UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
ANNUAL
REPORT
PURSUANT
TO SECTIONS 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark
One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended October 3, 2008
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ______to______
Commission
file number: 000-51928
CPI
International, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
(State
or Other Jurisdiction of Incorporation or Organization)
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75-3142681
(I.R.S.
Employer Identification No.)
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811
Hansen Way, Palo Alto, California 94303
(Address
of Principal Executive Offices and Zip Code)
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(650)
846-2900
(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the
Act:
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Title of each
Class
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Name of Each Exchange on Which
Registered
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Common
Stock, par value $0.01 per share
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The
Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
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Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
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Yes
¨ No
x
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Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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Yes
¨ No
x
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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.
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Yes
x No
¨
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Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form
10-K.
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x
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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 the definitions of “large accelerated filer,” “accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer
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¨
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Accelerated
filer
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x
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Non-accelerated
filer
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¨
(Do not check if a smaller reporting company)
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Smaller
reporting company
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¨
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Indicate by
check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
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Yes
¨ No
x
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The
aggregate market value of common stock held by non-affiliates of the
registrant as of March 28, 2008 (the last business day of the registrant’s
most recently completed second fiscal quarter) was approximately $73
million, based on the closing sale price of $9.98 per share of common
stock as reported on the Nasdaq Stock Market.
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Indicate the
number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 16,360,349 shares of the
registrant’s common stock, par value $0.01 per share, were outstanding at
December 1, 2008.
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DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of
the registrant’s definitive 2009 proxy statement, anticipated to be filed with
the Securities and Exchange Commission within 120 days after the close of the
registrant’s fiscal year, are incorporated by reference into Part III of this
Form 10-K.
TABLE
OF CONTENTS
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PART I |
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4
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Risk Factors |
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17 | ||
| Item 1B. | Unresolved Staff Comments | 30 | |||
| Item 2. | Properties |
30
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| Item 3. | Legal Proceedings |
30
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| Item 4. | Submission of Matters to a Vote of Security Holders | 30 | |||
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PART II | 31 |
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72 |
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PART IV | 73 |
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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 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.
| Item 1. |
Business
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Background
We are a
provider of microwave and radio frequency (“RF”), power and control products for
critical defense, communications, medical, scientific and other applications. We
develop, manufacture and distribute products used to generate, amplify, transmit
and receive high-power/high-frequency microwave and RF signals and/or provide
power and control for various applications.
Approximately
half of our product sales for fiscal year 2008 were for United States and
foreign government and military end use, particularly for radar and electronic
warfare applications. We are one of three companies in the U.S. that have the
facilities and expertise to produce a broad range of high-power microwave
products to the demanding specifications required for advanced military
applications. Our products are critical elements of high-priority U.S. and
foreign military programs and platforms, including numerous planes, ships and
ground-based platforms. Defense applications of our products include
transmitting and receiving radar signals for locating and tracking threats,
weapons guidance and navigation, as well as transmitting decoy and jamming
signals for electronic warfare and transmitting signals for satellite
communications. The U.S. Government is our only customer that accounted for more
than 10% of our sales in the last three fiscal years.
In
addition to our strong presence in defense applications, we have successfully
applied our key technologies to commercial end markets, including
communications, medical, industrial and scientific applications, which provide
us with a diversified base of sales. Approximately half of our product sales for
fiscal year 2008 were for commercial applications.
We
continue to develop higher-power, wider-bandwidth and higher-frequency microwave
products that enable significant technological advances for our defense and
commercial customers. In fiscal year 2008, we generated approximately 58% of our
total sales from products for which we believe we are the sole provider to our
customers, enhancing our reputation and the stability of our
business.
Having
average lives of between three and seven years, many of our products “wear out”
and require replacement. We estimate that approximately 45% of our total sales
for fiscal year 2008 were generated from recurring sales of replacements, spares
and repairs, including upgraded replacements for existing products, providing us
with a stable, predictable business that is partially insulated from dramatic
shifts in market conditions. We regularly work with our customers to create
upgraded products with enhanced bandwidth, power and reliability. We estimate
that our products are installed on more than 125 U.S. defense systems and more
than 180 commercial systems. This installed base and our sole-provider
positioning on high-profile U.S. military and commercial programs provide us
with a reputation and market visibility that we believe will help us generate
profitable future sales growth.
In 1948,
Russell and Sigurd Varian, the historical founders of our business and the
inventors of the klystron, founded Varian Associates, Inc. and introduced the
klystron as its first commercial product. The klystron is still a foundation of
modern high-power microwave applications and makes possible the generation,
amplification and transmission of high-fidelity electronic signals at high-power
levels and high frequencies. Varian Associates’ first products became the
progenitors of our current product lines. Over time, Varian Associates, through
internal development and acquisition, developed new devices and new uses for its
products, including applications for the radar and electronic warfare,
communications, medical, industrial and scientific markets.
In 1995,
a private equity fund, together with members of management, purchased the
electron device business from Varian Associates and formed our predecessor,
Communications & Power Industries Holding Corporation, which was the parent
company of Communications and Power Industries, Inc. In November 2003, CPI
Acquisition Corp., which, at the time, was wholly owned by The Cypress Group
(“Cypress), was incorporated in Delaware. In January 2004, CPI
Acquisition Corp. acquired our predecessor in a merger and changed its name from
CPI Acquisition Corp. to CPI Holdco, Inc. In January 2006, CPI Holdco, Inc.
changed its name to CPI International, Inc. On May 3, 2006, we completed the
initial public offering of the common stock of CPI International.
Unless
otherwise noted or dictated by context, (1) “CPI International” or “successor”
means CPI International, Inc., (2) “predecessor” means Communications &
Power Industries Holding Corporation, the predecessor to CPI International, (3)
“Communications & Power Industries” means Communications & Power
Industries, Inc., the direct, wholly owned operating subsidiary of CPI
International and (4) “merger” or the “January 2004 merger” means the January
23, 2004 merger pursuant to which CPI International acquired the predecessor.
The terms “we,” “us,” and “our” refer to CPI International and its direct and
indirect subsidiaries on a consolidated basis after the merger, or to the
predecessor and its direct and indirect subsidiaries on a consolidated basis
prior to the merger, as applicable.
We are
organized into six operating divisions: Microwave Power Products Division (Palo
Alto, California), Beverly Microwave Division (Beverly, Massachusetts), Satcom
Division (Ontario, Canada), Communications & Medical Products
Division (Ontario, Canada), Econco Division (Woodland, California) and Malibu
Division (Camarillo, California). In fiscal year 2006, we moved the operations
of our Eimac business (“Eimac”), which was formerly a separate division, from
San Carlos, California into our facility in nearby Palo Alto, California, and
integrated those operations into our Microwave Power Products Division in order
to realize increased efficiencies and achieve additional cost
savings.
In August
2007, we purchased all outstanding common stock of Malibu Research Associates,
Inc. (“Malibu”), a privately held company, in order to expand our product
offering to both new and existing customers in the radar and electronic warfare
and communications markets. As a result of this acquisition, we formed the
Malibu Division.
Markets
We
develop, manufacture and distribute products used to generate, amplify, transmit
and receive high-power/high-frequency microwave and RF signals and/or provide
power and control for various applications in defense and commercial markets. We
serve five end markets: the radar and electronic warfare, communications,
medical, industrial and scientific markets. Certain of our products are sold in
more than one end market depending on the specific power and frequency
requirements of the application and the physical operating conditions of the end
product. End-use applications of these systems include:
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the
transmission of radar signals for navigation and
location;
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the
transmission of deception signals for electronic
countermeasures;
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the
transmission, reception and amplification of voice, data and video signals
for broadcasting, data links, Internet, flight testing and other types of
commercial and military
communications;
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providing
power and control for medical diagnostic
imaging;
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generating
microwave energy for radiation therapy in the treatment of cancer;
and
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generating
microwave energy for various industrial and scientific
applications.
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Our end
markets are described below.
Radar
and Electronic Warfare Market
We supply
products used in various types of military radar systems, including search, fire
control, tracking and weather radar systems. In radar systems, our products are
used to generate or amplify electromagnetic energy pulses, which are transmitted
via the radar system’s antenna through the air until they strike a target. The
return “echo” is read and analyzed by the receiving portion of the radar system,
which then enables the user to locate and identify the target. Our products have
been an integral element of radar systems for more than five
decades.
We supply
microwave power amplifiers to the electronic warfare market. Electronic warfare
systems provide protection for ships, aircraft and high-value land targets
against radar-guided weapons by interfering with, deceiving or disabling the
threats. Electronic warfare systems include onboard electronic equipment, pods
that attach under aircraft wings and expendable decoys. Within an electronic
warfare system, our components amplify low-level incoming signals received from
enemy radar or enemy communications systems and amplify or modify those signals
to enable the electronic warfare system either to jam or deceive the threat. We
believe that we are a leading provider of microwave power sources for the
electronic warfare market, having sold thousands of devices into the market, and
we believe that we have a sole provider position in products for certain
high-power phased array systems and expendable decoys. The electronic warfare
market also includes devices and subsystems being developed or supplied for
high-power microwave applications, such as systems to disable and destroy
improvised explosive devices (“IEDs”) and Active Denial (a new system, currently
in testing, that uses microwave energy to deter unfriendly personnel). Many of
the electronic warfare programs on which we are a qualified supplier are
well-entrenched current programs for which we believe that there is ongoing
demand.
Our radar
and electronic warfare products include microwave and power grid sources,
microwave amplifiers, receiver protectors, multifunction integrated microwave
assemblies, as well as complete transmitter subsystems consisting of the
microwave amplifier, power supply and control system. With our acquisition of
Malibu, our product offering has expanded to include advanced antenna systems
for radar and radar simulators. Our products are used in airborne, unmanned
aerial vehicles (“UAVs”), ground and shipboard radar systems. We believe that we
are a leading provider of power grid and microwave power sources for government
radar and electronic warfare applications, with an installed base of products on
more than 125 systems and a sole provider position in numerous landmark
programs.
Our sales
in the radar and electronic warfare market were $151.8 million, $144.2 million
and $146.7 million in fiscal years 2008, 2007 and 2006, respectively. On
average, approximately two-thirds of our sales in the radar and
electronic warfare markets are generated from recurring sales of replacements,
spares and repairs, including upgraded replacements for existing
products.
Medical
Market
Within
the medical market, we focus on diagnostic and treatment applications. For
diagnostic applications, we provide products for medical imaging applications,
such as x-ray imaging, positron emission tomography (“PET”) and magnetic
resonance imaging (“MRI”). For these applications, we provide x-ray generators,
subsystems, software and user interfaces, including state-of-the-art,
high-efficiency, compact power supplies and modern microprocessor-based controls
and operator consoles for
diagnostic
imaging. X-ray generators are used to generate and control the electrical energy
being supplied to an x-ray vacuum electron device (“VED”) and, therefore,
control the dose of radiation delivered to the patient during an x-ray imaging
procedure. In addition, these x-ray generators include a user interface to
control the operation of the equipment, including exposure times and the
selection of the anatomic region of the body to be examined. These generators
are interfaced with, and often power and control, auxiliary devices such as
patient positioners, cameras and automatic exposure controls to synchronize the
x-ray examination with this other equipment. We also provide power grid devices
for PET Isotope production systems. These systems are linac-based proton
accelerators used in the detection of cancer and other diseases.
For
treatment applications, we provide klystron VEDs and electron guns for high-end
radiation therapy machines. Klystrons provide the microwave energy to accelerate
a beam of energy toward a cancerous tumor.
Sales in
the medical market were $65.8 million, $67.6 million and $57.6 million in fiscal
years 2008, 2007 and 2006, respectively.
Since
1995, when Varian Associates sold its electron devices business to us, we have
been the sole provider of klystron high-power microwave devices to Varian
Medical Systems Inc.’s oncology systems division for use in its High Energy
Clinac® radiation therapy machines for the treatment of cancer, and we expect
this relationship to continue. We also provide x-ray generators for use on the
On-Board Imager accessory for the Clinac and Trilogy™ medical linear
accelerators. This automated system for image-guided radiation therapy uses
high-resolution x-ray images to pinpoint tumor sites. More than 5,000 of Varian
Medical Systems’ Clinac and Trilogy medical linear accelerators for cancer
radiotherapy are in service around the world, delivering more than 30 million
cancer treatments each year.
The
market for our x-ray generators and associated products is broad, ranging from
dealers who buy only a few generators per year, up to large original equipment
manufacturers (“OEMs”) who buy hundreds per year. We sell our x-ray generators
and associated equipment worldwide and have been growing both our geographic
presence and our product portfolio. We believe that we are a leading independent
supplier of x-ray generators in the world, and we believe that this market
provides continued long-term growth opportunities for us.
We have
traditionally focused on hospital, or “mid- to high-end” applications, and have
become a premier supplier to this part of the market. However, there exists
substantial demand for private clinic, or “lower-end” applications, and we have
introduced new families of products that allow us to participate more fully in
this part of the market.
Communications
Market
In the
communications market, we provide microwave amplifiers for communications links
for broadcast, video, voice and data transmission. We divide the communications
market into satellite, terrestrial broadcast, data link and over-the-horizon
communications applications. Our sales in the communications market were $117.8
million, $112.3 million and $106.7 million in fiscal years 2008, 2007 and 2006,
respectively. The communications market is the most volatile of our end markets,
and sales can vary significantly from quarter to quarter due, in part, to the
timing and size of our shipments for specific infrastructure programs, including
direct-to-home satellite communications applications, during a particular
quarter. Historically, we have focused on commercial communications
applications, but we have recently expanded our focus to include military
communications applications, as we believe that there is a significant and
growing market for our products for these applications.
In each
of the satellite, terrestrial broadcast, data link and over-the-horizon
communications markets, our products amplify and transmit signals within an
overall communications system. Ground-based satellite communications
transmission systems use our products to enable the transmission of microwave
signals, carrying either analog or digital information, from a ground-based
station to the transponders on an orbiting satellite by boosting the power of
the low-level original signal to desired power levels for transmission over
hundreds or thousands of miles to the satellite. The signal is received by the
satellite transponder, converted to the downlink frequency and retransmitted to
a ground-based receiving station. Terrestrial broadcast systems use our products
to amplify and transmit signals, including television and radio signals at very
high (“VHF”) and ultra high (“UHF”) frequencies, or other signals at a variety
of frequencies. Over-the-horizon (also referred to as “troposcatter”) systems
use our amplifiers to send a signal through the atmosphere, bouncing the signal
off the troposphere, the lowest atmospheric layer, and enabling receipt of the
signal tens of miles to hundreds of miles away. With our acquisition of Malibu
in fiscal year 2007, our product offering in the communications market has
expanded to include the airborne and ground nodes of the tactical common data
link (“TCDL”) network for various platforms, including UAVs. TCDL is a
high-bandwidth digital data link that transmits and receives real-time command
and control, intelligence, surveillance and reconnaissance data between manned
and unmanned airborne platforms and their associated ground-based and ship-based
terminals.
Satellite
Communications
The
majority of our communications products are sold into the satellite
communications market. We believe that we are a leading producer of power
amplifiers, amplifier subsystems and high-power microwave devices for satellite
uplinks. We believe that we have a worldwide installed base of more than 25,000
amplifiers. We believe that we offer one of the industry’s most comprehensive
lines of satellite communications amplifiers, with offerings for virtually every
currently applicable frequency and power requirement for both fixed and mobile
satellite communications applications in the military and commercial arena. Our
technological expertise, our well-established worldwide service network and our
ability to design and manufacture both the fully integrated amplifier and either
the associated high-power microwave device or the solid-state RF device allow us
to provide a superior overall service to our customers.
We
believe that we are well equipped to participate in the newest growth areas,
including: amplifiers for the 30 gigahertz (GHz) band (Ka-band), which is
projected to be one of the major new satellite communications growth areas for
both commercial and military applications; the growing application of
conventional and high-definition television for direct-to-home satellite
broadcast; the use of satellite communications for broadband data
communications; and specialized amplifiers for the military communications
market, such as multi-band amplifiers, which operate at multiple discrete
frequency bands.
Terrestrial
Broadcast Communications
We serve
the AM, FM and shortwave radio and VHF and UHF television broadcast market with
high-quality, reliable and efficient high-power microwave and RF devices. Eimac,
which is part of our Microwave Power Products Division, supplies these products
to transmitter OEMs directly and offers immediate delivery of products to end
users through our distributors. Our Econco Division is a provider of rebuilding
services for high-power power grid devices, allowing broadcasters to extend the
life of their devices at a cost that is lower than buying a new device. Although
the terrestrial broadcast industry is considered a mature market, we believe
that emerging shortwave digital radio technology will provide new opportunity
for our high-power products. Through the years, we have established a customer
base of several thousand customers in the broadcast market, providing us with
opportunities for replacement, spares, upgrade and rebuilding
business.
Data
Link Communications
Data link
applications use our products to transmit signals from an airborne platform to
the ground or other airborne or satellite platforms, or vice versa.
Over-the-horizon
Communications
We
provide high-power amplifiers and traveling wave tubes for over-the-horizon, or
troposcatter, communications applications. The over-the-horizon communications
market involves over-the-horizon, microwave-based communication systems. These
systems transmit voice, video and data signals for up to several hundred miles
by bouncing the signals off the troposphere, the lowest atmospheric layer, which
is approximately six miles above the earth’s surface. Since no satellite is
required, these systems can provide an easy-to-install, relocatable and
cost-efficient alternative to satellite-based communications.
Industrial
Market
The
industrial market includes applications for a wide range of systems used for
material processing, instrumentation and voltage generation. We offer a number
of specialized product lines to address this diverse market. We produce fully
integrated amplifiers that include the associated high-power microwave devices
used in instrumentation applications for electromagnetic interference and
compatibility testing. Our products are also installed in the power supply
modules of industrial equipment using RF energy to perform pipe and plastic
welding, textile drying and semiconductor wafer fabrication. We have a line of
industrial RF generators that use high-power microwave technology for various
industrial heating and material processing applications. Our sales in the
industrial market were $25.1 million, $20.5 million and $22.1 million in fiscal
years 2008, 2007 and 2006, respectively.
Scientific
Market
The
scientific market consists primarily of equipment used in reactor fusion
programs and accelerators for the study of high-energy particle physics,
referred to as “Big Science.” Generally, in scientific applications, our
products are used to generate high levels of microwave or RF energy to
accelerate a beam of electrons in order to study the atom and its elementary
particles. Our products are also used in research related to the generation of
electricity from fusion reactions. Our sales in the scientific market were $9.5
million, $6.5 million and $6.6 million in fiscal years 2008, 2007 and 2006,
respectively.
Geographic
Markets
We sell
our products in more than 90 countries. In fiscal year 2008, sales to customers
in the U.S., Europe and Asia accounted for approximately 64%, 18% and 14% of our
total sales, respectively. No country other than the U.S. accounted for more
than 10% of our sales in fiscal year 2008. See “Sales, Marketing and Service.”
For financial information about geographic areas, see Note 11 to the
accompanying audited consolidated financial statements.
Products
We have
an extensive portfolio of over 4,500 products that includes a wide range of
microwave and power grid VEDs, in addition to products such as:
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satellite
communications amplifier
subsystems;
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radar
and electronic warfare subsystems;
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specialized
antenna subsystems;
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solid-state
integrated microwave assemblies;
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medical
x-ray generators and control
systems;
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modulators
and transmitters; and
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various
electronic power supply and control equipment and
devices.
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Additionally,
we have developed complementary, more highly integrated, subsystems that contain
additional integrated components for medical imaging and for satellite
communications applications. These integrated subsystems generally sell for
higher prices.
Generally, our
products are used to:
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generate
or amplify (multiply) various forms of electromagnetic energy (these
products are generally referred to as VEDs, vacuum electron devices, or
simply as devices);
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transmit,
direct, measure and control electromagnetic
energy;
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provide
the voltages and currents to power and control devices that generate
electromagnetic energy; or
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provide
some combination of the above
functions.
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VEDs were
initially developed for defense applications but have since been applied to many
commercial markets. We use tailored variations of this key technology to address
the different frequency and power requirements in each of our target markets.
Generally our VED products derive from, or are enhancements to, the original VED
technology on which our company was founded. Most of our other products were
natural offshoots of the original VED technology and were developed in response
to the opportunities and requirements in the market for more fully integrated
products and services. The type of device selected for a specific application is
based on the operating parameters required by the system. Our products generally
have selling prices ranging from $2,000 to $100,000, with certain, limited
products priced up to $1,000,000.
We sell
several categories of VEDs, including:
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Klystrons
and gyrotrons: Klystrons are typically high-power VEDs that
operate over a narrow range of frequencies, with power output ranges from
hundreds of watts to megawatts and frequencies from 500 kilohertz to over
30 GHz. We produce and manufacture klystrons for a variety of radar,
communications, medical, industrial
and
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| scientific applications. Gyrotron oscillators and amplifiers operate at very high-power and very high frequencies. Power output of one megawatt has been achieved at frequencies greater than 100 GHz. These devices are used in areas such as fusion research, electronic warfare and high-resolution radar. |
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Helix
traveling wave tubes: Helix traveling wave tubes are VEDs that
operate over a wide range of frequencies at moderate output power levels
(tens of watts to thousands of watts). These devices are ideal for
terrestrial and satellite communications and electronic warfare
applications.
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Coupled
cavity traveling wave tubes: Coupled cavity traveling wave
tubes are VEDs that combine some of the power generating capability of a
klystron with some of the increased bandwidth (wider frequency range)
properties of a helix traveling wave tube. These amplifiers are medium
bandwidth, high-power devices, since power output levels can be as high as
one megawatt. These devices are used primarily for high-power and
multi-function radars, including front line radar
systems.
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Magnetrons: Magnetron
oscillators are VEDs capable of generating high-power output at relatively
low cost. Magnetrons generate power levels as high as 20 megawatts and
cover frequencies up to the 40 GHz range. We design and manufacture
magnetrons for radar, electronic warfare and missile programs within the
defense market. Shipboard platforms include search and air traffic control
radar on most aircraft carriers, cruisers and destroyers of NATO-country
naval fleets. Ground-based installations include various military and
civil search and air traffic control radar systems. We are also a supplier
of magnetrons for use in commercial weather radar. Potential new uses for
magnetrons include high-power microwave systems for disruption of enemy
electronic equipment and the disabling or destruction of roadside bombs
and other IEDs.
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Cross-field
amplifiers: Cross-field amplifiers are VEDs used for high-power
radar applications because they have power output capability as high as 10
megawatts. Our cross-field amplifiers are primarily used to support the
Aegis radar system used by the U.S. Navy and select foreign naval vessels.
We supply units for both new ships and
replacements.
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Power
grid devices: Power grid devices are lower frequency VEDs that
are used to generate, amplify and control electromagnetic energy. These
devices are used in commercial and military communications systems and
radio and television broadcasting. We also supply power grid devices for
the shortwave broadcast market. Our products are also widely used in
equipment that serves the industrial markets such as textile drying, pipe
welding and semiconductor wafer
fabrication.
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In
addition to VEDs, we also sell:
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Microwave
transmitter subsystems: Our microwave transmitter subsystems
are integrated assemblies generally built around our VED products. These
subsystems incorporate specialized high-voltage power supplies to power
the VED, plus cooling and control systems that are uniquely designed to
work in conjunction with our devices to maximize life, performance and
reliability. Microwave transmitter subsystems are used in a variety of
defense and commercial applications. Our transmitter subsystems are
available at frequencies ranging from one GHz all the way up to 100 GHz
and beyond.
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Satellite
communications amplifiers: Satellite communications amplifiers
provide integrated power amplification for the transmission of voice,
broadcast, data, Internet and other communications signals from ground
stations to satellites in all frequency bands. We provide a broad line of
complete, integrated satellite communications amplifiers that consist of a
VED or solid-state microwave amplifier, a power supply to power the
device, radio frequency conditioning circuitry, cooling equipment,
electronics to control the amplifier and enable it to interface with the
satellite ground station, and a cabinet. These amplifiers are often
combined in sub-system configurations with other components to meet
specific customer requirements. We offer amplifiers for both defense and
commercial applications. Our products include amplifiers based on
traveling wave tubes, klystrons, solid-state devices and millimeter wave
devices.
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Receiver
protectors and control components: Receiver protectors are used
in the defense market in radar systems to protect sensitive receivers from
extraneous high-power signals, thereby preventing damage to the receiver.
We have been designing and manufacturing receiver protector products for
more than 50 years. We believe that we are the world’s largest
manufacturer of receiver protectors and the only manufacturer offering the
full range of available technologies. We also manufacture a wide range of
other components used to control the RF energy in the customer’s system.
Our receiver protectors and control components are integrated into
prominent fielded military programs. As radar systems have evolved to
improve performance and reduce size and weight, we have invested in
solid-state technology to develop the microwave control components to
allow us to offer more fully integrated products, referred to as
multifunction assemblies, as required by modern radar
systems.
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Medical
x-ray imaging systems: We design and manufacture x-ray
generators for medical imaging applications. These consist of power
supplies, cooling, control and display subsystems that drive the x-ray
equipment used by healthcare providers for medical imaging. The energy in
an x-ray imaging system is generated by an x-ray tube which is another
version of a VED operating in a different region of the electromagnetic
spectrum. These generators use the high-voltage and control systems
expertise originally developed by us while designing power systems to
drive our other VEDs. We also provide the electronics and software
subsystems that control and tie together much of the other ancillary
equipment in a typical x-ray imaging
system.
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Antenna
systems: We design and manufacture antenna systems for a variety of
applications, including, radar, electronic warfare, communications and
telemetry. Along with a variety of antenna types, including phased array,
edge and tilt scanning antennas, conformal electronic scanning antennas,
stabilized shipboard tracking antennas and our trademark FLAPS (“Flat
Parabolic Surface”) antennas, the antenna systems also include the highly
efficient harmonic drive pedestals used to support them. The antenna
systems used on airborne, shipboard and ground-based platforms are
designed to enable high performance, high data rate transmission at
frequencies ranging from one GHz to
100GHz.
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Backlog
As of
October 3, 2008, we had an order backlog of $201.3 million compared to an order
backlog of $196.4 million as of September 28, 2007. 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 reduced 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. Historically, however,
the amount of modifications and terminations has not been material compared to
total contract volume. Approximately 90% of our backlog as of October 3, 2008 is
expected to be filled within fiscal year 2009.
Sales,
Marketing and Service
Our
global distribution system provides us with the capability to introduce, sell
and service our products worldwide. Our distribution system primarily uses our
direct sales professionals throughout the world. We have direct sales offices
throughout North America and Europe, as well as in India, Singapore, China and
Australia. As of October 3, 2008, we had 136 direct sales, marketing and
technical support individuals on staff. Our wide-ranging distribution
capabilities enable us to serve our growing international markets, which
accounted for approximately 36% of our sales in fiscal year 2008.
Our sales
professionals receive extensive technical training and focus exclusively on our
products. As a result, they are able to provide knowledgeable assistance to our
customers regarding product applications, the introduction and implementation of
new technology and at the same time provide local technical
support.
In
addition to our direct sales force, we use approximately 54 external sales
organizations and one significant stocking distributor, Richardson Electronics,
Ltd., to service the needs of customers in certain markets. The majority of the
third-party sales organizations that we use are located outside the U.S. and
Europe and focus primarily on customers in South America, Southeast Asia, the
Middle East, Africa and Eastern Europe. Through the use of third-party sales
organizations, we are better able to meet the needs of our foreign customers by
establishing a local presence in lower volume markets. Using both our direct
sales force and our largest distributor, Richardson Electronics, we are able to
market our products to both end users and system integrators around the world
and are able to deliver our products with short turn-around times.
Given the
complexity of our products, their critical function in customers’ systems and
the unacceptably high costs to our customers of system failure and downtime, we
believe that our customers view our product breadth, reliability and superior
responsive service as key points of differentiation. We offer comprehensive
customer support, with direct technical support provided by 17 strategically
located service centers, primarily serving satellite communications customers.
These service centers are located in the U.S. (California and New Jersey),
Canada (Georgetown, Ontario), Brazil, China (two), India (three), Indonesia,
Japan, Peru, Russia, Singapore, South Africa, Taiwan and The Netherlands. The
service centers enable us to provide extensive technical support and rapid
response to customers’ critical spare parts and service requirements throughout
the world. In addition, we offer on-site installation assistance, on-site
service contracts, a 24-hour technical support hotline and complete product
training at our facilities, our service centers or customer sites. We believe
that many of our customers specify our products in competitive bids due to our
responsive global support and product quality.
Competition
The
industries and markets in which we operate are competitive. We encounter
competition in most of our business areas from numerous other companies,
including units of L-3 Communications and Thales Electron Devices, e2v
technologies plc and Comtech Xicom Technology, Inc., a subsidiary of Comtech
Telecommunications Corporation. Some of our competitors have parent entities
that have resources substantially greater than ours. In certain markets, some of
these competitors are also our customers and/or our suppliers, particularly for
products for satellite communications applications. Our ability to compete in
our markets depends to a significant extent on our ability to provide
high-quality products with shorter lead times at competitive prices and our
readiness in facilities, equipment and personnel.
We also
continually engage in research and development efforts in order to introduce
innovative new products for technologically sophisticated customers and markets.
There is an inherent risk that advances in existing technology, or the
development of new technology, could adversely affect our market position and
financial condition. We provide both VED and solid-state alternatives to our
customers. Solid-state devices are generally best suited for lower-power
applications, while only VEDs currently serve higher-power and higher-frequency
demands. Because of the small dimensions of solid-state components, solid-state
devices have challenges in dissipating the significant amount of excess heat
energy that is generated in high-power, high-frequency applications. As a
result, we believe that for the foreseeable future, solid-state devices will be
unable to compete on a cost-effective basis in the high-power/high-frequency
markets that represent the majority of our business. The extreme operating
parameters of these applications necessitate heat dissipation capabilities that
are best satisfied by our VED products. We believe VED and solid-state
technology currently each serves its own specialized market without significant
overlap in most applications.
Research
and Development
Total
research and development spending was $22.8 million, $16.3 million and $14.8
million during fiscal years 2008, 2007 and 2006, respectively. Total research
and development spending consisted of company-sponsored research and development
expense of $10.8 million, $8.6 million and $8.6 million during fiscal years
2008, 2007 and 2006, respectively, and customer-sponsored research and
development of $12.0 million, $7.7 million and $6.2 million during fiscal years
2008, 2007 and 2006, respectively. Customer-sponsored research and development
costs are charged to cost of sales to correspond with revenue
recognized.
Manufacturing
We
manufacture our products at six manufacturing facilities in five locations in
North America. We have implemented modern manufacturing methodologies based upon
a continuous improvement philosophy, including just-in-time materials handling,
demand flow technology, statistical process control and value-managed
relationships with suppliers and customers. We obtain certain materials
necessary for the manufacture of our products, such as molybdenum, cupronickel,
oxygen-free high conductivity (“OFHC”) copper and some cathodes, from a limited
group of, or occasionally sole, suppliers. Four of our facilities have achieved
the ISO 9001 international certification standard.
Generally,
each of our manufacturing divisions uses similar manufacturing processes
consisting of product development, procurement of components and/or
sub-assemblies, high-level assembly and testing. For satellite communications
equipment, the process is primarily one of integration, and we use contract
manufacturers to provide sub-assemblies whenever possible. Satellite
communications
equipment
uses both VED and solid-state technology, and the Satcom Division procures
certain of the critical components that it incorporates into its subsystems from
our other manufacturing divisions.
Our
business is dependent, in part, on our intellectual property rights, including
trade secrets, patents and trademarks. We rely on a combination of nondisclosure
and other contractual arrangements as well as trade secret, patent, trademark
and copyright laws to protect our intellectual property rights. We do not
believe that any single patent or other intellectual property right or license
is material to our success as a whole.
On
occasion, we have entered into agreements pursuant to which we license
intellectual property from third parties for use in our business, and we also
license intellectual property to third parties. As a result of contracts with
the U.S. Government, some of which contain patent and/or data rights clauses,
the U.S. Government has acquired royalty-free licenses or other rights in
inventions and technology resulting from certain work done by us on behalf of
the U.S. Government.
U.S.
Government Contracts and Regulations
We deal
with numerous U.S. Government agencies and entities, including the Department of
Defense, and, accordingly, we must comply with and are affected by laws and
regulations relating to the formation, administration and performance of U.S.
Government contracts. We are affected by similar government authorities with
respect to our international business.
U.S.
Government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds on a fiscal
year basis even though contract performance may extend over many years.
Therefore, long-term government contracts and related orders are subject to
cancellation if appropriations for subsequent performance periods are not
approved.
In
addition, our U.S. Government contracts may span one or more base years and
multiple option years. The U.S. Government generally has the right not to
exercise option periods and may not exercise an option period if the applicable
U.S. Government agency does not receive funding or is not satisfied with our
performance of the contract. All of our government contracts and most of our
government subcontracts can be terminated by the U.S. Government, or another
relevant government, either for its convenience or if we default by failing to
perform under the contract. Upon termination for convenience of a fixed-price
contract, we normally are entitled to receive the purchase price for delivered
items, reimbursement for allowable costs for work-in-process and an allowance
for profit on the work performed. Upon termination for convenience of a
cost-reimbursement contract, we normally are entitled to reimbursement of
allowable costs plus a portion of the fee. The amount of the fee recovered, if
any, is related to the portion of the work accomplished prior to
termination.
Environmental
Matters
We are
subject to a variety of U.S. federal, state and local, as well as foreign,
environmental laws and regulations relating to, among other things, wastewater
discharge, air emissions, storage and handling of hazardous materials, disposal
of hazardous wastes and remediation of soil and groundwater contamination. We
use a number of chemicals or similar substances and generate wastes that are
classified as hazardous, and we require environmental permits to conduct certain
of our operations. Violation of such laws and regulations can result in fines,
penalties and other sanctions.
In
connection with the sale of Varian Associates, Inc.’s electron devices business
to us in 1995, Varian Medical Systems, Inc. (as successor to Varian Associates)
generally agreed to indemnify us for various environmental liabilities relating
to Varian Associates’ electron devices business prior to August 1995. We are
generally not indemnified by Varian Medical Systems with respect to liabilities
resulting from our operations after August 1995. Pursuant to this agreement,
Varian Medical Systems is undertaking environmental investigation and remedial
work at our two manufacturing facilities in Palo Alto, California and Beverly,
Massachusetts, that are known to require remediation.
To date,
Varian Medical Systems has, generally at its expense, conducted required
investigation and remediation work at our facilities and responded to
environmental claims arising from Varian Medical Systems (or its predecessor’s)
prior operations of the electron devices business.
In
connection with the agreement for the sale of our San Carlos facility in
September 2006, the buyer of the facility obtained insurance to cover the
expected environmental remediation costs and other potential environmental
liabilities at that facility. In addition, in connection with the sale, we
released Varian Medical Systems from certain of its indemnification obligations
with respect to that facility. If the proceeds of the environmental insurance
are insufficient to cover the required remediation costs and potential other
environmental liabilities at that facility, we could be required to bear a
portion of those liabilities.
We
believe that we have been and are in substantial compliance with environmental
laws and regulations, and we do not expect to incur material costs relating to
environmental compliance.
Employees
As of
October 3, 2008, we had approximately 1,650 employees, of which 430 are located
outside the United States (including approximately 400 in Canada). None of our
employees is subject to a collective bargaining agreement although a limited
number of our sales force members located in Europe are members of work councils
or unions. We have not experienced any work stoppages and believe that we have
good relations with our employees.
Financial
Information About Segments
For
financial information about our segments, see Note 11 to the accompanying
audited consolidated financial statements.
Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports are accessible at no cost on
our Web site at www.cpii.com as soon as reasonably practicable after they are
filed or furnished to the Securities and Exchange Commission (the “SEC”). They
are also available by contacting our Investor Relations at
investor.relations@cpii.com and are also accessible on the SEC’s Web site at
www.sec.gov.
Our Web site and the
information contained therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K or our other filings with
the SEC.
| Risk Factors |
Investors
should carefully consider the following risks and other information in this
report and our other filings with the SEC before deciding to invest in us or to
maintain or increase any investment. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties may also
adversely impact and impair our business. If any of the following risks actually
occur, our business, results of operations or financial condition would likely
suffer. In such case, the trading price of our securities could decline and
investors might lose all or part of their investment.
RISKS
RELATING TO OUR BUSINESS
We
face competition in the markets in which we sell our products.
The U.S. and foreign markets in which
we sell our products are competitive. Our ability to compete in these markets
depends on our ability to provide high-quality products with short lead times at
competitive prices, as well our ability to create innovative new products. In
addition, our competitors could introduce new products with greater
capabilities, which could have a material adverse effect on our business.
Certain of our competitors are owned by companies that have substantially
greater financial resources than we do. Also, our foreign competitors may not be
subject to U.S. Government export restrictions, which may make it easier in
certain circumstances for them to sell to foreign customers. If we are unable to
compete successfully against our current or future competitors, our business and
sales will be harmed.
Fluctuations
in our operating results, including quarterly net orders and sales, may result
in volatility in our stock price, which could cause losses to our
stockholders.
We have experienced and, in the future,
expect to experience fluctuations in our quarterly operating results, including
net orders and sales. The timing of customers’ order placement and customers’
willingness to commit to purchase products at any particular time are inherently
difficult to predict or forecast. Once orders are received, factors that may
affect whether these orders become sales and translate into revenues in a
particular quarter include:
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delay
in shipments due to various factors, including cancellations by a
customer, delays in a customer’s own production schedules, natural
disasters or manufacturing
difficulties;
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delay
in a customer’s acceptance of a product;
or
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a
change in a customer’s financial condition or ability to obtain
financing.
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The
current global economic and financial markets conditions, including severe
disruptions in the credit markets and the potential for a significant and
prolonged global economic recession, may have an adverse effect on our results
of operations. A prolonged general economic recession and, specifically, a
prolonged recession in the defense, communications or medical markets, or
technological changes, as well as other market factors could intensify
competitive pricing pressure, create an imbalance of industry supply and demand,
or otherwise diminish volumes or profits.
Our
quarterly operating results may also be affected by a number of other factors,
including:
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changes
or anticipated changes in third-party reimbursement amounts or policies
applicable to treatments using our
products;
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revenues
becoming affected by seasonal
influences;
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changes
in foreign currency exchange rates;
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changes
in the relative portion of our revenues represented by our various
products;
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timing
of the announcement, introduction and delivery of new products or product
enhancements by us and by our
competitors;
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disruptions
in the supply or changes in the costs of raw materials, labor, product
components or transportation
services;
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the
impact of changing levels of sales to sole purchasers of certain of our
products; and
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unfavorable
outcome of any litigation.
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A
significant portion of our sales is, and is expected to continue to be, from
contracts with the U.S. Government, and any significant reduction in the U.S.
defense budget or any disruption or decline in U.S. Government expenditures
could negatively affect our results of operations and cash flows.
Over 35%, 32% and 33% of our sales in
our 2008, 2007 and 2006 fiscal years, respectively, were made to the U.S.
Government, either directly or indirectly through prime contractors or
subcontractors. Because U.S. Government contracts are dependent on the U.S.
defense budget, any significant disruption or decline in U.S. Government
expenditures in the future, changes in U.S. Government spending priorities,
other legislative changes or changes in our relationship with the U.S.
Government could result in the loss of some or all of our government contracts,
which, in turn, could result in a decrease in our sales and cash
flow.
In
addition, U.S. Government contracts are also conditioned upon continuing
congressional approval and the appropriation of necessary funds. Congress
usually appropriates funds for a given program each fiscal year even though
contract periods of performance may exceed one year. Consequently, at the outset
of a major program, multi-year contracts are usually funded for only the first
year, and additional monies are normally committed to the contract by the
procuring agency only as Congress makes appropriations for future fiscal years.
