprise the following:

 

Quarter Ended

 

 

 

December 29, 2006

 

Share-based compensation cost recognized in the income statement by caption:

 

 

 

Cost of sales

 

$

39

 

Research and development

 

10

 

Selling and marketing

 

19

 

General and administrative

 

137

 

 

 

$

205

 

Share-based compensation cost capitalized in inventory

 

$

44

 

Share-based compensation cost remaining in inventory
at end of period

 

29

 

Share-based compensation expense by type of award:

 

 

 

Stock options

 

$

175

 

Restricted stock

 

30

 

 

 

$

205

 

 

6.                                      Derivative Financial Instruments

The Company uses forward exchange contracts to hedge the foreign currency exposure associated with forecasted manufacturing costs in Canada. As of December 29, 2006, CPI had outstanding forward contract commitments to purchase Canadian dollars for an aggregate U.S. notional amount of $17.3 million; the last forward contract expires on September 24, 2007.  At December 29, 2006 and

18




September 29, 2006, the fair value of foreign currency forward contracts was a liability of $0.5 million and an asset of $0.1 million, respectively, and the unrealized (loss) gain was approximately $(0.3) million and $8 thousand, net of related tax expense, respectively.

The Company’s foreign currency forward contracts are designated as a cash flow hedge and are considered highly effective, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The unrealized gains and losses from foreign exchange forward contracts are included in “Accumulated other comprehensive income” in the condensed consolidated balance sheets, and the Company anticipates recognizing the entire unrealized loss in operating earnings within the next twelve months. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness, and are recognized in General and Administrative in the condensed consolidated statements of operations when the hedged item affects earnings. The time value was not material for first quarter of fiscal years 2007 and 2006. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the Company promptly recognizes the gain or loss on the associated financial instrument in the condensed consolidated statements of operations. No ineffective amounts were recognized due to anticipated transactions failing to occur in the first quarter of fiscal years 2007 and 2006. Realized gains and losses from foreign currency forward contracts are recognized in cost of sales and general and administrative in the condensed consolidated statements of operations.  Net income in the first quarter of fiscal year 2007 includes a recognized loss from foreign currency forward contracts of $0.1 million.  Net income in the first quarter of fiscal year 2006 includes a recognized gain from foreign currency forward contracts of $0.4 million.

In April 2005, the Company expanded its use of derivatives to hedge the interest rate exposure associated with the FR Notes. On April 15, 2005, the Company entered into an $80 million interest rate swap contract (“the Swap”) to receive variable rate 6-month LIBOR interest and pay 4.15% fixed rate interest, which when combined with the 5.75% margin, results in a fixed rate of 9.9% on the FR Notes through January 31, 2008. The Swap interest payments are made semi-annually, beginning with the first payment on February 1, 2006. The Swap matures on January 31, 2008. In fiscal year 2005, the Company deposited $1.0 million as collateral for the Swap; the amount of collateral fluctuates based on the fair value of the Swap.  In fiscal year 2006, the Company received a $0.5 million refund of the Swap collateral. The Swap collateral remaining is reported as Other long-term assets in the accompanying condensed consolidated balance sheets. The unrealized gains and losses from the Swap are included in “Accumulated other comprehensive income” in the condensed consolidated balance sheets. The ineffective portion of the Swap was not significant and the interest rate swap gain or loss are included in the assessment of hedge effectiveness. At December 29, 2006 and September 29, 2006, the fair value of the Swap was an asset of $1.0 million and $1.1 million, respectively, and the unrealized gain, net of related tax expense, was approximately $0.6 million and $0.7 million, respectively.

7.                                      Income Taxes

The Company’s effective tax rate was approximately 39% for the first quarter of fiscal year 2007 and 48% for the first quarter of fiscal year 2006.  The effective tax rate for the first quarter of fiscal year 2006 included a $0.3 million charge attributable to the fourth quarter of fiscal year 2005; consisting of $0.5 million to correct the overstatement of tax benefits recorded in the fourth quarter of fiscal year 2005 for stock-based compensation expense that is not deductible for income tax purposes in a foreign tax jurisdiction, offset by reversal of a $0.2 million tax contingency reserve that was no longer required.