We cannot ensure that any of our government contracts will continue to be funded
from year to year. If such contracts are not funded, our sales may decline,
which could negatively affect our results of operations and result in decreased
cash flows.
We
are subject to risks particular to companies supplying defense-related equipment
and services to the U.S. Government. The occurrence of any of these risks could
cause a loss of or decline in our sales to the U.S. Government.
U.S.
Government contracts contain termination provisions and are subject to audit and
modification
The U.S.
Government has the ability to:
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terminate
existing contracts, including for the convenience of the government or
because of a default in our performance of the
contract;
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reduce
the value of existing contracts;
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cancel
multi-year contracts or programs;
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audit
our contract-related costs and fees, including allocated indirect
costs;
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suspend
or debar us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
and
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control
and potentially prohibit the export of our products, technology or other
data.
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All of
our U.S. Government contracts can be terminated by the U.S. Government either
for its convenience or if we default by failing to perform under the contract.
Termination-for-convenience provisions provide only for our recovery of costs
incurred or committed, settlement expenses and profit on the work completed
prior to termination. Termination-for-default provisions may provide for the
contractor to be liable for excess costs incurred by the U.S. Government in
procuring undelivered items from another source. Our contracts with foreign
governments generally contain similar provisions relating to termination at the
convenience of the customer.
The U.S.
Government may review or audit our direct and indirect costs and performance on
certain contracts, as well as our accounting and general business practices, for
compliance with complex statutes and regulations, including the Truth in
Negotiations Act, Federal Acquisition Regulations, Cost Accounting Standards and
other administrative regulations. Like most government contractors, the U.S.
Government audits our costs and performance on a continual basis, and we have
outstanding audits. Based on the results of these audits, the U.S. Government
may reduce our contract-related costs and fees, including allocated indirect
costs. In addition, under U.S. Government regulations, some of our costs,
including certain financing costs, research and development costs and marketing
expenses, may not be reimbursable under U.S. Government contracts.
We
are subject to laws and regulations related to our U.S. Government contracts
business which may impose additional costs on our business.
As a U.S.
Government contractor, we must comply with, and are affected by, laws and
regulations related to our performance of our government contracts and our
business. These laws and regulations may impose additional costs on our
business. In addition, we are subject to audits, reviews and investigations of
our compliance with these laws and regulations. In the event that we are found
to have failed to comply with these laws and regulations, we may be fined, we
may not be reimbursed for costs incurred in performing the contracts, our
contracts may be terminated and we may be unable to obtain new contracts. If a
government review, audit or investigation uncovers improper or illegal
activities, we may be subject to civil or criminal penalties and administrative
sanctions, including forfeiture of claims and profits, suspension of payments,
statutory penalties, fines and suspension or debarment.
In
addition, many of our U.S. Government contracts require our employees to
maintain various levels of security clearances, and we are required to maintain
certain facility clearances. Complex regulations and requirements apply to
obtaining and maintaining security clearances and facility clearances, and
obtaining such clearances can be a lengthy process. To the extent we are not
able to obtain or maintain security clearances or facility clearances, we also
may not be able to seek or perform future classified contracts. If we are unable
to do any of the foregoing, we will not be able to maintain or grow our
business, and our revenue may decline.
As
a result of our U.S. Government business, we may be subject to false claim
suits, and a judgment against us in any of these suits could cause us to be
liable for substantial damages.
Our
business with the U.S. Government, subjects us to “qui tam,” or “whistle
blower,” suits brought by private plaintiffs in the name of the U.S. Government
upon the allegation that we submitted a false claim to the U.S. Government, as
well as to false claim suits brought by the U.S. Government. A judgment against
us in a qui tam or false claim suit could cause us to be liable for substantial
damages (including treble damages and monetary penalties) and could carry
penalties of suspension or debarment, which would make us ineligible to receive
any U.S. Government contracts for a period of up to three years. Any material
judgment, or any suspension or debarment, could result in increased costs, which
could negatively affect our results of operations. In addition, any of the
foregoing could cause a loss of customer confidence and could negatively harm
our business and our future prospects.
Some
of our sole-provider business from the U.S. Government in the future may be
subject to competitive bidding.
Some of
the business that we will seek from the U.S. Government in the future may be
awarded through a competitive bidding process. Competitive bidding on government
contracts presents risks such as:
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the
need to bid on programs in advance of contract performance, which may
result in unforeseen performance issues and costs;
and
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the
expense and delay that may arise if our competitors protest or challenge
the award made to us, which could result in a reprocurement, modified
contract, or reduced work.
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If we fail to win competitively bid
contracts or fail to perform these contracts in a profitable manner, our sales
and results of operations could suffer.
Our
business and operating results could be adversely affected by losses under
fixed-price contracts.
Most of
our governmental and commercial contracts are fixed-price
contracts. Fixed-price contracts require us to perform all work under the
contract for a specified lump-sum price. Fixed-price contracts expose us to a
number of risks, including underestimation of costs, ambiguities in
specifications, unforeseen costs or difficulties, problems with new
technologies, delays beyond our control, failure of subcontractors to perform
and economic or other changes that may occur during the contract period. In
addition, some of our fixed-price contracts contain termination provisions that
permit our customer to terminate the contract if we are unsuccessful in
fulfilling our obligations under the contract. In that event, we could be liable
for the excess costs incurred by our customer in completing the
contract.
Laws
and regulations governing the export of our products could adversely impact our
business.
Licenses
for the export of many of our products are required from government agencies in
accordance with various regulations, including the United States Export
Administration Regulations and the International Traffic In Arms Regulations
(“ITAR”). Under these regulations, we must obtain a license or permit from the
U.S. Government before transferring export-controlled technical data to a
foreign person or exporting certain of our products that have been designated as
important for national security. These laws and regulations could adversely
impact our sales and business in the following scenarios:
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In
order to obtain the license for the sale of such a product, we are
required to obtain information from the potential customer and provide it
to the U.S. Government. If the U.S. Government determines that the sale
presents national security risks, it may not approve the
sale.
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Delays
caused by the requirement to obtain a required license or other
authorization may cause delays in our production, sales and export
activities, and may cause us to lose potential
sales.
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If
we violate these laws and regulations, we could be subject to fines or
penalties, including debarment as an exporter and/or a government
contractor.
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We
generate sales from contracts with foreign governments, and significant changes
in government policies or to appropriations of those governments could have an
adverse effect on our business, results of operations and financial
condition.
We
estimate that approximately 12%, 15% and 16% of our sales in fiscal years 2008,
2007 and 2006, respectively, were made directly or indirectly to foreign
governments. Significant changes to appropriations or national defense policies,
disruptions of our relationships with foreign governments or terminations of our
foreign government contracts could have an adverse effect on our business,
results of operations and financial condition.
Our
international operations subject us to the social, political and economic risks
of doing business in foreign countries.
We
conduct a substantial portion of our business, employ a substantial number of
employees, and use external sales organizations, in Canada and in other
countries outside of the United States. As a result, we are subject to risks of
doing business internationally. Direct sales to customers located outside the
United States were 36%, 41% and 37% in fiscal years 2008, 2007 and 2006,
respectively. Circumstances and developments related to international operations
that could negatively affect our business, results of operations and financial
condition include the following:
|
·
|
changes
in currency rates with respect to the U.S.
dollar;
|
|
·
|
changes
in regulatory requirements;
|
|
·
|
potentially
adverse tax consequences;
|
|
·
|
U.S.
and foreign government policies;
|
|
·
|
currency
restrictions, which may prevent the transfer of capital and profits to the
United States;
|
|
·
|
restrictions
imposed by the U.S. Government on the export of certain products and
technology;
|
|
·
|
the
responsibility of complying with multiple and potentially conflicting
laws;
|
|
·
|
difficulties
and costs of staffing and managing international
operations;
|
|
·
|
the
impact of regional or country specific business cycles and economic
instability; and
|
|
·
|
geopolitical
developments and conditions, including international hostilities, acts of
terrorism and governmental reactions, trade relationships and military and
political alliances.
|
Limitations on imports, currency
exchange control regulations, transfer pricing regulations and tax laws and
regulations could adversely affect our international operations, including the
ability of our non-U.S. subsidiaries to declare dividends or otherwise transfer
cash among our subsidiaries to pay interest and principal on our
debt.
We
are subject to risks of currency fluctuations and related hedging
operations.
A portion of our business is conducted
in currencies other than the U.S. dollar. In particular, we incur significant
expenses in Canadian dollars in connection with our Canadian operations, but do
not receive significant revenues in Canadian dollars. Changes in exchange rates
among certain currencies, such as the Canadian dollar and the U.S. dollar, will
affect our cost of sales, operating margins and
revenues. Specifically, if the Canadian dollar strengthens relative
to the U.S. dollar, our expenses will increase, and our results of operations
will suffer. We use financial instruments, primarily Canadian dollar forward
contracts, to hedge a portion of the Canadian dollar denominated costs for our
manufacturing operation in Canada. If these hedging activities are not
successful or we change or reduce these hedging activities in the future, we may
experience significant unexpected expenses from fluctuations in exchange
rates.
Our
business, results of operations and financial condition may be adversely
affected by increased or unexpected costs incurred by us on our contracts and
sales orders.
The terms
of virtually all of our contracts and sales orders require us to perform the
work under the contract or sales order for a predetermined fixed price. As a
result, we bear the risk of increased or unexpected costs associated with a
contract or sales order, which may reduce our profit or cause us to sustain
losses. Future increased or unexpected costs on a significant number of our
contracts and sales orders could adversely affect our business, results of
operations and financial condition.
The
end markets in which we operate are subject to technological change, and changes
in technology could adversely affect our sales.
Our defense and commercial end markets
are subject to technological change. Advances in existing technology, or the
development of new technology, could adversely affect our business and results
of operations. Historically, we have relied on a combination of internal
research and development and customer-funded research and development
activities. To succeed in the future, we must continually engage in effective
and timely research and development efforts in order to introduce innovative new
products for technologically sophisticated customers and end markets and to
benefit from the activities of our customers. If we fail to adapt successfully
to technological changes or fail to obtain access to important technologies, our
sales could suffer.
Environmental
laws and regulations and other obligations relating to environmental matters
could subject us to liability for fines, clean-ups and other damages, require us
to incur significant costs to modify our operations and/or increase our
manufacturing costs.
Environmental
laws and regulations could limit our ability to operate as we are currently
operating and could result in additional costs.
We are
subject to a variety of U.S. federal, state and local, as well as foreign,
environmental laws and regulations relating, among other things, to wastewater
discharge, air emissions, storage and handling
of
hazardous materials, disposal of hazardous wastes and remediation of soil and
groundwater contamination. We use a number of chemicals or similar substances
and generate wastes that are classified as hazardous. We require environmental
permits to conduct many of our operations. Violations of environmental laws and
regulations could result in substantial fines, penalties and other sanctions.
Changes in environmental laws or regulations (or in their enforcement) affecting
or limiting, for example, our chemical uses, certain of our manufacturing
processes or our disposal practices, could restrict our ability to operate as we
are currently operating or impose additional costs. In addition, we may
experience releases of certain chemicals or discover existing contamination,
which could cause us to incur material cleanup costs or other
damages.
We
could be subject to significant liabilities if the obligations associated with
existing environmental contamination are not satisfied by Varian Medical Systems
or by insurance proceeds.
When we
purchased our electron devices business in 1995, Varian Medical Systems
generally agreed to indemnify us for various environmental liabilities relating
to the business prior to the sale, with certain exceptions and limitations.
Varian Medical Systems is undertaking the environmental investigation and
remedial work at our manufacturing facilities that are known to require
environmental remediation. In addition, Varian Medical Systems has been sued or
threatened with suit with respect to environmental obligations related to these
manufacturing facilities. If Varian Medical Systems does not comply fully with
its indemnification obligations to us or does not continue to have the financial
resources to comply fully with those obligations, we could be subject to
significant liabilities.
In
connection with the sale of our former San Carlos facility, the buyer of the
facility obtained insurance to cover the expected environmental remediation
costs and other potential environmental liabilities at that facility, and we
released Varian Medical Systems from certain of its indemnification obligations
with respect to that facility. If the proceeds of the environmental insurance
are insufficient to cover the required remediation costs at that facility and
potential third party claims, we could be subject to material
liabilities.
We
have only a limited ability to protect our intellectual property rights, which
are important to our success.
Our
success depends, in part, upon our ability to protect our proprietary technology
and other intellectual property. We rely on a combination of trade secrets,
confidentiality policies, nondisclosure and other contractual arrangements and
patent, copyright and trademark laws to protect our intellectual property
rights. The steps we take to protect our intellectual property may not be
adequate to prevent or deter infringement or other violations of our
intellectual property, and we may not be able to detect unauthorized use or take
appropriate and timely steps to enforce our intellectual property rights. In
addition, we cannot be certain that our processes and products do not or will
not infringe or otherwise violate the intellectual property rights of others.
Infringement or other violations of intellectual property rights could cause us
to incur significant costs, prevent us from selling our products and have a
material adverse effect on our business, results of operations and financial
condition.
Our
inability to obtain certain necessary raw materials and key components could
disrupt the manufacture of our products and cause our sales and results of
operations to suffer.
We obtain
certain raw materials and key components necessary for the manufacture of our
products, such as molybdenum, cupronickel, OFHC copper and some cathodes from a
limited group of, or occasionally sole, suppliers. If any of our suppliers fails
to meet our needs, we may not have readily available alternatives. Delays in
component deliveries could cause delays in product shipments and require the
redesign of certain products. If we are unable to obtain necessary raw materials
and key
components
from our suppliers under favorable purchase terms and/or on a timely basis or to
develop alternative sources, our ability to manufacture products could be
disrupted or delayed, and our sales and results of operations could
suffer.
If
we are unable to retain key management and other personnel, our business and
results of operations could be adversely affected.
Our business and future performance
depends on the continued contributions of key management personnel. Our current
management team has an average of more than 25 years experience with us in
various capacities. Since assuming their current leadership roles in 2002, this
team has increased our sales, reduced our costs and grown our business. The
unanticipated departure of any key member of our management team could have an
adverse effect on our business and our results of operations. In addition, some
of our technical personnel, such as our key engineers, could be difficult to
replace.
We
may not be successful in implementing part of our growth strategy if we are
unable to identify and acquire suitable acquisition targets or integrate
acquired companies successfully.
Finding
and consummating acquisitions is one of the components of our growth strategy.
Our ability to grow by acquisition depends on the availability of acquisition
candidates at reasonable prices and our ability to obtain additional acquisition
financing on acceptable terms. In making acquisitions, we may experience
competition from larger companies with significantly greater resources. We are
likely to use significant amounts of cash, issue additional equity securities
and/or incur additional debt in connection with future acquisitions, each of
which could have a material adverse effect on our business. There can be no
assurance that we will be able to obtain the necessary funds to carry out
acquisitions on commercially reasonable terms, or at all.
In
addition, acquisitions could place demands on our management and/or our
operational and financial resources and could cause or result in the
following:
|
·
|
difficulties
in assimilating and integrating the operations, technologies and products
acquired;
|
|
·
|
the
diversion of our management’s attention from other business
concerns;
|
|
·
|
our
operating and financial systems and controls being inadequate to deal with
our growth; and
|
|
·
|
the
potential loss of key employees.
|
Future
acquisitions of companies may also provide us with challenges in implementing
the required processes, procedures and controls in our acquired operations.
Acquired companies may not have disclosure controls and procedures or internal
control over financial reporting that are as thorough or effective as those
required by securities law in the United States.
Goodwill
and other intangibles resulting from our acquisitions could become
impaired.
As of October 3, 2008, our
goodwill, developed and core technology and other intangibles amounted to $241.1
million, net of accumulated amortization. We will amortize approximately $3.0
million in each of fiscal years 2009, 2010, 2011 and 2012, $2.9 million in
fiscal year 2013, and $60.4 million thereafter. To the extent we do not generate
sufficient cash flows to recover the net amount of any investment in goodwill
and other intangibles recorded, the investment could be considered impaired and
subject to write off. We expect to record further goodwill and other intangible
assets as a result of any
future
acquisitions we may complete. Future amortization of such other intangible
assets or impairments, if any, of goodwill would adversely affect our results of
operations in any given period.
Our market capitalization has
historically exceeded our net asset value, although recently it has been
particularly volatile. Our market capitalization has dropped below our net asset
value in certain days of October, November and December 2008 largely, we
believe, as a result of the recent global economic downturn and
volatility in the financial markets. If our stock price continuously
falls below our net asset value per share, the decline in our market
capitalization could trigger the requirement of performing the impairment test
on goodwill in fiscal year 2009, which could result in an impairment of our
goodwill.
Our
backlog is subject to modifications and terminations of orders, which could
negatively impact our sales.
Backlog
represents firm orders for which goods and services are yet to be provided,
including with respect to government contracts that are cancelable at will. As
of October 3, 2008, we had an order backlog of $201.3 million. Although
historically the amount of modifications and terminations of our orders has not
been material compared to our total contract volume, customers can, and
sometimes do, terminate or modify these orders. Cancellations of purchase orders
or reductions of product quantities in existing contracts could substantially
and materially reduce our backlog and, consequently, our future sales. Our
failure to replace canceled or reduced backlog could negatively impact our sales
and results of operations.
Changes
in our effective tax rate may have an adverse effect on our results of
operations.
Our
future effective tax rates may be adversely affected by a number of factors
including:
|
·
|
the
jurisdictions in which profits are determined to be earned and
taxed;
|
|
·
|
the
resolution of issues arising from tax audits with various tax
authorities;
|
|
·
|
changes
in the valuation of our deferred tax assets and
liabilities;
|
|
·
|
adjustments
to estimated taxes upon finalization of various tax
returns;
|
|
·
|
increases
in expenses not deductible for tax
purposes;
|
|
·
|
changes
in available tax credits;
|
|
·
|
changes
in share-based compensation
expense;
|
|
·
|
changes
in tax laws or the interpretation of such tax laws and changes in
generally accepted accounting principles;
and/or
|
|
·
|
the
repatriation of non-U.S. earnings for which we have not previously
provided for U.S. taxes.
|
Any significant increase in our future
effective tax rates could adversely impact net income for future
periods.
RISKS
RELATED TO OUR INDEBTEDNESS
We
have a substantial amount of debt, and we may incur substantial additional debt
in the future, which could adversely affect our financial health, our ability to
obtain financing in the future and our ability to react to changes in our
business.
We have a
substantial amount of debt and may incur additional debt in the future. As of
October 3, 2008, our total consolidated indebtedness was $225.75 million and we
had $55.4 million of additional borrowings available under the revolver under
our senior credit facilities. Our substantial amount of debt could have
important consequences to us and our stockholders, including, without
limitation, the following:
|
·
|
it
will require us to dedicate a substantial portion of our cash flow from
operations, in the near term, to make interest payments on our
indebtedness, and in the longer term, to repay the outstanding principal
amount of our indebtedness, each of which will reduce the funds available
for working capital, capital expenditures and other general corporate
expenses;
|
|
·
|
it
could limit our flexibility in planning for or reacting to changes in our
business, the markets in which we compete and the economy at
large;
|
|
·
|
it
could limit our ability to borrow additional funds in the future, if
needed, because of applicable financial and restrictive covenants of our
indebtedness; and
|
|
·
|
it
could make us more vulnerable to interest rate increases because a portion
of our borrowings is, and will continue to be, at variable rates of
interest.
|
A default
under our debt obligations could result in the acceleration of those
obligations. We may not have the ability to fund our debt obligations in the
event of such a default. This may adversely affect our ability to operate our
business and therefore could adversely affect our results of operations and
financial condition and, consequently, the price of our common stock. In
addition, we may incur additional debt in the future. If debt levels increase,
the related risks that we and our stockholders face could
intensify.
The
agreements and instruments governing our debt contain restrictions and
limitations that could limit our flexibility in operating our
business.
Our
senior credit facilities and the indentures governing our outstanding notes have
a number of customary covenants that, among other things, restrict our ability
to:
|
·
|
incur
additional indebtedness;
|
|
·
|
sell
assets or consolidate or merge with or into other
companies;
|
|
·
|
pay
dividends or repurchase or redeem capital
stock;
|
|
·
|
make
certain investments;
|
|
·
|
issue
capital stock of our subsidiaries;
|
|
·
|
incur
liens; and
|
|
·
|
enter
into certain types of transactions with our
affiliates.
|
These
covenants could have the effect of limiting our flexibility in planning for or
reacting to changes in our business and the markets in which we
compete.
Under our
senior credit facilities, we are required to satisfy and maintain specified
financial ratios and tests. Events beyond our control may affect our ability to
comply with those provisions, and we may not be able to meet those ratios and
tests, which would result in a default under our senior credit facilities. In
addition, our senior credit facilities and the indenture governing
Communications & Power Industries’ 8% senior subordinated notes restrict
Communications & Power Industries’ ability to make distributions to CPI
International. Because we are a holding company with no operations of our own,
we rely on distributions from Communications & Power Industries, our wholly
owned subsidiary, to satisfy our obligations under our floating rate senior
notes. If Communications & Power Industries is unable make distributions to
us, and we cannot obtain other funds to satisfy our obligations under our
floating rate senior notes, a default under our floating rate senior notes could
result.
The
breach of any covenants or obligations in our senior credit facilities and the
indentures governing our outstanding notes could result in a default under the
applicable debt agreement or instrument and could trigger acceleration of (or
the right to accelerate) the related debt. Because of cross-default provisions
in the agreements and instruments governing our indebtedness, a default under
one agreement or instrument could result in a default under, and the
acceleration of, our other indebtedness. In addition, the lenders under our
senior credit facilities could proceed against the collateral securing that
indebtedness. If any of our indebtedness were to be accelerated, it could
adversely affect our ability to operate our business or we may be unable to
repay such debt, and, therefore, such acceleration could adversely affect our
results of operations, financial condition and, consequently, the price of our
common stock.
The
current disruptions in the financial markets could affect our ability to obtain
debt financing and have other adverse effects on us.
The U.S.
credit markets have recently experienced historic dislocations and liquidity
disruptions which have caused financing to be unavailable in many cases. These
circumstances have materially impacted liquidity in the debt markets, making
financing terms less attractive for borrowers who are able to find financing,
and in many cases have resulted in the unavailability of certain types of debt
financing. Continued uncertainty in the credit markets may negatively impact our
ability to access funds through our existing revolving credit facilities with
certain lending institutions. If we were to need to access funds through our
existing revolving credit facilities but were unable to do so, that failure
could have a material adverse affect on our financial condition and results of
operations.
Our
outstanding notes and our senior credit facilities are subject to
change-of-control provisions. We may not have the ability to raise funds
necessary to fulfill our obligations under our debt following a change of
control, which could place us in default.
We may
not have the ability to raise the funds necessary to fulfill our obligations
under our outstanding notes and our senior credit facilities following a
change-of-control. Under the indentures governing our notes, upon the occurrence
of specified change of control events, we are required to offer to repurchase
the notes. However, we may not have sufficient funds at the time of the
change-of-control event to make the required repurchase of our notes. In
addition, a change of control under our senior credit facilities would result in
an event of default thereunder and permit the acceleration of the outstanding
obligations under the senior credit facilities.
RISKS
RELATED TO OUR COMMON STOCK
The
price of our common stock may fluctuate, which could negatively affect the value
of stockholders’ investments.
The
market price of our common stock may fluctuate widely as a result of various
factors, such as period-to-period fluctuations in our actual or anticipated
operating results, sales of our common stock by our existing equity investors,
developments in our industry, the failure of securities analysts to cover our
common stock or changes in financial estimates by analysts, failure to meet
financial estimates by analysts, competitive factors, general economic and
securities market conditions and other external factors. Also, securities
markets worldwide experience significant price and volume fluctuations. This
market volatility, as well as general economic or market conditions and market
conditions affecting the common stock of companies in our industry in
particular, could reduce the market price of our common stock in spite of our
operating performance. Stockholders may be unable to resell their shares of our
common stock at or above the purchase price for their shares or at
all.
If
our share price is volatile, we may be the target of securities litigation,
which is costly and time-consuming to defend.
In the
past, following periods of market volatility in the price of a company’s
securities, securityholders have sometimes instituted class action litigation.
If the market value of our common stock experiences adverse fluctuations and we
become involved in this type of litigation, regardless of the outcome, we could
incur substantial legal costs and our management’s attention could be diverted
from the operation of our business, causing our business to suffer.
Future
sales of shares of our common stock in the public market could depress our stock
price and make it difficult for stockholders to recover the full value of their
investment.
We cannot
predict the effect, if any, that market sales of shares of common stock or the
availability of shares of common stock for sale will have on the market price of
our common stock from time to time. Future sales, or the perception or
availability for sale in the public market, of substantial amounts of our common
stock could adversely affect the market price of our common stock.
In
addition, we may issue a substantial number of shares of our common stock under
our stock incentive and stock purchase plans. As of October 3, 2008, we had
options outstanding to purchase 3,349,294 shares of our common stock under our
2000 Stock Option Plan, our 2004 Stock Incentive Plan and our 2006 Equity and
Performance Incentive Plan, of which 2,556,762 were exercisable as of such date.
In addition, as of October 3, 2008, our 2006 Equity and Performance Incentive
Plan and 2006 Employee Stock Purchase Plan provide for the issuance of up to an
additional 1,188,598 shares of our common stock to employees, directors and
consultants. The issuance of significant additional shares of our common stock
upon the exercise of outstanding options or otherwise pursuant to these stock
plans could have a material adverse effect on the market price of our common
stock and could significantly dilute the interests of other
stockholders.
The
controlling position of Cypress will limit other stockholders’ ability to
influence corporate matters.
As of
October 3, 2008, entities affiliated with Cypress collectively own approximately
54% of our outstanding shares of common stock. Accordingly, the entities
affiliated with Cypress have significant influence over our management, affairs
and most matters requiring stockholder approval, including the election of
directors and the approval of significant corporate transactions. The
entities
affiliated
with Cypress will also be able to deter any attempted change of control. This
concentrated control will limit other stockholders’ ability to influence
corporate matters and, as a result, we may take actions that some of our
stockholders may not view as beneficial. Accordingly, the market price of our
common stock could be adversely affected.
Our
anti-takeover provisions could prevent or delay a change in control of our
company, even if such change of control would be beneficial to our
stockholders.
Provisions
of our amended and restated certificate of incorporation and amended and
restated bylaws, as well as provisions of Delaware law, could discourage, delay
or prevent a merger, acquisition or other change in control of our company.
These provisions include:
|
·
|
a
board of directors that is classified such that only one-third of
directors are elected each year;
|
|
·
|
“blank
check” preferred stock that could be issued by our board of directors to
increase the number of outstanding shares and thwart a takeover
attempt;
|
|
·
|
limitations
on the ability of stockholders to call special meetings of
stockholders;
|
|
·
|
prohibiting
stockholder action by written consent and requiring all stockholder
actions to be taken at a meeting of our
stockholders;
|
|
·
|
establishing
advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon by stockholders
at stockholder meetings; and
|
|
·
|
requiring
that the affirmative vote of the holders of at least two-thirds (66.7%) of
the voting power of our issued and outstanding capital stock entitled to
vote in the election of directors be obtained to amend certain provisions
of our amended and restated certificate of
incorporation.
|
In
addition, Section 203 of the Delaware General Corporation Law, which will apply
to us after affiliates of Cypress collectively cease to own at least 15% of the
total voting power of our common stock, limits business combination transactions
with 15% stockholders that have not been approved by the board of directors.
These provisions and other similar provisions make it more difficult for a third
party to acquire us without negotiation. These provisions may apply even if the
transaction may be considered beneficial by some stockholders.
|
Item 1B. Unresolved
Staff Comments
|
None.
|
Item 2. Properties
|
We own,
lease or sublease manufacturing, assembly, warehouse, service and office
properties having an aggregate floor space of approximately 954,000 square feet,
of which approximately 1,080 square feet are leased or subleased to a third
party. The table that follows provides summary information regarding principal
properties owned or leased by us:
|
Square
Footage
|
||||||||||
|
Location
|
Owned
|
Leased/
Subleased
|
Segment
Using the Property
|
|||||||
|
Beverly,
Massachusetts
|
174,000 |
(a)
|
VED
|
|||||||
|
Georgetown,
Ontario, Canada
|
192,000 |
(b)
|
22,000 |
VED
and satcom equipment
|
||||||
|
Woodland,
California
|
36,900 | 9,900 |
VED
|
|||||||
|
Palo
Alto, California
|
418,300 |
(c)
|
VED
and satcom equipment
|
|||||||
|
Mountain
View, California
|
42,500 |
VED
|
||||||||
|
Camarillo,
California
|
37,700 |
Other
|
||||||||
|
Various
other locations
|
21,000 |
(d)
|
VED
and satcom equipment
|
|||||||
|
|
|
(a)
|
The
Beverly, Massachusetts square footage also includes
approximately 1,080 square feet leased to a
tenant.
|
|
(b)
|
Includes
a facility expansion completed in fiscal year 2007 that added
approximately 63,000 square feet.
|
|
(c)
|
Includes
49,100 square feet that are subleased from Varian, Inc. Varian, Inc.
subleases the land from Varian Medical Systems, Inc. and Varian Medical
Systems leases the land from Stanford University.
|
|
(d)
|
Leased
facilities occupied by our field sales and service
organizations.
|
The
lenders under our senior credit facilities have a security interest in certain
of our interests in the real property that we own and lease. Our headquarters
and one principal complex, including one of our manufacturing facilities,
located in Palo Alto, California, are subleased from Varian Medical Systems or
one of its affiliates or former affiliates. Therefore, our occupancy rights are
dependent on our sublessor’s fulfillment of its responsibilities to the master
lessor, including its obligation to continue environmental remediation
activities under a consent order with the California Environmental Protection
Agency. The consequences of the loss by us of such occupancy rights could
include the loss of valuable improvements and favorable lease terms, the
incurrence of substantial relocation expenses and the disruption of our business
operations.
|
Item 3. Legal
Proceedings
|
We may be
involved from time to time in various legal proceedings and various cost
accounting and other government pricing claims. We do not expect that the legal
proceedings and government pricing claims in which we are currently involved
will individually or in the aggregate have a significant impact on our business,
financial condition, results of operation or liquidity.
Item 4. Submission of Matters
to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 2008.
|
Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Our
common stock, par value $0.01 per share, has traded on the Nasdaq Stock Market
LLC under the symbol “CPII” since April 28, 2006. Prior to April 28, 2006, there
was no established public trading market for our stock. The following table sets
forth the high and low closing sale prices for our common stock as reported by
The Nasdaq Stock Market from September 30, 2006, through October 3,
2008.
|
High
|
Low
|
|||||||
|
Fiscal
year 2007
|
||||||||
|
First
fiscal quarter (September 30, 2006 to December 29, 2006)
|
$ | 15.46 | $ | 13.04 | ||||
|
Second
fiscal quarter (December 30, 2006 to March 30, 2007)
|
$ | 19.76 | $ | 14.96 | ||||
|
Third
fiscal quarter (March 31, 2007 to June 29, 2007)
|
$ | 21.11 | $ | 18.81 | ||||
|
Fourth
fiscal quarter (June 30, 2007 to September 28, 2007)
|
$ | 20.72 | $ | 16.20 | ||||
|
Fiscal
year 2008
|
||||||||
|
First
fiscal quarter (September 29, 2007 to December 28, 2007)
|
$ | 20.77 | $ | 16.35 | ||||
|
Second
fiscal quarter (December 29, 2007 to March 28, 2008)
|
$ | 17.22 | $ | 9.09 | ||||
|
Third
fiscal quarter (March 29, 2008 to June 27, 2008)
|
$ | 14.00 | $ | 9.40 | ||||
|
Fourth
fiscal quarter (June 28, 2008 to October 3, 2008)
|
$ | 16.02 | $ | 12.13 | ||||
As of
December 1, 2008, there were 20 stockholders of record of our common stock
and 16,360,349 shares of common stock outstanding.
No
dividends were paid in fiscal years 2008 and 2007. We currently expect to retain
any future earnings for use in the operation and expansion of our business and
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Any payment of cash dividends on our common stock will be
dependent upon the ability of Communications & Power Industries, our wholly
owned subsidiary, to pay dividends or make cash payments or advances to us. The
indenture governing Communications & Power Industries’ 8% senior
subordinated notes imposes restrictions on Communications & Power
Industries’ ability to make distributions to us, and the agreements governing
our senior credit facilities generally do not permit Communications & Power
Industries to make distributions to us for the purpose of paying dividends to
our stockholders. In addition, the indenture governing our floating rate senior
notes due 2015 also imposes restrictions on our ability to pay dividends or make
distributions to our stockholders. Our future dividend policy will also depend
on the requirements of any future financing agreements to which we may be a
party and other factors considered relevant by our board of directors, including
the Delaware General Corporation Law, which provides that dividends are only
payable out of surplus or current net profits.
The
disclosure required by Item 201(d) of Regulation S-K is incorporated by
reference to the definitive proxy statement for our 2009 Annual Meeting of
Stockholders anticipated to be filed with the SEC within 120 days after the end
of the fiscal year covered by this Annual Report under the heading “Equity Compensation Plan
Information.”
Stock Performance
Graph
The
following graph shows the value of an investment of $100 on April 28, 2006
(the first day our common stock was traded) in each of our common stock, The
Nasdaq Composite Index and the Nasdaq Electronic Components Stocks
Index for the period from April 28, 2006 to October 3, 2008. All
values assume reinvestment of the pre-tax value of dividends.
The
comparisons in the graph below are based upon historical data and are not
indicative of, nor intended to forecast, future performance of our common
stock.
The information contained
under the heading “Stock Performance Graph” above shall not be deemed to be
“soliciting material” or to be filed with the SEC or subject to Regulations 14A
or 14C or to the liabilities of the Section 18 of the Securities Exchange
Act of 1934, as amended, and shall not be incorporated
by reference in any filing of CPI International under the Securities Act,
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
Issuer
Purchases of Equity Securities
The table
below shows repurchases of our common stock during the three months ended
October 3, 2008:
|
Period
|
Total
Number of Shares Purchased
|
Average Price Paid per
Share1
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs
(in thousands)2
|
||||||||||||
|
June
28-August 1, 2008
|
- | $ | - | - | $ | 10,200 | ||||||||||
|
August
2-August 29, 2008
|
31,200 | $ | 14.18 | 31,200 | $ | 9,757 | ||||||||||
|
August
30-October 3, 2008
|
38,828 | $ | 14.30 | 38,828 | $ | 9,200 | ||||||||||
| 70,028 | $ | 14.25 | 70,028 | $ | 9,200 | |||||||||||
|
|
||
|
1
Excludes brokerage commission of $0.03
per
share.
|
||
|
2
On May 28,
2008, we announced the approval of our common stock repurchase program,
which authorizes us to repurchase up to $12.0 million of our common stock
from time to time through May 23, 2009. The program may be modified or
terminated by our board of directors at any time.
|
||
|
Item 6. Selected
Financial Data
|
The
selected consolidated financial and other data for CPI International and
subsidiaries as of October 3, 2008 and September 28, 2007, and for the fiscal
years ended October 3, 2008, September 28, 2007 and September 29, 2006 have been
derived from our audited consolidated financial statements included elsewhere in
this Annual Report. The selected consolidated financial and other data for CPI
International and subsidiaries as of September 29, 2006, September 30, 2005 and
October 1, 2004 and for the fiscal year ended September 30, 2005 and the 36-week
period ended October 1, 2004, and for Communications & Power Industries
Holding Corporation, our predecessor, and subsidiaries for the 16-week period
ended January 22, 2004 have been derived from our audited consolidated financial
statements not included elsewhere in this Annual Report. The audited
consolidated financial statements as of the dates and periods noted above have
been audited by KPMG LLP, an independent registered public accounting
firm.
All
fiscal years presented comprised 52 weeks each except for fiscal year 2008 which
comprised 53 weeks ended October 3, 2008.
You
should read the following data in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and the related notes included elsewhere in this Annual
Report.
|
FIVE-YEAR
SELECTED FINANCIAL DATA
|
||||||||||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
36-Week
|
16-Week
|
|||||||||||||||||||
|
October
3,
2008
(Successor)
|
September
28,
2007
(Successor)
|
September
29,
2006
(Successor)
|
September
30,
2005
(Successor)
|
Period
Ended
October 1,
2004 (Successor)
|
Period
Ended
January
22, 2004 (Predecessor)
|
|||||||||||||||||||
|
Statement of Operations Data:
|
||||||||||||||||||||||||
|
Sales
|
$ | 370,014 | $ | 351,090 | $ | 339,717 | $ | 320,732 | $ | 202,266 | $ | 79,919 | ||||||||||||
|
Cost
of sales(1)
|
261,086 | 237,789 | 236,063 | 216,031 | 141,172 | 56,189 | ||||||||||||||||||
|
Gross
profit
|
108,928 | 113,301 | 103,654 | 104,701 | 61,094 | 23,730 | ||||||||||||||||||
|
Research
and development
|
10,789 | 8,558 | 8,550 | 7,218 | 5,253 | 2,200 | ||||||||||||||||||
|
Selling
and marketing
|
21,144 | 19,258 | 19,827 | 18,547 | 11,082 | 4,352 | ||||||||||||||||||
|
General
and administrative
|
22,746 | 21,519 | 22,418 | 27,883 | 12,499 | 6,026 | ||||||||||||||||||
|
Merger
expenses(2)
|
- | - | - | - | - | 6,374 | ||||||||||||||||||
|
Amortization
of acquisition-related intangible assets
|
3,103 | 2,316 | 2,190 | 7,487 | 13,498 | - | ||||||||||||||||||
|
Acquired
in-process research and development(3)
|
- | - | - | - | 2,500 | - | ||||||||||||||||||
|
Net
loss on disposition of fixed assets
|
205 | 129 | 586 | 446 | 197 | 7 | ||||||||||||||||||
|
Total
operating costs and expenses
|
57,987 | 51,780 | 53,571 | 61,581 | 45,029 | 18,959 | ||||||||||||||||||
|
Operating
income
|
50,941 | 61,521 | 50,083 | 43,120 | 16,065 | 4,771 | ||||||||||||||||||
|
Interest
expense, net
|
19,055 | 20,939 | 23,806 | 20,310 | 10,518 | 8,902 | ||||||||||||||||||
|
Loss
on debt extinguishment(4)
|
633 | 6,331 | - | - | - | - | ||||||||||||||||||
|
Income
tax expense
|
10,804 | 11,748 | 9,058 | 9,138 | 2,899 | 439 | ||||||||||||||||||
|
Net
income (loss)
|
$ | 20,449 | $ | 22,503 | $ | 17,219 | $ | 13,672 | $ | 2,648 | $ | (4,570 | ) | |||||||||||
|
Earnings
per share(5)
|
||||||||||||||||||||||||
|
Basic
|
$ | 1.25 | $ | 1.39 | $ | 1.20 | $ | 1.05 | $ | 0.20 | N/A | (6) | ||||||||||||
|
Diluted
|
$ | 1.16 | $ | 1.27 | $ | 1.09 | $ | 0.98 | $ | 0.19 | N/A | (6) | ||||||||||||
|
Shares
used to calculate net earnings per share(7)
|
||||||||||||||||||||||||
|
Basic
|
16,356 | 16,242 | 14,311 | 13,079 | 13,063 | N/A | (6) | |||||||||||||||||
|
Diluted
|
17,697 | 17,721 | 15,789 | 13,974 | 13,700 | N/A | (6) | |||||||||||||||||
|
Cash
dividend per share(8)
|
$ | - | $ | - | $ | 1.19 | $ | 5.80 | $ | - | $ | - | ||||||||||||
|
Other
Financial Data:
|
||||||||||||||||||||||||
|
EBITDA(9)
|
$ | 61,271 | $ | 64,288 | $ | 59,096 | $ | 57,297 | $ | 32,816 | $ | 6,549 | ||||||||||||
|
EBITDA
margin(10)
|
16.6 | % | 18.3 | % | 17.4 | % | 17.9 | % | 16.2 | % | 8.2 | % | ||||||||||||
|
Operating
income margin(11)
|
13.8 | % | 17.5 | % | 14.7 | % | 13.4 | % | 7.9 | % | 6.0 | % | ||||||||||||
|
Net
income (loss) margin(12)
|
5.5 | % | 6.4 | % | 5.1 | % | 4.3 | % | 1.3 | % | (5.7) | % | ||||||||||||
|
Depreciation
and amortization(13)
|
$ | 10,963 | $ | 9,098 | $ | 9,013 | $ | 14,177 | $ | 16,751 | $ | 1,778 | ||||||||||||
|
Capital
expenditures(14)
|
$ | 4,262 | $ | 8,169 | $ | 10,913 | $ | 17,131 | $ | 3,317 | $ | 459 | ||||||||||||
| Ratio of earnings to fixed charges(15) | 2.57 | x | 2.59 | x | 2.08 | x | 2.10 | x | 1.51 | x | - | |||||||||||||
|
Net
cash provided by operating activities
|
$ | 33,881 | $ | 21,659 | $ | 10,897 | $ | 31,349 | $ | 12,203 | $ | 6,574 | ||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||||
|
Working
capital
|
$ | 88,103 | $ | 81,547 | $ | 77,113 | $ | 65,400 | $ | 72,385 | $ | - | ||||||||||||
|
Total
assets
|
$ | 466,948 | $ | 476,222 | $ | 441,759 | $ | 454,544 | $ | 431,207 | $ | - | ||||||||||||
|
Long-term
debt
|
$ | 224,660 | $ | 245,567 | $ | 245,067 | $ | 284,231 | $ | 210,606 | $ | - | ||||||||||||
|
Total
stockholders’ equity
|
$ | 143,865 | $ | 125,906 | $ | 99,673 | $ | 52,667 | $ | 107,594 | $ | - | ||||||||||||
|
(1)
|
Includes
charges for the amortization of inventory write-up of $351 incurred in
connection with the Econco acquisition for fiscal year 2005, and $5,500
incurred during the 36-week period ended October 1, 2004 in connection
with our January 2004 merger.
|
|
(2)
|
Represents
merger expenses resulting from our January 2004
merger.
|
|
(3)
|
Represents
a write off of in-process research and development resulting from our
January 2004 merger.
|
|
(4)
|
Resulted
from early repayment of our previous senior credit facilities in
connection with the amendment and restatement of such facilities and early
extinguishment of $10 million and $58 million of our floating rates senior
notes in fiscal years 2008 and 2007, respectively. For fiscal year 2008,
the amount of loss includes non-cash write-offs of $0.4 million
of unamortized debt issue costs and issue discount costs and $0.2 million
in cash payments for call premiums. For fiscal year 2007, the amount of
loss includes non-cash write-offs of $4.7 million of
unamortized debt issue costs and issue discount costs and $1.9 million in
cash payments for call premiums, partially offset by $0.3 million of cash
proceeds from the early termination of the related interest rate swap
agreement.
|
|
(5)
|
Basic
earnings per share represents net income divided by weighted average
common shares outstanding, and diluted earnings per share represents net
income divided by weighted average common and common equivalent shares
outstanding.
|
|
(6)
|
Due
to the significant change in capital structure at the closing date of its
January 2004 merger, the predecessor amount has not been presented because
it is not considered comparable to the amount for CPI
International.
|
|
(7)
|
On
April 7, 2006, in connection with the amendment and restatement of the
certificate of incorporation of CPI International, we effected a
3.059-to-1 stock split of the outstanding shares of common stock of CPI
International as of such date. All share and per share amounts for
Successor periods herein have been retroactively restated to reflect the
stock split.
|
|
(8)
|
In
February 2005 and in December 2005 we paid special cash dividends of
$75,809 and $17,000, respectively, to stockholders of CPI International.
Cash dividend per share is calculated by dividing the dollar amount of the
dividend by weighted average common shares
outstanding.
|
|
(9)
|
EBITDA represents earnings before
net interest expense, provision for income taxes and depreciation and
amortization. For the reasons listed below, we believe that GAAP-based
financial information for leveraged businesses such as ours should
be supplemented by EBITDA so that investors better
understand our financial performance in connection with their analysis of
our business:
|
|
·
|
EBITDA
is a component of the measure used by our board of directors and
management team to evaluate our operating
performance;
|
|
·
|
our
senior credit facilities contain a covenant that requires us to maintain a
senior secured leverage ratio that contains EBITDA as a component, and our
management team uses EBITDA to monitor compliance with such covenant; see
“Management’s discussion and analysis of financial condition and results of operations-Liquidity and
Capital Resources-Covenant
compliance;”
|
|
·
|
EBITDA
is a component of the measure 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 measure used by the management to facilitate internal comparisons
to competitors’ results and our industry in general;
and
|
|
·
|
the
payment of bonuses to certain members of management is contingent upon,
among other things, the satisfaction by us of certain targets that contain
EBITDA as a component.
|
|
|
Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. When analyzing our performance, EBITDA should be considered in addition to, and not as a substitute for, net income, cash flows from operating activities or other statements of operations or statements of cash flows data prepared in accordance with GAAP. |
The following table
reconciles net income (loss) to EBITDA:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
36-Week
|
16-Week
|
|||||||||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
September
30,
|
Period
Ended
|
Period
Ended
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
October
1, 2004
|
January
22, 2004
|
|||||||||||||||||||
|
(Successor)
|
(Successor)
|
(Successor)
|
(Successor)
|
(Successor)
|
(Predecessor)
|
|||||||||||||||||||
|
Net
income (loss)
|
$ | 20,449 | $ | 22,503 | $ | 17,219 | $ | 13,672 | $ | 2,648 | $ | (4,570 | ) | |||||||||||
|
Depreciation
and amortization(13)
|
10,963 | 9,098 | 9,013 | 14,177 | 16,751 | 1,778 | ||||||||||||||||||
|
Interest
expense, net
|
19,055 | 20,939 | 23,806 | 20,310 | 10,518 | 8,902 | ||||||||||||||||||
|
Income
tax expense
|
10,804 | 11,748 | 9,058 | 9,138 | 2,899 | 439 | ||||||||||||||||||
|
EBITDA
|
$ | 61,271 | $ | 64,288 | $ | 59,096 | $ | 57,297 | $ | 32,816 | $ | 6,549 | ||||||||||||
| (10) | EBITDA margin represents EBITDA divided by sales. |
|
(11)
|
Operating
income margin represents operating income divided by
sales.
|
|
(12)
|
Net
income (loss) margin represents net income (loss) divided by
sales.
|
|
(13)
|
Depreciation
and amortization excludes amortization of deferred debt issuance costs,
which are included in interest expense,
net.
|
|
(14)
|
Fiscal
years 2007 and 2006 include $4.1 million and $2.3 million, respectively,
of capital expenditures for the expansion of our building in Georgetown,
Ontario, Canada. Fiscal years 2006 and 2005 include capital expenditures
of $4.7 million and $13.1 million, respectively, resulting from the
relocation of our San Carlos, California facility to Palo Alto, California
and Mountain View, California.
|
|
(15)
|
For
purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and fixed
charges less capitalized interest. Fixed charges consist of interest
expense, including amortization of debt issuance costs and that portion of
rental expenses that management considers to be a reasonable approximation
of interest. Earnings were insufficient to cover fixed charges by $4,131
for the 16-week period ended January 22,
2004.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Our fiscal years are the 52- or
53-week periods that end on the Friday nearest September 30. Fiscal year 2008
comprised the 53-week period ending October 3, 2008; fiscal year 2007 comprised
the 52-week period ended September 28, 2007; and fiscal year 2006 comprised the
52-week period ended September 29, 2006. The following discussion should be read
in conjunction with our consolidated financial statements, and the notes
thereto, included elsewhere in this Annual Report.
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.
Acquisition
of Malibu Research Associates, Inc.
On August
10, 2007, we completed the acquisition of all of the outstanding common stock of
Malibu. Malibu, headquartered in Camarillo, California, is a designer,
manufacturer and integrator of advanced antenna systems for radar, radar
simulators and telemetry systems, as well as for data links used in ground,
airborne, unmanned aerial vehicles (“UAVs”) and shipboard systems. Under the
terms of the purchase agreement, at the closing of the acquisition, we paid cash
of approximately $22.4 million, which included $2.3 million and $1.0 million
placed into indemnity and working capital escrow accounts, respectively. The
indemnity escrow amount was provided to ensure funds are available to satisfy
potential indemnification claims asserted prior to January 1, 2009, and the
working capital escrow amount was provided to satisfy any negative differences
between the estimated working capital amount as of the acquisition closing date
and the actual working capital amount at the acquisition closing
date.
During
the second quarter of fiscal year 2008, the valuation of Malibu’s net working
capital amount as of the acquisition closing date was finalized, resulting in a
disbursement of cash to us of $1.6 million from the escrow accounts and in an
adjusted cash purchase price of approximately $20.7 million.
Additionally,
we may be required to pay a potential earnout to the former stockholders of
Malibu of up to $14.0 million, which is primarily contingent upon the
achievement of certain financial objectives over the three years following the
acquisition (“Financial Earnout”), and a discretionary earnout of up to $1.0
million contingent upon achievement of certain succession planning goals. No
earnout was earned for the first earnout period, and the maximum
potential Financial Earnout that could be earned over the three years following
the acquisition has been reduced from $14.0 million to $12.3 million based on
the performance in the first earnout period.
Eimac
Relocation
After relocating Eimac
from our former facility in San Carlos, California to Palo Alto, California in
fiscal year 2006, we made organizational changes and consolidated Eimac into our
Microwave Power Products division, located in Palo Alto, California, in June
2006. The Eimac integration was completed in January 2007. As part of this
relocation and integration, Eimac experienced planned manufacturing disruptions
stemming from the decommissioning of our production equipment in San Carlos and
the required reconfiguration, installation and testing of that equipment prior
to production readiness in Palo Alto. During fiscal year 2005, in anticipation
of these planned disruptions, customers accelerated the placement of orders with
Eimac. This order acceleration in fiscal year 2005, and the subsequent
acceleration of product shipments, caused a reduction of customers’ demand
requirements from Eimac during fiscal year 2006, particularly in our medical,
communications and industrial markets.
Eimac orders
and sales for fiscal year 2006 reflected the negative impact of the Eimac
relocation and integration. In addition, during fiscal year 2006, we incurred
move-related expenses and Eimac experienced unfavorable overhead absorption and
manufacturing variances due to the reduction in sales volume and relocation
disruptions. By the first quarter of fiscal year 2007, orders and sales rates
for Eimac had recovered to near their historical levels.
Orders
We sell
our products into five end markets: radar and electronic warfare, medical,
communications, industrial and scientific.
Our
customer sales contracts are recorded as orders when we accept written customer
purchase orders or contracts. Customer purchase orders with an undefined
delivery schedule, or blanket purchase orders, are not reported as orders until
the delivery date is determined. Our government sales contracts are not reported
as orders until we have been notified that the contract has been funded. Total
orders for a fiscal period represent the total dollar amount of customer orders
recorded by us during the fiscal period, reduced by the dollar amount of any
order cancellations or terminations during the fiscal period.
Our
orders by market for fiscal years 2008 and 2007 are summarized as follows
(dollars in millions):
|
Fiscal
Year Ended
|
||||||||||||||||||||||||
| October 3, 2008 | September 28, 2007 | Increase | ||||||||||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Amount
|
Orders
|
Amount
|
Orders
|
Amount
|
Percent
|
|||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 141.5 | 38 | % | $ | 138.2 | 41 | % | $ | 3.3 | 2 | % | ||||||||||||
|
Medical
|
67.7 | 18 | 66.3 | 19 | 1.4 | 2 | ||||||||||||||||||
|
Communications
|
127.1 | 34 | 106.7 | 31 | 20.4 | 19 | ||||||||||||||||||
|
Industrial
|
24.8 | 7 | 21.8 | 6 | 3.0 | 14 | ||||||||||||||||||
|
Scientific
|
13.1 | 3 | 10.7 | 3 | 2.4 | 22 | ||||||||||||||||||
|
Total
|
$ | 374.2 | 100 | % | $ | 343.7 | 100 | % | $ | 30.5 | 9 | % | ||||||||||||
In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the tactical common data link (“TCDL”) products at our
Malibu division, which we acquired in August 2007. TCDL products support
intelligence, surveillance and reconnaissance (“ISR”) applications. Previously,
orders and sales of our TCDL products were included in our radar and electronic
warfare market. We are now reporting these orders and sales in our
communications market, which we believe is
the more
appropriate category for these products. We reclassified previously reported
orders and sales information to properly reflect TCDL products as an increase in
the communications market and a corresponding decrease in the radar and
electronic warfare market. The reclassified order amounts were $4.1 million in
the first nine months of fiscal year 2008 and $0.4 million in fiscal year 2007.
The table above reflects this change.
In fiscal
year 2008, our Malibu division received orders totaling $18.1 million, of which
approximately 12% was in the radar and electronic warfare market and
approximately 88% was in the communications market. Orders from the Malibu
division were $2.1 million in fiscal year 2007.
Orders
for fiscal year 2008 of $374.2 million were $30.5 million, or 9%, higher than
orders of $343.7 million for fiscal year 2007. Explanations for the order
increase by market for fiscal year 2008 compared to fiscal year 2007 are as
follows:
|
·
|
Radar and Electronic
Warfare: The majority of our orders in the radar and electronic
warfare markets are for products for domestic and international defense
and government end uses. Orders in these markets are characterized by many
smaller orders in the $0.5 million to $3.0 million range by product or
program, with no significant products or programs by themselves explaining
the annual change. Timing of these orders may vary from year to year.
Orders for these markets increased approximately 2% from $138.2 million in
fiscal year 2007 to $141.5 million in fiscal year 2008. In fiscal year
2008, increased demand for products to support the HAWK missile system,
due to delays in the receipt of previously expected orders for this
program, and increased demand for products to support the APN-245
Automatic Carrier Landing System were partially offset by a $5.9 million
decrease in demand for products to support the Aegis weapons system,
continued delays in the placement of defense orders and an expected
decrease in orders to support the EarthCare cloud-profiling radar program
due to the timing of that program.
Demand for our
products to support ships with the Aegis weapons system has two
components: we support new ship builds and we provide spare and repair
products for previously fielded ships. Over the past several years, we
have seen high demand for products to support a significant number of new
ship builds for the Aegis weapons program for U.S. and international
military customers. We have now received all orders for our products
required to support these new ship builds, and, as a result, we expect the
near-term demand to be primarily for spare and repair products. Therefore,
our near-term orders for this program are expected to be at similar or
somewhat lower levels than in fiscal year 2008, and our near-term sales
are expected to be at significantly lower levels than in fiscal year 2008.
We expect demand for our products to increase again in several years as
the new ships are commissioned, deployed and added to the installed base,
after which they also will require spare and repair products.
During fiscal year
2008, previously unexpected delays in the receipt of orders for radar and
electronic warfare programs impacted the timing of our sales for these
programs. We expect these delays to continue for the foreseeable
future.
|
|
·
|
Medical: Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, PET and MRI applications, and for radiation therapy applications for the treatment of cancer. The approximately 2% increase in medical orders from fiscal year 2007 to fiscal year 2008 was due primarily to an increase in demand for x-ray generators from one customer and other international customers, as well as an increase in orders for products for radiation therapy applications. This increase was partially offset by the absence |
|
in
fiscal year 2008, due to timing, of a Russian tender program in which we
had participated in fiscal years 2006 and 2007. In fiscal year 2007, we
received approximately $6 million in orders for the Russian tender
program. The program did not recur in fiscal year
2008.
In
addition, in fiscal year 2007, demand for products for MRI applications
was very strong, as a customer ordered a two-year supply of these products
in one fiscal year, and we shipped a significant amount of these products
during that fiscal year. As a result, in fiscal year 2008, orders for
products for MRI applications decreased approximately $5.3 million as
compared to fiscal year 2007.
|
|
|
·
|
Communications: The
approximately 19% increase in communications orders was primarily
attributable to increases in orders for products to support military
communications applications, including the receipt of our first production
orders for Increment One of the Warfighter Information Network Tactical
(“WIN-T”) military communications program, and telemetry and TCDL orders
received by our recently acquired Malibu division. These increases were
partially offset by a decrease in orders for certain military
communications programs, including WIN-T’s predecessor program, the
now-completed Joint Network Node (“JNN”) military communications program
for which we had strong demand in fiscal year 2007, and a decrease in
orders for direct-to-home broadcast applications. We expect our
participation in military communications programs to continue to
grow.
|
|
· |
Industrial: Orders in
the industrial market, one of our smallest markets, are cyclical. The $3.0
million increase in industrial orders was attributable to orders for
products used in a wide variety of industrial applications, including
industrial fabrication applications, international test systems and food
processing, cargo screening and other industrial
applications.
|
| · |
Scientific: Orders in
the scientific market, our smallest market, are historically one-time
projects and can fluctuate significantly from period to period. The $2.4
million increase in scientific orders was primarily the result of orders
for products to support a new accelerator project for fusion research at
an international scientific institute.
|
We believe that the current economic
environment and challenging credit conditions may have a negative impact on our
orders, primarily in our commercial markets, in the foreseeable future. Our
orders in the defense markets may also be impacted by reductions or delays in
the funding of applicable government contracts.
Incoming
order levels fluctuate significantly on a quarterly or annual basis, and a
particular quarter’s or year’s order rate may not be indicative of future order
levels. In addition, our sales are highly dependent upon manufacturing
scheduling and performance and, accordingly, it is not possible to accurately
predict when orders will be recognized as sales.
Backlog
As of October
3, 2008, we had an order backlog of $201.3 million compared to an order backlog
of $196.4 million as of September 28, 2007. Approximately $0.9 million of the
$4.9 million increase in backlog during fiscal year 2008 was due to orders at
our recently acquired Malibu division. Because our orders for government end-use
products generally have much longer delivery terms than our orders for
commercial business (which require quicker turn-around), our backlog is
primarily composed of government orders.
Backlog
represents the cumulative balance, at a given point in time, of recorded
customer sales orders that have not yet been shipped or recognized as sales.
Backlog is increased when an order is received, and backlog is decreased when we
recognize sales. We believe backlog and orders information is helpful to
investors because this information may be indicative of future sales results.
Although backlog consists of firm orders for which goods and services are yet to
be provided, customers can, and sometimes do, terminate or modify these orders.
However, historically the amount of modifications and terminations has not been
material compared to total contract volume.
Results
of Operations
We derive
our revenue primarily from the sale of microwave and radio frequency products,
including high-power microwave amplifiers, satellite communications amplifiers,
medical x-ray imaging subsystems and other related products. Our products
generally have selling prices ranging from $2,000 to $100,000, with certain
limited products priced up to $1,000,000.
Cost of
goods sold generally includes costs for raw materials, manufacturing costs,
including allocation of overhead and other indirect costs, charges for reserves
for excess and obsolete inventory, warranty claims and losses on fixed price
contracts. Operating expenses generally consist of research and development,
selling and marketing and general and administrative expenses.
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
Year
Ended
|
||||||||||||||||||||||||
|
October
3, 2008
|
September
28, 2007
|
September
29, 2006
|
||||||||||||||||||||||
|
%
of
|
%
of
|
%
of
|
||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||||||||
|
Sales
|
$ | 370.0 | 100.0 | % | $ | 351.1 | 100.0 | % | $ | 339.7 | 100.0 | % | ||||||||||||
|
Cost
of sales
(a)
|
261.1 | 70.6 | 237.8 | 67.7 | 236.1 | 69.5 | ||||||||||||||||||
|
Gross
profit
|
108.9 | 29.4 | 113.3 | 32.3 | 103.7 | 30.5 | ||||||||||||||||||
|
Research
and development
|
10.8 | 2.9 | 8.6 | 2.4 | 8.6 | 2.5 | ||||||||||||||||||
|
Selling
and marketing (a)
|
21.1 | 5.7 | 19.3 | 5.5 | 19.8 | 5.8 | ||||||||||||||||||
|
General
and administrative (a)
|
22.7 | 6.1 | 21.5 | 6.1 | 22.4 | 6.6 | ||||||||||||||||||
|
Amortization
of acquisition-related intangibles
|
3.1 | 0.8 | 2.3 | 0.7 | 2.2 | 0.6 | ||||||||||||||||||
|
Net
loss on disposition of assets
|
0.2 | 0.1 | 0.1 | 0.0 | 0.6 | 0.2 | ||||||||||||||||||
|
Operating
income
|
50.9 | 13.8 | 61.5 | 17.5 | 50.1 | 14.7 | ||||||||||||||||||
|
Interest
expense, net
|
19.1 | 5.2 | 20.9 | 6.0 | 23.8 | 7.0 | ||||||||||||||||||
|
Loss
on debt extinguishment
|
0.6 | 0.2 | 6.3 | 1.8 | - | - | ||||||||||||||||||
|
Income
before taxes
|
31.3 | 8.5 | 34.3 | 9.8 | 26.3 | 7.7 | ||||||||||||||||||
|
Income
tax expense
|
10.8 | 2.9 | 11.7 | 3.3 | 9.1 | 2.7 | ||||||||||||||||||
|
Net
income
|
$ | 20.4 | 5.5 | % | $ | 22.5 | 6.4 | % | $ | 17.2 | 5.1 | % | ||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||
|
EBITDA
(b)
|
$ | 61.3 | 16.6 | % | $ | 64.3 | 18.3 | % | $ | 59.1 | 17.4 | % | ||||||||||||
|
Note: Totals
may not equal the sum of the components due to independent rounding.
Percentages are calculated based on rounded dollar amounts
presented.
|
|
(a)
|
Fiscal
year 2006 includes a special bonus expense (see “Special Bonus” below) of
$3.25 million, allocated as follows: $0.3 million to cost of sales, $0.2
million to selling and marketing and $2.75 million to general and
administrative.
|
|
(b)
|
EBITDA
represents earnings before net interest expense, provision for income
taxes and depreciation and amortization. For the reasons listed below, we
believe that GAAP-based financial information for leveraged businesses
such as ours should be supplemented by EBITDA so that investors better
understand our financial performance in connection with their analysis of
our business:
|
|
|
·
|
EBITDA
is a component of the measures used by our board of directors and
management team to evaluate our operating
performance;
|
|
|
·
|
our
senior credit facilities contain a covenant that requires us to maintain a
senior secured leverage ratio that contains EBITDA as a component, and our
management team uses EBITDA to monitor compliance with such
covenant;
|
|
|
·
|
EBITDA
is a component of the measures used by our management team to make
day-to-day operating decisions;
|
|
|
·
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and therefore is a component
of the measures used by the management to facilitate internal comparisons
to competitors' results and our industry in general;
and
|
|
|
·
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
|
|
Other
companies may define EBITDA differently and, as a result, our measure of
EBITDA may not be directly comparable to EBITDA of other companies.
Although we use EBITDA as a financial measure to assess the performance of
our business, the use of EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to operate
our business. When analyzing our performance, EBITDA should be considered
in addition to, and not as a substitute for, net income, cash flows from
operating activities or other statements of operations or statements of
cash flows data prepared in accordance with
GAAP.
|
| For a reconciliation of Net Income to EBITDA, see Note 11 of the accompanying audited consolidated financial statements. |
Our
results for fiscal year 2008 compared to our results for fiscal year
2007
Sales:
Our sales by market for fiscal years 2008 and 2007 are summarized as follows
(dollars millions):
|
Year
Ended
|
||||||||||||||||||||||||
|
October
3, 2008
|
September
28, 2007
|
Increase
(Decrease)
|
||||||||||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Percent
|
|||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 151.8 | 40 | % | $ | 144.2 | 41 | % | $ | 7.6 | 5 | % | ||||||||||||
|
Medical
|
65.8 | 18 | 67.6 | 19 | (1.8 | ) | (3 | ) | ||||||||||||||||
|
Communications
|
117.8 | 32 | 112.3 | 32 | 5.5 | 5 | ||||||||||||||||||
|
Industrial
|
25.1 | 7 | 20.5 | 6 | 4.6 | 22 | ||||||||||||||||||
|
Scientific
|
9.5 | 3 | 6.5 | 2 | 3.0 | 46 | ||||||||||||||||||
|
Total
|
$ | 370.0 | 100 | % | $ | 351.1 | 100 | % | $ | 18.9 | 5 | % | ||||||||||||
In the fourth quarter of fiscal year 2008, we changed the way in which we categorize orders and sales of the TCDL products at our Malibu division. Previously, orders and sales of our TCDL products were included in our radar and electronic warfare market. We are now reporting these orders and sales in our communications market, which we believe is the more appropriate category for these products. We reclassified previously reported orders and sales information to properly reflect TCDL products as an increase in the communications market and a corresponding decrease in the radar and electronic warfare market. The reclassified sales amounts were $2.5 million in fiscal year 2008 and $1.5 million in fiscal year 2007. The table above reflects this change.
In fiscal year 2008, our new Malibu division generated sales totaling $16.4 million, of which approximately 13% was in the radar and electronic warfare market and approximately 87% was in the communications market. Sales from the Malibu division equaled $3.1 million in fiscal year 2007.
Sales for
fiscal year 2008 of $370.0 million were $18.9 million, or approximately 5%,
higher than sales of $351.1 million for fiscal year 2007. Approximately
45% and 47% of our sales in fiscal years 2008 and 2007,
respectively, were sales of replacements, spares and repairs, including upgraded
replacements for existing products. Explanations for the sales increase or
decrease by market for fiscal year 2008 as compared to fiscal year 2007 are as
follows:
|
·
|
Radar and Electronic Warfare:
The majority of our sales in the radar and electronic warfare
markets are for products for domestic and international defense and
government end uses. Approximately two-thirds of our sales in the
radar and electronic warfare markets are sales of replacements,
spares and repairs. The timing of order receipts and subsequent shipments
in these markets may vary from year to year. On a combined basis, sales
for these two markets increased approximately 5% from $144.2 million in
fiscal year 2007 to $151.8 million in fiscal year 2008. The increase in
sales was due primarily to increased sales to support the HAWK missile
system, increased sales for other radar systems and sales of radar
products by our recently acquired Malibu
division.
|
|
·
|
Medical: Sales
of our medical products consist of sales for medical imaging applications,
such as x-ray imaging, PET and MRI, and for radiation therapy applications
for the treatment of cancer. The 3% decrease in sales of our medical
products was primarily due to a Russian tender program in which we
participated in fiscal years 2006 and 2007 that did not recur in fiscal
year 2008. In fiscal year 2008, sales for the Russian tender program
decreased $5.5 million in comparison to fiscal year
2007.
In
addition, in fiscal year 2007, a customer ordered a two-year supply of
products for MRI applications in one fiscal year, resulting in unusually
strong demand for these products, and we shipped a significant amount of
these products during that fiscal year. As a result, in fiscal year 2008,
sales of products for MRI applications decreased approximately $2.4
million.
Excluding
the Russian tender program and MRI applications from both fiscal years
2007 and 2008, medical sales increased 12% from $53.4 million in fiscal
year 2007 to $59.6 million in fiscal year
2008.
|
|
·
|
Communications: The 5%
increase in sales in the communications market was primarily the result of
sales of telemetry and TCDL products by our recently acquired Malibu
division, as well as the start of production shipments for Increment One
of the WIN-T military communications program. These increases were
partially offset by a decrease in sales of products for certain military
communications programs, including the now-completed JNN program, and
certain broadcast network applications for which we had strong sales in
fiscal year 2007.
In fiscal year 2008, the $7.3 million
increase in sales of products to support the WIN-T military communications
program was offset by a $3.7 million decrease in sales of products to
support its predecessor, the JNN military communications program, due to
the completion of that program. We expect that our overall participation
levels in the WIN-T program, which ramped up for production in the first
six months of fiscal year 2008, will be significantly higher than our
participation levels in the previous JNN program. Our sales of products
to
|
|
|
support
military communications applications increased in fiscal year 2008, and we
expect our participation in military communications programs to continue
to grow.
|
|
·
|
Industrial:
Sales in the industrial market are cyclical. The $4.6 million
increase in industrial sales was due to sales of products used in a wide
variety of industrial applications, including induction welding, dialectic
heating and instrumentation applications and domestic and international
test systems.
|
|
·
|
Scientific: Sales in the
scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $3.0 million increase in
scientific sales was primarily the result of increased product shipments
for the Spallation Neutron Source at Oakridge National Laboratory. We
received approximately $5 million in orders for this program in fiscal
year 2007 and expect to complete our shipments of products for this
program in the second quarter of fiscal year
2009.
|
We
believe that the current economic environment and challenging credit conditions
may have an impact on our sales, primarily in our commercial markets, in the
foreseeable future. Our sales in the defense markets may also be impacted by
reductions or delays in the funding of applicable government
contracts.
Gross Profit.
Gross profit was $108.9 million, or 29.4% of sales, for fiscal year 2008 as
compared to $113.3 million, or 32.3% of sales, for fiscal year 2007. For fiscal
year 2008 as compared to fiscal year 2007, gross profit was unfavorably impacted
by cost overruns on advanced antenna development programs at our recently
acquired Malibu division, the shipment of lower margin products and the currency
impact from the weakness of the U.S. dollar, partially offset by additional
gross profit from the $18.9 million increase in sales volume. The shipment of
lower margin products in fiscal year 2008 include a large number of new product
and engineering development programs that we expect will grow our business in
the future. The weakness of the U.S. dollar for fiscal year 2008 as compared to
fiscal year 2007 caused a reduction in gross profit of approximately $2.5
million from the translation of Canadian dollar denominated manufacturing
expenses to U.S. dollars, net of currency hedging contracts. In addition, gross
profit for fiscal year 2007 includes an approximately $0.6 million
reduction to cost of sales to capitalize inventory that had been improperly
expensed in prior periods.
In fiscal
year 2008, we engaged in a higher level of new product and engineering
development programs than in fiscal year 2007 in order to continue to grow our
business. These programs typically result in lower gross margins and higher
period-to-period variability of our financial results. Notable new product and
engineering development programs currently include Increment One of the WIN-T
military communications program, the EarthCARE cloud-profiling program and
products to support the Active Denial System, counter-IED systems, cargo
screening programs, high-resolution nuclear magnetic resonance (“NMR”) programs
and next generation weather radar systems and higher-power medical applications.
We believe that our product and engineering development programs will increase
our future growth potential throughout our markets and businesses and expect the
elevated levels of development activity to continue for the foreseeable
future.
Research and Development.
Company-sponsored research and development expenses were $10.8 million, or 2.9%
of sales, for fiscal year 2008 and $8.6 million, or 2.4% of sales for fiscal
year 2007. The increase in research and development expenses for fiscal year
2008 compared to fiscal year 2007 was due primarily to expenditures of $1.0
million on the U.S. Army's WIN-T program and increased spending of $1.0 million
on medical diagnostic imaging products.
Total spending on
research and development, including customer-sponsored research and development,
was as follows (in millions):
|
Year Ended
|
||||||||
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Company
sponsored
|
$ | 10.8 | $ | 8.6 | ||||
|
Customer
sponsored, charged to cost of sales
|
$ | 12.0 | $ | 7.7 | ||||
| $ | 22.8 | $ | 16.3 | |||||
Selling and Marketing. Selling
and marketing expenses were $21.1 million, or 5.7% of sales, for fiscal year
2008, a $1.8 million increase from the $19.3 million, or 5.5% of sales, in
fiscal year 2007. The increase in selling and marketing expenses for fiscal year
2008 compared to fiscal year 2007 primarily reflects selling and marketing
expenses of $1.0 million at our recently acquired Malibu division, as well as
the unfavorable impact of the weaker U.S. dollar on foreign-based
expenses.
General and Administrative.
General and administrative expenses were $22.7 million, or 6.1% of sales, for
fiscal year 2008, a $1.2 million increase from the $21.5 million, or 6.1% of
sales, for fiscal year 2007. The increase in general and administrative expenses
in fiscal year 2008 was primarily due to $1.7 million of expenses for our
recently acquired Malibu division, higher stock-based compensation expenses of
$0.6 million, and higher legal fees of $0.2 million, partially offset by lower
management incentive bonus expense of $0.7 million, lower expenses of $0.6
million associated with the evaluation of potential acquisition candidates in
fiscal year 2007 and the favorable impact from foreign currency transactions of
$0.3 million in fiscal year 2008 compared to fiscal year 2007.
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 $3.1 million for fiscal year
2008 and $2.3 million for fiscal year 2007. The $0.8 million increase in
amortization of acquisition-related intangibles is primarily due to amortization
of intangible assets for our recently acquired Malibu division. Amortizable
acquisition-related intangible assets are amortized over periods of up to
50 years.
Interest Expense, net (“Interest
Expense”). Interest expense of $19.1 million for fiscal year 2008 was
$1.8 million lower than interest expense of $20.9 million for fiscal year 2007.
The reduction in interest expense for fiscal year 2008 was primarily due to the
redemption of debt during the fourth quarter of fiscal year 2007 and throughout
fiscal year 2008, and lower interest rates on our debt obligations during fiscal
year 2008 compared to fiscal year 2007. The reduction in interest rates was
primarily due to the refinancing of our senior credit facilities during the
fourth quarter of fiscal year 2007.
Loss on Debt Extinguishment.
Loss on debt extinguishment of $0.6 million for fiscal year 2008 was $5.7
million lower than loss on debt extinguishment of $6.3 million for fiscal year
2007. In fiscal year 2008, loss on debt extinguishment resulted from the $10.0
million early redemption of our floating rate senior notes: $6.0 million in
March 2008, $2.0 million in June 2008 and $2.0 million in August 2008. In fiscal
year 2007, loss on debt extinguishment resulted from the $58 million early
redemption of our floating rate senior notes and the termination of our previous
$130 million senior credit facilities in connection with the amendment and
restatement of such facilities.
The loss on debt
extinguishment consists of the following (in millions):
|
Year Ended
|
||||||||
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Non-cash
write-off of deferred debt issue costs and issue discount
costs
|
$ | 0.4 | $ | 4.7 | ||||
|
Cash
payments for call premiums
|
0.2 | 1.9 | ||||||
|
Cash
proceeds from early termination of interest rate swap on floating
rate senior notes
|
- | (0.3 | ) | |||||
| $ | 0.6 | $ | 6.3 | |||||
Income Tax Expense. We
recorded an income tax expense of $10.8 million and $11.7 million for fiscal
years 2008 and 2007, respectively. Our effective tax rates were approximately
34.6% and 34.3% for fiscal years 2008 and 2007, respectively. The effective
income tax rate for fiscal year 2008 includes a discrete tax benefit of $0.4
million that is attributable to fiscal year 2007 and is related to the
correction of an immaterial error in the computation of the warranty expense tax
deduction in a foreign tax jurisdiction. The effective tax rate for fiscal
year 2007 included a discrete tax benefit of $1.8 million related to the filing
of amended income tax returns for prior years to reflect a change in estimate
with regard to reporting Canadian income earned in the U.S., offset by a charge
to deferred income tax expense of approximately $0.9 million that should have
been reported in fiscal year 2006. Our worldwide effective income tax rate,
excluding discrete tax items, was approximately 36% for fiscal year
2008.
Net Income. Net income was
$20.4 million, or 5.5% of sales, for fiscal year 2008 as compared to $22.5
million, or 6.4% of sales, for fiscal year 2007. Lower net income for fiscal
year 2008 was primarily due to cost overruns on development programs at our
recently acquired Malibu division, the shipment of lower-margin products,
incremental operating expenses for the recently acquired Malibu division, the
unfavorable impact from the weakness of the U.S. dollar and higher research and
development expenses, partially offset by additional gross profit from the
increase in sales volume, a smaller loss on debt extinguishment and lower
interest expense.
EBITDA. EBITDA was $61.3
million, or 16.6% of sales, for fiscal year 2008 as compared to $64.3 million,
or 18.3% of sales, in fiscal year 2007. Lower EBITDA for fiscal year 2008 was
primarily due to cost overruns on development programs at our recently acquired
Malibu division, the shipment of lower margin products, incremental operating
expenses for the recently acquired Malibu division, the unfavorable impact from
the weakness of the U.S. dollar and higher research and development expenses,
partially offset by additional gross profit from the increase in sales
volume.
Calculation of Management
Bonuses. Management bonuses were $1.9 million in fiscal year 2008
compared to $2.7 million in fiscal year 2007. Management bonuses for fiscal
years 2008 and 2007 were calculated pursuant to our Management Incentive Plan
(“MIP”) and were based on three factors: (1) EBITDA as adjusted for purposes of
calculating management bonuses; (2) a measure of cash generated by operations;
and (3) individual goals that were customized for certain participating members
of management. The weight given to each of these factors varied for each person.
Generally, for our officers, equal weight was given to the first two factors,
and the third factor was not applicable. For our other members of management,
equal weight was given to each of the three factors described above. Management
bonuses are paid in cash approximately three months after the end of the fiscal
year. EBITDA as adjusted for purposes of calculating management bonuses is equal
to EBITDA for the fiscal year adjusted to exclude the impact of certain
non-recurring or non-cash charges as pre-determined in our MIP for the fiscal
year. EBITDA for purposes of calculating management bonuses for fiscal year
2008
was $64.0
million compared to $71.2 million in fiscal year 2007. The non-recurring and
non-cash charges that were excluded from EBITDA in calculating management
bonuses (a) for fiscal year 2008 were loss on debt extinguishment of $0.6
million and stock-based compensation expense of $2.1 million, and (b) for fiscal
year 2007 were loss on debt extinguishment of $6.3 million and stock-based
compensation expense of $1.2 million, offset by the inventory correction of $0.6
million. We are presenting EBITDA as adjusted for purposes of calculating
management bonuses here to help investors understand how our management bonuses
were calculated, and not as a measure to be used by investors to evaluate our
operating results or liquidity.
Our
results for fiscal year 2007 compared to our results for fiscal year
2006
Sales:
Our sales by market for fiscal years 2007 and 2006 are summarized as follows
(dollars millions):
|
Year
Ended
|
||||||||||||||||||||||||
|
September
28, 2007
|
September
29, 2006
|
Increase
(Decrease)
|
||||||||||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Percent
|
|||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 144.2 | 41 | % | $ | 146.7 | 43 | % | $ | (2.5 | ) | (2 | ) % | |||||||||||
|
Medical
|
67.6 | 19 | 57.6 | 17 | 10.0 | 17 | ||||||||||||||||||
|
Communications
|
112.3 | 32 | 106.7 | 31 | 5.6 | 5 | ||||||||||||||||||
|
Industrial
|
20.5 | 6 | 22.1 | 7 | (1.6 | ) | (7 | ) | ||||||||||||||||
|
Scientific
|
6.5 | 2 | 6.6 | 2 | (0.1 | ) | (2 | ) | ||||||||||||||||
|
Total
|
$ | 351.1 | 100 | % | $ | 339.7 | 100 | % | $ | 11.4 | 3 | % | ||||||||||||
In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the TCDL products at our Malibu division. The table above
reflects the change. Previously, orders and sales of our TCDL products were
included in our radar and electronic warfare market. We are now reporting these
orders and sales in our communications market, which we believe is the more
appropriate category for these products. We reclassified previously reported
orders and sales information to properly reflect TCDL products as an increase in
the communications market and a corresponding decrease in the radar and
electronic warfare market. The reclassified sales amount was $1.5 million in
fiscal year 2007; there was no reclassified sales amount in fiscal year 2006 as
we acquired the Malibu division in August 2007.
In fiscal
year 2007, our new Malibu division generated sales totaling $3.1 million, of
which approximately 17% was in the radar and electronic warfare market and
approximately 83% was in the communications market.
Sales for fiscal year 2007 of $351.1
million were $11.4 million, or approximately 3%, higher than sales of $339.7
million for fiscal year 2006. Explanations for the sales increase or decrease by
market for fiscal year 2007 as compared to fiscal year 2006 are as
follows:
|
·
|
Radar and Electronic Warfare:
The majority of our sales in the radar and electronic warfare
markets are for products for domestic and international defense and
government end uses. The timing of order receipts and subsequent shipments
in these markets may vary from year to year. Sales for these markets were
essentially unchanged, totaling $146.7 million in fiscal year 2006 and
$144.2 million in fiscal year 2007.
|
|
·
|
Medical: Sales of
our medical products consist of sales for medical imaging applications,
such as x-ray imaging, PET and MRI applications, and for radiation therapy
applications for the treatment of cancer. The approximately 17% increase
in sales of our medical imaging and radiation therapy products was
primarily due to a $6.9 million increase in sales of our products used in
x-ray imaging. The increase in sales of x-ray imaging products resulted
from growth in our market share, as well as a $1.9 million increase in
shipments for the second year of a tender program that supported the
expansion of the Russian medical infrastructure. Sales of our products
used in MRI applications also increased $2.4 million, as a customer
ordered a two-year supply of products for MRI applications in one fiscal
year, a significant amount of which we shipped during fiscal year
2007.
|
|
·
|
Communications: The
approximately 5% increase in sales in the communications market was
primarily the result of sales of telemetry and TCDL products by our
recently acquired Malibu division, increased sales of both newer and
traditional satellite communications amplifiers for foreign broadcast
network and direct-to-home applications, as well as newer satellite
communications amplifiers for foreign news gathering and mobile
applications and U.S. military satellite communications programs. These
increases were partially offset by a decrease in shipments of our
traditional satellite communications products for North American
direct-to-home broadcast
applications.
|
|
·
|
Industrial: Sales in the
industrial market, one of our smallest markets, are cyclical. The decrease
in industrial sales was primarily due the timing of orders and shipments
of products used in industrial heating systems, electromagnetic
susceptibility test programs and other industrial
applications.
|
|
·
|
Scientific: Sales in the
scientific market, our smallest market, are historically one-time projects
and can fluctuate significantly from period to period. Sales in this
market were essentially unchanged.
|
Gross Profit. Gross profit was
$113.3 million, or 32.3% of sales, for fiscal year 2007 as compared to $103.7
million, or 30.5% of sales, for fiscal year 2006. Fiscal year 2006 included
non-recurring expenses of approximately $6.0 million for move-related expenses,
including unfavorable overhead absorption and manufacturing variances, from the
Eimac relocation. Fiscal year 2007, as compared to fiscal year 2006, was
favorably impacted by a 3% increase in shipment volume and the shipment of
products with higher gross margins and was unfavorably impacted by approximately
$2.6 million due to increases in our Canadian dollar denominated manufacturing
expenses resulting from the expiration of favorable foreign currency hedge
contracts in March 2006 and the further weakening of the U.S. dollar. Gross
profit for fiscal year 2007 included a reduction to cost of sales of
approximately $0.6 million to capitalize inventory that was improperly expensed
in prior periods.
Research and
Development. Customer-sponsored research and development expenses were
$8.6 million, or 2.4% of sales, for fiscal year 2007 and $8.6 million, or 2.5%
of sales for fiscal year 2006. Research and development spending was primarily
directed toward additional investments in the growth of medical diagnostic
imaging products, as well as VED products for radar, electronic warfare and
certain satellite communication markets.
Total
spending on research and development, including customer-sponsored research and
development, was as follows (in millions):
|
Year Ended
|
||||||||
|
September
28,
|
September
29,
|
|||||||
|
2007
|
2006
|
|||||||
|
Company
sponsored
|
$ | 8.6 | $ | 8.6 | ||||
|
Customer
sponsored, charged to cost of sales
|
$ | 7.7 | $ | 6.2 | ||||
| $ | 16.3 | $ | 14.8 | |||||
Selling and Marketing. Selling
and marketing expenses were $19.3 million, or 5.5% of sales, for fiscal year
2007, a $0.5 million decrease from the $19.8 million, or 5.8% of sales, for
fiscal year 2006. The reduction in selling and marketing expenses for fiscal
year 2007 compared to fiscal year 2006 was primarily due to higher spending in
fiscal year 2006 for new product introductions. Selling and marketing expenses
for fiscal year 2006 included $0.2 million of the special bonus discussed
below.
General and Administrative.
General and administrative expenses were $21.5 million, or 6.1% of sales, for
fiscal year 2007, a $0.9 million decrease from the $22.4 million, or 6.6% of
sales, for fiscal year 2006. Fiscal year 2006 included $2.75 million of the
special bonus, discussed below, and Eimac relocation expenses of $1.2 million.
Fiscal year 2007, compared to fiscal year 2006, included approximately $1.4
million of additional expenses associated with meeting the compliance
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, $0.5 million for
expenses associated with the evaluation of potential acquisition candidates,
$0.5 million higher stock-based compensation expenses and additional expenses of
$0.3 million as a result of becoming a publicly traded company in April
2006.
Special Bonus. In the first quarter of
fiscal year 2006, our board of directors approved the payment of $3.25 million
in special, one-time bonuses to our employees and directors (other than
directors who are employees or affiliates of The Cypress Group) to reward them
for the increase in company value. The special bonus was not paid pursuant to
our MIP, our 2006 Equity and Performance Incentive Plan or any of our other
formal compensation plans. The bonus amount was not determined based on a
formula, but was instead an amount determined by our board of directors to be
reasonable compensation for the increase in company value. The special bonus was
charged to the consolidated statement of operations for fiscal year 2006 in the
same lines as cash compensation paid to the same employees and directors, as
follows: $2.75 million to general and administrative, $0.3 million to cost of
sales and $0.2 million to selling and marketing.
Amortization of Acquisition-Related
Intangibles. Amortization of acquisition-related intangibles consists of
purchase accounting charges for technology and other intangible assets.
Amortization of acquisition-related intangibles was $2.3 million for fiscal year
2007 and $2.2 million for fiscal year 2006. The $0.1 million increase in
amortization of acquisition-related intangibles was due to additional
amortization expenses related to the acquisition of Malibu.
Interest Expense, net (“Interest
Expense”). Interest expense of $20.9 million for fiscal year 2007 was
$2.9 million lower than interest expense of $23.8 million for fiscal year 2006.
The reduction in interest expense for fiscal year 2007 compared to fiscal year
2006 was primarily due to lower debt levels resulting from the term loan
prepayments of $5.0 million in December 2006 and $47.5 million in May 2006 using
proceeds from the initial public offering of our common stock.
Loss on Debt
Extinguishment. Loss on debt extinguishment of $6.3 million in fiscal
year 2007 resulted from our refinancings during the year. The loss on debt
extinguishment consists of $2.6 million in non-cash write-offs of deferred debt
issue costs and issue discount costs and $1.9 million in cash payments for call
premiums from the early retirement of $58.0 million of our floating rate senior
notes, and $2.1 million in non-cash write-offs of deferred debt issue costs for
the termination of our previous $130 million senior credit facilities in
connection with the amendment and restatement of such facilities, partially
offset by $0.3 million of cash proceeds from the early termination of our
interest rate swap on our floating rate senior notes.
Income Tax Expense. We
recorded an income tax expense of $11.7 million and $9.1 million for fiscal
years 2007 and 2006, respectively. Our effective tax rate was approximately
34.3% for fiscal year 2007 as compared to approximately 34.5% for fiscal year
2006. The effective tax rate for fiscal year 2007 included a discrete tax
benefit of $1.8 million related to the filing of amended income tax returns for
prior years to reflect a change in estimate with regard to reporting Canadian
income earned in the U.S., offset by a charge to deferred income tax expense of
approximately $0.9 million that should have been reported during the last
quarter of fiscal year 2006.
The U.S.
income tax expense for fiscal year 2006 included a $1.3 million discrete tax
benefit related to a change in estimate with regard to reporting Canadian income
earned in the U.S. for fiscal year 2005 based on a determination of the
character of such income. Income tax expense for fiscal year 2006 also included
a $0.3 million charge attributable to the fourth quarter of fiscal year 2005 and
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 the reversal of a $0.2 million tax contingency reserve.
Net Income. Net income was
$22.5 million, or 6.4% of sales, for fiscal year 2007 as compared to $17.2
million, or 5.1% of sales, for fiscal year 2006. The increase in net income for
fiscal year 2007 was primarily due to the absence in fiscal year 2007 of
non-recurring expenses for the Eimac relocation and the special bonus and higher
gross profit in fiscal year 2007 due to the increase in shipment volume which
was partially offset by higher expenses for the extinguishment of debt, higher
Canadian dollar denominated expenses and higher income tax expense.
EBITDA. EBITDA was $64.3
million, or 18.3% of sales, for fiscal year 2007 as compared to $59.1 million,
or 17.4% of sales, in fiscal year 2006. The increase in EBITDA for fiscal year
2007 was primarily due to the absence in fiscal year 2007 of Eimac move-related
expenses of $7.6 million, including unfavorable overhead absorption and
manufacturing variances for the Eimac relocation, the absence in fiscal year
2007 of non-recurring expenses for the special bonus of $3.25 million and higher
sales volume and the shipment of products with higher gross margins in fiscal
year 2007, partially offset by the loss on debt extinguishment of $6.3 million
for fiscal year 2007 and increases in our Canadian dollar denominated expenses
of $2.6 million resulting from the weakening of the U.S. dollar and expiration
of favorable foreign currency hedge contracts in March 2006.
Calculation of
Management Bonuses. Management bonuses were $2.7 million in
fiscal year 2007 compared to $2.5 million in fiscal year 2006. Management
bonuses for fiscal years 2007 and 2006 were calculated pursuant to our MIP and
were based on three factors: (1) EBITDA as adjusted for purposes of calculating
management bonuses; (2) a measure of cash generated by operations; and (3)
individual goals that were customized for certain participating members of
management. The weight given to each of these factors varied for each person.
Generally, for our officers, equal weight was given to the first two factors,
and the third factor was not applicable. For our other members of management,
equal weight was given to each of the three factors described above. Management
bonuses are paid in cash approximately three months after the end of the fiscal
year. EBITDA as adjusted for purposes of
calculating
management bonuses is equal to EBITDA for the fiscal year adjusted to exclude
the impact of certain non-recurring or non-cash charges as pre-determined in our
MIP for the fiscal year. EBITDA for purposes of calculating management bonuses
for fiscal year 2007 was $71.2 million compared to $67.2 million in fiscal year
2006. The non-recurring and non-cash charges that were excluded from EBITDA in
calculating management bonuses (a) for fiscal year 2007 were loss on debt
extinguishment of $6.3 million, stock-based compensation expense of $1.2
million, offset by the inventory correction of $0.6 million, and (b) for fiscal
year 2006 were direct costs for the Eimac relocation of $4.6 million,
stock-based compensation expense of $0.3 million and the special bonus of $3.25
million. We are presenting EBITDA as adjusted for purposes of calculating
management bonuses here to help investors understand how our management bonuses
were calculated, and not as a measure to be used by investors to evaluate our
operating results or liquidity.
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):
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
and cash equivalents
|
$ | 28.7 | $ | 20.5 | $ | 30.2 | ||||||
|
Working
capital
|
$ | 88.1 | $ | 81.5 | $ | 77.1 | ||||||
We invest
cash balances in excess of operating requirements in overnight U.S. Government
securities and money market accounts. In addition to the above cash and cash
equivalents, we have restricted cash of $0.8 million as of October 3, 2008,
consisting primarily of bank guarantees from customer advance payments to our
international subsidiaries. The bank guarantees become unrestricted cash when
performance under the sales or supply contract is complete.
The
significant factors underlying the $8.2 million net increase in cash and cash
equivalents during fiscal
year 2008 were the net cash provided by our operating activities of
$33.9 million, an escrow refund of $1.6 million related to the Malibu
acquisition and $0.9 million proceeds from employee stock purchases, partially
offset by repayment of $11.0 million of the outstanding balance on our senior
term loan, the redemption of $10.0 million in principal amount of our floating
rate senior notes, capital expenditures of $4.3 million and purchase of
treasury stock for $2.8 million.
We had
total principal amount of debt outstanding of $225.75 million and
$246.75 million as of October 3, 2008 and September 28, 2007,
respectively. As of October 3, 2008, we had borrowing availability of
$55.4 million under the revolver under our senior credit
facilities.
As of
October 15, 2008, after giving effect to an additional optional prepayment of
$1.0 million on our senior term loan on such date, we had $224.75 million
in total principal amount of debt outstanding.
As more
fully described below, our most significant debt covenant compliance requirement
is maintaining a secured leverage ratio of 3.75:1; our current secured leverage
ratio is approximately 1:1. With this low secured leverage ratio, we do
not anticipate any need to restructure our debt or reenter the capital markets
until fiscal year 2011 when our Senior Credit Facilities will likely
expire.
Historical
Operating, Investing and Financing Activities
In
summary, our cash flows were as follows (in millions):
|
October
3,
|
September
28,
|
September 29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 33.9 | $ | 21.7 | $ | 10.9 | ||||||
|
Net
cash used in investing activities
|
$ | (2.8 | ) | $ | (30.4 | ) | $ | (0.2 | ) | |||
|
Net
cash used in financing activities
|
$ | (22.9 | ) | $ | (1.0 | ) | $ | (7.1 | ) | |||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 8.2 | $ | (9.7 | ) | $ | 3.6 | |||||
Operating
Activities
In fiscal years
2008, 2007 and 2006, 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 $33.9 million in fiscal year 2008 was
attributable to net income of $20.4 million and depreciation, amortization and
other non-cash charges of $13.7 million, slightly offset by $0.2 million net
cash used for working capital. The primary working capital uses of cash in
fiscal year 2008 were decreases in accrued expenses, product warranty and income
taxes payable. The decrease in accrued expenses related primarily to the timing
of payroll and employee vacations, combined with lower incentive compensation
and a decrease in consulting and professional costs. These uses of cash were
significantly offset by decreases in receivables and inventories and release of
restricted cash. Accounts receivables decreased due to timing and improved
collection of trade receivables. Inventories decreased due to an effort to
reduce inventory carrying levels.
Net cash
provided by operating activities of $21.7 million in fiscal year 2007 was
attributable to net income of $22.5 million and depreciation, amortization and
other non-cash charges of $16.2 million, partially offset by $17.0 million net
cash used for working capital. In fiscal year 2007, the primary working capital
uses of cash were increases in inventories and accounts receivables and a
decrease in income tax payable. The higher inventory level was largely due to
increasing sales volume, the timing of sales contracts and an increase in
inventory that was purchased due to sales order forecasts and to satisfy
customer delivery commitments. The increase in accounts receivable resulted from
overall higher sales. The reduction in income taxes payable was due to the
timing of payments and a discrete tax benefit related to the filing of amended
tax return for the prior years to reflect a change in reporting Canadian income
earned in the U.S.
The $10.9
million net cash provided by operating activities for fiscal year 2006 was
primarily comprised of net income of $17.2 million plus the net effect of
non-cash expenses totaling $5.5 million, partially offset by $11.8 million net
cash used for working capital. In fiscal year 2006, the primary working capital
uses were for increases in accounts receivable and inventories due to an
increase in sales volume, and the reduction of accounts payable and accrued
expenses due to the timing of payments made to our suppliers, partially offset
by increases in income tax payable due to the tax gain on the sale of our San
Carlos, California property and increases in tax contingency reserve
requirements. The working capital uses of cash also consisted of a reduction in
advance payments from customers, primarily due to the completion of
direct-to-home sale contracts.
Investing
Activities
Investing
activities for fiscal year 2008 consisted primarily of $4.3 million capital
expenditures and $0.1 million payment of patent application fees. The amount of
cash used in investing activities was partially offset by a $1.6 million escrow
refund related to the Malibu acquisition.
Investing
activities for fiscal year 2007 consisted primarily of $22.2 million for the
acquisition of Malibu, net of cash acquired, and capital expenditures of $8.2
million, including $4.1 million to complete the building expansion project at
our Canadian facility. We funded the acquisition of Malibu out of cash on hand
generated from operations.
Investing
activities for fiscal year 2006 consisted primarily of $10.9 million for capital
expenditures, including $4.7 million for capital equipment, building and land
lease improvements in Palo Alto, California related to the Eimac relocation and
$2.3 million for a building expansion project at our Canadian facility. The
capital expenditures were almost entirely offset by the net proceeds from the
sale of the San Carlos, California property of $10.7 million ($11.3 million
gross proceeds less expenses for the sale of $0.6 million). Capital expenditures
for the improvements to our Palo Alto facility were funded with proceeds from
the sale of the San Carlos property.
Financing
Activities
Net cash
used in financing activities for fiscal year 2008 consisted primarily of $2.8
million treasury stock purchases under the stock repurchase program discussed
below, redemption of $10.0 million in principal amount of our floating rate
senior notes and term loan repayments aggregating $11.0 million.
The $11.0 million term loan repayments during fiscal year 2008 comprised the
scheduled amortization payment of $250,000 for the first quarter of fiscal year
2008 and optional prepayments aggregating $10.75 million. The cash used in
financing activities for fiscal year 2008 was partially offset by $0.9 million
in proceeds from employee stock purchases.
Net cash used
in financing activities for fiscal year 2007 consisted primarily of $100.75
million repayments on the floating rate senior notes and the term loan under our
senior credit facilities and $2.5 million of debt issue costs incurred to issue
our new term loan facility. Cash used in financing activities was partially
offset by $100.0 million of proceeds from borrowings under our new term loan,
$1.4 million of proceeds from stock option exercises and employee stock
purchases and $0.8 million excess tax benefit from stock option
exercises.
For fiscal year
2006, financing activities consisted primarily of the initial public offering of
our common stock, which was completed on May 3, 2006, and the special cash
dividend paid to stockholders of CPI International. In the initial public
offering, we 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 total proceeds to us of approximately $47.3 million, net of
transaction costs of approximately $5.6 million. We used the net proceeds of the
initial public offering to repay $47.5 million of the term loan under our senior
credit facilities. In December 2005, our board of directors declared and
paid a special cash dividend of $17 million to stockholders of CPI
International. This dividend was paid using the $10 million in net proceeds
obtained from the additional borrowing under our senior credit facilities in
December 2005 and available cash.
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. Based on the calculation of excess cash flow for fiscal year 2008,
no excess cash flow payment is expected to be made in fiscal year 2009. There
was no excess cash flow payment due for fiscal year 2007, and, therefore, no
excess cash flow payment was made in fiscal year 2008. A $1.7 million excess
cash flow payment for fiscal year 2006 was made in fiscal year
2007.
Stock
Repurchase Program
On May
28, 2008, we announced that our board of directors authorized us to implement a
program to repurchase up to $12.0 million of our common stock from time to time,
funded entirely from cash on hand. Repurchases made under the program are
subject to the terms and limitations of our debt covenants, as well as market
conditions and share price, and will be made at management's discretion in open
market trades, through block trades or in privately negotiated transactions. The
program may be modified or terminated by our board of directors at any time.
During fiscal year 2008, we repurchased 206,243 shares at an average per share
price of $13.54, plus average brokerage commissions of $0.04 per share, for an
aggregate cost of $2.8 million. Repurchased shares have been recorded as
treasury shares and will be held until our board of directors designates that
these shares be retired or used for other purposes.
Contractual
Obligations
The
following table summarizes our significant contractual obligations at October 3,
2008 and the effect that such obligations are expected to have on our liquidity
and cash flows in future periods (in thousands):
|
Total
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
||||||||||||||||
|
Operating
leases
|
$ | 8,272 | $ | 2,037 | $ | 2,432 | $ | 907 | $ | 2,896 | ||||||||||
|
Purchase
commitments
|
29,394 | 28,148 | 1,234 | 12 | - | |||||||||||||||
|
Debt
obligations
|
225,750 | 1,000 | 87,750 | 125,000 | 12,000 | |||||||||||||||
|
Interest
on debt obligations
|
56,520 | 17,167 | 32,642 | 5,308 | 1,403 | |||||||||||||||
| FIN No. 48 tax liabilities | 5,609 | 5,609 | - | - | - | |||||||||||||||
|
Total
cash obligations
|
$ | 325,545 | $ | 53,961 | $ | 124,058 | $ | 131,227 | $ | 16,299 | ||||||||||
|
Standby
letters of credit
|
$ | 4,609 | $ | 4,609 | ||||||||||||||||
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 the senior credit facilities,
which is assumed to mature on the earlier date of August 1, 2011 as described
below under “Senior Credit Facilities,” (2) that interest rates in effect on
October 3, 2008 remain constant for future periods, and (3) a debt level based
on mandatory repayments according to the contractual amortization schedule other
than the $1.0 million amount
shown in
debt obligations for “Less than 1 year,” which is an optional prepayment made on
October 15, 2008. See Note 13 to the accompanying audited consolidated financial
statements.
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.
Leases: We
are 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 our leases provide for escalating lease
payments.
Purchase
Commitments: As of October 3, 2008,
we had known purchase commitments of $36.7 million, 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 we cannot
cancel or for which we would be required to pay a termination fee in the event
of cancellation.
Debt
Obligations:
Long-term
debt comprises the following (in thousands):
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Term
loan, expiring 2014
|
$ | 88,750 | $ | 99,750 | ||||
|
8%
Senior subordinated notes due 2012
|
125,000 | 125,000 | ||||||
|
Floating
rate senior notes due 2015, net of issue discount of $90 and
$183
|
11,910 | 21,817 | ||||||
| 225,660 | 246,567 | |||||||
|
Less: Current
portion
|
1,000 | 1,000 | ||||||
|
Long-term
portion
|
$ | 224,660 | $ | 245,567 | ||||
|
Standby
letters of credit
|
$ | 4,609 | $ | 3,725 | ||||
Senior Credit
Facilities: On August 1, 2007,
Communications & Power Industries amended and restated its then existing
senior credit facilities. The amended and restated senior credit facilities
provide for borrowings of up to an aggregate principal amount of $160 million,
consisting of a $100 million term loan facility and a $60 million revolving
credit facility, with a sub-facility of $15 million for letters of credit and $5
million for swing line loans. Upon certain specified conditions, including
maintaining a senior secured leverage ratio of 3.75:1 or less on a pro forma
basis, Communications & Power Industries may seek commitments for a new
class of term loans, not to exceed $125 million in the aggregate. The senior
credit facilities are guaranteed by CPI International and all of Communications
& Power Industries’ domestic subsidiaries and are secured by substantially
all of the assets of CPI International, Communications & Power Industries
and Communications & Power Industries’ domestic subsidiaries.
Except as
provided in the following sentence, the term loan will mature on August 1, 2014
and the revolver will mature on August 1, 2013. However, if, prior to August 1,
2011, Communications & Power Industries has not repaid or refinanced its
$125 million 8% senior subordinated notes due 2012, both the term loan and the
revolver will mature on August 1, 2011.
The
senior credit facilities replaced Communications & Power Industries’
previous senior credit facilities of $130 million. On the closing date of the
senior credit facilities, Communications & Power
Industries
borrowed $100 million under the term loan. Borrowings under the senior credit
facilities bear interest at a rate equal to, at Communications & Power
Industries’ option, LIBOR or the ABR plus the applicable margin. The ABR is the
greater of the (a) the prime rate and (b) the federal funds rate plus 0.50%. For
term loans, the applicable margin will be 2.00% for LIBOR borrowings and 1.00%
for ABR borrowings. The applicable margins under the revolver vary depending on
Communications & Power Industries’ leverage ratio, as defined in the senior
credit facilities, and range from 1.25% to 2.00% for LIBOR borrowings and from
0.25% to 1.00% for ABR borrowings.
In
addition to customary fronting and administrative fees under the senior credit
facilities, Communications & Power Industries will pay letter of credit
participation fees equal to the applicable LIBOR margin per annum on the average
daily amount of the letter of credit exposure, and a commitment fee on the
average daily unused commitments under the revolver. The commitment fee will
vary depending on Communications & Power Industries’ leverage ratio, as
defined in the senior credit facilities, and will range from 0.25% to
0.50%.
The
senior credit facilities require that Communications & Power Industries
repay $250,000 of the term loan at the end of each fiscal quarter prior to the
maturity date of the term loan, with the remainder due on the maturity date.
Communications & Power Industries is required to prepay its outstanding
loans under the senior credit facilities, subject to certain exceptions and
limitations, with net cash proceeds received from certain events, including,
without limitation (1) all such proceeds received from certain asset sales by
CPI International, Communications & Power Industries or any of
Communications & Power Industries’ subsidiaries, (2) all such proceeds
received from issuances of debt (other than certain specified permitted debt) or
preferred stock by CPI International, Communications & Power Industries or
any of Communications & Power Industries’ subsidiaries and (3) all such
proceeds paid to CPI International, Communications & Power Industries or any
of Communications & Power Industries’ subsidiaries from casualty and
condemnation events in excess of amounts applied to replace, restore or reinvest
in any properties for which proceeds were paid within a specified
period.
If
Communications & Power Industries’ leverage ratio, as defined in the senior
credit facilities, exceeds 3.5:1 at the end of any fiscal year, Communications
& Power Industries will also be required to make an annual prepayment within
90 days after the end of such fiscal year equal to 50% of excess cash flow, as
defined in the senior credit facilities, less optional prepayments made during
the fiscal year. Communications & Power Industries can make optional
prepayments on the outstanding loans at any time without premium or penalty,
except for customary “breakage” costs with respect to LIBOR loans.
The
senior credit facilities contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of CPI International,
Communications & Power Industries or any of Communications & Power
Industries’ 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. Communications & Power Industries and its subsidiaries must comply
with a maximum capital expenditure limitation and a maximum total secured
leverage ratio, each calculated on a consolidated basis for Communications &
Power Industries.
Communications
& Power Industries made repayments on the term loan of $11.0 million during
fiscal year 2008 and $250,000 during the fourth quarter of fiscal year 2007,
leaving a principal balance of $88.75 million as of October 3, 2008. The $11.0
million term loan repayment during fiscal year 2008 comprised the scheduled
amortization payment of $250,000 for the first quarter of fiscal year 2008 and
an optional prepayment of $10.75 million. A portion of the optional prepayment
was applied against the
scheduled
amortization payment due for the second, third and fourth quarters of fiscal
year 2008. Another portion of the optional prepayment will be applied against
the scheduled amortization payments due through fiscal year 2014.
On
October 3, 2008, the amount available for borrowing under the revolver, after
taking into account Communications & Power Industries’ outstanding letters
of credit of $4.6 million, was approximately $55.4 million.
See Note
13 to the accompanying audited consolidated financial statements for a
discussion of the additional $1.0 million prepayment of the term loan made on
October 15, 2008.
8% Senior
Subordinated Notes due 2012 of Communications & Power
Industries: As of October 3, 2008, Communications & Power
Industries had $125.0 million in aggregate principal amount of its 8% senior
subordinated notes due 2012. The notes have no sinking fund
requirements.
The 8%
senior subordinated notes bear interest at the rate of 8.0% per year, payable on
February 1 and August 1 of each year. The 8% senior subordinated notes
will mature on February 1, 2012. The 8% senior subordinated notes are
unsecured obligations, jointly and severally guaranteed by CPI International and
each of Communications & Power Industries’ domestic subsidiaries. The
payment of all obligations relating to the 8% senior subordinated 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%
senior subordinated notes) of Communications & Power Industries, including
debt under the senior credit facilities. Each guarantee of the 8% senior
subordinated notes is and will be subordinated to guarantor senior debt (as
defined in the indenture governing the 8% senior subordinated notes) on the same
basis as the 8% senior subordinated notes are subordinated to Communications
& Power Industries’ senior debt.
At any
time or from time to time on or after February 1, 2008, Communications
& Power Industries, at its option, may redeem the 8% senior subordinated
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 | % | ||
Upon a
change of control, Communications & Power Industries may be required to
purchase all or any part of the 8% senior subordinated notes for a cash price
equal to 101% of the principal amount, plus accrued and unpaid interest thereon,
if any, to the date of purchase.
The
indenture governing the 8% senior subordinated notes contains a number of
covenants that, among other things, restrict, subject to certain exceptions, the
ability of Communications & Power Industries and its restricted subsidiaries
(as defined in the indenture governing the 8% senior subordinated 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% senior subordinated notes include:
failure to make payments on the 8% senior subordinated notes when due; failure
to comply with covenants in the indenture governing the 8% senior subordinated
notes; a default under certain other indebtedness of Communications & Power
Industries 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 Communications & Power Industries or any of the restricted
subsidiaries; and the occurrence of certain insolvency or bankruptcy
events.
Floating Rate
Senior Notes due 2015 of CPI International: As of October 3, 2008, $12.0
million of aggregate principal amount remained outstanding under CPI
International’s floating rate senior notes due 2015 after giving effect to the
redemption of $10.0 million and $58.0 million in fiscal years 2008 and 2007,
respectively. The notes were originally issued at a 1% discount and have no
sinking fund requirements.
The
floating rate senior notes require interest payments at an annual interest rate,
reset at the beginning of each semi-annual period, equal to the then six-month
LIBOR plus 5.75%, payable semiannually on February 1 and August 1 of each year.
The interest rate on the semi-annual interest payment due February 1, 2009 is
8.875% per annum. CPI International may, at its option, elect to pay interest
through the issuance of additional floating rate senior notes for any interest
payment date on or after August 1, 2006 and on or before February 1, 2010.
If CPI International elects to pay interest through the issuance of additional
floating rate senior notes, the annual interest rate on the floating rate senior
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 floating rate senior notes (up to a maximum of 4%). The floating rate
senior notes will mature on February 1, 2015.
The
floating rate senior notes are general unsecured obligations of CPI
International. The floating rate senior 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 floating rate senior notes are senior in right of payment to
CPI International’s existing and future indebtedness that is expressly
subordinated to the floating rate senior notes.
Because
CPI International is a holding company with no operations of its own, CPI
International relies on distributions from Communications & Power Industries
to satisfy its obligations under the floating rate senior notes. The senior
credit facilities and the indenture governing the 8% senior subordinated notes
restrict Communications & Power Industries’ ability to make distributions to
CPI International. The senior credit facilities prohibit Communications &
Power Industries from making distributions to CPI International unless there is
no default under the senior credit facilities and Communications & Power
Industries satisfies a senior secured leverage ratio of 3.75:1, and in the case
of distributions to pay amounts other than interest on the floating rate senior
notes, the amount of the distribution and all prior such distributions do not
exceed a specified amount. The indenture governing the 8% senior subordinated
notes prohibits Communications & Power Industries 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% senior subordinated
notes) does not exceed a specified amount.
At any
time or from time to time on or after February 1, 2007, CPI International, at
its option, may redeem the floating rate senior 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
|
102 | % | ||
|
2009
|
101 | % | ||
|
2010
and thereafter
|
100 | % | ||
Upon a
change of control, as defined in the indenture governing the floating rate
senior notes, CPI International may be required to purchase all or any part of
the outstanding floating rate senior 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 floating rate senior 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 floating rate
senior 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 floating rate senior notes include:
failure to make payments on the floating rate senior notes when due; failure to
comply with covenants in the indenture governing the floating rate senior 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.
Interest Rate
Swaps: To hedge the interest rate exposure associated with the term loan
under our senior credit facilities, on September 28, 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 this interest rate swap with decreasing
notional amounts to match the expected pay down of the term loan. The notional
value of the interest rate swap was $70.0 million at October 3, 2008 and
represented approximately 79% of the aggregate term loan balance. The interest
rate swap agreement is effective through June 30, 2011. There are no collateral
requirements under the interest rate swap.
On August
31, 2007, we completed an early settlement of our $80.0 million interest rate
swap contract associated with the floating rate senior notes, for
which we received $0.4 million in cash representing the final net swap interest
originally due on January 31, 2008.
Covenant
Compliance: Our ability to continue
to operate depends, among other things, on our continued access to capital,
including credit under our senior credit facilities. These credit facilities,
along with the indentures governing the floating rate senior notes and the 8%
senior subordinated notes, contain certain restrictive covenants. Continued
access to our senior credit facilities is subject to remaining in compliance
with the covenants thereunder.
Our
senior credit facilities contain a maximum total secured leverage ratio covenant
of 3.75:1 for Communications & Power Industries. As of October 3, 2008, the
secured leverage ratio for Communications & Power Industries was 0.94:1. The
secured leverage ratio is the ratio of Consolidated Secured Indebtedness (as
defined for purposes of our senior credit facilities, which generally includes
total secured debt less cash and cash equivalents, of Communications & Power
Industries) to Consolidated EBITDA (as computed pursuant to the formulas set
forth in our senior credit facilities). For fiscal year 2008, Consolidated
Secured Indebtedness was $60.2 million and Consolidated EBITDA was $64.0
million.
Consolidated
EBITDA is used to determine compliance with many of the covenants contained in
our senior credit facilities. Consolidated EBITDA and all of its component
elements are defined in our debt agreements and include non-GAAP measures.
Consolidated EBITDA is defined as EBITDA further adjusted to exclude unusual
items, non-cash items and other adjustments permitted in calculating covenant
compliance under our senior credit facilities, as shown in the table
below.
Consolidated
EBITDA as calculated under our senior credit facilities for fiscal year 2008 is
as follows (in thousands):
|
EBITDA(a)
|
$ | 61,271 | |||
|
Stock
compensation expense(b)
|
2,135 | ||||
|
Loss
on debt extinguishment(c)
|
633 | ||||
|
Consolidated
EBITDA
|
$ | 64,039 | |||
|
(a)
|
For
a reconciliation of net income to EBITDA for fiscal year 2008, see
footnote 9 in “Selected Financial
Data.”
|
|
(b)
|
Represents
a non-cash charge for stock compensation related to stock options, and
restricted stock and the discount on our employee stock
purchases.
|
|
(c)
|
Represents
costs associated with our debt refinancing during fiscal year 2008, which
include non-cash write-offs of $0.4 million of unamortized debt
issue costs and issue discount costs and $0.2 million in cash payments for
call premiums.
|
Events
beyond our control may affect our ability to comply with the covenant ratios
described above as well as the other covenants in our senior credit facilities.
Any breach of the covenants in our senior credit facilities could result in a
default and could trigger acceleration of (or the right to accelerate) the
amounts owing under our senior credit facilities. Because of cross-default
provisions in the agreements and instruments governing our indebtedness, a
default under our senior credit facilities could result in a default under, and
the acceleration of, our other indebtedness. In addition, the lenders under our
senior credit facilities could proceed against the collateral securing that
indebtedness. If the indebtedness under our senior credit facilities were to be
accelerated, our ability to operate our business would be materially
impaired.
As of
October 3, 2008 we are in compliance with the covenants under the indentures
governing our floating rate senior notes, 8% senior subordinated notes and the
agreements governing our senior credit facilities, and we expect to remain in
compliance with those covenants throughout fiscal year 2009.
Contingent
Income Tax Obligations
Our total
unrecognized tax benefit, excluding any related interest accrual, was $5.6
million as of October 3, 2008 and is reported as a current liability (income
taxes payable) in our consolidated balance sheet since it is expected to be
settled within the next 12 months. See Note 10 to the accompanying audited
consolidated financial statements for more information.
Contingent
Earnout Consideration
In
addition to the $20.5 million of net cash consideration paid for the Malibu
acquisition, there is a potential earnout payable to the former stockholders of
Malibu of up to $14.0 million, which is primarily contingent upon the
achievement of certain financial objectives over the three years following the
acquisition (“Financial Earnout”), and a discretionary earnout of up to $1.0
million contingent upon achievement of certain succession planning goals by June
30, 2010. No earnout was earned for the first earnout period, and the
maximum potential Financial Earnout that could be earned over the three years
following the acquisition has been reduced from $14.0 million to $12.3 million
based on the performance in the first earnout period. Any earnout consideration
that is 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.
Dividends
from Communications & Power Industries to CPI International
For fiscal
years 2008, 2007 and 2006, respectively, Communications & Power Industries
paid $13.6 million, $66.3 million and $24.9 million of cash dividends to CPI
International. In fiscal year 2008, CPI International used $10.0 million of the
cash dividends to repurchase and redeem floating rate senior notes, $2.8 million
to repurchase approximately 206,000 shares of our stock, $0.5 million to make
cash interest payments on the floating rate senior notes and $0.2 million for
redemption premiums and other fees and expenses related to the repurchase and
redemption of the floating rate senior notes. In fiscal year 2007, CPI
International used $6.3 million of the cash dividends to make cash interest
payments on the floating rate senior notes, $58.0 million to repurchase and
redeem floating rate senior notes and $2.0 million for redemption premiums and
other fees and expenses related to the repurchase and redemption of the floating
rate senior notes. In fiscal year 2006, CPI International used the cash
dividends from Communications & Power Industries to make cash interest
payments of $7.9 million on the floating rate senior notes and to pay a special
cash dividend of $17.0 million to its stockholders. In fiscal year 2006, a
portion of the special cash dividend was paid using $10 million in net proceeds
obtained from an additional borrowing under our senior credit facilities. Our
future ability to make semi-annual cash interest payments on our floating rate
senior notes and pay any principal and related obligations will depend on
Communications & Power Industries’ ability to make dividends to CPI
International in the amounts necessary for such payments. Our senior credit
facilities prohibit Communications & Power Industries from making
distributions to CPI International unless there is no default under our senior
credit facilities and we and Communications & Power Industries satisfy the
secured leverage ratio test described above.
The
indenture governing Communications & Power Industries’ 8% senior
subordinated notes prohibits Communications & Power Industries from making
distributions to us unless:
|
·
|
There
is no default under the indenture.
|
|
·
|
The
ratio of Communications & Power Industries’ Consolidated Cash Flow (as
defined in the indenture) for the most recent four quarters to
Communications & Power Industries’ Consolidated Interest Expense (as
defined in the indenture) for the same period is at least
2:1.
|
As of October 3, 2008, the ratio
of Communications & Power Industries’ Consolidated Cash Flow for the most
recent four quarters to Communications & Power Industries’ Consolidated
Interest Expense was 3.96:1.
|
·
|
The
amount of the proposed dividend plus all previous Restricted Payments (as
defined in the indenture) does not exceed the aggregate contractual limit
on Restricted Payments, which is based on one-half of the aggregate
Consolidated Net Income of Communications & Power Industries since the
date of the issuance of the 8% senior subordinated notes, the amount of
certain capital contributions and certain other items. In addition, the
indenture permits up to $10 million of additional Restricted Payments
outside of the contractual limit described in the preceding
sentence.
|
San
Carlos Facility
In
September 2006, the sale of the land and building previously used by our
operations in San Carlos, California was completed for aggregate proceeds of
$24.8 million, of which $13.5 million was received in advance in fiscal year
2004 and the balance was received in September 2006. 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 the sale.
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
fiscal year 2008 were $4.3 million. In fiscal year 2009, ongoing capital
expenditures are expected to be approximately $5.0 to $6.0 million.
Recent
Accounting Pronouncements
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued
FASB Interpretation (“FIN”) No. 48, “Accounting for Income Tax Uncertainties.”
FIN No. 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by the taxing authority. The recently issued literature also provides guidance
on the derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties. FIN No. 48 also
includes guidance concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with any recorded
income tax uncertainties. Effective September 29, 2007, we adopted FIN No. 48.
The adoption of FIN No. 48 did not have any impact on our financial position,
net income or prior year financial statements. See Note 10, "Income Taxes," to
the consolidated financial statements included in this Form 10-K for further
discussion.
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 for financial
assets and liabilities and for fiscal years beginning after November 15, 2008
for non-financial assets and liabilities. We are
required
to adopt SFAS No. 157 in our fiscal year 2009 commencing October 4, 2008 for
financial assets and liabilities and in our fiscal year 2010 commencing October
3, 2009 for non-financial assets and liabilities. We do not believe the adoption
of SFAS No. 157 will have a material impact on our financial position or results
of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS No. 159
is to provide opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. We are required to adopt SFAS No. 159 in our fiscal year 2009
commencing October 4, 2008 and do not believe the adoption of this new standard
will have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statement—amendments of ARB No. 51.” SFAS No. 160
states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS No.
160 applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. We will be required to adopt SFAS No. 160 in
our fiscal year 2010 commencing October 3, 2009. We do not believe the adoption
of SFAS No. 160 will have a material impact on our financial position or results
of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No.
141(R)”), “Business Combinations,” which replaces SFAS No. 141.
SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non controlling interest in the acquiree
and the goodwill acquired. The Statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008. We will be required to adopt
SFAS No. 141(R) in our fiscal year 2010 commencing October 3, 2009.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s
derivative instruments and hedging activities including: (1) how and why an
entity uses derivative instruments; (2) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (3) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with earlier
application encouraged. We will be required to adopt SFAS No. 161 in our second
quarter of fiscal year 2009 commencing January 3, 2009. This standard is not
expected to have a material effect on our financial position or results of
operations, and will likely result in additional disclosures related to our
derivatives.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3 (“FSP FAS
142-3”), “Determination of the Useful Life of Intangible Assets.” FSP
FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” More specifically, FSP FAS 142-3 removes the requirement under
paragraph 11 of SFAS No. 142 to consider whether an intangible asset
can be renewed without substantial cost or material modifications to the
existing terms and conditions and instead, requires an entity to consider its
own historical experience in renewing similar arrangements. FSP FAS 142-3
also requires expanded disclosure related to the determination of intangible
asset useful lives. FSP FAS 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. We will be required to
adopt FSP FAS 142-3 in our fiscal year 2010 commencing October 3, 2009 and are
currently evaluating the impact, if any, that the adoption of this new standard
will have on our consolidated financial statements.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles, or GAAP, in the United States of America, which
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon various factors and information available to us at the time that these
estimates, judgments and assumptions are made. These factors and information may
include, but are not limited to, history and prior experience, experience of
other enterprises in the same industry, new related events, current economic
conditions and information from third party professionals. The estimates,
judgments and assumptions we make can affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well as the reported
amounts of revenues and expenses during the periods presented. To the extent
there are material differences between these estimates, judgments or assumptions
and actual results, our financial statements will be affected.
We believe the
following critical accounting policies are the most significant to the
presentation of our financial statements and require the most subjective and
complex judgments. These matters, and the judgments and uncertainties affecting
them, are also essential to understanding our reported and future operating
results. See Note 1 to our audited consolidated financial statements for a more
comprehensive discussion of our significant accounting
policies.
Revenue
recognition
We
generally recognize revenue upon shipment of product, following receipt of
written purchase orders, when the price is fixed or determinable, title has
transferred and collectibility is reasonably assured. Revenue recognized under
the percentage of completion method of accounting is determined on the basis of
costs incurred and estimates of costs at completion, which require management
estimates of future costs. Changes in estimated costs at completion over time
could have a material impact on our operating results.
Inventory
reserves
We assess
the valuation of inventory and periodically write down the value for estimated
excess and obsolete inventory based upon actual usage and estimates about future
demand. The excess balance determined by this analysis becomes the basis for our
excess inventory charge. Management personnel play a key role in our excess
inventory review process by providing updated sales forecasts, managing product
rollovers and working with manufacturing to maximize recovery of excess
inventory. If our
estimates
regarding demand are inaccurate or changes in technology affect demand for
certain products in an unforeseen manner, we may incur losses or gains in excess
of our established markdown reserve that could be material.
Management
also reviews the carrying value of inventory for lower of cost or market on an
individual product or contract basis. A loss reserve is charged to cost of sales
if the estimated product cost or the contract cost at completion is in excess of
net realizable value (selling price less estimated cost of disposal). If the
actual contract cost at completion is different than originally estimated, then
a loss or gain provision adjustment would be recorded that could have a material
impact on our operating results.
Product
warranty
Our
products are generally warranted for a variety of periods, typically one to
three years or a predetermined product usage life. A provision for estimated
future costs of repair, replacement or customer accommodations is reflected in
the consolidated condensed financial statements included in this report. We
assess the adequacy of our preexisting warranty liabilities and adjust the
balance based on actual experience and changes in future expectations. The
determination of product warranty reserves requires us to make estimates of
product return rates and expected cost to repair or replace the products under
warranty. If actual repair and replacement costs differ significantly from our
estimates, then adjustments to recognize additional cost of sales may be
required.
Business
combination and related goodwill and intangibles
We
account for business combinations using the purchase method of accounting
pursuant to SFAS No. 141, "Business Combinations." Intangible assets
acquired in a purchase method business combination are
recognized and reported apart from goodwill, pursuant to the criteria specified
by SFAS No. 141.
Accounting
for business combinations requires the allocation of purchase price to
identifiable tangible and intangible assets and liabilities based upon their
fair value. The allocation of purchase price is a matter of judgment and
requires the use of estimates and fair value assumptions. The allocation of
purchase price to finite-lived assets can have a significant impact on operating
results because finite-lived assets are depreciated or amortized over their
remaining useful lives.
The
values assigned to acquired identifiable intangible assets for technology were
determined based on the excess earnings method of the income approach. This
method determines fair market value using estimates and judgments regarding the
expectations of future after-tax cash flows from those assets over their lives,
including the probability of expected future contract renewals and sales, all of
which are discounted to their present value.
Recoverability
of long-lived assets
We
account for goodwill and other intangible assets in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires
that goodwill and identifiable intangible assets with indefinite useful lives be
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
We amortize identifiable intangible assets on a straight-line basis over their
useful lives of up to 50 years.
We assess
the recoverability of the carrying value of goodwill and other intangible assets
with indefinite useful lives at least annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be fully
recoverable. Recoverability of goodwill is measured at the reporting unit level
(our six divisions) based on a two-step approach. First, the carrying amount of
the reporting unit is compared to the fair value as estimated by the future net
discounted cash flows expected to be generated by the reporting unit. To the
extent that the carrying value of the reporting unit exceeds the fair value of
the reporting unit, a second step is performed, wherein the reporting unit's
assets and liabilities are valued. The implied fair value of goodwill is
calculated as the fair value of the reporting unit in excess of the fair value
of all non-goodwill assets and liabilities allocated to the reporting unit. To
the extent the reporting unit's carrying value of goodwill exceeds its implied
fair value, impairment exists and must be recognized. This process requires the
use of discounted cash flow models that utilize estimates of future revenue and
expenses as well as the selection of appropriate discount rates. There is
inherent uncertainty in these estimates, and changes in these factors over time
could result in an impairment charge.
At
October 3, 2008 and September 28, 2007, the carrying amount of goodwill and
other intangible assets, net was $241.1 million and $243.3 million,
respectively. Based on our annual test for impairment performed in the fourth
quarter of fiscal year 2008, goodwill was determined not to be impaired. We will
continue to evaluate the need for impairment if changes in circumstances or
available information indicate that impairment may have occurred, and at least
annually in the fourth quarter.
Our
market capitalization has historically exceeded our net asset value, although
recently it has been particularly volatile. Our market capitalization has
dropped below our net asset value in certain days of October, November and
December 2008 largely, we believe, as a result of the recent global
economic downturn and volatility in the financial markets. If our stock price
continuously falls below our net asset value per share, the decline in our
market capitalization could trigger the requirement of performing the impairment
test on goodwill in fiscal year 2009, which could result in an impairment of our
goodwill.
At
October 3, 2008 and September 28, 2007, the carrying amount of property,
plant and equipment was $62.5 million and $66.0 million, respectively.
We assess the recoverability of property, plant and equipment to be held and
used by a comparison of the carrying amount of an asset or group of assets to
the future net undiscounted cash flows expected to be generated by the asset or
group of assets. If such assets are considered impaired, then the impairment
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. This process requires the use of cash flow
models that utilize estimates of future revenue and expenses. There is inherent uncertainty in these estimates, and changes in
these factors over time could result in an impairment charge.
A
prolonged general economic downturn and, specifically, a prolonged downturn in
the defense, communications or medical markets, or technological changes, as
well as other market factors could intensify competitive pricing pressure,
create an imbalance of industry supply and demand, or otherwise diminish volumes
or profits. Such events, combined with changes in interest rates, could
adversely affect our estimates of future net cash flows to be generated by our
long-lived assets. Consequently, it is possible that our future operating
results could be materially and adversely affected by any impairment charges
related to the recoverability of our long-lived assets.
Accounting
for stock-based compensation
At the
beginning of fiscal year 2006, we adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123R"), and Staff Accounting Bulletin
(“SAB”) No. 107, "Share-Based Payment," for our existing stock option plans
under the prospective method. Under the prospective method, only new awards (or
awards modified, repurchased, or cancelled after the effective date) are
accounted for under the provisions of SFAS No. 123R. Previously, we applied
the intrinsic-value method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Under the intrinsic-value method, compensation expense
was recorded only if the market price of the stock exceeded the stock option
exercise price at the measurement date. We will continue to account for stock
option awards outstanding at September 30, 2005 on a graded vesting basis
using the intrinsic-value method of measuring equity share options.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable and requires the input of subjective
assumptions, including the expected stock price volatility and estimated option
life. For purposes of this valuation model, no dividends have been
assumed.
In
accordance with SFAS No. 123R, prior to becoming a public entity in
April 2006, we used the minimum value method to determine a calculated
value, rather than a fair value, of share awards. Under the minimum value
method, stock price volatility was assumed to be zero. The estimated fair value
(or calculated value, as applicable) of our stock-based awards, less expected
forfeitures, is amortized over the awards' vesting period on a straight-line
basis for awards granted after the adoption of SFAS No. 123R. Since our
common stock has not been publicly traded for a sufficient time period, the
expected volatility is based on expected volatilities of similar companies that
have a longer history of being publicly traded. The risk-free rates are based on
the U.S. Treasury yield in effect at the time of the grant. Since our historical
data is limited, the expected life of options granted is based on the simplified
method for plain vanilla options in accordance with SAB No. 107. In
December 2007, the SEC issued SAB No. 110, an amendment of SAB No. 107. SAB
No. 110 states that the staff will continue to accept, under certain
circumstances, the continued use of the simplified method beyond
December 31, 2007. Accordingly, we will continue to use the simplified
method until we have enough historical experience to provide a reasonable
estimate of expected term. In fiscal years 2008, 2007 and 2006, we recognized
$2.1 million, $1.2 million and $0.3 million, respectively, in stock-based
compensation expense.
Income
taxes
We must
make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of tax credits, tax benefits and deductions and in the calculation
of certain tax assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and financial statement
purposes. Significant changes to these estimates may result in an increase or
decrease to our tax provision in a subsequent period.
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. In the first
quarter of fiscal year 2008, we adopted FIN No. 48 and related guidance.
See Note 10 to the consolidated condensed financial statements included in this
Form 10-K for further discussion. FIN No. 48 requires that we recognize
liabilities for uncertain tax positions based on the two-step process prescribed
within the interpretation. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
requires us to estimate and measure the tax benefit as the largest amount that
is more than 50% likely of being realized upon ultimate settlement. It is
inherently difficult and subjective to estimate such amounts, as this requires
us to determine the probability of various possible outcomes. We reevaluate
these uncertain tax positions on a quarterly basis. This evaluation is based on
factors including, but not limited to, changes in facts or circumstances,
changes in tax law, effectively settled issues under audit, and new audit
activity. Such a change in recognition or measurement would result in the
recognition of a tax benefit or an additional charge to the tax
provision.
|
Item 7A. Quantitative
and Qualitative Disclosures About Market
Risk
|
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 October 3, 2008, we had fixed rate senior subordinated
notes of $125.0 million due in 2012, bearing interest at 8% per year and
variable rate debt consisting of $12.0 million floating rate senior notes
due in 2015 and a $88.75 million term loan under our amended and restated
senior credit facilities due in 2014. Our variable rate debt is subject to
changes in the prime rate and the LIBOR rate.
We use
derivative instruments from time to time in order to manage interest costs and
risk associated with our long-term debt. On September 21, 2007, we entered
into an interest rate swap contract to receive three-month USD-LIBOR-BBA
(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
to match the expected pay down of the term loan. The notional value of the swap
was $70.0 million at October 3, 2008 and represented approximately 79% of
the aggregate term loan balance. The swap agreement is effective through
June 30, 2011. Under the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, this arrangement was
initially designated and qualified as an effective cash flow hedge of interest
rate risk related to the term loan under our senior credit facilities which
permitted recording the fair value of the swap and corresponding unrealized gain
or loss to accumulated other comprehensive income in the consolidated balance
sheets. The interest rate swap gain or loss is included in the assessment of
hedge effectiveness. At October 3, 2008, the fair value of the short-term and
long-term portions of the 2007 Swap was a liability of $1.1 million (accrued
expenses) and $0.8 million (other long-term liabilities), respectively. At
October 3, 2008, the unrealized loss, net of tax, on the swap was $1.2
million.
We
performed a sensitivity analysis to assess the potential loss in future earnings
that a 10% increase in interest rates over a one-year period would have on our
floating rate senior notes and term loan under our senior credit facilities. The
impact was determined based on the hypothetical change from the end of period
market rates over a period of one year and results in a net decrease of future
annual earnings of approximately $0.1 million.
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 SFAS No. 133. The unrealized gains and losses from
foreign exchange forward contracts are included in "accumulated other
comprehensive income" in the consolidated balance sheets. If the transaction
being hedged fails to occur, or if a portion of any derivative is ineffective,
then we promptly recognize the gain or loss on the associated financial
instrument in the consolidated statements of operations. No ineffective amounts
were recognized due to anticipated transactions failing to occur in fiscal years
2008, 2007 and 2006.
As of
November 4, 2008, we had entered into Canadian dollar forward contracts as
follows: for fiscal year 2009, approximately $50 million (Canadian
dollars), or approximately 90% of estimated Canadian dollar denominated expenses
at an average rate of approximately $0.94 U.S. dollar to Canadian dollar; for
the first half of fiscal year 2010, approximately $19 million (Canadian
dollars), or approximately 70% of estimated Canadian dollar denominated
expenses, at an average rate of $0.83 U.S. dollar to Canadian dollar. We
estimate the impact of a 1 cent change in the U.S. dollar to Canadian dollar
exchange rate (without giving effect to our Canadian dollar forward contracts)
to be approximately $0.3 million annually to our net income or
approximately 2 cents to basic and diluted earnings per share.
Net
income for fiscal year 2008 includes a recognized gain from foreign currency
forward contracts of $0.5 million. Net income for fiscal year 2007 includes a
recognized loss from foreign currency forward contracts of $0.4 million. Net
income for fiscal years 2006 includes a recognized gain from foreign currency
forward contracts of $1.2 million. At October 3, 2008, the fair value of the
unrealized loss, net of tax, on Canadian dollar forward contracts was $0.4
million. At September 28, 2007, the fair value of the unrealized gain, net of
tax, on Canadian dollar forward contracts was $1.2 million.
|
Item 8. Financial
Statements and Supplementary Data
|
The
consolidated financial statements required by this item are hereby incorporated
by reference to Part IV of this Annual Report on Form 10-K, and the
supplementary data required by this item are included in Note 1 to the
consolidated financial statements.
|
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
Item 9A. Controls and
Procedures
Evaluation of Disclosure Controls and
Procedures
An
evaluation was performed under the supervision and with the participation of our
management, including our chief executive officer and our chief financial
officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on that evaluation, our chief executive
officer and our chief financial officer have concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures are
effective.
Management’s Annual Report on
Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended).
Under the
supervision and with the participation of our management, including our chief
executive officer and our chief financial officer, we conducted an evaluation of
the effectiveness of our internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated Framework. Based on its
evaluation, our management concluded that our internal control over financial
reporting was effective as of October 3, 2008.
KPMG LLP,
an independent registered public accounting firm, has audited the consolidated
financial statements included in this Annual Report on Form 10-K and, as part of
their audit, has issued its attestation report, included herein, on the
effectiveness of our internal control over financial reporting as of October 3,
2008.
Changes
in Internal Control over Financial Reporting
There has
been no change in our internal control over financial reporting that occurred
during the fourth quarter of fiscal year 2008 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting as of October 3, 2008.
|
Item 9B. Other
Information
|
None.
| Item 10. |
Directors,
Executive Officers and Corporate
Governance
|
The information required under this
item is incorporated by reference herein to our definitive 2009 proxy statement
anticipated to be filed with the SEC within 120 days after October 3,
2008.
| Item 11. |
Executive
Compensation
|
The information required under this
item is incorporated by reference herein to our definitive 2009 proxy statement
anticipated to be filed with the SEC within 120 days after October 3,
2008.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
The information required under this
item is incorporated by reference herein to our definitive 2009 proxy statement
anticipated to be filed with the SEC within 120 days after October 3,
2008.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required under this
item is incorporated by reference herein to our definitive 2009 proxy statement
anticipated to be filed with the SEC within 120 days after October 3,
2008.
|
Principal
Accounting Fees and Services
|
The information required under this
item is incorporated by reference herein to our definitive 2009 proxy statement
anticipated to be filed with the SEC within 120 days after October 3,
2008.
Notwithstanding the foregoing,
information appearing in the sections of our 2009 definitive proxy statement
entitled “Compensation Committee Report on Executive Compensation” and “Report
of the Audit Committee” shall not be deemed to be incorporated by reference in
this Form 10-K.
|
Exhibits,
Financial Statement Schedules
|
(a)
(1) Financial
Statements:
The following consolidated
financial statements and schedules are filed as a part of this
report:
|
·
|
Reports
of Independent Registered Public Accounting
Firm
|
|
·
|
Consolidated
Balance Sheets
|
|
·
|
Consolidated
Statements of Operations
|
|
·
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive
Income
|
|
·
|
Consolidated
Statements of Cash Flows
|
|
·
|
Notes
to Consolidated Financial
Statements
|
(2) Consolidated
Financial Statement Schedules
All
schedules are omitted because they are not applicable, or because the required
information is included in the financial statements or notes
thereto.
(3)
The Exhibit Index beginning on page 126 of this annual report is hereby
incorporated by reference herein.
(b) Exhibits:
See Item 15(a)(3)
above.
(c) Financial Statement
Schedules:
See Item 15(a)(2) above.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
CPI
International, Inc.:
We have
audited the accompanying consolidated balance sheets of CPI International, Inc.
and subsidiaries (the “Company”) as of October 3, 2008 and September 28, 2007,
and the related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended October 3, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CPI International, Inc. and
subsidiaries as of October 3, 2008 and September 28, 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 3, 2008, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), CPI International, Inc.’s internal
control over financial reporting as of October 3, 2008, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated December 15, 2008
expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Mountain
View, California
December
15, 2008
/s/ KPMG
LLP
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
CPI
International, Inc.:
We have
audited CPI International, Inc.’s internal control over financial reporting as
of October 3, 2008, based on criteria established in the Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). CPI International, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report On Internal
Control Over Financial Reporting (Item 9A). Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, CPI International, Inc. maintained, in all material respects, effective
internal control over financial reporting as of October 3, 2008, based on
criteria established in the Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of CPI
International, Inc. and subsidiaries as of October 3, 2008 and September 28,
2007, and the related consolidated statements of operations, stockholders’
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended October 3, 2008, and our report dated December 15, 2008
expressed an unqualified opinion on those consolidated financial
statements.
Mountain
View, California
December
15, 2008
/s/ KPMG
LLP
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except per share data)
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 28,670 | $ | 20,474 | ||||
|
Restricted
cash
|
776 | 2,255 | ||||||
|
Accounts
receivable, net
|
47,348 | 52,589 | ||||||
|
Inventories
|
65,488 | 67,447 | ||||||
|
Deferred
tax assets
|
11,411 | 9,744 | ||||||
|
Prepaid
and other current assets
|
3,823 | 4,639 | ||||||
|
Total
current assets
|
157,516 | 157,148 | ||||||
|
Property,
plant, and equipment, net
|
62,487 | 66,048 | ||||||
|
Deferred
debt issue costs, net
|
4,994 | 6,533 | ||||||
|
Intangible
assets, net
|
78,534 | 81,743 | ||||||
|
Goodwill
|
162,611 | 161,573 | ||||||
|
Other
long-term assets
|
806 | 3,177 | ||||||
|
Total
assets
|
$ | 466,948 | $ | 476,222 | ||||
|
Liabilities
and stockholders’ equity
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
portion of long-term debt
|
$ | 1,000 | $ | 1,000 | ||||
|
Accounts
payable
|
21,109 | 21,794 | ||||||
|
Accrued
expenses
|
23,044 | 26,349 | ||||||
|
Product
warranty
|
4,159 | 5,578 | ||||||
|
Income
taxes payable
|
7,766 | 8,748 | ||||||
|
Advance
payments from customers
|
12,335 | 12,132 | ||||||
|
Total
current liabilities
|
69,413 | 75,601 | ||||||
|
Deferred
income taxes
|
27,321 | 28,394 | ||||||
|
Long-term
debt, less current portion
|
224,660 | 245,567 | ||||||
|
Other
long-term liabilities
|
1,689 | 754 | ||||||
|
Total
liabilities
|
323,083 | 350,316 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Preferred
stock ($0.01 par value; 10,000 shares authorized and none issued and
outstanding)
|
- | - | ||||||
|
Common
stock ($0.01 par value, 90,000 shares authorized;
16,538 and 16,370 shares issued; 16,332
and 16,370 shares outstanding)
|
165 | 164 | ||||||
|
Additional
paid-in capital
|
71,818 | 68,763 | ||||||
|
Accumulated
other comprehensive (loss) income
|
(1,809 | ) | 937 | |||||
|
Retained
earnings
|
76,491 | 56,042 | ||||||
|
Treasury
stock, at cost (206 and 0 shares)
|
(2,800 | ) | - | |||||
|
Total
stockholders’ equity
|
143,865 | 125,906 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 466,948 | $ | 476,222 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
Year Ended
|
|||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||||
|
Sales
|
$ | 370,014 | $ | 351,090 | $ | 339,717 | |||||||
|
Cost
of sales
|
261,086 | 237,789 | 236,063 | ||||||||||
|
Gross
profit
|
108,928 | 113,301 | 103,654 | ||||||||||
|
Operating
costs and expenses:
|
|||||||||||||
|
Research
and development
|
10,789 | 8,558 | 8,550 | ||||||||||
|
Selling
and marketing
|
21,144 | 19,258 | 19,827 | ||||||||||
|
General
and administrative
|
22,746 | 21,519 | 22,418 | ||||||||||
|
Amortization
of acquisition-related intangible assets
|
3,103 | 2,316 | 2,190 | ||||||||||
|
Net
loss on disposition of fixed assets
|
205 | 129 | 586 | ||||||||||
|
Total
operating costs and expenses
|
57,987 | 51,780 | 53,571 | ||||||||||
|
Operating
income
|
50,941 | 61,521 | 50,083 | ||||||||||
|
Interest
expense, net
|
19,055 | 20,939 | 23,806 | ||||||||||
|
Loss
on debt extinguishment
|
633 | 6,331 | - | ||||||||||
|
Income
before taxes
|
31,253 | 34,251 | 26,277 | ||||||||||
|
Income
tax expense
|
10,804 | 11,748 | 9,058 | ||||||||||
|
Net
income
|
$ | 20,449 | $ | 22,503 | $ | 17,219 | |||||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$ | 1.25 | $ | 1.39 | $ | 1.20 | |||||||
|
Diluted
|
$ | 1.16 | $ | 1.27 | $ | 1.09 | |||||||
|
Shares
used to calculate earnings per share:
|
|||||||||||||
|
Basic
|
16,356 | 16,242 | 14,311 | ||||||||||
|
Diluted
|
17,697 | 17,721 | 15,789 | ||||||||||
The accompanying notes are an integral
part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
(in
thousands)
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||||||||||
|
Common Stock
|
Paid-in
|
Comprehensive
|
Retained
|
Treasury Stock
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Income (Loss)
|
Earnings
|
Shares
|
Amount
|
Total
|
|||||||||||||||||||||||||
|
Balances,
September 30, 2005
|
13,079 | $ | 131 | $ | 34,595 | $ | 1,621 | $ | 16,320 | - | $ | - | $ | 52,667 | ||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 17,219 | - | - | 17,219 | ||||||||||||||||||||||||
|
Unrealized
loss on cash flow hedges, net of tax
|
- | - | - | (942 | ) | - | - | - | (942 | ) | ||||||||||||||||||||||
|
Total
comprehensive income
|
16,277 | |||||||||||||||||||||||||||||||
|
Proceeds
from initial public offering, net
of issuance costs
|
2,941 | 27 | 47,272 | - | - | - | - | 47,299 | ||||||||||||||||||||||||
|
Stock-based
compensation cost
|
- | - | 299 | - | - | - | - | 299 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
20 | 2 | 53 | - | - | - | - | 55 | ||||||||||||||||||||||||
|
Tax
benefit related to stock option exercises
|
- | - | 76 | - | - | - | - | 76 | ||||||||||||||||||||||||
|
Issuance
of restricted stock awards
|
10 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Special
cash dividend
|
- | - | (17,000 | ) | - | - | - | - | (17,000 | ) | ||||||||||||||||||||||
|
Balances,
September 29, 2006
|
16,050 | 160 | 65,295 | 679 | 33,539 | - | - | 99,673 | ||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 22,503 | - | - | 22,503 | ||||||||||||||||||||||||
|
Unrealized
gain on cash flow hedges, net of tax
|
- | - | - | 431 | - | - | - | 431 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
22,934 | |||||||||||||||||||||||||||||||
|
Adoption
of SFAS No. 158, net of tax
|
- | - | - | (173 | ) | - | - | - | (173 | ) | ||||||||||||||||||||||
|
Stock-based
compensation cost
|
- | - | 1,128 | - | - | - | - | 1,128 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
262 | 3 | 721 | - | - | - | - | 724 | ||||||||||||||||||||||||
|
Tax
benefit related to stock option exercises
|
- | - | 781 | - | - | - | - | 781 | ||||||||||||||||||||||||
|
Issuance
of common stock under employee stock purchase plan
|
51 | 1 | 838 | - | - | - | - | 839 | ||||||||||||||||||||||||
|
Issuance
of restricted stock awards
|
7 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Balances,
September 28, 2007
|
16,370 | 164 | 68,763 | 937 | 56,042 | - | - | 125,906 | ||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 20,449 | - | - | 20,449 | ||||||||||||||||||||||||
|
Unrealized
loss on cash flow hedges, net of tax
|
- | - | - | (2,697 | ) | - | - | - | (2,697 | ) | ||||||||||||||||||||||
|
Unrealized
actuarial loss and prior service credit for
pension liability, net of tax
|
- | - | - | (49 | ) | - | - | - | (49 | ) | ||||||||||||||||||||||
|
Total
comprehensive income
|
17,703 | |||||||||||||||||||||||||||||||
|
Stock-based
compensation cost
|
- | - | 2,160 | - | - | - | - | 2,160 | ||||||||||||||||||||||||
|
Exercise
of stock options
|
9 | - | 38 | - | - | - | - | 38 | ||||||||||||||||||||||||
|
Tax
benefit related to stock option exercises
|
- | - | 5 | - | - | - | - | 5 | ||||||||||||||||||||||||
|
Issuance
of common stock under employee
stock purchase plan
|
72 | 1 | 852 | - | - | - | - | 853 | ||||||||||||||||||||||||
|
Issuance
of restricted stock awards
|
89 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Forfeiture
of restricted stock awards
|
(2 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||
|
Purchase
of treasury stock
|
- | - | - | - | - | (206 | ) | (2,800 | ) | (2,800 | ) | |||||||||||||||||||||
|
Balances,
October 3, 2008
|
16,538 | $ | 165 | $ | 71,818 | $ | (1,809 | ) | $ | 76,491 | (206 | ) | $ | (2,800 | ) | $ | 143,865 | |||||||||||||||
The accompanying notes are an integral
part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
income
|
$ | 20,449 | $ | 22,503 | $ | 17,219 | ||||||
|
Adjustments
to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Depreciation
|
7,607 | 6,562 | 6,561 | |||||||||
|
Amortization
of intangibles
|
3,356 | 2,536 | 2,452 | |||||||||
|
Amortization
of deferred debt issue costs
|
1,197 | 1,401 | 1,417 | |||||||||
|
Amortization
of discount on floating rate senior notes
|
15 | 49 | 50 | |||||||||
|
Non-cash
loss on debt extinguishment
|
420 | 4,659 | - | |||||||||
|
Non-cash
defined benefit pension expense
|
55 | - | - | |||||||||
|
Stock-based
compensation expense
|
2,135 | 1,239 | 274 | |||||||||
|
Allowance
for doubtful accounts
|
- | (329 | ) | 11 | ||||||||
|
Deferred
income taxes
|
(1,360 | ) | (561 | ) | (5,927 | ) | ||||||
|
Net
loss on the disposition of assets
|
205 | 129 | 586 | |||||||||
|
Tax
benefit from stock option exercises
|
50 | 1,281 | 76 | |||||||||
|
Excess
tax benefit on stock option exercises
|
(18 | ) | (781 | ) | (47 | ) | ||||||
|
Changes
in operating assets and liabilities, net
of acquired assets and assumed liabilities:
|
||||||||||||
|
Restricted
cash
|
1,479 | (509 | ) | (459 | ) | |||||||
|
Accounts
receivable
|
5,241 | (7,388 | ) | (4,344 | ) | |||||||
|
Inventories
|
1,986 | (8,473 | ) | (3,688 | ) | |||||||
|
Prepaid
and other current assets
|
(470 | ) | (811 | ) | 1 | |||||||
|
Other
long-term assets
|
(208 | ) | 476 | 329 | ||||||||
|
Accounts
payable
|
(685 | ) | (215 | ) | (2,320 | ) | ||||||
|
Accrued
expenses
|
(4,953 | ) | (320 | ) | (4,054 | ) | ||||||
|
Product
warranty
|
(1,419 | ) | (653 | ) | (401 | ) | ||||||
|
Income
taxes payable
|
(779 | ) | (2,262 | ) | 8,877 | |||||||
|
Advance
payments from customers
|
203 | 2,202 | (5,757 | ) | ||||||||
|
Other
long-term liabilities
|
(625 | ) | 924 | 41 | ||||||||
|
Net
cash provided by operating activities
|
33,881 | 21,659 | 10,897 | |||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Proceeds
from sale of property, plant and equipment
|
- | - | 11,334 | |||||||||
|
Expenses
relating to sale of San Carlos property
|
- | - | (577 | ) | ||||||||
|
Capital
expenditures
|
(4,262 | ) | (8,169 | ) | (10,913 | ) | ||||||
|
Acquisitions,
net of cash acquired
|
1,615 | (22,174 | ) | - | ||||||||
|
Payment
of patent application fees
|
(147 | ) | - | - | ||||||||
|
Net cash used in investing activities
|
(2,794 | ) | (30,343 | ) | (156 | ) | ||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Proceeds
from issuance of debt
|
- | 100,000 | 10,000 | |||||||||
|
Proceeds
from issuance of common stock
|
- | - | 52,940 | |||||||||
|
Proceeds
from stock purchase plan and exercises of stock options
|
891 | 1,436 | 55 | |||||||||
|
Repayments
of debt
|
(21,000 | ) | (100,750 | ) | (47,500 | ) | ||||||
|
Debt
issuance costs
|
- | (2,462 | ) | - | ||||||||
|
Common
stock issuance costs
|
- | - | (5,641 | ) | ||||||||
|
Purchase
of treasury stock
|
(2,800 | ) | - | - | ||||||||
|
Stockholder
distribution payments
|
- | - | (17,000 | ) | ||||||||
|
Excess
tax benefit on stock option exercises
|
18 | 781 | 47 | |||||||||
|
Net cash used in financing activities
|
(22,891 | ) | (995 | ) | (7,099 | ) | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
8,196 | (9,679 | ) | 3,642 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
20,474 | 30,153 | 26,511 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 28,670 | $ | 20,474 | $ | 30,153 | ||||||
|
Supplemental
cash flow disclosures
|
||||||||||||
|
Cash
paid for interest
|
$ | 18,720 | $ | 22,255 | $ | 23,549 | ||||||
|
Cash
paid for income taxes, net of refunds
|
$ | 13,099 | $ | 13,631 | $ | 6,157 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
79
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(All
tabular dollar amounts in thousands except share and per share
amounts)
Organization and Basis of
Presentation: Unless the context otherwise
requires, “CPI International” means CPI International, Inc. (formerly known as
CPI Holdco, 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.
The
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 2008 comprises the 53-week period ending
October 3, 2008 and fiscal years 2007 and 2006 comprised the 52-week period
ending September 28, 2007 and September 29, 2006. All period references are to
the Company’s fiscal periods unless otherwise indicated.
Foreign Currency
Translation: The functional currency of the
Company’s foreign subsidiaries is the U.S. dollar. Gains or losses resulting
from the translation into U.S. dollars of amounts denominated in foreign
currencies are included in the determination of net income or loss. Foreign
currency translation gains and losses are generally reported on a net basis in
the caption “general and administrative” in the consolidated statements of
operations, except for translation gains or losses on income tax-related assets
and liabilities, which are reported in “income tax expense” in the consolidated
statements of operations.
Use of
Estimates: The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of sales and costs and expenses during the reporting period. On
an ongoing basis, the Company evaluates its estimates, including those related
to provision for revenue recognition; inventory and inventory reserves; product
warranty; business combinations; recoverability and valuation of recorded
amounts of long-lived assets and identifiable intangible assets, including
goodwill; recognition of share-based compensation; and recognition and
measurement of current and deferred income tax assets and liabilities. The
Company bases its estimates on various factors and information, which may
include, but are not limited to, history and prior experience, experience of
other enterprises in the same industry, new related events, current economic
conditions and information from third party professionals that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue
Recognition: Sales are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable, and collectibility is reasonably assured. The Company’s products
are generally subject to warranties, and the Company provides for the estimated
future costs of repair, replacement or customer accommodation in cost of
sales.
The
Company has commercial and U.S. Government fixed-price contracts that are
accounted for under American Institute of Certified Public Accountants Statement
of Position No. 81-1, “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.” These contracts have represented not more
than 2% of the Company’s sales during fiscal years 2008, 2007 and 2006, and are
for contracts that generally are greater than one year in duration and that
include a significant amount of product development. The Company uses the
percentage-of-completion method when reasonably dependable estimates of the
extent of progress toward completion, contract revenues and contract costs can
be made. The portion of revenue earned or the amount of gross profit earned for
a period is determined by measuring the extent of progress toward completion
using total cost incurred to date and estimated costs at contract
completion.
Sales
under cost-reimbursement contracts, which are primarily for research and
development, are recorded as costs are incurred and include estimated earned
fees in the proportion that costs incurred to date bear to total estimated
costs. The fees under certain commercial and U.S. Government contracts may be
increased or decreased in accordance with cost or performance incentive
provisions that measure actual performance against established targets or other
criteria. Such incentive fee awards or penalties are included in revenue at the
time the amounts can be reasonably determined.
Revenue
is recorded net of taxes collected from customers that are remitted to
governmental authorities, with the collected taxes recorded as current
liabilities until remitted to the relevant government authority.
Fair Value of Financial
Instruments: Financial instruments include cash
and cash equivalents, restricted cash, accounts receivable, derivative
instruments, accounts payable and long-term debt. Cash equivalents include
highly liquid short-term investments with original maturities of three months or
less, readily convertible to known amounts of cash. As of October 3, 2008 and
September 28, 2007, cash equivalents were $24.9 million and $17.7 million,
respectively. The carrying value of the Company’s cash, restricted cash,
accounts receivable, derivative instruments and accounts payable approximate
their fair values. The estimated fair value of the Company’s debt as of October
3, 2008 and September 28, 2007 was $217.8 million and $249.7 million,
respectively. The fair value estimates were based on market interest rates and
other market information available to management as of each balance sheet date
presented. The approximate fair values do not take into consideration expenses
that could be incurred in an actual settlement.
Restricted
Cash: Restricted cash consists 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.
Inventories: Inventories
are stated at the lower of average cost or market value, primarily using the
average cost method. Costs include labor, material, and overhead costs. Overhead
costs are based on indirect costs allocated among cost of sales, work-in-process
inventory, and finished goods inventory. Inventories
also include costs and earnings in excess of progress billings for contracts
using the percentage of completion method of accounting. Progress billings in
excess of costs and earnings for
contracts
using the percentage of completion method of accounting are reported in Advance
Payments from Customers.
The
Company assesses the valuation of inventory and periodically writes down the
value for estimated excess and obsolete inventory based upon actual usage and
estimates about future demand. The excess balance determined by this analysis
becomes the basis for the Company’s excess inventory charge. Management
personnel play a key role in the excess inventory review process by providing
updated sales forecasts, managing product rollovers and working with
manufacturing to maximize recovery of excess inventory. If actual market
conditions are less favorable than those projected by management, additional
write-downs may be required. If actual market conditions are more favorable than
anticipated, inventory previously written down may be sold, resulting in lower
cost of sales and higher income from operations than expected in that
period.
Management
also reviews the carrying value of inventory for lower of cost or market on an
individual product or contract basis. A loss is charged to cost of sales when
known if estimated product or contract cost at completion is in excess of net
realizable value (selling price less estimated cost of disposal). If actual
product or contract cost at completion is different than originally estimated,
then a loss or gain provision adjustment is recorded that would have an impact
on the Company’s operating results.
Property, Plant, and
Equipment: Property, plant and equipment are
stated at cost. Major improvements are capitalized, while maintenance and
repairs are expensed as incurred. Plant and equipment are depreciated over their
estimated useful lives using the straight-line method. Building, land
improvements, and process equipment are depreciated generally over twenty-five,
twenty and twelve years, respectively. Machinery and equipment are depreciated
generally over seven to twelve years. Office furniture and equipment are
depreciated generally over five to ten years. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives, or
the remaining term of the lease, whichever is shorter.
Goodwill and Other Intangible
Assets: The Company accounts for business
combinations using the purchase method of accounting pursuant to Statement of
Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”
Intangible assets acquired in a purchase method business combination are
recognized and reported apart from goodwill, pursuant to the criteria specified
by SFAS No. 141.
The
values assigned to acquired identifiable intangible assets for technology were
determined based on the excess earnings method of the income approach. This
method determines fair market value using estimates and judgments regarding the
expectations of future after-tax cash flows from those assets over their lives,
including the probability of expected future contract renewals and sales, all of
which are discounted to their present value.
The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that
goodwill and identifiable intangible assets with indefinite useful lives be
tested for impairment at least annually. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Identifiable intangible assets are amortized on a straight-line basis over their
useful lives of up to 50 years. The Company tests goodwill for impairment
annually or more frequently if events and circumstances warrant. The Company’s
annual testing resulted in no impairment of goodwill in fiscal years 2008, 2007
and 2006.
Long-Lived
Assets: The Company accounts for long-lived assets
in accordance with SFAS No. 144, which requires that long-lived and intangible
assets, including property, equipment, and leasehold improvements, be evaluated
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would be
recognized when the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount. Such impairment loss would be measured as the difference
between the carrying amount of the asset and its fair value.
There
were no triggering events identified that would indicate a need to review for
impairment of long-lived assets during fiscal years 2008, 2007 and
2006.
Deferred Debt Issue
Costs: Costs incurred related to the issuance of
the Company’s long-term debt and other credit facilities are capitalized and
amortized over the estimated time the obligations are expected to be outstanding
using the effective interest method. Deferred debt issue costs for CPI’s
revolving credit facility and term loan, CPI’s 8% Senior Subordinated Notes due
2012, and CPI International’s Floating Rate Senior Notes due 2015 are
amortized over a period of 4 years, 8 years, and 10 years, respectively. As a
result of the Company’s prepayment or refinancing transactions as discussed in
Note 5, $0.3 million and $4.2 million of unamortized deferred debt issue costs
were written-off and charged to loss on debt extinguishment in the consolidated
statement of operations for fiscal years 2008 and 2007, respectively. As of
October 3, 2008 and September 28, 2007, gross deferred debt issue costs were
$8.3 million and $8.7 million, and accumulated amortization was $3.3 million and
$2.2 million, respectively.
Product
Warranty: The Company’s products typically carry
warranty periods of one to three years or warranties over a predetermined
product usage life. The Company estimates the costs that may be incurred under
its warranty plans and records a liability in the amount of such estimated costs
at the time revenue is recognized. The determination of product warranty
reserves requires the Company to make estimates of product return rates and
expected cost to repair or replace the products under warranty. The Company
assesses the adequacy of its preexisting warranty liabilities and adjusts the
balance based on actual experience and changes in future
expectations.
Derivative Instruments and
Hedging: The Company accounts for derivative
instruments and hedging activities in accordance with SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138,
“Accounting for Certain Derivative Instruments and Hedging Activities—an
amendment of Financial Accounting Standards Board (“FASB”) Statement No. 133”
and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.” In accordance with these standards, derivative instruments
are recorded on the balance sheet as either an asset or liability measured at
its fair value. The Company uses foreign currency forward contracts to hedge
Canadian dollar expenses and interest rate swap agreements to reduce its
exposure to changes in variable interest rates on debt. Derivatives are not used
for speculative purposes.
The
Company’s derivatives are designated as cash flow hedges and the effective
portion of the change in fair value of the derivative is recorded in
stockholders’ equity as a separate component of accumulated other comprehensive
income and is recognized in the statement of operations when the hedged item
affects earnings. The ineffective portion of the change in fair value of the
derivative is immediately recognized in earnings.
Business Risks and Credit
Concentrations: Defense-related applications, such
as certain radar, electronic countermeasures and military communications,
constitute a significant portion of the Company’s sales. Companies engaged in
supplying defense-related equipment and services to government agencies are
subject to certain business risks unique to that industry. Sales to the
government may be affected by changes in procurement policies, budget
considerations, changing concepts of national defense, political developments
abroad, and other factors.
Research and
Development: Company-sponsored research and development costs
related to both present and future products are expensed as incurred.
Customer-sponsored research and development costs are charged to cost of sales
to match revenue recognized. Total expenditures incurred by the Company on
research and development are summarized as follows:
|
|
Year Ended
|
|||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CPI
Sponsored
|
$ | 10,789 | $ | 8,558 | $ | 8,550 | ||||||
|
Customer
Sponsored
|
12,028 | 7,738 | 6,227 | |||||||||
| $ | 22,817 | $ | 16,296 | $ | 14,777 | |||||||
Advertising
Expenses: Costs related to advertising are recognized in
selling and marketing expenses as incurred. Advertising expenses were not
material in any of the periods presented.
Stock-based
Compensation: At the beginning of fiscal year
2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123R”), and Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based
Payment,” for its existing stock option plans under the prospective method.
Under the prospective method, only new awards (or awards modified, repurchased,
or cancelled after the effective date) are accounted for under the provisions of
SFAS No. 123R. Previously, the Company applied the intrinsic-value method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. Under
the intrinsic-value method, compensation expense was recorded only if the market
price of the stock exceeded the stock option exercise price at the measurement
date. The Company will continue to account for stock option awards outstanding
at September 30, 2005 using the intrinsic-value method of measuring equity share
options. See Note 9 for information regarding share-based
compensation.
Income
Taxes: The Company records income taxes using the
asset and liability method. Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. See Note 10 for further discussion on
income taxes.
Comprehensive
Income: The Company has adopted the accounting
treatment prescribed by SFAS No. 130. Comprehensive income is defined as a
change in equity of a company during a period from transactions and other events
and circumstances excluding transactions resulting from investments by owners
and distributions to owners. The primary difference between net income and
comprehensive income for the Company arises from unrealized gains and losses on
cash flow hedge contracts, net of tax.
Earnings per
share: Basic earnings per share are computed using
the weighted-average number of common shares outstanding during the period
excluding outstanding nonvested restricted shares subject to repurchase. Diluted
earnings per share are computed using the weighted-average number of common and
dilutive potential common equivalent shares outstanding during the period.
Potential common equivalent shares consist of common stock issuable upon
exercise of stock options and nonvested restricted shares and units using the
treasury stock method.
The following table is a reconciliation
of the shares used to calculate basic and diluted earnings per share (in
thousands):
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Weighted
average shares outstanding - Basic
|
16,356 | 16,242 | 14,311 | |||||||||
|
Effect
of dilutive stock options and
nonvested restricted
stock shares and units
|
1,341 | 1,479 | 1,478 | |||||||||
|
Weighted
average shares outstanding - Diluted
|
17,697 | 17,721 | 15,789 | |||||||||
The
calculation of diluted net income per share excludes all anti-dilutive shares.
The number of anti-dilutive shares, as calculated based on the weighted average
closing price of the Company’s common stock for the periods, was approximately
781,000 shares, 484,000 shares and 128,000 shares for fiscal years 2008,
2007 and 2006, respectively.
Recently Issued Accounting
Standards: In June 2006, FASB issued FASB
Interpretation (“FIN”) No. 48, “Accounting for Income Tax Uncertainties.” FIN
No. 48 defines the threshold for recognizing the benefits of tax return
positions in the financial statements as “more-likely-than-not” to be sustained
by the taxing authority. The recently issued literature also provides guidance
on the derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties. FIN No. 48 also
includes guidance concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with any recorded
income tax uncertainties. Effective in the first quarter of fiscal year 2008
starting September 29, 2007, the Company adopted FIN No. 48. The adoption of FIN
No. 48 did not have any impact on the Company’s financial position, net income
or prior year financial statements. See Note 10, "Income Taxes," for further
discussion.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for measuring fair value under other
accounting pronouncements that permit or require fair value measurements,
changes the methods used to measure fair value and expands disclosures about
fair value measurements. In particular, disclosures are required to provide
information on: the extent to which fair value is used to measure assets and
liabilities; the inputs used to develop measurements; and the effect of certain
of the measurements on earnings (or changes in net assets). SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 for financial
assets and liabilities and for fiscal years beginning after November 15, 2008
for non-financial assets and liabilities. Early adoption, as of the beginning of
an entity’s fiscal year, is also permitted, provided interim financial
statements have not yet been issued. The Company is required to adopt SFAS No.
157 in its fiscal year 2009 commencing October 4, 2008 for financial assets and
liabilities and in its fiscal year 2010
commencing
October 3, 2009 for non-financial assets and liabilities. The Company does not
believe the adoption of SFAS No. 157 will have a material impact on its
financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.” SFAS No. 159 permits companies to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS No. 159
is to provide opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
hedge accounting provisions. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 is effective for fiscal years beginning after November
15, 2007. The Company is required to adopt SFAS No. 159 in its fiscal year 2009
commencing October 4, 2008 and does not believe the adoption of this new
standard will have a material impact on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statement—amendments of ARB No. 51.” SFAS No. 160
states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS No.
160 applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The Company will be required to adopt SFAS
No. 160 in its fiscal year 2010 commencing October 3, 2009. The Company does not
believe the adoption of SFAS No. 160 will have a material impact on its
financial position or results of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No.
141(R)”), “Business Combinations,” which replaces SFAS No. 141.
SFAS No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non controlling interest in the acquiree
and the goodwill acquired. The Statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008. The Company will be required to
adopt SFAS No. 141(R) in its fiscal year 2010 commencing October 3,
2009.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s
derivative instruments and hedging activities including: (1) how and why an
entity uses derivative instruments; (2) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (3) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with earlier
application encouraged. The Company will be required to adopt SFAS No. 161 in
its second quarter of fiscal year 2009 commencing January 3, 2009. This standard
is not expected to have a material effect on the Company's financial position or
results of operations, and will likely result in additional disclosures related
to the Company’s derivatives.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3 (“FSP FAS
142-3”), “Determination of the Useful Life of Intangible Assets.” FSP
FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” More specifically, FSP FAS 142-3 removes the requirement under
paragraph 11 of SFAS No. 142 to consider whether an intangible asset
can be renewed without substantial cost or material modifications to the
existing terms and conditions and instead, requires an entity to consider its
own historical experience in renewing similar arrangements. FSP FAS 142-3
also requires expanded disclosure related to the determination of intangible
asset useful lives. FSP FAS 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. The Company will be
required to adopt FSP FAS 142-3 in its fiscal year 2010 commencing October 3,
2009 and is currently evaluating the impact, if any, that the adoption of this
new standard will have on its consolidated financial statements.
2. Supplemental Balance Sheet
Information
Accounts
Receivable: Accounts receivable are stated net of
allowances for doubtful accounts as follows:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Accounts
receivable
|
$ | 47,437 | $ | 52,678 | ||||
|
Less:
Allowance for doubtful accounts
|
(89 | ) | (89 | ) | ||||
|
Accounts
receivable, net
|
$ | 47,348 | $ | 52,589 | ||||
The
following table sets forth the changes in allowance for doubtful account during
fiscal years 2008, 2007 and 2006:
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Balance
at beginning of period
|
$ | 89 | $ | 494 | $ | 723 | ||||||
|
Provision
(recoveries) for doubtful accounts charged
to general and
administrative expense
|
19 | (329 | ) | 11 | ||||||||
|
Write-offs
against allowance
|
(19 | ) | (76 | ) | (240 | ) | ||||||
|
Balance
at end of period
|
$ | 89 | $ | 89 | $ | 494 | ||||||
Inventories: The
following table provides details of inventories, net of reserves:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Raw
material and parts
|
$ | 40,187 | $ | 40,725 | ||||
|
Work
in process
|
17,622 | 18,168 | ||||||
|
Finished
goods
|
7,679 | 8,554 | ||||||
| $ | 65,488 | $ | 67,447 | |||||
Reserve for excess, slow moving and
obsolete inventory: The following table summarizes
the activity related to reserves for excess, slow moving and obsolete inventory
during fiscal years 2008 and 2007:
|
Year Ended
|
||||||||
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Balance
at beginning of period
|
$ | 9,784 | $ | 8,822 | ||||
|
Malibu
acquisition
|
- | 601 | ||||||
|
Inventory
provision, charged to cost of sales
|
1,908 | 1,191 | ||||||
|
Inventory
write-offs
|
(1,832 | ) | (830 | ) | ||||
|
Balance
at end of period
|
$ | 9,860 | $ | 9,784 | ||||
Reserve for loss
contracts: The following table summarizes the activity
related to reserves for loss contracts during fiscal years 2008 and
2007:
|
Year Ended
|
||||||||
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Balance
at beginning of period
|
$ | 2,700 | $ | 1,702 | ||||
|
Malibu
acquisition
|
- | 1,984 | ||||||
|
Provision
for loss contracts, charged
to cost of
sales
|
2,810 | 1,196 | ||||||
|
Credit
to cost of sales upon revenue
recognition
|
(3,582 | ) | (2,182 | ) | ||||
|
Balance
at end of period
|
$ | 1,928 | $ | 2,700 | ||||
Reserve
for loss contracts are reported in the consolidated balance sheet in the
following accounts:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Inventories
|
$ | 1,640 | $ | 1,123 | ||||
|
Accrued
expenses
|
288 | 1,577 | ||||||
| $ | 1,928 | $ | 2,700 | |||||
Property, Plant, and Equipment,
Net: The following table provides details of
property, plant and equipment, net:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Land
and land leaseholds
|
$ | 4,775 | $ | 4,715 | ||||
|
Buildings
|
40,068 | 39,496 | ||||||
|
Machinery
and equipment
|
43,501 | 39,233 | ||||||
|
Construction
in progress
|
638 | 1,806 | ||||||
| 88,982 | 85,250 | |||||||
|
Less:
accumulated depreciation and amortization
|
(26,495 | ) | (19,202 | ) | ||||
|
Property,
plant, and equipment, net
|
$ | 62,487 | $ | 66,048 | ||||
Intangible
Assets: The following tables present the details
of the Company’s total acquisition-related intangible assets:
|
Weighted Average
|
October 3, 2008
|
September 28, 2007
|
||||||||||||||||||||||||||
| Useful Life
(in years)
|
Cost
|
Accumulated Amortization
|
Net
|
Cost
|
Accumulated Amortization
|
Net
|
||||||||||||||||||||||
|
VED
Core Technology
|
50
|
$ | 30,700 | $ | (2,887 | ) | $ | 27,813 | $ | 30,700 | $ | (2,273 | ) | $ | 28,427 | |||||||||||||
|
VED
Application Technology
|
25
|
19,800 | (3,713 | ) | 16,087 | 19,800 | (2,921 | ) | 16,879 | |||||||||||||||||||
|
X-ray
Generator and Satcom
Application
Technology
|
15
|
8,000 | (2,508 | ) | 5,492 | 8,000 | (1,974 | ) | 6,026 | |||||||||||||||||||
|
Antenna
and Telemetry
Technology
|
25
|
5,300 | (241 | ) | 5,059 | 5,300 | (29 | ) | 5,271 | |||||||||||||||||||
|
Customer
backlog
|
1
|
580 | (580 | ) | - | 580 | (78 | ) | 502 | |||||||||||||||||||
|
Land
lease
|
46
|
11,810 | (1,181 | ) | 10,629 | 11,810 | (928 | ) | 10,882 | |||||||||||||||||||
|
Tradename
|
20
- Indefinite
|
7,600 | (55 | ) | 7,545 | 7,600 | - | 7,600 | ||||||||||||||||||||
|
Customer
list and programs
|
25
|
6,280 | (950 | ) | 5,330 | 6,280 | (684 | ) | 5,596 | |||||||||||||||||||
|
Noncompete
agreement
|
5
|
640 | (208 | ) | 432 | 640 | (80 | ) | 560 | |||||||||||||||||||
|
Patent
application fees
|
-
|
147 | - | 147 | - | - | - | |||||||||||||||||||||
| $ | 90,857 | $ | (12,323 | ) | $ | 78,534 | $ | 90,710 | $ | (8,967 | ) | $ | 81,743 | |||||||||||||||
Intangible
assets, net as of October 3, 2008 include a total of approximately $0.1 million
of application costs and associated legal costs incurred to obtain certain
patents. Upon obtaining these patents, these costs will be amortized on a
straight-line basis and charged to operations over their estimated useful lives,
not to exceed 17 years.
During
the fourth quarter of fiscal year 2008, the Company changed the estimated
economic life of the tradename associated with its Eimac business from
indefinite to 20 years. The Company believes the 20-year life reflects Eimac’s
current operating conditions and economic expectations. The net effect of this
change on fiscal year 2008 was to decrease income before taxes by approximately
$55,000. As of October 3, 2008, the net book value of Eimac’s tradename was
approximately $4.3 million.
The
amortization of intangible assets amounted to $3.4 million, $2.5 million and
$2.5 million for fiscal years 2008, 2007 and 2006, respectively.
Based on acquisitions
completed as of October 3, 2008, the estimated future amortization expense of
intangible assets, excluding the Company’s unamortized tradenames, is as
follows:
|
Fiscal Year
|
Amount
|
|||
|
2009
|
3,028 | |||
|
2010
|
3,006 | |||
|
2011
|
3,006 | |||
|
2012
|
2,992 | |||
|
2013
|
2,900 | |||
|
Thereafter
|
60,402 | |||
| $ | 75,334 | |||
Goodwill: The
following table sets forth the changes in goodwill by reportable segment during
fiscal years 2008 and 2007:
|
Reportable Segments
|
||||||||||||||||
|
VED
|
Satcom
|
Other
|
Total
|
|||||||||||||
|
Balance
at September 29, 2006
|
$ | 133,637 | $ | 13,852 | $ | - | $ | 147,489 | ||||||||
|
Malibu
acquisition
|
- | - | 14,856 | 14,856 | ||||||||||||
|
Other
adjustments
|
(740 | ) | (22 | ) | (10 | ) | (772 | ) | ||||||||
|
Balance
at September 28, 2007
|
132,897 | 13,830 | 14,846 | 161,573 | ||||||||||||
|
Malibu
purchase price and allocation adjustment
|
- | - | 1,028 | 1,028 | ||||||||||||
|
Other
adjustment
|
- | - | 10 | 10 | ||||||||||||
|
Balance
at October 3, 2008
|
$ | 132,897 | $ | 13,830 | $ | 15,884 | $ | 162,611 | ||||||||
During
fiscal year 2008, the Company finalized the purchase price valuation and
allocation associated with its acquisition of Malibu Research Associates, Inc.
in August 2007, resulting in a $1.0 million increase in goodwill. See Note 3 for
details.
Other
adjustments for fiscal year 2007 include (1) a correction to reduce goodwill by
$0.5 million for subsequently recognized deferred tax assets associated with the
acquisition of Econco Broadcast Service, Inc., and (2) an adjustment of $0.3
million for tax benefit realized from the exercise of fully vested stock options
that were acquired in connection with the January 23, 2004 merger pursuant to
which CPI International acquired Communications & Power Industries Holding
Corporation (the “January 2004 merger”).
Accrued
Expenses: The following table provides details of
accrued expenses:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Payroll
and employee benefits
|
$ | 12,758 | $ | 15,164 | ||||
|
Accrued
interest
|
2,001 | 2,073 | ||||||
|
Other
accruals
|
8,285 | 9,112 | ||||||
| $ | 23,044 | $ | 26,349 | |||||
Product
Warranty: The following table summarizes the
activity related to product warranty during fiscal years 2008 and
2007:
|
Year Ended
|
||||||||
|
|
October
3,
|
September
28,
|
||||||
|
2008
|
2007
|
|||||||
|
Beginning
accrued warranty
|
$ | 5,578 | $ | 5,958 | ||||
|
Malibu
acquisition
|
- | 273 | ||||||
|
Actual
costs of warranty claims
|
(4,329 | ) | (5,328 | ) | ||||
|
Estimates
for product warranty, charged to cost of sales
|
2,910 | 4,675 | ||||||
|
Ending
accrued warranty
|
$ | 4,159 | $ | 5,578 | ||||
Malibu
Research Associates
On August
10, 2007, the Company completed its acquisition of all outstanding common stock
of the privately held Malibu Research Associates, Inc. (“Malibu”). Malibu,
headquartered in Camarillo, California, is a designer, manufacturer and
integrator of advanced antenna systems for radar, radar simulators and telemetry
systems, as well as for data links used in ground, airborne, unmanned aerial
vehicles (“UAV”) and shipboard systems. Under the terms of the purchase
agreement, at the closing of the acquisition, the Company paid cash of
approximately $22.4 million, which included $2.3 million and $1.0 million placed
into indemnity and working capital escrow accounts, respectively. The indemnity
escrow amount was provided to ensure funds are available to satisfy potential
indemnification claims asserted prior to January 1, 2009, and the working
capital escrow amount was provided to satisfy any negative differences between
the estimated working capital amount as of the acquisition closing date and the
actual working capital amount at the acquisition closing date.
For
financial reporting purposes, consideration of approximately $2.6 million, which
was part of the cash consideration paid for Malibu at the closing of the
acquisition, was excluded from the purchase price allocation and was reported as
other long-term assets in the consolidated balance sheet at September 28, 2007.
This amount represented the difference between the estimated working capital
amount as of the acquisition closing date and the actual working capital amount
as of the acquisition closing date. In accordance with SFAS No. 141, any
contingent consideration that has not been determined beyond a reasonable doubt
is excluded from the purchase price allocation until the contingency is
resolved. The Company intended to make a claim against the working capital
escrow account of $1.0 million and, if necessary, the indemnity escrow account
of $2.3 million to recover the working capital shortfall once the amount of such
shortfall had been finally determined.
During
the second quarter of fiscal year 2008, the valuation of Malibu’s net working
capital amount as of the acquisition closing date was finalized, resulting in a
disbursement of cash to the Company of $1.6 million from the escrow accounts.
The remaining $1.0 million of consideration was allocated to goodwill as the
working capital contingency was resolved, which resulted in an adjusted cash
purchase price of approximately $20.7 million. The remaining $1.8 million,
including interest, held in the indemnity escrow account is available to cover
potential indemnification claims asserted prior to January 1, 2009.
Also
during fiscal year 2008, in connection with the filing of Malibu’s 2007 income
tax returns, further allocation adjustments were made to the purchase price
which resulted in a $0.2 million decrease in the assumed income tax payable and
a $0.2 million increase in deferred tax liability.
Additionally,
the Company may be required to pay a potential earnout to the former
stockholders of Malibu of up to $14.0 million, which is primarily contingent
upon the achievement of certain financial objectives over the three years
following the acquisition (“Financial Earnout”); and a discretionary earnout of
up to $1.0 million contingent upon achievement of certain succession planning
goals by June 30, 2010. As of October 3, 2008, the Company has not accrued any
of these contingent earnout amounts as achievement of the objectives and goals
has not occurred. Any earnout consideration paid based on financial performance
will be recorded as additional goodwill. Any discretionary succession earnout
consideration paid will be recorded as general and administrative expense. No
earnout was earned for the first earnout period, and the maximum
potential Financial Earnout that could be earned over the three years following
the acquisition has been reduced from $14.0 million to $12.3 million based on
the performance in the first earnout period.
Under the
purchase method of accounting, the assets and liabilities of Malibu were
adjusted to their fair values and the excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill. The allocation of the
purchase price to specific assets and liabilities was based, in part, upon
internal estimates of cash flow and recoverability. The valuation of
identifiable intangible assets acquired was based on management’s estimates,
currently available information and reasonable and supportable assumptions. This
purchase price allocation was generally based on the fair value of these assets
determined using the income approach.
The
following table summarizes the allocation of the fair value of Malibu’s assets
acquired and liabilities assumed:
|
Net
current liabilities
|
$ | (3,727 | ) | |
|
Property,
plant and equipment
|
719 | |||
|
Deferred
tax liabilities
|
(933 | ) | ||
|
Identifiable
intangible assets
|
8,790 | |||
|
Goodwill
|
15,884 | |||
| $ | 20,733 |
The
following table presents details of the purchased intangible assets
acquired:
|
Weighted Average Useful Life
(in years)
|
Amount
|
|||||||
|
Non
compete agreements
|
5 | $ | 530 | |||||
|
Tradename
|
Indefinite
|
1,800 | ||||||
|
Antenna
and Telemetry technology
|
25 | 5,300 | ||||||
|
Backlog
|
1 | 580 | ||||||
|
Customer
relationships
|
15 | 580 | ||||||
| $ | 8,790 | |||||||
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”
goodwill and indefinite lived intangibles will not be amortized but will be
tested for impairment at least annually.
The
Company’s consolidated financial statements include Malibu’s financial results
from the acquisition date.
Pro
Forma Results
Pro forma
information giving effect to the Malibu acquisition has not been presented
because the pro forma information would not differ materially from the
historical results of the Company.
4. Sale of San Carlos Assets
In
September 2006, the Company completed the sale of the land and building
previously used by its operations in San Carlos, California for aggregate
proceeds of $24.8 million, of which $11.3 million was received in September 2006
and $13.5 million was received as advance payments in fiscal year 2004. 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.
5. Long-Term Debt
Long-term
debt comprises the following:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Term
loan, expiring 2014
|
$ | 88,750 | $ | 99,750 | ||||
|
8%
Senior subordinated notes due 2012
|
125,000 | 125,000 | ||||||
|
Floating
rate senior notes due 2015, net of issue discount of $90 and
$183
|
11,910 | 21,817 | ||||||
| 225,660 | 246,567 | |||||||
|
Less: Current
portion
|
1,000 | 1,000 | ||||||
|
Long-term
portion
|
$ | 224,660 | $ | 245,567 | ||||
|
Standby
letters of credit
|
$ | 4,609 | $ | 3,725 | ||||
Senior Credit
Facilities: On August 1, 2007, CPI
amended and restated its then existing senior credit facilities. The amended and
restated senior credit facilities (the “Senior Credit Facilities”) provide for
borrowings of up to an aggregate principal amount of $160 million, consisting of
a $100 million term loan facility (“Term Loan”) and a $60 million revolving
credit facility (“Revolver”), with a sub-facility of $15 million for letters of
credit and $5 million for swing line loans. Upon certain specified conditions,
including maintaining a senior secured leverage ratio of 3.75:1 or less on a pro
forma basis, CPI may seek commitments for a new class of term loans, not to
exceed $125 million in the aggregate. The Senior Credit Facilities are
guaranteed by CPI International and all of CPI’s domestic subsidiaries and are
secured by substantially all of the assets of CPI International, CPI and CPI’s
domestic subsidiaries.
Except as
provided in the following sentence, the Term Loan will mature on August 1, 2014
and the Revolver will mature on August 1, 2013. However, if, prior to August 1,
2011, CPI has not repaid or refinanced its $125 million 8% Senior Subordinated
Notes due 2012, both the Term Loan and the Revolver will mature on August 1,
2011.
The
Senior Credit Facilities replaced CPI’s previous senior credit facilities of
$130 million. On the closing date of the Senior Credit Facilities, CPI borrowed
$100 million under the Term Loan. Borrowings under the Senior Credit Facilities
bear interest at a rate equal to, at CPI’s option, LIBOR or the ABR plus the
applicable margin. The ABR is the greater of the (a) the prime rate and (b) the
federal funds rate plus 0.50%. For Term Loans, the applicable margin will be
2.00% for LIBOR borrowings and 1.00% for ABR borrowings. The applicable margins
under the Revolver vary depending on CPI’s leverage ratio, as defined in the
Senior Credit Facilities, and range from 1.25% to 2.00% for LIBOR borrowings and
from 0.25% to 1.00% for ABR borrowings.
In
addition to customary fronting and administrative fees under the Senior Credit
Facilities, CPI will pay letter of credit participation fees equal to the
applicable LIBOR margin per annum on the average daily amount of the letter of
credit exposure, and a commitment fee on the average daily unused commitments
under the Revolver. The commitment fee will vary depending on CPI’s leverage
ratio, as defined in the Senior Credit Facilities, and will range from 0.25% to
0.50%.
The
Senior Credit Facilities require that CPI repay $250,000 of the Term Loan at the
end of each fiscal quarter prior to the maturity date of the Term Loan, with the
remainder due on the maturity date. CPI is required to prepay its outstanding
loans under the Senior Credit Facilities, subject to certain exceptions and
limitations, with net cash proceeds received from certain events, including,
without limitation (1) all such proceeds received from certain asset sales by
CPI International, CPI or any of CPI’s subsidiaries, (2) all such proceeds
received from issuances of debt (other than certain specified permitted debt) or
preferred stock by CPI International, CPI or any of CPI’s subsidiaries, and (3)
all such proceeds paid to CPI International, CPI or any of CPI’s subsidiaries
from casualty and condemnation events in excess of amounts applied to replace,
restore or reinvest in any properties for which proceeds were paid within a
specified period.
If CPI’s
leverage ratio, as defined in the Senior Credit Facilities, exceeds 3.5:1 at the
end of any fiscal year, CPI will also be required to make an annual prepayment
within 90 days after the end of such fiscal year equal to 50% of excess cash
flow, as defined in the Senior Credit Facilities, less optional prepayments made
during the fiscal year. CPI can make optional prepayments on the outstanding
loans at any time without premium or penalty, except for customary “breakage”
costs with respect to LIBOR loans.
The
Senior Credit Facilities contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of CPI International, CPI
or any of CPI’s subsidiaries to: sell assets; engage in mergers and
acquisitions; pay dividends and distributions or repurchase their capital stock;
incur additional indebtedness or issue equity interests; make investments and
loans; create liens or further negative pledges on assets; engage in certain
transactions with affiliates; enter into sale and leaseback transactions; amend
agreements or make prepayments relating to subordinated indebtedness; and amend
or waive provisions of charter documents in a manner materially adverse to the
lenders. CPI and its subsidiaries must comply with a maximum capital expenditure
limitation and a maximum total secured leverage ratio, each calculated on a
consolidated basis for CPI.
CPI made
repayments on the Term Loan of $11.0 million during fiscal year 2008 and
$250,000 during the fourth quarter of fiscal year 2007, leaving a principal
balance of $88.75 million as of October 3, 2008. The $11.0 million Term Loan
repayment during fiscal year 2008 comprised the scheduled amortization payment
of $250,000 for the first quarter of fiscal year 2008 and an optional prepayment
of $10.75 million. A portion of the optional prepayment was applied against the
scheduled amortization payment due for the second, third and fourth quarters of
fiscal year 2008. Another portion of the optional prepayment will be applied
against the scheduled amortization payments due through fiscal year
2014.
At
October 3, 2008, the amount available for borrowing under the Revolver, after
taking into account the Company‘s outstanding letters of credit of $4.6 million,
was approximately $55.4 million.
See Note
13 “Subsequent Event” for a discussion of the additional $1.0 million prepayment
of the Term Loan made on October 15, 2008.
8% Senior
Subordinated Notes due 2012 of CPI: As of October 3, 2008, CPI
had $125.0 million in aggregate principal amount of its 8% Senior
Subordinated Notes
due 2012 (the “8% Notes”). The 8% Notes have no sinking fund
requirements.
The 8%
Notes bear interest at the rate of 8.0% per year, payable on February 1 and
August 1 of each year. The 8% Notes will mature on February 1, 2012.
The 8% Notes are unsecured obligations, jointly and severally guaranteed by CPI
International and each of CPI’s domestic subsidiaries. The payment of all
obligations relating to the 8% Notes are subordinated in right of payment to the
prior payment in full in cash or cash equivalents of all senior debt (as defined
in the indenture governing the 8% Notes) of CPI, including debt under the Senior
Credit Facilities. Each guarantee of the 8% Notes is and will be subordinated to
guarantor senior debt (as defined in the indenture governing the 8% Notes) on
the same basis as the 8% Notes are subordinated to CPI’s senior
debt.
At any
time or from time to time on or after February 1, 2008, CPI, at its option,
may redeem the 8% Notes, in whole or in part, at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest thereon, if any, to the redemption date, if redeemed
during the 12-month period beginning on February 1 of the years indicated
below:
|
Year
|
Optional
Redemption Price
|
|||
|
2008
|
104 | % | ||
|
2009
|
102 | % | ||
|
2010
and thereafter
|
100 | % | ||
Upon a
change of control, CPI may be required to purchase all or any part of the 8%
Notes for a cash price equal to 101% of the principal amount, plus accrued and
unpaid interest thereon, if any, to the date of purchase.
The
indenture governing the 8% Notes contains a number of covenants that, among
other things, restrict, subject to certain exceptions, the ability of CPI and
its restricted subsidiaries (as defined in the indenture governing the 8% Notes)
to incur additional indebtedness, sell assets, consolidate or merge with or into
other companies, pay dividends or repurchase or redeem capital stock or
subordinated indebtedness, make certain investments, issue capital stock of
their subsidiaries, incur liens and enter into certain types of transactions
with their affiliates.
Events of
default under the indenture governing the 8% Notes include: failure to make
payments on the 8% Notes when due; failure to comply with covenants in the
indenture governing the 8% Notes; a default under certain other indebtedness of
CPI or any of its restricted subsidiaries that is caused by a failure to make
payments on such indebtedness or that results in the acceleration of the
maturity of such indebtedness; the existence of certain final judgments or
orders against CPI or any of the restricted subsidiaries; and the occurrence of
certain insolvency or bankruptcy events.
Floating Rate
Senior Notes due 2015 of CPI International: As of October 3, 2008, $12.0
million of aggregate principal amount remained outstanding under CPI
International’s Floating Rate Senior Notes due 2015 (the “FR Notes”) after
giving effect to the redemption of $10.0 million and $58.0 million in fiscal
years 2008 and 2007, respectively. The FR Notes were originally issued at a 1%
discount and have no sinking fund requirements.
The FR
Notes require interest payments at an annual interest rate, reset at the
beginning of each semi-annual period, equal to the then six-month LIBOR plus
5.75%, payable semiannually on February 1 and August 1 of each year. The
interest rate on the semi-annual interest payment due February 1, 2009 is 8.875%
per annum. CPI International may, at its option, elect to pay interest through
the issuance of additional FR Notes for any interest payment date on or after
August 1, 2006 and on or before February 1, 2010. If CPI International
elects to pay interest through the issuance of additional FR Notes, the annual
interest rate on the FR Notes will increase by an additional 1% step-up, with
the step-up increasing by an additional 1% for each interest payment made
through the issuance of additional FR Notes (up to a maximum of 4%). The FR
Notes will mature on February 1, 2015.
The FR
Notes are general unsecured obligations of CPI International. The FR Notes are
not guaranteed by any of CPI International’s subsidiaries but are structurally
subordinated to all existing and future indebtedness and other liabilities of
CPI International’s subsidiaries. The FR Notes are senior in right of payment to
CPI International’s existing and future indebtedness that is expressly
subordinated to the FR Notes.
Because
CPI International is a holding company with no operations of its own, CPI
International relies on distributions from Communications & Power Industries
to satisfy its obligations under the FR Notes. The Senior Credit Facilities and
the indenture governing the 8% Notes restrict CPI’s ability to make
distributions to CPI International. The Senior Credit Facilities prohibit CPI
from making distributions to CPI International unless there is no default under
the Senior Credit Facilities and CPI satisfies a senior secured leverage ratio
of 3.75:1, and in the case of distributions to pay amounts other than interest
on the FR Notes, the amount of the distribution and all prior such distributions
do not exceed a specified amount. The indenture governing the 8% Notes prohibits
CPI from making distributions to CPI International unless, among other things,
there is no default under the indenture and the amount of
the
proposed dividend plus all previous Restricted Payments (as defined in the
indenture governing the 8% Notes) does not exceed a specified
amount.
At any
time or from time to time on or after February 1, 2007, CPI International, at
its option, may redeem the FR Notes in whole or in part at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued and unpaid interest thereon, if any, to the redemption date, if redeemed
during the 12-month period beginning on February 1 of the years indicated
below:
|
Year
|
Optional
Redemption Price
|
|||
|
2008
|
102 | % | ||
|
2009
|
101 | % | ||
|
2010
and thereafter
|
100 | % | ||
Upon a
change of control, as defined in the indenture governing the FR Notes, CPI
International may be required to purchase all or any part of the outstanding FR
Notes for a cash price equal to 101% of the principal amount, plus accrued and
unpaid interest thereon, if any, to the date of purchase.
The
indenture governing the FR Notes contains certain covenants that, among other
things, limit the ability of CPI International and its restricted subsidiaries
(as defined in the indenture governing the FR Notes) to incur additional
indebtedness, sell assets, consolidate or merge with or into other companies,
pay dividends or repurchase or redeem capital stock or subordinated
indebtedness, make certain investments, issue capital stock of their
subsidiaries, incur liens and enter into certain types of transactions with
their affiliates.
Events of
default under the indenture governing the FR Notes include: failure to make
payments on the FR Notes when due; failure to comply with covenants in the
indenture governing the FR Notes; a default under certain other indebtedness of
CPI International or any of its restricted subsidiaries that is caused by a
failure to make payments on such indebtedness or that results in the
acceleration of the maturity of such indebtedness; the existence of certain
final judgments or orders against CPI International or any of the restricted
subsidiaries; and the occurrence of certain insolvency or bankruptcy
events.
Debt
Maturities: As of October 3, 2008, maturities on
long-term debt were as follows:
|
Fiscal Year
|
Term
Loan
|
8% Senior
Subordinated Notes
|
Floating Rate
Senior Notes
|
Total
|
||||||||||||
|
2009
|
$ | 1,000 | $ | - | $ | - | $ | 1,000 | ||||||||
|
2010
|
- | - | - | - | ||||||||||||
|
2011
|
87,750 | - | - | 87,750 | ||||||||||||
|
2012
|
- | 125,000 | - | 125,000 | ||||||||||||
|
2013
|
- | - | - | - | ||||||||||||
|
Thereafter
|
- | - | 12,000 | 12,000 | ||||||||||||
| $ | 88,750 | $ | 125,000 | $ | 12,000 | $ | 225,750 | |||||||||
The above
table assumes (1) that the respective debt instruments will be outstanding until
their scheduled maturity dates, except for the Term Loan under the Senior Credit
Facilities, which is assumed
to mature
on the earlier date of August 1, 2011 as described above under “Senior Credit
Facilities,” and (2) a debt level based on mandatory repayments according to the
contractual amortization schedule other than the $1.0 million amount shown in
fiscal year 2009 for the Term Loan, which is an optional prepayment made on
October 15, 2008. See Note 13.
As of
October 3, 2008, the Company was in compliance with the covenants under the
indentures governing the 8% Notes and FR Notes and the agreements governing the
Senior Credit Facilities, and the Company expects to remain in compliance with
those covenants throughout fiscal year 2009.
Loss on debt
extinguishment: The redemption of $10.0 million of the FR Notes in fiscal
year 2008, as discussed above, resulted in a loss on debt extinguishment of
approximately $0.6 million, including non-cash write-offs of $0.4 million of
unamortized debt issue costs and issue discount costs and $0.2 million in cash
payments primarily for call premiums. The debt refinancing during fiscal year
2007 resulted in a loss on debt extinguishment of approximately $6.3 million,
including non-cash write-offs of $4.7 million of unamortized debt
issue costs and issue discount costs and $1.9 million in cash payments for call
premiums, partially offset by $0.3 million of cash proceeds from the early
termination of interest rate swap on the FR Notes.
Interest rate
swap agreements: See Note 7 for information on the interest rate swap
agreements entered into by the Company to hedge the interest rate exposure
associated with the Term Loan and the FR Notes.
6. Employee
Benefit Plans
Retirement
Plans: CPI provides a qualified 401(k) investment
plan covering substantially all of its domestic employees, a pension
contribution plan covering substantially all of its Canadian employees and a
profit sharing plan covering substantially all of its Econco employees. These
plans provide for CPI to contribute an amount based on a percentage of each
participant’s base pay. CPI also has a Non-Qualified Deferred Compensation Plan
(the “Non-Qualified Plan”) that allows eligible executives and directors to
defer a portion of their compensation. The Non-Qualified Plan liability recorded
by the Company amounted to approximately $0.2 million as of October 3, 2008 and
September 28, 2007. Except for the Econco profit sharing plan, all participant
contributions and Company matching contributions are 100% vested. For the Econco
profit sharing plan, employee contributions are 100% vested, while employer
contributions vest ratably over a 5 year period beginning with the second year
of service. Total CPI contributions to these retirement plans were $3.7 million,
$3.7 million and $3.8 million for fiscal years 2008, 2007 and 2006,
respectively.
Defined Benefit Pension Plan:
The Company maintains a defined benefit pension plan for its Chief Executive
Officer (“CEO”). The plan’s benefits are based on the CEO’s compensation
earnings and are limited by statutory requirements of the Canadian Income Tax
Act. All costs of the plan are borne by the Company.
As of
September 28, 2007, the Company adopted the provisions of 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)". SFAS No.
158 requires that the funded status of defined-benefit postretirement plans be
recognized on the Company’s consolidated balance sheets, and changes in the
funded status be reflected in comprehensive income. SFAS No. 158 also requires
the measurement date of the plan’s funded status to be the same as the Company’s
fiscal year-end. Although the measurement
date
provision was not required to be adopted until fiscal year 2008, the Company
early-adopted this provision for fiscal year 2007.
At
October 3, 2008 and September 28, 2007, the Company recorded a liability of
$0.3 million and $0.2 million, respectively, which approximates the
excess of the projected benefit obligation over plan assets of $0.7 million and
$0.8 million, respectively. Additionally, the Company recorded an unrealized
loss of $0.2 million, net of tax, to “accumulated other comprehensive
income” in the consolidated balance sheets as of October 3, 2008 and September
28, 2007.
The
Company’s defined benefit pension plan is managed by an insurance company
consistent with regulations or market practice in Canada, where the plan assets
are invested. Net pension expense was not material for any period. Contributions
to the plan are not expected to be significant to the financial position of the
Company.
The
Company uses forward exchange contracts to hedge the foreign currency exposure
associated with forecasted manufacturing costs in Canada. As of October 3, 2008,
the Company had outstanding forward contract commitments to purchase $37.8
million Canadian dollars. The last forward contract expires on June 29, 2009. At
October 3, 2008, the fair value of foreign currency forward contracts was a net
liability of $0.5 million and the unrealized loss, net of related tax expense,
was $0.4 million. At September 28, 2007, the fair value of foreign currency
forward contracts was a net asset of $1.3 million, and the unrealized gain, net
of related tax expense, was $1.2 million.
The
Company’s foreign currency forward contracts are designated as a cash flow hedge
and are considered highly effective, as defined by SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.” The unrealized gains and losses
from foreign exchange forward contracts are included in “accumulated other
comprehensive income” in the consolidated balance sheets, and the Company
anticipates recognizing the entire current unrealized loss in operating earnings
within the next 12 months. Changes in the fair value of foreign currency forward
contracts due to changes in time value are excluded from the assessment of
effectiveness, and are immediately recognized in general and administrative in
the consolidated statements of operations. The time value was not material for
fiscal years 2008, 2007 or 2006. If the transaction being hedged fails to occur,
or if a portion of any derivative is ineffective, then the Company promptly
recognizes the gain or loss on the associated financial instrument in the
consolidated statements of operations. No ineffective amounts were recognized
due to anticipated transactions failing to occur in fiscal years 2008, 2007 and
2006. Realized gains and losses from foreign currency forward contracts are
recognized in cost of sales and general and administrative in the consolidated
statements of operations. Net income for fiscal year 2008 includes a recognized
gain from foreign currency forward contracts of $0.5 million. Net income for
fiscal year 2007 includes a recognized loss from foreign currency forward
contracts of $0.4 million. Net income for fiscal year 2006 includes a recognized
gain from foreign currency forward contracts of $1.2 million.
The
Company also uses derivatives to hedge the interest rate exposure associated
with its long- term debt. During the fourth quarter of 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 to match the
expected pay down of its Term Loan under the Senior Credit Facilities discussed
in Note 5. The notional value of the 2007 Swap was
$70.0
million at October 3, 2008 and represented approximately 79% of the aggregate
Term Loan balance. The Swap agreement is effective through June 30, 2011. Under
the provisions of SFAS No. 133, this arrangement was initially designated and
qualified as an effective cash flow hedge of interest rate risk related to the
Term Loan, which permitted recording the fair value of the 2007 Swap and
corresponding unrealized gain or loss to accumulated other comprehensive income
in the consolidated balance sheets. The interest rate swap gain or loss is
included in the assessment of hedge effectiveness. At October 3, 2008, the fair
value of the short-term and long-term portions of the 2007 Swap was a liability
of $1.1 million (accrued expenses) and $0.8 million (other long-term
liabilities), respectively. At September 28, 2007, the fair value of the
short-term and long-term portions of the 2007 Swap was an asset of $0.1 million
(other current assets) and a liability of $0.3 million (other long-term
liabilities), respectively. At October 3, 2008 and September 28, 2007, the
unrealized loss, net of tax, was $1.2 million and $0.1 million,
respectively.
During
the fourth quarter of fiscal year 2007, the Company completed an early
settlement of its $80.0 million interest rate swap contract (the “2005 Swap”)
associated with its FR Notes as discussed in Note 5, for which the Company
received $0.4 million in cash representing the final net swap interest
originally due on January 31, 2008. Of the $0.4 million proceeds from the 2005
Swap settlement, $0.3 million was recognized immediately as a gain on the
ineffective portion of the 2005 Swap effected by the repurchase and redemption
of an aggregate of $58.0 million of the FR Notes in the fourth quarter of fiscal
year 2007. Included in accumulated other comprehensive income in the
consolidated balance sheet, the fair value of the unrealized gain on the 2005
Swap was approximately $51,000, net of tax, as of September 28,
2007.
8. 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
October 3, 2008 were as follows:
|
Fiscal
Year
|
Operating
Leases
|
|||
|
2009
|
$ | 2,037 | ||
|
2010
|
1,756 | |||
|
2011
|
676 | |||
|
2012
|
530 | |||
|
2013
|
377 | |||
|
Thereafter
|
2,896 | |||
| $ | 8,272 | |||
Real
estate taxes, insurance, and maintenance are also obligations of the Company.
Rental expense under non-cancelable operating leases amounted to $2.5 million,
$1.9 million and $1.8 million for fiscal years 2008, 2007 and 2006,
respectively. Assets subject to capital leases at October 3, 2008 and September
28, 2007 were not material.
Guarantees: The Company has
restricted cash of $0.8 million and $2.3 million as of October 3, 2008 and
September 28, 2007, respectively, consisting primarily of bank guarantees from
customer
advance
payments to the Company’s international subsidiaries. The bank guarantees become
unrestricted cash when performance under the sales or supply contract is
complete.
Purchase commitments: As of
October 3, 2008, the Company had the following known purchase commitments, which
include primarily future purchases for inventory-related items under various
purchase arrangements as well as other obligations in the ordinary course of
business that the Company cannot cancel or where it would be required to pay a
termination fee in the event of cancellation:
|
Fiscal
Year
|
Purchase
Contracts
|
|||
|
2009
|
$ | 28,148 | ||
|
2010
|
955 | |||
|
2011
|
279 | |||
|
2012
|
12 | |||
| 2013 | - | |||
| $ | 29,394 | |||
Contingent Earnout Consideration:
As discussed in Note 3, in addition to the $20.5 million of net cash
consideration paid for the Malibu acquisition, there is a potential Financial
Earnout payable to the former stockholders of Malibu of up to $14.0 million,
which is primarily contingent upon the achievement of certain financial
objectives over the three years following the acquisition, and a discretionary
earnout of up to $1.0 million contingent upon achievement of certain succession
planning goals by June 30, 2010. No earnout was earned for the first
earnout period, and the maximum potential Financial Earnout that could be
earned over the three years following the acquisition has been reduced from
$14.0 million to $12.3 million.
Indemnification: As permitted
under Delaware law, the Company has agreements whereby the Company indemnifies
its officers, directors and certain employees for certain events or occurrences
while the employee, officer or director is, or was serving, at the Company’s
request in such capacity. The term of the indemnification period is for the
officer’s or director’s lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has Director and Officer insurance
policies that limit its exposure and may enable it to recover a portion of any
future amounts paid.
The
Company has entered into other standard indemnification agreements in its
ordinary course of business. Pursuant to these agreements, the Company agrees to
indemnify, defend, hold harmless, and to reimburse the indemnified party for
losses suffered or incurred by the indemnified party, generally the Company’s
business partners or customers, in connection with any patent, copyright or
other intellectual property infringement claim by any third party with respect
to its products. The term of these indemnification agreements is generally
perpetual after execution of the agreement. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. The likelihood of loss under these
agreements is remote. Accordingly, the Company has no liabilities recorded for
these agreements as of October 3, 2008.
Employment Agreements: The
Company has entered into employment agreements with certain members of executive
management that include provisions for the continued payment of salary, benefits
and a pro-rata portion of annual bonus upon employment termination for periods
ranging from 12 months to 30 months.
Contingencies: From time to
time, the Company may be subject to claims that arise in the ordinary course of
business. 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.
Subsequent
to October 3, 2008, 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 results of operations and
cash flows.
Common and Preferred
Stock: The Company has 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. At October 3, 2008 and
September 28, 2007, there were no shares of Preferred Stock
outstanding.
On May 3,
2006, the Company completed the initial public offering 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 total proceeds to the Company of approximately $47.3
million, net of transaction costs of approximately $5.6 million. The Company
used the net proceeds to repay $47.3 million of a term loan under its previous
senior credit facilities.
Treasury Stock: On
May 28, 2008, the Company announced that its board of directors authorized the
Company to implement a program to repurchase up to $12.0 million of the
Company's common stock from time to time through May 23, 2009, funded entirely
from cash on hand. Repurchases made under the program are subject to the terms
and limitations of Company's debt covenants, as well as market conditions and
share price, and will be made at management's discretion in open market trades,
through block trades or in privately negotiated transactions. The program may be
modified or terminated by the Company's board of directors at any time. During
fiscal year 2008, the Company repurchased 206,243 shares at an average per share
price of $13.54, plus average brokerage commissions of $0.04 per share, for an
aggregate cost of $2.8 million. Repurchased shares have been recorded as
treasury shares and will be held until the Company’s board of directors
designates that these shares be retired or used for other purposes.
Stock-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 Stock Incentive Plan and the 2000 Stock Option 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. Approximately 552,000 shares were available for grant as of October 3,
2008.
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. Under the 2006 ESPP,
approximately 637,000 shares of common stock were available for issuance as of
October 3, 2008.
2004
Plan: The Company issued both time (“Time”) and
performance (“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. Time stock option awards vested at a rate of 20% to 25% per
fiscal year based on the grant date. In September 2005, the Compensation
Committee approved the acceleration of vesting of all unvested Performance stock
options as of September 30, 2005. The Company has ceased making new grants under
the 2004 Plan.
2000
Plan: The 2000 Plan was acquired by the Company in
the January 2004 merger, and no further options are available for issuance
thereunder. In accordance with the terms of the stock option agreements, the
unvested stock options outstanding under the 2000 Plan became fully vested at
the merger closing date in January 2004. The 2000 Plan option holders were
offered the opportunity to either roll over their stock options 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: Options
outstanding that have vested and are expected to vest as of October 3, 2008 are
as follows:
|
Number of Shares
|
Weighted-Average Price
|
Weighted-Average Remaining Contractual Term
(Years)
|
Aggregate Intrinsic Value
|
|||||||||||||
|
Vested
|
2,556,762 | $ | 3.83 | 5.2 | $ | 23,052 | ||||||||||
|
Expected
to vest
|
768,756 | 13.98 | 7.7 | 1,271 | ||||||||||||
|
Total
|
3,325,518 | 6.17 | 5.8 | $ | 24,323 | |||||||||||
Options
outstanding that are expected to vest are net of estimated future option
forfeitures in accordance with the provisions of SFAS No. 123(R). As of
October 3, 2008, there was $4.0 million of unrecognized compensation costs
related to stock options granted under the Company’s stock option plans. The
unrecognized compensation cost is expected to be recognized over a weighted
average period of 1.8 years.
A summary
of the status of the Company’s stock option plans as of October 3, 2008 and
September 28, 2007 and of changes during fiscal year 2008 is presented
below:
|
Outstanding Options
|
Exercisable Options
|
|||||||||||||||||||||||||||||||
|
Number of Shares
|
Weighted-Average Exercise
Price
|
Weighted-Average Remaining Contractual Term
(Years)
|
Aggregate Intrinsic Value
|
Number of Shares
|
Weighted-Average Exercise
Price
|
Weighted-Average Remaining Contractual Term
(Years)
|
Aggregate Intrinsic Value
|
|||||||||||||||||||||||||
|
Balance
at September 28, 2007
|
3,171,081 | $ | 5.61 | 6.58 | $ | 42,513 | 2,259,528 | $ | 3.00 | 5.98 | $ | 36,184 | ||||||||||||||||||||
|
Granted
|
208,750 | 16.79 | ||||||||||||||||||||||||||||||
|
Exercised
|
(8,906 | ) | 4.32 | |||||||||||||||||||||||||||||
|
Forfeited
or cancelled
|
(21,631 | ) | 17.75 | |||||||||||||||||||||||||||||
|
Balance
at October 3, 2008
|
3,349,294 | $ | 6.23 | 5.77 | $ | 24,363 | 2,556,762 | $ | 3.83 | 5.16 | $ | 23,052 | ||||||||||||||||||||
The
aggregate intrinsic value in the preceding tables represents the total intrinsic
value, based on the Company’s closing stock price of $12.64 as of October 3,
2008 or $19.01 as of September 28, 2007, 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 the respective dates. As of October 3,
2008, approximately 2.4 million exercisable options were
in-the-money.
During
fiscal years 2008, 2007 and 2006, cash received from option exercises was
approximately $38,000, $0.7 million and $55,000, and total intrinsic value of
options exercised was $0.1 million, $3.6 million and $0.2 million,
respectively.
Outstanding
and exercisable options presented by exercise price at October 3, 2008 are as
follows:
|
Options Outstanding
|
Exercisable Options
|
|||||||||||||||
|
Exercise
Price
|
Number of
Options
Outstanding
|
Weighted-Average Remaining
Contractual Term
(Years)
|
Number of
Options
Exercisable
|
Weighted-Average Remaining
Contractual Term
(Years)
|
||||||||||||
| $ | 0.20 | 621,287 | 4.4 | 621,287 | 4.4 | |||||||||||
| $ | 0.74 | 164,327 |
1.9
|
164,327 | 1.9 | |||||||||||
| $ | 1.08 | 8,000 | 5.3 | 8,000 | 5.3 | |||||||||||
| $ | 4.32 | 1,701,442 | 5.5 | 1,546,557 | 5.5 | |||||||||||
| $ | 6.61 | 49,032 | 6.0 | 49,032 | 6.0 | |||||||||||
| $ | 6.98 | 23,706 | 6.5 | 19,884 | 6.5 | |||||||||||
| $ | 14.22 | 283,000 | 8.2 | 71,875 | 8.2 | |||||||||||
| $ | 16.79 | 200,625 | 9.2 | 425 | 9.2 | |||||||||||
| $ | 16.94 | 1,500 | 9.2 | - | - | |||||||||||
| $ | 17.09 | 6,000 | 8.4 | 2,000 | 8.4 | |||||||||||
| $ | 18.00 | 274,875 | 7.6 | 71,875 | 7.6 | |||||||||||
| $ | 19.53 | 9,500 | 9.0 | - | - | |||||||||||
| $ | 19.80 | 6,000 | 8.6 | 1,500 | 8.6 | |||||||||||
|
Total
|
3,349,294 | 5.8 | 2,556,762 | 5.2 | ||||||||||||
Stock Purchase Plan: Employees
purchased approximately 72,000 shares and 51,000 shares in fiscal years 2008 and
2007, respectively, for $0.9 million and $0.8 million, respectively, under the
2006 ESPP. The first purchase under the 2006 ESPP occurred in the first quarter
of fiscal year 2007. As of October 3, 2008, 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: As of October 3, 2008, there were outstanding 117,154 shares of
nonvested restricted stock and restricted stock units, and as of September 28,
2007 and September 29, 2006, there were 11,466 and 9,999 shares, respectively,
of nonvested restricted stock, in each case granted to directors and employees.
The restricted stock and restricted stock units vest over periods of one to four
years and have a 10 year contractual life. Upon vesting, each restricted stock
unit will automatically convert into one share of common stock of CPI
International.
A summary
of the status of the Company’s nonvested restricted stock and restricted stock
unit awards as of October 3, 2008 and September 28, 2007 and of changes during
fiscal year 2008 is presented below:
|
Number of Shares
|
Weighted-Average Grant-Date
Fair Value
Per Share
|
Aggregate
Fair Value*
|
|||||||||||
|
Nonvested
at September 28, 2007
|
11,466 | $ | 17.44 | ||||||||||
|
Granted
|
114,461 | $ | 15.22 | ||||||||||
|
Vested
|
(5,848 | ) | $ | 17.60 | $ | 62 | |||||||
|
Forfeited
|
(2,925 | ) | $ | 16.79 | |||||||||
|
Nonvested
at October 3, 2008
|
117,154 | $ | 15.28 | ||||||||||
|
|
|
|
|||||||||||
|
*
Based on the value of the Company's stock on the date that the restricted
stock units vest.
|
|||||||||||||
Aggregate
intrinsic value of the nonvested restricted stock and restricted stock unit
awards at October 3, 2008 was $1.5 million. As of October 3, 2008, there was
$1.4 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
1.9 years.
The
Company settles stock option exercises, restricted stock awards and restricted
stock units with newly issued common shares.
Valuation
and Expense Information under SFAS No. 123(R)
On
October 1, 2005, the Company adopted SFAS No. 123 (revised 2004) or 123(R),
“Share-Based Payment,” which requires the measurement and recognition of
compensation expense for all share-based payment awards made to the Company’s
employees and directors, including employee stock options, restricted stock,
restricted stock units and employee stock purchases related to the ESPP based on
estimated fair values.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable and requires the input of
subjective
assumptions, including the expected stock price volatility and estimated option
life. The Company currently does not intend to pay dividends and, accordingly,
no dividends have been assumed in
its
Black-Scholes calculation. Since the Company’s common stock has not been
publicly traded for a sufficient time period, the expected volatility is based
on expected volatilities of similar companies that have a longer history of
being publicly traded. The risk-free rates are based on the U.S. Treasury yield
in effect at the time of the grant. Since the Company’s historical data is
limited, the expected term of options granted is based on the simplified method
for plain vanilla options in accordance with SEC SAB No. 107. In December 2007,
the SEC issued SAB No. 110, an amendment of SAB No. 107. SAB No. 110 states
that the staff will continue to accept, under certain circumstances, the
continued use of the simplified method beyond December 31, 2007.
Accordingly, the Company will continue to use the simplified method until it has
enough historical experience to provide a reasonable estimate of expected
term.
Assumptions
used in the Black-Scholes model to estimate the fair value of stock option
grants during each period are presented below. In accordance with SFAS No. 123R,
prior to becoming a public entity, the Company used the minimum value method to
determine a calculated value, rather than a fair value, of share
awards.
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
term (in years)
|
6.25 | 6.25 | 6.47 | |||||||||
|
Expected
volatility
|
41.20 | % | 49.33 | % | 53.57 | % | ||||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | 0.0 | % | ||||||
|
Risk-free
rate
|
3.8 | % | 4.7 | % | 4.7 | % | ||||||
The
weighted-average grant-date fair value of options granted during fiscal years
2008, 2007 and 2006 was $7.83, $8.98 and $10.60 per share,
respectively.
Based on
the 15% discount received by the employees, the weighted-average fair value
of shares issued under the 2006 ESPP was $2.08 and $2.47 per share during fiscal
years 2008 and 2007, respectively.
Using the
market price of the Company’s common stock on the date of grant, the
weighted-average estimated fair value of restricted stock and restricted stock
units granted was $15.22, $17.09 and $18.00 per share during fiscal years 2008,
2007 and 2006, respectively.
As
stock-based compensation expense recognized in the consolidated statement of
operations for all fiscal years presented is based on awards ultimately expected
to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
The
following table summarizes stock-based compensation expense for fiscal years
2008, 2007 and 2006, which was allocated as follows:
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Share-based
compensation cost recognized in the income statement by
caption:
|
||||||||||||
|
Cost
of sales
|
$ | 425 | $ | 274 | $ | 36 | ||||||
|
Research
and development
|
153 | 94 | 15 | |||||||||
|
Selling
and marketing
|
229 | 122 | 27 | |||||||||
|
General
and administrative
|
1,328 | 749 | 196 | |||||||||
| $ | 2,135 | $ | 1,239 | $ | 274 | |||||||
|
Share-based
compensation cost capitalized in inventory
|
$ | 453 | $ | 297 | $ | 25 | ||||||
|
Share-based
compensation cost remaining in inventory at end of
period
|
$ | 76 | $ | 48 | $ | 25 | ||||||
|
Share-based
compensation expense by type of award:
|
||||||||||||
|
Stock
options
|
$ | 1,544 | $ | 1,006 | $ | 224 | ||||||
|
Restricted
stock and restricted stock units
|
438 | 110 | 50 | |||||||||
|
Stock
purchase plan
|
153 | 123 | - | |||||||||
| $ | 2,135 | $ | 1,239 | $ | 274 | |||||||
The tax
benefit realized from option exercises and restricted stock vesting totaled
approximately $50,000, $1.3 million and $0.1 million during fiscal years 2008,
2007 and 2006, respectively.
Income
before income taxes consisted of the following:
|
Year
Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
U.S.
|
$ | 20,405 | $ | 20,466 | $ | 16,432 | ||||||
|
Foreign
|
10,848 | 13,785 | 9,845 | |||||||||
| $ | 31,253 | $ | 34,251 | $ | 26,277 | |||||||
Income
tax expense consisted of the following:
|
Year
Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 6,904 | $ | 4,946 | $ | 5,447 | ||||||
|
State
|
1,980 | 2,320 | 1,967 | |||||||||
|
Foreign
|
3,035 | 4,693 | 7,571 | |||||||||
| 11,919 | 11,959 | 14,985 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(934 | ) | 117 | (3,598 | ) | |||||||
|
State
|
(208 | ) | (143 | ) | (397 | ) | ||||||
|
Foreign
|
27 | (185 | ) | (1,932 | ) | |||||||
| (1,115 | ) | (211 | ) | (5,927 | ) | |||||||
|
Income
tax expense
|
$ | 10,804 | $ | 11,748 | $ | 9,058 | ||||||
The
Company recorded an income tax provision of $10.8 million, $11.7 million and
$9.1 million for fiscal years 2008, 2007 and 2006, respectively. The Company’s
effective tax rate was approximately 34.6% for fiscal year 2008 as compared to
approximately 34.3% and 34.5% for fiscal years 2007 and 2006.
The
effective income tax rate for fiscal year 2008 includes a discrete tax benefit
of $0.4 million that is attributable to fiscal year 2007 related to the
correction of an immaterial error in the computation of the warranty expense tax
deduction in a foreign tax jurisdiction. The Company believes that the impact of
the correction was not material to its consolidated financial statements for
fiscal year 2008 or 2007.
U.S.
income tax expense for fiscal year 2007 includes a charge to deferred
income tax expense of approximately $0.9 million to correct an error for a
deferred tax asset that should have been expensed in fiscal year 2006. The
Company believes that the impact of the $0.9 million charge to deferred income
tax expense was not material to its consolidated financial statements for either
fiscal year 2007 or 2006.
Income
tax expense for fiscal year 2006 includes a $0.3 million charge attributable to
fiscal year 2005, consisting of $0.5 million to correct the overstatement of tax
benefits recorded in fiscal year 2005 for stock-based compensation expense that
is not deductible for income tax purposes in a foreign tax jurisdiction, offset
by the reversal of a $0.2 million tax contingency reserve that is no longer
considered necessary. The Company believes that the impact of the correction was
not material to its consolidated financial statements for fiscal year 2006 or
2005.
CPI
International adopted FIN No. 48, “Accounting for Uncertainty in Income
Taxes,” in the first quarter of fiscal year 2008 commencing on
September 29, 2007. In connection with the Company’s adoption of FIN
No. 48, there was no cumulative effect adjustment necessary to the
September 29, 2007 balance of retained earnings. The total unrecognized tax
benefit, excluding any related interest accrual, was $5.6 million and $4.9
million as of October 3, 2008 and September 29, 2007, respectively, and is
reported as a current liability (income taxes payable) since it is expected to
be settled within 12 months of the reporting date. Of the total
unrecognized tax benefit balance, $4.6 million and $4.4 million would reduce the
effective tax rate if recognized as of October 3, 2008 and
September 29, 2007, respectively.
A
reconciliation of the beginning and ending balances of the total amount of
unrecognized tax benefits, excluding accrued interest and penalties, for the
year ended October 3, 2008 is as follows:
|
Unrecognized
tax benefits at September 29, 2007
|
$ | 4,954 | ||
|
Increase
in tax provisions for current year
|
1,183 | |||
|
Expiration
of statutes of limitations
|
(235 | ) | ||
|
Changes
due to translation of foreign currency
|
(293 | ) | ||
|
Unrecognized
tax benefits at October 3, 2008
|
$ | 5,609 |
The
Company’s policy to classify interest and penalties on unrecognized tax benefits
as a component of income tax expense in the statements of operations and
comprehensive income did not change upon the adoption of FIN No. 48. As of
October 3, 2008 and September 29, 2007, the Company had accrued $1.8
million and $1.3 million of interest for unrecognized tax benefits,
respectively. The Company had minimal penalties accrued in income tax
expense.
Based on
the outcome of examinations of the Company and the result of the expiration of
statutes of limitations for specific jurisdictions, it is reasonably possible
that the related unrecognized tax benefits could change from those recorded in
the statement of financial position. The majority of the Company’s
unrecognized tax benefit is attributable to the Canada Revenue Agency (“CRA”)
income tax contingency. The CRA is conducting an audit of the Company’s
income tax returns in Canada for fiscal years 2001 and 2002. The Company
received a proposed tax assessment, including interest expense from the CRA for
fiscal years 2001 and 2002. The tax assessment is based on tax deductions
related to the valuation of the Satcom business, which was purchased by
Communications & Power Industries Canada Inc. from CPI in fiscal years
2001 and 2002. While the Company believes that it has meritorious defenses
and intends to vigorously defend its position, it is reasonably possible that
the CRA may issue a formal tax assessment requiring the Company to settle the
tax deficiency within 12 months. The Company believes that adequate
accruals have been provided for any adjustments that may result from the CRA
examination. In addition, the Company has provided for amounts of anticipated
tax audit adjustments in various jurisdictions based on its reasonable estimate
of additional taxes and interest that do not meet the more likely than not
standard under FIN No. 48.
Deferred
income taxes reflect the net tax effects of temporary differences between the
basis of assets and liabilities for financial reporting and income tax purposes.
The Company’s deferred tax assets (liabilities) were as follows:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Inventory
and other reserves
|
$ | 6,347 | $ | 5,642 | ||||
|
Accrued
vacation
|
2,120 | 2,064 | ||||||
|
Deferred
compensation and other accruals
|
4,263 | 4,179 | ||||||
|
Other
comprehensive income
|
1,102 | - | ||||||
|
Debt
issuance costs
|
684 | 790 | ||||||
|
Foreign
jurisdictions, net
|
558 | 472 | ||||||
|
Land
lease amortization
|
663 | 681 | ||||||
|
State
taxes
|
521 | 561 | ||||||
|
Gross
deferred tax assets
|
16,258 | 14,389 | ||||||
|
Valuation
allowance
|
- | - | ||||||
|
Total
deferred tax assets
|
$ | 16,258 | $ | 14,389 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Accelerated
depreciation
|
$ | (7,491 | ) | $ | (7,536 | ) | ||
|
Acquisition-related
intangibles
|
(23,450 | ) | (23,950 | ) | ||||
|
Other
comprehensive income
|
- | (480 | ) | |||||
|
Foreign
jurisdictions, net
|
(1,091 | ) | (973 | ) | ||||
|
Total
deferred tax liabilities
|
$ | (32,032 | ) | $ | (32,939 | ) | ||
|
Net
deferred tax liabilities
|
$ | (15,774 | ) | $ | (18,550 | ) | ||
Realization
of the Company’s net deferred tax assets is based upon the weight of available
evidence, including such factors as recent earnings history and expected future
taxable income. The Company believes it is more likely than not that such
assets will be realized; however, ultimate realization could be negatively
impacted by market conditions and other variables not known or anticipated at
this time. The net deferred tax assets (liabilities) were classified in the
consolidated balance sheet as follows:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Current
deferred tax assets
|
$ | 11,411 | $ | 9,744 | ||||
|
Long-term
deferred tax assets (other long-term assets)
|
136 | 100 | ||||||
|
Long-term
deferred tax liabilities
|
(27,321 | ) | (28,394 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (15,774 | ) | $ | (18,550 | ) | ||
The
Company has not provided deferred taxes on approximately $25 million of the
Company's undistributed earnings in its Canadian operations which are intended
to be permanently reinvested. A determination of the amount of the
unrecognized deferred tax liability associated with these earnings is
impracticable.
The
differences between the effective income tax rate and the federal statutory
income tax rate were as follows:
|
Year
Ended
|
||||||||||||
|
October
3,
2008
|
September
28,
2007
|
September
29,
2006
|
||||||||||
|
Statutory
federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Domestic
manufacturing deduction
|
(1.5 | ) | (0.7 | ) | (1.0 | ) | ||||||
|
Extraterritorial
income exclusion benefit
|
- | (0.1 | ) | (0.8 | ) | |||||||
|
Foreign
tax rate differential
|
- | 1.4 | (3.4 | ) | ||||||||
|
State
taxes
|
3.7 | 3.8 | 3.9 | |||||||||
|
Foreign
tax credits
|
(2.3 | ) | (3.2 | ) | (2.1 | ) | ||||||
|
Change
in foreign filing position
|
- | (5.3 | ) | (4.9 | ) | |||||||
|
Change
in state apportionment factors
|
- | - | (2.7 | ) | ||||||||
|
Tax
contingency reserve accrual
|
0.5 | 0.1 | 8.9 | |||||||||
|
Non-deductible
expenses
|
0.3 | 0.3 | 0.2 | |||||||||
|
Correction
of error from prior year
|
(1.4 | ) | 2.6 | 1.1 | ||||||||
|
Other
differences
|
0.3 | 0.4 | 0.3 | |||||||||
|
Effective
tax rate
|
34.6 | % | 34.3 | % | 34.5 | % | ||||||
The
Company reports information about operating segments in accordance with SFAS No.
131 “Disclosures about Segments of an Enterprise and Related Information.” In
accordance with SFAS No. 131, the Company has six divisions that meet the
criteria of an operating segment, and the Company has two reportable segments:
VED and satcom equipment. 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.
The
Company’s reportable segments, VED and satcom equipment, are differentiated
based on their underlying profitability and economic performance. The VED
segment is made up of four divisions, that have been aggregated based on the
similarity of their economic characteristics as measured by EBITDA, and the
similarity of their products and services, production processes, types of
customers and distribution methods, and nature of regulatory environments. The
satcom equipment segment consists of one division. The Company’s analysis of the
similarity of economic characteristics was based on both a historical and
anticipated future analysis of performance.
The VED
segment develops, manufactures and distributes high power/high frequency
microwave and radio frequency signal components. Its products include linear
beam, cavity, power grid, crossed field and magnetron devices. These products
are used in the communication, radar, electronic countermeasures, industrial,
medical and scientific markets depending on the specific power and frequency
requirements of the end-user and the physical operating conditions of the
environment in which the VED will be located. These products are distributed
through the Company’s direct sales force, independent sales representatives and
distributors.
The
satcom equipment segment manufactures and supplies high power amplifiers and
networks for satellite communication uplink and industrial applications. This
segment also provides spares, service and other post sales support. Its products
are distributed through the Company’s direct sales force and independent sales
representatives.
Amounts
not reported as VED or satcom equipment are reported as Other. In accordance
with quantitative and qualitative guidelines established by SFAS No. 131, Other
includes the activities of the Company’s recently acquired Malibu division and
unallocated corporate expenses, such as business combination-related expenses,
share-based compensation expense, and certain non-recurring or unusual expenses.
The Malibu division is a designer, manufacturer and integrator of advanced
antenna systems for radar, radar simulators and telemetry systems, as well as
for data links used in ground, airborne, UAV’s and shipboard
systems.
Sales and
marketing, and certain administration expenses, are allocated to the divisions
and are included in the results reported. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Intersegment product transfers are recorded at
cost.
Summarized
financial information concerning the Company’s reportable segments is shown in
the following tables:
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Sales
from external customers
|
||||||||||||
|
VED
|
$ | 279,364 | $ | 280,010 | $ | 275,254 | ||||||
|
Satcom
equipment
|
74,264 | 67,965 | 64,463 | |||||||||
|
Other
|
16,386 | 3,115 | - | |||||||||
| $ | 370,014 | $ | 351,090 | $ | 339,717 | |||||||
|
Intersegment
product transfers
|
||||||||||||
|
VED
|
$ | 27,462 | $ | 22,898 | $ | 23,220 | ||||||
|
Satcom
equipment
|
116 | 23 | 34 | |||||||||
| $ | 27,578 | $ | 22,921 | $ | 23,254 | |||||||
|
Capital
expenditures
|
||||||||||||
|
VED
|
$ | 2,659 | $ | 7,649 | $ | 5,407 | ||||||
|
Satcom
equipment
|
692 | 341 | 559 | |||||||||
|
Other
|
911 | 179 | 4,947 | |||||||||
| $ | 4,262 | $ | 8,169 | $ | 10,913 | |||||||
|
EBITDA
|
||||||||||||
|
VED
|
$ | 69,923 | $ | 75,230 | $ | 70,366 | ||||||
|
Satcom
equipment
|
5,997 | 6,056 | 4,967 | |||||||||
|
Other
|
(14,649 | ) | (16,998 | ) | (16,237 | ) | ||||||
| $ | 61,271 | $ | 64,288 | $ | 59,096 | |||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Total
assets
|
||||||||||||
|
VED
|
$ | 324,483 | $ | 335,926 | $ | 328,211 | ||||||
|
Satcom
equipment
|
48,219 | 49,266 | 43,604 | |||||||||
|
Other
|
94,246 | 91,030 | 69,944 | |||||||||
| $ | 466,948 | $ | 476,222 | $ | 441,759 | |||||||
EBITDA
represents earnings before net interest expense, provision for income taxes and
depreciation and amortization. For the reasons listed below, the Company
believes that GAAP-based financial information for leveraged businesses such as
the Company’s business should be supplemented by EBITDA so that investors better
understand the Company’s financial performance in connection with their analysis
of the Company’s business:
|
|
•
|
EBITDA
is a component of the measures used by the Company’s board of directors
and management team to evaluate the Company’s operating
performance;
|
|
|
•
|
the
Senior Credit Facilities contain a covenant that requires the Company to
maintain a senior secured leverage ratio that contains EBITDA as a
component, and the Company’s management team uses EBITDA to monitor
compliance with this covenant;
|
|
|
•
|
EBITDA
is a component of the measures used by the Company’s management team to
make day-to-day operating
decisions;
|
|
|
•
|
EBITDA
facilitates comparisons between the Company’s operating results and those
of competitors with different capital structures and therefore is a
component of the measures used by the Company’s management to facilitate
internal comparisons to competitors’ results and the Company’s industry in
general; and
|
|
|
•
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by the Company of certain targets that contain EBITDA as a
component.
|
Other
companies may define EBITDA differently and, as a result, the Company’s measure
of EBITDA may not be directly comparable to EBITDA of other companies. Although
the Company uses EBITDA as a financial measure to assess the performance of its
business, the use of EBITDA is limited because it does not include certain
material costs, such as interest and taxes, necessary to operate the Company’s
business. When analyzing the Company’s performance, EBITDA should be considered
in addition to, and not as a substitute for, net income, cash flows from
operating activities or other statements of operations or statements of cash
flows data prepared in accordance with GAAP.
The
following table reconciles net income to EBITDA:
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
income
|
$ | 20,449 | $ | 22,503 | $ | 17,219 | ||||||
|
Depreciation
and amortization
|
10,963 | 9,098 | 9,013 | |||||||||
|
Interest
expense, net
|
19,055 | 20,939 | 23,806 | |||||||||
|
Income
tax expense
|
10,804 | 11,748 | 9,058 | |||||||||
|
EBITDA
|
$ | 61,271 | $ | 64,288 | $ | 59,096 | ||||||
Net
property, plant and equipment by geographic area were as follows:
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
United
States
|
$ | 48,593 | $ | 51,704 | $ | 53,306 | ||||||
|
Canada
|
13,843 | 14,308 | 10,475 | |||||||||
|
Other
|
51 | 36 | 70 | |||||||||
|
Total
|
$ | 62,487 | $ | 66,048 | $ | 63,851 | ||||||
With the
exception of goodwill, the Company does not identify or allocate assets by
operating segment, nor does its CODM evaluate operating segments using discrete
asset information.
Goodwill
by geographic area was as follows:
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Geographic
areas:
|
||||||||
|
United
States
|
$ | 114,297 | $ | 113,310 | ||||
|
Canada
|
48,314 | 48,263 | ||||||
| $ | 162,611 | $ | 161,573 | |||||
Sales are
attributed to geographic regions based on the location of the Company’s
customers. Geographic sales for external customers by location were as
follows:
|
Year Ended
|
||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
United
States
|
$ | 237,909 | $ | 208,682 | $ | 214,650 | ||||||
|
All
foreign countries
|
132,105 | 142,408 | 125,067 | |||||||||
|
Total
sales
|
$ | 370,014 | $ | 351,090 | $ | 339,717 | ||||||
There were no individual foreign
countries with sales greater than 10% of total sales for the periods
presented.
The
United States Government is the only customer that accounted for 10% or more of
the Company’s consolidated sales in fiscal years 2008, 2007 and 2006. Direct
sales to the United States Government were $68.6 million, $56.8 million and
$59.7 million for fiscal years 2008, 2007 and 2006, respectively. Accounts
receivable from this customer represented 17% and 15% of consolidated accounts
receivable at October 3, 2008 and September 28, 2007, respectively.
In
management’s opinion, the unaudited data has been prepared on the same basis as
the audited information and includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the data for the
periods presented. The Company’s results of operations have varied and may
continue to fluctuate significantly from quarter to quarter. The results of
operations in any period should not be considered indicative of the results to
be expected from any future period.
All
quarters presented comprised 13 weeks each except for the fourth quarter of
fiscal year ended October 3, 2008 which comprised 14 weeks.
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Year
ended October 3, 2008
|
||||||||||||||||
|
Sales
|
$ | 85,910 | $ | 94,804 | $ | 90,734 | $ | 98,566 | ||||||||
|
Gross
profit
|
24,136 | 28,066 | 27,232 | 29,494 | ||||||||||||
|
Net
income
|
2,510 | 6,154 | 5,824 | 5,961 | ||||||||||||
|
Basic
earnings per share
|
$ | 0.15 | $ | 0.38 | $ | 0.36 | $ | 0.37 | ||||||||
|
Diluted
earnings per share
|
$ | 0.14 | $ | 0.35 | $ | 0.33 | $ | 0.34 | ||||||||
|
Year
ended September 28, 2007
|
||||||||||||||||
|
Sales
|
$ | 83,723 | $ | 88,444 | $ | 87,318 | $ | 91,605 | ||||||||
|
Gross
profit
|
26,581 | 27,705 | 28,651 | 30,364 | ||||||||||||
|
Net
income
|
5,835 | 5,760 | 8,131 | 2,777 | ||||||||||||
|
Basic
earnings per share
|
$ | 0.36 | $ | 0.35 | $ | 0.50 | $ | 0.17 | ||||||||
|
Diluted
earnings per share
|
$ | 0.33 | $ | 0.32 | $ | 0.46 | $ | 0.16 | ||||||||
Net
income for the fourth quarter of fiscal year 2007 includes approximately $3.9
million, net of related income tax expense, for loss on debt extinguishment and
immaterial correction of errors for (1) approximately $0.9 million for deferred
income tax expense to correct an error that arose in the fourth quarter of
fiscal year 2006 and (2) a favorable impact to cost of sales of approximately
$1.1 million ($0.8 million, net of related income tax expense) as a result of
the correction of an error in the accounting for inventory that was improperly
expensed in prior periods.
Net
income for the third quarter of fiscal year 2007 includes a discrete tax benefit
of $1.8 million related to the filing of amended income tax returns for prior
years to reflect a change in estimate with regard to reporting Canadian income
earned in the U.S.
On
October 15, 2008, the Company made another optional prepayment of $1.0 million
on its Term Loan, further reducing the balance of the Term Loan to $87.75
million.
14. Supplemental
Guarantors Condensed Consolidating Financial Information
On
January 23, 2004, CPI issued $125.0 million of 8% Notes that are guaranteed by
CPI International and all of CPI’s domestic subsidiaries. Separate financial
statements of the guarantors are not presented because (i) the guarantors are
wholly-owned and have fully and unconditionally guaranteed the 8% Notes on a
joint and several basis, and (ii) the Company’s management has determined that
such separate financial statements are not material to investors. Instead,
presented below are the consolidating financial statements of: (a) the parent,
CPI International, (b) the issuer, CPI, (c) the guarantor subsidiaries (all of
the domestic subsidiaries), (d) the non-guarantor subsidiaries, (e) the
consolidating elimination entries, and (f) the consolidated totals. The
accompanying consolidating financial information should be read in connection
with the 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.