19




Without the correction to the overstatement of tax benefits, the Company’s effective tax rate for the first quarter of fiscal year 2006 would have been approximately 41%.

8.                                      Earnings Per Share

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common and dilutive potential common equivalent shares outstanding during the period. Potential common equivalent shares consist of common stock issuable upon exercise of stock options using the treasury stock method.

The following table is a reconciliation of the shares used to calculate basic and diluted earnings per share:

 

Quarter Ended

 

 

 

December 29,

 

December 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Weighted average common shares outstanding – Basic

 

16,063,221

 

13,078,954

 

Effect of dilutive stock options

 

1,481,142

 

1,689,128

 

Weighted average common shares outstanding – Diluted

 

17,544,363

 

14,768,082

 

 

As further discussed in Note 4, on April 7, 2006, in connection with the amendment and restatement of its certificate of incorporation, the Company effected a 3.059-to-1 split of its outstanding shares of common stock as of such date. All share and per share amounts have been retroactively restated to reflect this stock split.

9.                                      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, its Chief Executive Officer, and is based on the nature of the Company’s operations and products offered to customers.

20




Summarized financial information concerning the Company’s reportable segments is shown in the following tables:

 

Quarter Ended

 

 

 

December 29,

 

December 30,

 

 

 

2006

 

2005

 

Sales from external customers

 

 

 

 

 

VEDs

 

$

66,975

 

$

63,196

 

Satcom equipment

 

16,748

 

19,183

 

 

 

$

83,723

 

$

82,379

 

Intersegment product transfers

 

 

 

 

 

VEDs

 

$

5,123

 

$

6,208

 

Satcom equipment

 

 

 

 

 

$

5,123

 

$

6,208

 

EBITDA

 

 

 

 

 

VEDs

 

$

17,584

 

$

16,065

 

Satcom equipment

 

1,497

 

2,891

 

Other

 

(1,996

)

(6,441

)

 

 

$

17,085

 

$

12,515

 

 

Amounts not reported as VED or satcom equipment are reported as other.  Other consists primarily of corporate operating expenses and certain other expenses that are managed by the corporate organization, such as business combination-related expenses, share-based compensation expense, and certain non-recurring or unusual expenses. The first quarter of fiscal year 2006 included non-recurring expenses for a special bonus of $3.25 million and expenses of $1.8 million related to the relocation of the Company’s Eimac operations from its former San Carlos, California facility to its nearby Palo Alto, California and Mountain View, California facilities.  The special bonus was paid to employees and directors (other than directors who are employees or affiliates of Cypress) to reward them for the increase in Company value.  Relocation expenses included move expenses and unfavorable overhead absorption and manufacturing variances for the Eimacoperations.

EBITDA represents earnings before provision for income taxes, net interest expense and depreciation and amortization. For the reasons listed below, the Company believes that GAAP-based financial information for leveraged businesses such as the Company’s business should be supplemented by EBITDA so that investors better understand the Company’s financial performance in connection with their analysis of the Company’s business:

·                    EBITDA is a component of the measures used by the Company’s board of directors and management team to evaluate the Company’s operating performance;

·                    the Senior Credit Facility contains covenants that require the Company to maintain certain interest expense coverage and leverage ratios that contain EBITDA as a component, and the Company’s management team uses EBITDA to monitor compliance with such covenants;

·                    EBITDA is a component of the measures used by the Company’s management team to make day-to-day operating decisions;

21




·                    EBITDA facilitates comparisons between the Company’s operating results and those of competitors with different capital structures and therefore is a component of the measures used by the Company’s management to facilitate internal comparisons to competitors’ results and the Company’s industry in general; and

·                    the payment of management bonuses is contingent upon, among other things, the satisfaction by the Company of certain targets that contain EBITDA as a component.

Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although the Company uses EBITDA as a financial measure to assess the performance of its business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate the Company’s business. When analyzing the Company’s performance, EBITDA should be considered in addition to, and not as a substitute for, net income, cash flows from operating activities or other statements of operations or statements of cash flows data prepared in accordance with GAAP.

The following table reconciles net income to EBITDA:

 

Quarter Ended

 

 

 

December 29,

 

December 30,

 

 

 

2006

 

2005

 

Net income

 

$

5,835

 

$

2,215

 

Depreciation and amortization

 

2,194

 

2,156

 

Interest expense, net

 

5,339

 

6,064

 

Income tax expense

 

3,717

 

2,080

 

EBITDA

 

$

17,085

 

$

12,515

 

 

Geographic sales by customer location were as follows for external customers:

 

Quarter Ended

 

 

 

December 29,

 

December 30,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

United States

 

$

49,504

 

$

51,000

 

All foreign countries

 

34,219

 

31,379

 

Total sales

 

$

83,723

 

$

82,379

 

 

22




Net property, plant and equipment by geographic area was as follows:

 

December 29, 2006

 

September 29, 2006

 

 

 

Cost

 

Accumulated
Depreciation
and
Amortization

 

Net Property,
Plant and
Equipment

 

Cost

 

Accumulated
Depreciation
and
Amortization

 

Net Property,
Plant and
Equipment

 

United States

 

$

65,345

 

$

(12,614

)

$

52,731

 

$

64,527

 

$

(11,221

)

$

53,306

 

Canada

 

13,935

 

(1,603

)

12,332

 

11,915

 

(1,440

)

10,475

 

Other

 

173

 

(116

)

57

 

177

 

(107

)

70

 

Total

 

$

79,453

 

$

(14,333

)

$

65,120

 

$

76,619

 

$

(12,768

)

$

63,851

 

 

The United States Government is the only customer that accounted for 10% or more of the Company’s consolidated sales in the first quarter of fiscal years 2007 and 2006.  Direct sales to the United States Government were $14.9 million and $12.7 million for first quarter of fiscal years 2007 and 2006, respectively. Accounts receivable from this customer represented 14% of consolidated accounts receivable as of December 29, 2006 and September 29, 2006.

There were no individual foreign countries with sales greater than 10% of total sales for the periods presented.

10.                               Sale of San Carlos Assets

In February 2003, the Company entered into an agreement to sell the land and close its facilities located in San Carlos, California to consolidate the San Carlos operations into the Company’s existing facility in nearby Palo Alto, California. In September 2006, the sale was completed.  The aggregate sales proceeds were $24.8 million, of which $11.3 million was received in September 2006 and $13.5 million was received as advance payments in fiscal 2004. The Company had total selling costs of $1.3 million related to the sale of the San Carlos property. The aggregate sales proceeds of $24.8 million less the related selling costs of $1.3 million, offset by the land and building’s net book value of approximately $23.5 million, resulted in no gain or loss on sale.

11.                               Special Cash Dividend

In December 2005, the Board of Directors declared and paid a special cash dividend to stockholders of $17.0 million. This dividend was paid using (a) the $10.0 million in net proceeds obtained from the additional borrowing under the Senior Credit Facility in connection with the December 2005 amendment thereto, and (b) available cash.

12.                               Recently Released Accounting Pronouncements

In June 2006, the Emerging Issues Task Force reached a consensus, ratified by the Financial Accounting Standards Board (“FASB”) in June 2006, on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (i.e., Gross versus Net Presentation).” The primary focus of this Issue is to require the disclosure of the accounting policy for any tax assessed by a government authority that is directly imposed on a revenue producing transaction (i.e., gross or net basis) for each period for which an income statement is presented if those amounts are significant. The Company is required to adopt the provisions of Issue No. 06-3 beginning in its second quarter of fiscal 2007 and its adoption is not expected to have a material impact on its financial condition or results of operations.

23




In June 2006, the FASB issued Interpretation 48, “Accounting for Income Tax Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. The recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. Any differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently in the process of determining the impact, if any, of adopting the provisions of FIN 48 on its financial position, results of operations and liquidity.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under other accounting pronouncements that permit or require fair value measurements, changes the methods used to measure fair value and expands disclosures about fair value measurements. In particular, disclosures are required to provide information on the extent to which fair value is used to measure assets and liabilities; the inputs used to develop measurements; and the effect of certain of the measurements on earnings (or changes in net assets). SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption, as of the beginning of an entity’s fiscal year, is also permitted, provided interim financial statements have not yet been issued. The Company is currently evaluating the potential impact, if any, that the adoption of SFAS No. 157 will have on its condensed consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R),” which requires an employer to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in its condensed consolidated balance sheet. Under SFAS No. 158, actuarial gains and losses and prior service costs or credits that have not yet been recognized through earnings as net periodic benefit cost will be recognized in other comprehensive income, net of tax, until they are amortized as a component of net periodic benefit cost. SFAS No. 158 is effective as of the end of the fiscal year ending after December 15, 2006 and shall not be applied retrospectively. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 158 will have on its condensed consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 does not change the guidance in SAB No. 99, “Materiality,” when evaluating the materiality of misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Upon initial application, SAB No. 108 permits a one-time cumulative effect adjustment to beginning retained earnings. The Company

24




believes at this time that the adoption of SAB No. 108 will not have a material impact on its condensed consolidated financial statements.

13.                               Supplemental Guarantors Condensed Consolidating Financial Information (Unaudited)

On January 23, 2004, CPI issued $125.0 million of 8% Notes that are guaranteed by CPI International and all of CPI’s domestic subsidiaries. Separate financial statements of the guarantors are not presented because (i) the guarantors are wholly-owned and have fully and unconditionally guaranteed the 8% Notes on a joint and several basis, and (ii) the Company’s management has determined that such separate financial statements are not material to investors. Instead, presented below are the consolidating financial statements of: (a) the parent or 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.

25




CONDENSED CONSOLIDATING BALANCE SHEET
As of December 29, 2006

 

 

Parent

 

Issuer

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

Consolidated

 

 

 

(CPI Int’l)

 

(CPI)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

276

 

$

29,528

 

$

930

 

$

1,895

 

$

 

$

32,629

 

Restricted cash

 

 

 

1,174

 

777

 

 

1,951

 

Accounts receivable, net

 

 

19,883

 

7,983

 

12,878

 

 

40,744

 

Inventories

 

 

36,692

 

2,424

 

16,828

 

(1,304

)

54,640

 

Deferred tax assets

 

 

11,100

 

3

 

781

 

 

11,884

 

Intercompany receivable

 

 

26,193

 

977

 

446

 

(27,616

)

 

Prepaid and other current assets

 

907

 

1,422

 

182

 

749

 

 

3,260

 

Total current assets

 

1,183

 

124,818

 

13,673

 

34,354

 

(28,920

)

145,108

 

Property, plant and equipment, net

 

 

49,843

 

2,904

 

12,373

 

 

65,120

 

Deferred debt issue costs, net

 

3,068

 

6,217

 

 

 

 

9,285

 

Intangible assets, net

 

 

59,504

 

6,652

 

8,722

 

 

74,878

 

Goodwill

 

 

93,348

 

5,848

 

48,263

 

 

147,459

 

Other long-term assets

 

569

 

407

 

 

 

 

976

 

Intercompany notes receivable

 

 

1,035

 

 

 

(1,035

)

 

Investment in subsidiaries

 

212,913

 

57,567

 

 

 

(270,480

)

 

Total assets

 

$

217,733

 

$

392,739

 

$

29,077

 