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
|
As
of October 3, 2008
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 84 | $ | 26,272 | $ | 493 | $ | 1,821 | $ | - | $ | 28,670 | ||||||||||||
|
Restricted
cash
|
- | - | 629 | 147 | - | 776 | ||||||||||||||||||
|
Accounts
receivable, net
|
- | 22,453 | 12,353 | 12,542 | - | 47,348 | ||||||||||||||||||
|
Inventories
|
- | 42,066 | 6,759 | 17,653 | (990 | ) | 65,488 | |||||||||||||||||
|
Deferred
tax assets
|
- | 10,853 | 2 | 556 | - | 11,411 | ||||||||||||||||||
|
Intercompany
receivable
|
- | 8,523 | 5,135 | 13,454 | (27,112 | ) | - | |||||||||||||||||
|
Prepaid
and other current assets
|
- | 2,370 | 632 | 821 | - | 3,823 | ||||||||||||||||||
|
Total
current assets
|
84 | 112,537 | 26,003 | 46,994 | (28,102 | ) | 157,516 | |||||||||||||||||
|
Property,
plant and equipment, net
|
- | 45,556 | 3,047 | 13,884 | - | 62,487 | ||||||||||||||||||
|
Deferred
debt issue costs, net
|
392 | 4,602 | - | - | - | 4,994 | ||||||||||||||||||
|
Intangible
assets, net
|
- | 56,700 | 14,168 | 7,666 | - | 78,534 | ||||||||||||||||||
|
Goodwill
|
- | 93,375 | 20,973 | 48,263 | - | 162,611 | ||||||||||||||||||
|
Other
long-term assets
|
- | 383 | 287 | 136 | - | 806 | ||||||||||||||||||
|
Intercompany
notes receivable
|
- | 1,035 | - | - | (1,035 | ) | - | |||||||||||||||||
|
Investment
in subsidiaries
|
182,869 | 101,193 | - | - | (284,062 | ) | - | |||||||||||||||||
|
Total
assets
|
$ | 183,345 | $ | 415,381 | $ | 64,478 | $ | 116,943 | $ | (313,199 | ) | $ | 466,948 | |||||||||||
|
Liabilities
and stockholders' equity
|
||||||||||||||||||||||||
|
Current
portion of long-term debt
|
$ | - | $ | 1,000 | $ | - | $ | - | $ | - | $ | 1,000 | ||||||||||||
|
Accounts
payable
|
272 | 10,893 | 2,116 | 7,828 | - | 21,109 | ||||||||||||||||||
|
Accrued
expenses
|
186 | 14,905 | 3,143 | 4,810 | - | 23,044 | ||||||||||||||||||
|
Product
warranty
|
- | 2,002 | 538 | 1,619 | - | 4,159 | ||||||||||||||||||
|
Income
taxes payable
|
- | 1,280 | 213 | 6,273 | - | 7,766 | ||||||||||||||||||
|
Advance
payments from customers
|
- | 7,624 | 3,132 | 1,579 | - | 12,335 | ||||||||||||||||||
|
Intercompany
payable
|
27,112 | - | - | - | (27,112 | ) | - | |||||||||||||||||
|
Total
current liabilities
|
27,570 | 37,704 | 9,142 | 22,109 | (27,112 | ) | 69,413 | |||||||||||||||||
|
Deferred
income taxes
|
- | 21,922 | - | 5,399 | - | 27,321 | ||||||||||||||||||
|
Intercompany
notes payable
|
- | - | - | 1,035 | (1,035 | ) | - | |||||||||||||||||
|
Long-term
debt, less current portion
|
11,910 | 212,750 | - | - | - | 224,660 | ||||||||||||||||||
|
Other
long-term liabilities
|
- | 1,213 | - | 476 | - | 1,689 | ||||||||||||||||||
|
Total
liabilities
|
39,480 | 273,589 | 9,142 | 29,019 | (28,147 | ) | 323,083 | |||||||||||||||||
|
Common
stock
|
165 | - | - | - | - | 165 | ||||||||||||||||||
|
Parent
investment
|
- | 50,020 | 43,167 | 58,114 | (151,301 | ) | - | |||||||||||||||||
|
Additional
paid-in capital
|
71,818 | - | - | - | - | 71,818 | ||||||||||||||||||
|
Accumulated
other comprehensive loss
|
(1,809 | ) | (1,809 | ) | - | (283 | ) | 2,092 | (1,809 | ) | ||||||||||||||
|
Retained
earnings
|
76,491 | 93,581 | 12,169 | 30,093 | (135,843 | ) | 76,491 | |||||||||||||||||
|
Treasury
stock
|
(2,800 | ) | - | - | - | - | (2,800 | ) | ||||||||||||||||
|
Total
stockholders’ equity
|
143,865 | 141,792 | 55,336 | 87,924 | (285,052 | ) | 143,865 | |||||||||||||||||
|
Total
liabilities and stockholders' equity
|
$ | 183,345 | $ | 415,381 | $ | 64,478 | $ | 116,943 | $ | (313,199 | ) | $ | 466,948 | |||||||||||
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
|
As
of September 28, 2007
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 1,378 | $ | 16,518 | $ | 958 | $ | 1,620 | $ | - | $ | 20,474 | ||||||||||||
|
Restricted
cash
|
- | - | 1,945 | 310 | - | 2,255 | ||||||||||||||||||
|
Accounts
receivable, net
|
- | 25,857 | 10,816 | 15,916 | - | 52,589 | ||||||||||||||||||
|
Inventories
|
- | 43,949 | 7,092 | 17,084 | (678 | ) | 67,447 | |||||||||||||||||
|
Deferred
tax assets
|
- | 9,272 | 3 | 469 | - | 9,744 | ||||||||||||||||||
|
Intercompany
receivable
|
- | 23,312 | 2,076 | 2,736 | (28,124 | ) | - | |||||||||||||||||
|
Prepaid
and other current assets
|
- | 3,250 | 545 | 844 | - | 4,639 | ||||||||||||||||||
|
Total
current assets
|
1,378 | 122,158 | 23,435 | 38,979 | (28,802 | ) | 157,148 | |||||||||||||||||
|
Property,
plant and equipment, net
|
- | 48,327 | 3,382 | 14,339 | - | 66,048 | ||||||||||||||||||
|
Deferred
debt issue costs, net
|
795 | 5,738 | - | - | - | 6,533 | ||||||||||||||||||
|
Intangible
assets, net
|
- | 67,008 | 6,465 | 8,270 | - | 81,743 | ||||||||||||||||||
|
Goodwill
|
- | 107,462 | 5,848 | 48,263 | - | 161,573 | ||||||||||||||||||
|
Other
long-term assets
|
- | 3,077 | - | 100 | - | 3,177 | ||||||||||||||||||
|
Intercompany
notes receivable
|
- | 1,035 | - | - | (1,035 | ) | - | |||||||||||||||||
|
Investment
in subsidiaries
|
174,333 | 64,641 | - | - | (238,974 | ) | - | |||||||||||||||||
|
Total
assets
|
$ | 176,506 | $ | 419,446 | $ | 39,130 | $ | 109,951 | $ | (268,811 | ) | $ | 476,222 | |||||||||||
|
Liabilities
and stockholders' equity
|
||||||||||||||||||||||||
|
Current
portion of long-term debt
|
$ | - | $ | 1,000 | $ | - | $ | - | $ | - | $ | 1,000 | ||||||||||||
|
Accounts
payable
|
224 | 10,421 | 2,430 | 8,719 | - | 21,794 | ||||||||||||||||||
|
Accrued
expenses
|
404 | 16,684 | 3,991 | 5,270 | - | 26,349 | ||||||||||||||||||
|
Product
warranty
|
- | 3,141 | 481 | 1,956 | - | 5,578 | ||||||||||||||||||
|
Income
taxes payable
|
- | 1,888 | 562 | 6,298 | - | 8,748 | ||||||||||||||||||
|
Advance
payments from customers
|
- | 5,926 | 4,933 | 1,273 | - | 12,132 | ||||||||||||||||||
|
Intercompany
payable
|
28,124 | - | - | - | (28,124 | ) | - | |||||||||||||||||
|
Total
current liabilities
|
28,752 | 39,060 | 12,397 | 23,516 | (28,124 | ) | 75,601 | |||||||||||||||||
|
Deferred
income taxes
|
31 | 22,833 | - | 5,530 | - | 28,394 | ||||||||||||||||||
|
Intercompany
notes payable
|
- | - | - | 1,035 | (1,035 | ) | - | |||||||||||||||||
|
Long-term
debt, less current portion
|
21,817 | 223,750 | - | - | - | 245,567 | ||||||||||||||||||
|
Other
long-term liabilities
|
- | 547 | - | 207 | - | 754 | ||||||||||||||||||
|
Total
liabilities
|
50,600 | 286,190 | 12,397 | 30,288 | (29,159 | ) | 350,316 | |||||||||||||||||
|
Common
stock
|
164 | - | - | - | - | 164 | ||||||||||||||||||
|
Parent
investment
|
- | 60,705 | 19,167 | 57,746 | (137,618 | ) | - | |||||||||||||||||
|
Additional
paid-in capital
|
68,763 | - | - | - | - | 68,763 | ||||||||||||||||||
|
Accumulated
other comprehensive income
|
937 | 886 | - | 155 | (1,041 | ) | 937 | |||||||||||||||||
|
Retained
earnings
|
56,042 | 71,665 | 7,566 | 21,762 | (100,993 | ) | 56,042 | |||||||||||||||||
|
Total
stockholders’ equity
|
125,906 | 133,256 | 26,733 | 79,663 | (239,652 | ) | 125,906 | |||||||||||||||||
|
Total
liabilities and stockholders' equity
|
$ | 176,506 | $ | 419,446 | $ | 39,130 | $ | 109,951 | $ | (268,811 | ) | $ | 476,222 | |||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the Year Ended October 3, 2008
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Sales
|
$ | - | $ | 228,215 | $ | 81,065 | $ | 140,420 | $ | (79,686 | ) | $ | 370,014 | |||||||||||
|
Cost
of sales
|
- | 163,032 | 69,153 | 108,275 | (79,374 | ) | 261,086 | |||||||||||||||||
|
Gross
profit
|
- | 65,183 | 11,912 | 32,145 | (312 | ) | 108,928 | |||||||||||||||||
|
Operating
costs and expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
- | 3,108 | 444 | 7,237 | - | 10,789 | ||||||||||||||||||
|
Selling
and marketing
|
- | 7,724 | 4,494 | 8,926 | - | 21,144 | ||||||||||||||||||
|
General
and administrative
|
- | 14,399 | 4,167 | 4,180 | - | 22,746 | ||||||||||||||||||
|
Amortization
of acquisition-related intangible assets
|
- | 1,391 | 1,108 | 604 | - | 3,103 | ||||||||||||||||||
|
Net
loss on disposition of fixed assets
|
- | 173 | 13 | 19 | - | 205 | ||||||||||||||||||
|
Total
operating costs and expenses
|
- | 26,795 | 10,226 | 20,966 | - | 57,987 | ||||||||||||||||||
|
Operating
income
|
- | 38,388 | 1,686 | 11,179 | (312 | ) | 50,941 | |||||||||||||||||
|
Interest
expense (income), net
|
1,734 | 17,355 | (53 | ) | 19 | - | 19,055 | |||||||||||||||||
|
Loss
on debt extinguishment
|
633 | - | - | - | - | 633 | ||||||||||||||||||
|
(Loss)
income before income tax expense
|
||||||||||||||||||||||||
|
and
equity in income of subsidiaries
|
(2,367 | ) | 21,033 | 1,739 | 11,160 | (312 | ) | 31,253 | ||||||||||||||||
|
Income
tax (benefit) expense
|
(900 | ) | 8,689 | 186 | 2,829 | - | 10,804 | |||||||||||||||||
|
Equity
in income of subsidiaries
|
21,916 | 9,572 | - | - | (31,488 | ) | - | |||||||||||||||||
|
Net
income
|
$ | 20,449 | $ | 21,916 | $ | 1,553 | $ | 8,331 | $ | (31,800 | ) | $ | 20,449 | |||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the Year Ended September 28, 2007
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Sales
|
$ | - | $ | 221,150 | $ | 64,375 | $ | 140,808 | $ | (75,243 | ) | $ | 351,090 | |||||||||||
|
Cost
of sales
|
- | 151,825 | 53,419 | 108,493 | (75,948 | ) | 237,789 | |||||||||||||||||
|
Gross
profit
|
- | 69,325 | 10,956 | 32,315 | 705 | 113,301 | ||||||||||||||||||
|
Operating
costs and expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
- | 2,729 | 95 | 5,734 | - | 8,558 | ||||||||||||||||||
|
Selling
and marketing
|
- | 7,958 | 3,398 | 7,902 | - | 19,258 | ||||||||||||||||||
|
General
and administrative
|
- | 14,801 | 1,644 | 5,074 | - | 21,519 | ||||||||||||||||||
|
Amortization
of acquisition-related intangible
assets
|
- | 1,462 | 250 | 604 | - | 2,316 | ||||||||||||||||||
|
Net
loss on disposition of fixed assets
|
- | 70 | - | 59 | - | 129 | ||||||||||||||||||
|
Total
operating costs and expenses
|
- | 27,020 | 5,387 | 19,373 | - | 51,780 | ||||||||||||||||||
|
Operating
income
|
- | 42,305 | 5,569 | 12,942 | 705 | 61,521 | ||||||||||||||||||
|
Interest
expense (income), net
|
7,301 | 13,833 | (57 | ) | (138 | ) | - | 20,939 | ||||||||||||||||
|
Loss
on debt extinguishment
|
4,279 | 2,052 | - | - | - | 6,331 | ||||||||||||||||||
|
(Loss)
income before income tax expense
|
||||||||||||||||||||||||
|
and
equity in income of subsidiaries
|
(11,580 | ) | 26,420 | 5,626 | 13,080 | 705 | 34,251 | |||||||||||||||||
|
Income
tax (benefit) expense
|
(4,390 | ) | 11,630 | 323 | 4,185 | - | 11,748 | |||||||||||||||||
|
Equity
in income of subsidiaries
|
29,693 | 14,903 | - | - | (44,596 | ) | - | |||||||||||||||||
|
Net
income
|
$ | 22,503 | $ | 29,693 | $ | 5,303 | $ | 8,895 | $ | (43,891 | ) | $ | 22,503 | |||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
|
||||||||||||||||||||||||
|
For
the Year Ended September 29, 2006
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Sales
|
$ | - | $ | 223,154 | $ | 57,214 | $ | 130,439 | $ | (71,090 | ) | $ | 339,717 | |||||||||||
|
Cost
of sales
|
- | 160,646 | 46,993 | 99,147 | (70,723 | ) | 236,063 | |||||||||||||||||
|
Gross
profit
|
- | 62,508 | 10,221 | 31,292 | (367 | ) | 103,654 | |||||||||||||||||
|
Operating
costs and expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
- | 3,561 | - | 4,989 | - | 8,550 | ||||||||||||||||||
|
Selling
and marketing
|
- | 8,388 | 3,678 | 7,761 | - | 19,827 | ||||||||||||||||||
|
General
and administrative
|
- | 13,508 | 1,289 | 7,621 | - | 22,418 | ||||||||||||||||||
|
Amortization
of acquisition-related intangible assets
|
- | 1,336 | 250 | 604 | - | 2,190 | ||||||||||||||||||
|
Net
loss on disposition of fixed assets
|
- | 509 | 2 | 75 | - | 586 | ||||||||||||||||||
|
Total
operating costs and expenses
|
- | 27,302 | 5,219 | 21,050 | - | 53,571 | ||||||||||||||||||
|
Operating
income
|
- | 35,206 | 5,002 | 10,242 | (367 | ) | 50,083 | |||||||||||||||||
|
Interest
expense (income), net
|
8,150 | 15,640 | (14 | ) | 30 | - | 23,806 | |||||||||||||||||
|
(Loss)
income before income tax expense
|
||||||||||||||||||||||||
|
and
equity in income of subsidiaries
|
(8,150 | ) | 19,566 | 5,016 | 10,212 | (367 | ) | 26,277 | ||||||||||||||||
|
Income
tax (benefit) expense
|
(3,260 | ) | 5,225 | 1,454 | 5,639 | - | 9,058 | |||||||||||||||||
|
Equity
in income of subsidiaries
|
22,109 | 7,768 | - | - | (29,877 | ) | - | |||||||||||||||||
|
Net
income
|
$ | 17,219 | $ | 22,109 | $ | 3,562 | $ | 4,573 | $ | (30,244 | ) | $ | 17,219 | |||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the Year Ended October 3, 2008
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (2,985 | ) | $ | 26,023 | $ | (78 | ) | $ | 10,921 | $ | - | $ | 33,881 | ||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | (3,302 | ) | (240 | ) | (720 | ) | - | (4,262 | ) | ||||||||||||||
|
Acquisitions,
net of cash acquired
|
- | 1,615 | - | - | - | 1,615 | ||||||||||||||||||
|
Payment
of patent application fees
|
- | - | (147 | ) | - | - | (147 | ) | ||||||||||||||||
|
Net
cash used in investing activities
|
- | (1,687 | ) | (387 | ) | (720 | ) | - | (2,794 | ) | ||||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||||||
|
Proceeds
from stock purchase plan and exercises of stock options
|
891 | - | - | - | - | 891 | ||||||||||||||||||
|
Repayments
of debt
|
(10,000 | ) | (11,000 | ) | - | - | - | (21,000 | ) | |||||||||||||||
|
Purchase
of treasury stock
|
(2,800 | ) | - | - | - | - | (2,800 | ) | ||||||||||||||||
|
Intercompany
dividends / debt
|
13,600 | (3,600 | ) | - | (10,000 | ) | - | - | ||||||||||||||||
|
Excess
tax benefit on stock option exercises
|
- | 18 | - | - | - | 18 | ||||||||||||||||||
|
Net
cash provided by (used in) financing activities
|
1,691 | (14,582 | ) | - | (10,000 | ) | - | (22,891 | ) | |||||||||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(1,294 | ) | 9,754 | (465 | ) | 201 | - | 8,196 | ||||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
1,378 | 16,518 | 958 | 1,620 | - | 20,474 | ||||||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 84 | $ | 26,272 | $ | 493 | $ | 1,821 | $ | - | $ | 28,670 | ||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the Year Ended September 28, 2007
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Cash
flows from operating activities
|
|
|||||||||||||||||||||||
|
Net cash (used in) provided by operating activities
|
$ | (8,497 | ) | $ | 24,520 | $ | 710 | $ | 4,926 | $ | - | $ | 21,659 | |||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | (3,396 | ) | (42 | ) | (4,731 | ) | - | (8,169 | ) | ||||||||||||||
|
Acquisitions,
net of cash acquired
|
- | (22,174 | ) | - | - | - | (22,174 | ) | ||||||||||||||||
|
Net
cash used in investing activities
|
- | (25,570 | ) | (42 | ) | (4,731 | ) | - | (30,343 | ) | ||||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||||||
|
Proceeds
from issuance of debt
|
- | 100,000 | - | - | - | 100,000 | ||||||||||||||||||
|
Proceeds
from stock purchase plan and exercises of stock options
|
1,436 | - | - | - | - | 1,436 | ||||||||||||||||||
|
Repayments
of debt
|
(58,000 | ) | (42,750 | ) | - | - | - | (100,750 | ) | |||||||||||||||
|
Debt
issuance costs
|
- | (2,462 | ) | - | - | - | (2,462 | ) | ||||||||||||||||
|
Intercompany
dividends
|
66,300 | (66,300 | ) | - | - | - | - | |||||||||||||||||
|
Excess
tax benefit on stock option exercises
|
- | 781 | - | - | - | 781 | ||||||||||||||||||
|
Net
cash provided by (used in) financing activities
|
9,736 | (10,731 | ) | - | - | - | (995 | ) | ||||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,239 | (11,781 | ) | 668 | 195 | - | (9,679 | ) | ||||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
139 | 28,299 | 290 | 1,425 | - | 30,153 | ||||||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,378 | $ | 16,518 | $ | 958 | $ | 1,620 | $ | - | $ | 20,474 | ||||||||||||
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the Year Ended September 29, 2006
|
||||||||||||||||||||||||
|
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
|
$ | (7,714 | ) | $ | 14,612 | $ | 94 | $ | 3,905 | $ | - | $ | 10,897 | |||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||||||
|
Proceeds
from sale of property, plant and equipment
|
- | 11,334 | - | - | - | 11,334 | ||||||||||||||||||
|
Expenses
relating to sale of San Carlos property
|
- | (577 | ) | (577 | ) | |||||||||||||||||||
|
Capital
expenditures
|
- | (7,679 | ) | (127 | ) | (3,107 | ) | - | (10,913 | ) | ||||||||||||||
|
Investment
in subsidiary
|
(47,500 | ) | 47,500 | - | - | - | - | |||||||||||||||||
|
Net
cash (used in) provided by investing activities
|
(47,500 | ) | 50,578 | (127 | ) | (3,107 | ) | - | (156 | ) | ||||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||||||
|
Proceeds
from issuance of debt
|
- | 10,000 | - | - | - | 10,000 | ||||||||||||||||||
|
Proceeds
from issuance of common stock
|
52,940 | - | - | - | - | 52,940 | ||||||||||||||||||
|
Proceeds
from exercise of stock options
|
55 | - | - | - | - | 55 | ||||||||||||||||||
|
Repayments
of debt
|
- | (47,500 | ) | - | - | - | (47,500 | ) | ||||||||||||||||
|
Common
stock issuance costs
|
(5,641 | ) | - | - | - | - | (5,641 | ) | ||||||||||||||||
|
Stockholder
distribution payments
|
(17,000 | ) | - | - | - | - | (17,000 | ) | ||||||||||||||||
|
Intercompany
dividends
|
24,919 | (24,919 | ) | - | - | - | - | |||||||||||||||||
|
Excess
tax benefit on stock option exercises
|
47 | - | - | - | - | 47 | ||||||||||||||||||
|
Net
cash provided by (used in) financing activities
|
55,320 | (62,419 | ) | - | - | - | (7,099 | ) | ||||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
106 | 2,771 | (33 | ) | 798 | - | 3,642 | |||||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
33 | 25,528 | 323 | 627 | - | 26,511 | ||||||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 139 | $ | 28,299 | $ | 290 | $ | 1,425 | $ | - | $ | 30,153 | ||||||||||||
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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. | ||||
| By: | /s/ O. JOE CALDARELLI | |||
| O. Joe Caldarelli | ||||
| Chief Executive Officer | ||||
| Date: December 15, 2008 | ||||
| By: | /s/ JOEL A. LITTMAN | |||
| Joel A. Littman | ||||
| Chief Financial Officer, Treasurer and Secretary | ||||
| (Principal Financial and Accounting Officer) | ||||
| Date: December 15, 2008 | ||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
Signature
|
Title | Date | ||||
|
/s/ O. JOE CALDARELLI
|
Chief
Executive Officer and Director
|
December
15, 2008
|
||||
|
O.
Joe Caldarelli
|
(Principal
Executive Officer)
|
|||||
|
/s/ JOEL A. LITTMAN
|
Chief
Financial Officer, Treasurer
|
December
15, 2008
|
||||
|
Joel
A. Littman
|
and
Secretary (Principal Financial
|
|||||
|
and
Accounting Officer)
|
||||||
|
MICHAEL TARGOFF*
|
Chairman
of the Board of Directors
|
December
15, 2008
|
||||
|
Michael
Targoff
|
||||||
|
MICHAEL F. FINLEY*
|
Director
|
December
15, 2008
|
||||
|
Michael
F. Finley
|
||||||
|
JEFFREY P. HUGHES*
|
Director
|
December
15, 2008
|
||||
|
Jeffrey
P. Hughes
|
||||||
|
STEPHEN R. LARSON*
|
Director
|
December
15, 2008
|
||||
|
Stephen
R. Larson
|
||||||
|
WILLIAM P. RUTLEDGE*
|
Director
|
December
15, 2008
|
||||
|
William
P. Rutledge
|
||||||
| By: |
/s/ JOEL A. LITTMAN
|
|||||
|
Joel
A. Littman
|
||||||
|
Attorney-in-fact
|
||||||
|
Exhibit
Number
|
Exhibit
Description
|
||
|
2.1
|
Agreement
and Plan of Merger, dated as of November 17, 2003, by and among the
Registrant, CPI Merger Sub Corp., Communications & Power Industries
Holding Corporation (“Holding”) and Green Equity Investors II, L.P., as
Securityholders’ Representative (Exhibit 2.4)(6)
|
||
|
2.2
|
Stock
Sale Agreement (“Stock Sale Agreement”), dated as of June 9, 1995, by and
between Communications & Power Industries, Inc. (“CPI”) (as successor
by merger to CPII Acquisition Corp., then known as Communications &
Power Industries Holding Corporation) and Varian Associates, Inc. (“Varian
Associates”) (Exhibit 2.1)(1)
|
||
|
2.3
|
First
Amendment to Stock Sale Agreement, dated as of August 11, 1995, by and
among Holding, CPI (as successor by merger to CPII Acquisition) and Varian
Associates (Exhibit 2.2)(1)
|
||
|
2.4
|
Second
Amendment to Stock Sale Agreement, dated as of August 11, 1995, by and
among Holding, CPI (as successor by merger to CPII Acquisition) and Varian
Associates (Exhibit 2.3)(1)
|
||
|
2.5
|
Modification
Agreement to Stock Sale Agreement, dated June 18, 2004, by and between CPI
and Varian Medical Systems, Inc. (Exhibit 10.2)(9)
|
||
|
3.1
|
Restated
Certificate of Incorporation of CPI, filed with the Delaware Secretary of
State on December 10, 2004 (Exhibit 3.1)(10)
|
||
|
3.2
|
Amended
and Restated Bylaws of CPI, dated March 19, 2002 (Exhibit
3.2)(4)
|
||
|
3.3
|
Amended
and Restated Certificate of Incorporation of the Registrant, filed with
the Delaware Secretary of State on April 7, 2006 (Exhibit
3.3)(15)
|
||
|
3.4
|
Amended
and Restated Bylaws of the Registrant, effective April 7, 2006 (Exhibit
3.4) (15)
|
||
|
4.1
|
Indenture,
dated as of January 23, 2004, by and among CPI, as Issuer, the Guarantors
named therein, as Guarantors, and The Bank of New York Trust Company, N.A.
(as successor to BNY Western Trust Company), as Trustee (Exhibit
4.1)(7)
|
||
|
4.2
|
Amended
and Restated Management Stockholders Agreement, dated as of April 27,
2006, by and among the Registrant, Cypress Merchant Banking Partners II
L.P., Cypress Merchant B II C.V., 55th Street Partners II L.P., Cypress
Side-by-Side LLC, and certain management stockholders named therein
(Exhibit 4.1)(16)
|
||
|
4.3
|
Indenture,
dated as of February 22, 2005, by and between the Registrant, as Issuer,
and The Bank of New York Trust Company, N.A., as Trustee (Exhibit
10.2)(11)
|
||
|
4.4
|
Amended
and Restated Registration Rights Agreement, dated as of April 27, 2006, by
and among CPI International, Inc., Cypress Merchant Banking Partners II
L.P., Cypress Merchant B II C.V., 55th Street Partners II L.P. and Cypress
Side-by-Side LLC (Exhibit 4.1)(16)
|
||
|
Exhibit
Number
|
Exhibit
Description
|
||
| 4.5 |
Specimen
common stock certificate of the Registrant (Exhibit
4.5)(15)
|
||
| 10.1 |
Credit
Agreement (“Credit Agreement”), dated as of January 23, 2004, amended and
restated as of November 29, 2004, by and among CPI, as Borrower, the
Guarantors named therein, the Lenders from time to time party thereto, UBS
Securities LLC, Bear, Stearns & Co. Inc., UBS Loan Finance LLC, UBS
AG, Stamford Branch, Bear Stearns Corporate Lending Inc., Wachovia Bank,
National Association, and Wachovia Capital Markets, LLC (Exhibit
10.1)(10)
|
||
| 10.2 |
Amendment
No. 1, dated as of February 16, 2005, to the Credit Agreement (Exhibit
10.1)(11)
|
||
| 10.3 |
Amendment
No. 2, dated as of April 13, 2005, to the Credit Agreement (Exhibit
10.1)(13)
|
||
| 10.4 |
Amendment
No. 3, dated as of December 15, 2005, to the Credit Agreement (Exhibit
10.1)(14)
|
||
| 10.5 |
Security
Agreement, dated as of January 23, 2004, among CPI, the Guarantors party
thereto, and UBS AG, Stamford Branch (Exhibit 10.2)(7)
|
||
| 10.6 |
Cross
License Agreement, dated as of August 10, 1995, between CPI and Varian
Associates (Exhibit 10.11)(1)
|
||
| 10.7 |
Agreement
of Purchase and Sale (San Carlos Property), dated February 7, 2003, by and
between CPI (as successor to Holding) and Palo Alto Medical Foundation;
Seventh Amendment, dated November 12, 2003; and Ninth Amendment, dated
June 16, 2004 (Exhibit 10.1)(9)
|
||
| 10.8 |
Agreement
re: Environmental Matters, dated June 18, 2004, by and between 301 Holding
LLC, CPI, Varian Medical Systems, Inc. and Palo Alto Medical Foundation
(Exhibit
10.3)(9)
|
||
| 10.9 |
Assignment
and Assumption of Lessee’s Interest in Lease (Units 1-4, Palo Alto) and
Covenants, Conditions and Restrictions on Leasehold Interests (Units 1-12,
Palo Alto), dated as of August 10, 1995, by and among Varian Realty Inc.,
Varian Associates and CPI (Exhibit 10.13)(1)
|
||
| 10.10 |
Fourth
Amendment of Lease, dated December 15, 2000, by and between The Board of
Trustees of the Leland Stanford Junior University and CPI (Exhibit
10.10)(3)
|
||
| 10.11 |
Sublease
(Unit 8, Palo Alto), dated as of August 10, 1995, by and between Varian
Realty Inc. and CPI (Exhibit 10.15)(1)
|
||
| 10.12 |
Sublease
(Building 4, Palo Alto), dated as of August 10, 1995, by and between CPI,
as Sublessee, Varian, as Sublessor, and Varian Realty Inc., as Adjacent
Property Sublessor (Exhibit
10.16)(1)
|
||
|
Exhibit
Number
|
Exhibit
Description
|
||
| 10.13 |
First
Amendment to Sublease, Subordination, Non-Disturbance and Attornment
Agreement, dated as of April 2, 1999, by and among Varian, Inc., CPI,
Varian, and Varian Realty Inc. (Exhibit 10.15)(12)
|
||
| 10.14 |
Second
Amendment to Sublease, dated as of April 28, 2000, by and between Varian,
Inc. and CPI (Exhibit 10.16) (12)
|
||
| 10.15 |
Communications
& Power Industries 2000 Stock Option Plan (Exhibit
10.32)(2)
|
||
| 10.16 |
First
Amendment to Communications and Power Industries 2000 Stock Option Plan
(Exhibit 10.32.1)(5)
|
||
| 10.17 |
Form
of Stock Option Agreement 2000 Stock Option Plan (Exhibit
10.33)(2)
|
||
| 10.18 |
Form
of Option Rollover Agreement (U.S. Employees) (Exhibit
10.3)(7)
|
||
| 10.19 |
Form
of Option Rollover Agreement (Canadian Employees) (Exhibit
10.5)(12)
|
||
| 10.20 |
Conformed
copy of 2004 Stock Incentive Plan reflecting amendments adopted on
September 24, 2004 and December 7, 2006 (Exhibit
10.20)(17)
|
||
| 10.21 |
Form
of Option Agreement (Employees) under the 2004 Stock Incentive Plan
(Exhibit 10.2)(8)
|
||
| 10.22 |
Form
of Option Agreement (Directors) under the 2004 Stock Incentive Plan
(Exhibit 10.3)(8)
|
||
| 10.23 |
Conformed
copy of 2006 Equity and Performance Incentive Plan reflecting amendments
adopted on December 7, 2006 and December 9, 2008
|
||
| 10.24 |
Form
of Stock Option Agreement (IPO Grant) under 2006 Equity and Performance
Incentive Plan (Exhibit 10.25)(15)
|
||
| 10.25 |
Form
of Stock Option Agreement (Senior Executives) (IPO Grant) under 2006
Equity and Performance Incentive Plan (Exhibit
10.26)(15)
|
||
| 10.26 |
Form
of Stock Option Agreement (Directors) under 2006 Equity and Performance
Incentive Plan (Exhibit 10.27)(15)
|
||
| 10.27 |
Form
of Restricted Stock Agreement (Directors) under 2006 Equity and
Performance Incentive Plan (Exhibit 10.28)(15)
|
||
| 10.28 |
Conformed
copy of 2006 Employee Stock Purchase Plan reflecting amendments adopted on
July 1, 2006 and December 7, 2006 (Exhibit 10.28)(17)
|
||
| 10.29 |
Pension
Plan for Executive Employees of CPI Canada, Inc. (as applicable to O. Joe
Caldarelli) effective January 1, 2002 (Exhibit
10.43)(6)
|
||
| 10.30 |
First
Amendment and Restatement of the CPI Non-Qualified Deferred Compensation
Plan effective as of December 1, 2004 (Exhibit
10.3)(22)
|
||
|
Exhibit
Number
|
Exhibit
Description
|
||
| 10.31 |
Employment
Agreement, dated as of April 27, 2006, by and between Communications &
Power Industries Canada Inc. and O. Joe Caldarelli (Exhibit
10.1)(16)
|
||
| 10.32 |
Amended
and Restated Employment Agreement, dated as of January 17, 2008, by and
between CPI and Robert A. Fickett (Exhibit 10.1)(22)
|
||
| 10.33 |
Amended
and Restated Employment Agreement, dated as of January 17, 2008, by and
between CPI and Joel A. Littman (Exhibit 10.2)(22)
|
||
| 10.34 |
Employment
Agreement, dated November 2, 2002, by and between CPI and Don Coleman
(Exhibit 10.41)(6)
|
||
| 10.35 |
Form
of Indemnification Agreement (Exhibit 10.36)(15)
|
||
| 10.36 |
Form
of Stock Option Agreement (Senior Executives) under 2006 Equity and
Performance Incentive Plan (Exhibit 10.1)(18)
|
||
| 10.37 |
Form
of Stock Option Agreement under 2006 Equity and Performance Incentive Plan
(Exhibit 10.2)(18)
|
||
| 10.38 |
Employment
Agreement, dated June 27, 2000, by and between CPI and John R. Beighley
(Exhibit 10.1)(19)
|
||
| 10.39 |
Amended
and Restated Credit Agreement, dated as of August 1, 2007, among CPI,
as Borrower, the Guarantors named therein, the Lenders from time to time
party thereto, UBS Securities LLC and Bear, Stearns & Co. Inc., UBS
Loan Finance LLC, UBS AG, Stamford Branch, , Bear Stearns Corporate
Lending Inc., The Royal Bank of Scotland PLC, and RBS Securities Corp
(Exhibit 10.1)(20)
|
||
| 10.40 |
Form
of Restricted Stock Agreement (Senior Executives) under 2006 Equity and
Performance Incentive Plan (Exhibit 10.1)(21)
|
||
| 10.41 |
Form
of Restricted Stock Agreement under 2006 Equity and Performance Incentive
Plan (Exhibit 10.2)(21)
|
||
| 10.42 |
Form
of Restricted Stock Unit Award Agreement (Senior Executives) under 2006
Equity and Performance Incentive Plan (Exhibit
10.3)(21)
|
||
| 10.43 |
Form
of Restricted Stock Unit Award Agreement under 2006 Equity and Performance
Incentive Plan (Exhibit 10.4)(21)
|
||
| 10.44 |
Employment
Agreement, dated June 21, 2004, by and between CPI and Andrew
Tafler
|
||
| 10.45 | New Form of Performance Stock Option Agreement (Senior Executives) under 2006 Equity and Performance Incentive Plan | ||
| 10.46 | New Form of Performance Stock Option Agreement under 2006 Equity and Performance Incentive Plan | ||
| 10.47 | New Form of Performance Restricted Stock Agreement (Senior Executives) under 2006 Equity and Performance Incentive Plan | ||
|
Exhibit
Number
|
Exhibit
Description
|
||
| 10.48 | New Form of Performance Restricted Stock Agreement under 2006 Equity and Performance Incentive Plan | ||
| 10.49 | New Form of Performance Restricted Stock Unit Award Agreement (Senior Executives) under 2006 Equity and Performance Incentive Plan | ||
| 10.50 | New Form of Performance Restricted Stock Unit Award Agreement under 2006 Equity and Performance Incentive Plan | ||
| 12 | Statement re: Computation of Ratio of Earnings to Fixed Charges | ||
| 21 |
Subsidiaries
of the Registrant
|
||
| 23.1 |
Consent
of KPMG LLP
|
||
| 24 |
Powers
of Attorney of the Board of Directors and Officers
|
||
| 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
|
||
|
(1)
|
Incorporated by reference to Communications & Power Industries Inc.’s Registration Statement on Form S-1 (Registration No. 033-96858) filed on September 12, 1995 | |
|
(2)
|
Incorporated
by reference to Communications & Power Industries Inc.’s Annual Report
on Form 10-K for the fiscal year ended September 29, 2000 (File No.
033-96858)
|
|
|
(3)
|
Incorporated by reference to Communications & Power Industries Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 29, 2000 (File No. 033-96858) | |
|
(4)
|
Incorporated
by reference to Communications & Power Industries Inc.’s Quarterly
Report on Form 10-Q for the quarter ended March 29,
2002
|
|
|
(5)
|
Incorporated
by reference to Communications & Power Industries Inc.’s Quarterly
Report on Form 10-Q for the quarter ended April 4, 2003
|
|
|
(6)
|
Incorporated
by reference to Communications & Power Industries Inc.’s Annual Report
on Form 10-K for the fiscal year ended October 3, 2003
|
|
|
(7)
|
Incorporated by reference to Communications & Power Industries Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 2, 2004 | |
|
(8)
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended April 2, 2004
|
|
(9)
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended July 2, 2004
|
|
|
(10)
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended October 1, 2004
|
|
|
(11)
|
Incorporated
by reference to the Registrant’s Form 8-K filed on February 23,
2005
|
|
|
(12)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-4
(Registration No. 333-123917) filed on April 7, 2005
|
|
|
(13)
|
Incorporated
by reference to the Registrant’s Form 8-K filed on April 19,
2005
|
|
|
(14)
|
Incorporated
by reference to the Registrant’s Form 8-K filed on December 16,
2005
|
|
|
(15)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1/A
filed on April 11, 2006 (Commission File No.
333-130662)
|
|
(16)
|
Incorporated
by reference to the Registrant’s Form 10-Q filed on May 15,
2006
|
|
|
(17)
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended September 29, 2006
|
|
|
(18)
|
Incorporated
by reference to the Registrant’s Form 8-K filed on December 13,
2006
|
|
|
(19)
|
Incorporated
by reference to the Registrant’s Form 10-Q filed on February 12,
2007
|
|
|
(20)
|
Incorporated
by reference to the Registrant’s Form 8-K filed on August 6,
2007
|
|
|
(21)
|
Incorporated
by reference to the Registrant’s Form 8-K filed on December 11,
2007
|
|
|
(22)
|
Incorporated
by reference to the Registrant’s Form 10-Q filed on February 6,
2008
|
131