$

103,712

 

$

(300,435

)

$

442,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

201

 

$

6,877

 

$

424

 

$

8,205

 

$

 

$

15,707

 

Accrued expenses

 

3,278

 

17,232

 

921

 

6,505

 

 

27,936

 

Product warranty

 

 

3,489

 

204

 

2,149

 

 

5,842

 

Income taxes payable

 

 

3,089

 

310

 

5,706

 

 

9,105

 

Advance payments from customers

 

 

3,923

 

1,686

 

1,215

 

 

6,824

 

Intercompany payable

 

27,616

 

 

 

 

(27,616

)

 

Total current liabilities

 

31,095

 

34,610

 

3,545

 

23,780

 

(27,616

)

65,414

 

Deferred income taxes

 

371

 

23,742

 

 

5,864

 

 

29,977

 

Intercompany notes payable

 

 

 

 

1,035

 

(1,035

)

 

Long-term debt, less current portion

 

79,294

 

162,500

 

 

 

 

241,794

 

Other long-term liabilities

 

 

51

 

 

 

 

51

 

Total liabilities

 

110,760

 

220,903

 

3,545

 

30,679

 

(28,651

)

337,236

 

Common stock

 

161

 

 

 

 

 

161

 

Parent investment

 

 

121,692

 

22,228

 

57,572

 

(201,492

)

 

Additional paid-in capital

 

65,765

 

 

 

 

 

65,765

 

Accumulated other comprehensive income

 

290

 

(315

)

 

(19

)

334

 

290

 

Retained earnings

 

40,757

 

50,459

 

3,304

 

15,480

 

(70,626

)

39,374

 

Net stockholders’ equity

 

106,973

 

171,836

 

25,532

 

73,033

 

(271,784

)

105,590

 

Total liabilities and stockholders’ equity

 

$

217,733

 

$

392,739

 

$

29,077

 

$

103,712

 

$

(300,435

)

$

442,826

 

 

26




CONDENSED CONSOLIDATING BALANCE SHEET
As of September 29, 2006

 

 

Parent

 

Issuer

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

Consolidated

 

 

 

(CPI Int’l)

 

(CPI)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

139

 

$

28,299

 

$

290

 

$

1,425

 

$

 

$

30,153

 

Restricted cash

 

 

 

941

 

805

 

 

1,746

 

Accounts receivable, net

 

 

22,642

 

7,132

 

13,854

 

 

43,628

 

Inventories

 

 

34,659

 

2,215

 

18,540

 

(1,383

)

54,031

 

Deferred tax assets

 

 

10,703

 

3

 

814

 

 

11,520

 

Intercompany receivable

 

 

27,988

 

2,748

 

 

(30,736

)

 

Prepaid and other current assets

 

887

 

1,238

 

165

 

790

 

 

3,080

 

Total current assets

 

1,026

 

125,529

 

13,494

 

36,228

 

(32,119

)

144,158

 

Property, plant and equipment, net

 

 

50,344

 

2,982

 

10,525

 

 

63,851

 

Deferred debt issue costs, net

 

3,123

 

6,521

 

 

 

 

9,644

 

Intangible assets, net

 

 

59,901

 

6,715

 

8,873

 

 

75,489

 

Goodwill

 

 

93,378

 

5,848

 

48,263

 

 

147,489

 

Other long-term assets

 

731

 

397

 

 

 

 

1,128

 

Intercompany notes receivable

 

 

1,035

 

 

 

(1,035

)

 

Investment in subsidiaries

 

204,778

 

55,247

 

 

 

(260,025

)

 

Total assets

 

$

209,658

 

$

392,352

 

$

29,039

 

$

103,889

 

$

(293,179

)

$

441,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

$

1,714

 

$

 

$

 

$

 

$

1,714

 

Accounts payable

 

199

 

9,667

 

490

 

8,745

 

 

19,101

 

Accrued expenses

 

1,298

 

16,130

 

921

 

4,920

 

 

23,269

 

Product warranty

 

 

3,506

 

204

 

2,248

 

 

5,958

 

Income taxes payable

 

 

4,778

 

204

 

5,711

 

 

10,693

 

Advance payments from customers

 

 

3,451

 

909

 

1,950

 

 

6,310

 

Intercompany payable

 

27,744

 

 

 

2,992

 

(30,736

)

 

Total current liabilities

 

29,241

 

39,246

 

2,728

 

26,566

 

(30,736

)

67,045

 

Deferred income taxes

 

447

 

23,578

 

 

5,908

 

 

29,933

 

Intercompany notes payable

 

 

 

 

1,035

 

(1,035

)

 

Long-term debt, less current portion

 

79,281

 

165,786

 

 

 

 

245,067

 

Other long-term liabilities

 

 

41

 

 

 

 

41

 

Total liabilities

 

108,969

 

228,651

 

2,728

 

33,509

 

(31,771

)

342,086

 

Common stock

 

160

 

 

 

 

 

160

 

Parent investment

 

 

120,705

 

22,228

 

57,536

 

(200,469

)

 

Additional paid-in capital

 

65,295

 

 

 

 

 

65,295

 

Accumulated other comprehensive income

 

679

 

8

 

 

(23

)

15

 

679

 

Retained earnings

 

34,555

 

42,988

 

4,083

 

12,867

 

(60,954

)

33,539

 

Net stockholders’ equity

 

100,689

 

163,701

 

26,311

 

70,380

 

(261,408

)

99,673

 

Total liabilities and stockholders’ equity

 

$

209,658

 

$

392,352

 

$

29,039

 

$

103,889

 

$

(293,179

)

$

441,759

 

 

27




CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended December 29, 2006

 

Parent

 

Issuer

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

Consolidated

 

 

 

(CPI Int’l)

 

(CPI)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Sales

 

$

 

$

51,365

 

$

14,580

 

$

34,543

 

$

(16,765

)

$

83,723

 

Cost of sales

 

 

35,495

 

12,065

 

26,426

 

(16,844

)

57,142

 

Gross profit

 

 

15,870

 

2,515

 

8,117

 

79

 

26,581

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

643

 

 

1,248

 

 

1,891

 

Selling and marketing

 

 

1,969

 

829

 

2,031

 

 

4,829

 

General and administrative

 

 

3,691

 

207

 

506

 

 

4,404

 

Amortization of acquisition-related intangible assets

 

 

334

 

63

 

151

 

 

548

 

Net loss on disposition of assets

 

 

 

 

18

 

 

18

 

Total operating costs and expenses

 

 

6,637

 

1,099

 

3,954

 

 

11,690

 

Operating income

 

 

9,233

 

1,416

 

4,163

 

79

 

14,891

 

Interest expense (income), net

 

2,048

 

3,291

 

(6

)

6

 

 

5,339

 

(Loss) income before income tax expense and equity in income of subsidiaries

 

(2,048

)

5,942

 

1,422

 

4,157

 

79

 

9,552

 

Income tax (benefit) expense

 

(779

)

2,571

 

381

 

1,544

 

 

3,717

 

Equity in income of subsidiaries

 

7,104

 

3,733

 

 

 

(10,837

)

 

Net income

 

$

5,835

 

$

7,104

 

$

1,041

 

$

2,613

 

$

(10,758

)

$

5,835

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Quarter Ended December 30, 2005

 

Parent

 

Issuer

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

Consolidated

 

 

 

(CPI Int’l)

 

(CPI)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

Sales

 

$

 

$

52,004

 

$

12,942

 

$

34,808

 

$

(17,375

)

$

82,379

 

Cost of sales

 

 

38,289

 

10,702

 

25,469

 

(17,289

)

57,171

 

Gross profit

 

 

13,715

 

2,240

 

9,339

 

(86

)

25,208

 

Operating costs and expenses: