UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended October 2,
2009
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OR
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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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 whether the
registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
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Yes
¨ 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 April 3, 2009 (the last business day of the registrant’s
most recently completed second fiscal quarter) was approximately $69
million, based on the closing sale price of $9.50 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: 16,607,483 shares of the registrant’s common
stock, par value $0.01 per share, were outstanding at December
1, 2009.
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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
Cautionary
Statements Regarding Forward-Looking Statements
This
document contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that relate to future events or our future
financial performance. In some cases, readers can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. Forward-looking statements are subject to known and unknown risks
and uncertainties, which could cause actual results to differ materially from
the results projected, expected or implied by the forward-looking statements.
These risk factors include, without limitation, competition in our end markets;
the impact of a general slowdown in the global economy; our significant amount
of debt; changes or reductions in the United States defense budget; currency
fluctuations; goodwill impairment considerations; customer cancellations of
sales contracts; U.S. Government contracts laws and regulations; changes in
technology; the impact of unexpected costs; the impact of environmental laws and
regulations; and inability to obtain raw materials and components. All written
and oral forward-looking statements made in connection with this report that are
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the foregoing risk factors and other cautionary statements
included herein and in our other filings with the Securities and Exchange
Commission (“SEC”). We are under no duty to update any of the forward-looking
statements after the date of this report to conform such statements to actual
results or to changes in our expectations.
The
information in this report is not a complete description of our business or the
risks and uncertainties associated with an investment in our securities. You
should carefully consider the various risks and uncertainties that impact our
business and the other information in this report and in our other filings with
the SEC before you decide to invest in our securities or to maintain or increase
your investment.
Background
We are a
provider of microwave, 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 2009 were for United States and
foreign government and military end use, particularly for radar, electronic
warfare and communications 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 2009 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 2009, we generated approximately 54% of our
total sales from products for which we believe that 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 40% of our total sales
for fiscal year 2009 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 & 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” means CPI
International, Inc., (2) “Communications & Power Industries” means
Communications & Power Industries, Inc., the direct, wholly owned operating
subsidiary of CPI International and (3) the terms “we,” “us” and “our” refer to
CPI International and its direct and indirect subsidiaries on a consolidated
basis.
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).
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 (or defense),
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 for electronic warfare programs. 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 electronic
warfare systems, having sold thousands of devices for those systems and that we
have a sole provider position in products for certain high-power phased array
systems and expendable decoys. Electronic warfare programs also include 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 relatively new system, currently in
testing and demonstration, 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 and multifunction integrated microwave
assemblies, as well as complete transmitter subsystems consisting of the
microwave amplifier, power supply and control system. Our product offering in
the radar and electronic warfare market also includes 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, which we also call our defense
market, were $135.9 million, $151.8 million and $144.2 million in fiscal years
2009, 2008 and 2007 respectively. On average, approximately
two-thirds of our sales in the radar and electronic warfare market 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, magnetic resonance imaging (“MRI”) and positron emission
tomography (“PET”). 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. 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.
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.
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 $61.2 million, $65.8 million and $67.6 million in fiscal
years 2009, 2008 and 2007, respectively.
For many
years, 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 5,200 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 have introduced new products, including
x-ray generators with image processing systems, to assist customers in their
migration from film-based radiology systems to digital radiology
systems. We believe that we are one of the 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. There also exists
substantial demand for “lower-end” applications, and, in recent years, we have
introduced 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 and millimeter-wave amplifiers for
commercial and military communications links for broadcast, video, voice and
data transmission. Our sales in the communications market were $106.4 million,
$117.8 million and $112.3 million in fiscal years 2009, 2008 and 2007,
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 programs during a particular
quarter, including, for example, infrastructure programs for commercial
direct-to-home or broadband satellite communications applications and military
satellite communications programs. Historically, we have focused primarily on
commercial communications applications, but in recent years, we have 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. Military communications applications now make up a growing
portion of our total communications business.
Our
commercial communications programs include satellite, terrestrial broadcast and
over-the-horizon applications. Our military communications programs include
satellite, data link and over-the-horizon communications applications. For
satellite, terrestrial broadcast, data link and over-the-horizon communications
applications, our products amplify and transmit signals within an overall
communications system:
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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.
The
majority of our communications products are sold into the satellite
communications market. We estimate that we have a worldwide installed base
of more than 25,000 amplifiers. We believe that we are a leading
producer of power amplifiers, amplifier subsystems and high-power
microwave devices for satellite uplinks, and 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
are participating in satellite communications growth areas, including:
amplifiers for the 30 gigahertz (GHz) band (Ka-band), which is one of the
major satellite communications growth areas for both commercial and
military applications; the growing application worldwide 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.
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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. 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.
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Data
link communications systems use our products to transmit and receive
real-time command and control, intelligence, surveillance and
reconnaissance (“ISR”) data between airborne platforms, including UAVs and
manned airborne platforms, and their associated ground-based and
ship-based terminals via high-bandwidth digital data links. Our
products are on the airborne and ground nodes of the tactical common data
link (“TCDL”) network for various
platforms.
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Over-the-horizon
(also referred to as “troposcatter”) systems use our high-power amplifiers
and traveling wave tubes 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. These
systems transmit voice, video and data signals without requiring the use
of a satellite, providing an easy-to-install, relocatable and
cost-efficient alternative to satellite-based
communications.
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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 $20.2 million, $25.1 million and $20.5 million in fiscal
years 2009, 2008 and 2007, 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 $9.2
million, $9.5 million and $6.5 million in fiscal years 2009, 2008 and 2007,
respectively.
Geographic
Markets
We sell
our products in approximately 90 countries. In fiscal year 2009, sales to
customers in the U.S., Europe and Asia accounted for approximately 63%, 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 2009. See “Sales, Marketing and
Service.” For financial information about geographic areas, see Note 12 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 $200,000, 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 (KHz) to
over 30 GHz. We produce and manufacture klystrons for a variety of radar,
communications, medical, industrial and 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, with power output levels that 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
ten megawatts. Our cross-field amplifiers are primarily used to support
radar systems on the Aegis weapons used by the U.S. Navy and select
foreign naval vessels. We supply units both for new ships and for
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 both for defense and
for 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 2, 2009, we had an order backlog of $225.7 million compared to an order
backlog of $201.3 million as of October 3, 2008. 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 2, 2009 is
expected to be filled within fiscal year 2010.
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 2, 2009, we had 138 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 37% of our sales in fiscal year 2009.
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 and 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 (four), India (two), 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 Corporation, Thales Electron Devices SA,
e2v technologies plc, Teledyne Technologies, Inc. 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
technologies currently serve their own specialized markets without significant
overlap in most applications.
Research
and Development
Total
research and development spending was $28.0 million, $22.8 million and $16.3
million during fiscal years 2009, 2008 and 2007, respectively. Total research
and development spending consisted of company-sponsored research and development
expense of $10.5 million, $10.8 million and $8.6 million during fiscal years
2009, 2008 and 2007, respectively, and customer-sponsored research and
development of $17.5 million, $12.0 million and $7.7 million during fiscal years
2009, 2008 and 2007, 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. Five 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 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 former facility located in San
Carlos, California 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 2, 2009, we had approximately 1,520 employees, of which 410 are located
outside the United States (including approximately 380 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 we believe that we
have good relations with our employees.
Financial
Information About Segments
For
financial information about our segments, see Note 12 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 Department
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.
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
recent 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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the
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.
More than 33%, 35% and 32% of our sales
in our 2009, 2008 and 2007 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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Each 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 under 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.
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.
Goodwill
and other intangibles resulting from our acquisitions could become
impaired.
As of October 2, 2009, our goodwill, developed and core technology
and other intangibles amounted to $237.7 million, net of accumulated
amortization. We will amortize approximately $3.0 million in each of fiscal
years 2010, 2011 and 2012, $2.9 million in each of fiscal years 2013 and 2014,
and $57.4 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 on certain days during
fiscal year 2009, largely, we believe, as a result of the recent global economic
downturn and volatility in the financial markets. If our stock price again 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,
which could result in an impairment of our goodwill.
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 15%, 12% and 15% of our sales in fiscal years 2009,
2008 and 2007, 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 certain
risks of doing business internationally. Direct sales to customers located
outside the United States were approximately 37%, 36% and 41% in fiscal years
2009, 2008 and 2007, 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.
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 could
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 purchase, 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 facility in San Carlos, California, 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 to
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.
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 2, 2009, we had an order backlog of $225.7 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 2, 2009, our total consolidated indebtedness was $194.9 million and we
had $54.5 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
recent 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 or to obtain replacement financing before our
existing debt matures. In addition, our existing senior credit facilities will
mature and come due on August 1, 2011 if we do not repay or refinance our 8%
Senior Subordinated Notes prior to that date. If we were to need to access
funds through our existing revolving credit facilities or to obtain replacement
financing, but were unable to do so, that failure could have a material adverse
affect on our financial condition and results of operations.
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.
Our
outstanding notes and our senior credit facilities are subject to
change-of-control provisions. We may not have the ability to raise the 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 2, 2009, we had
options outstanding to purchase 3,382,763 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 2,845,996 were exercisable as of such date.
In addition, as of October 2, 2009, our 2006 Equity and Performance Incentive
Plan and 2006 Employee Stock Purchase Plan provide for the issuance of up to an
additional 2,220,510 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
November 17, 2009, entities affiliated with Cypress collectively own
approximately 53% 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 (33.3%) 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 959,000 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 | 22,000 |
VED
and satcom equipment
|
|||||||
|
Woodland,
California
|
36,900 | 9,900 |
VED
|
|||||||
|
Palo
Alto, California
|
418,300 |
(b)
|
VED
and satcom equipment
|
|||||||
|
Mountain
View, California
|
42,500 |
VED
|
||||||||
|
Camarillo,
California
|
37,700 |
Other
|
||||||||
|
Various
other locations
|
26,000 |
(c)
|
VED
and satcom equipment
|
|||||||
|
(a)
|
The
Beverly, Massachusetts square footage also includes approximately 1,080
square feet leased to a tenant.
|
|
(b)
|
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.
|
|
(c)
|
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.
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.
There
were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 2009.
|
Market For Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity
Securities
|
Our
common stock, par value $0.01 per share, is traded on the Nasdaq Stock Market
LLC under the symbol “CPII.” 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 29, 2007, through October 2, 2009.
|
High
|
Low
|
|||||||
|
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 | ||||
|
Fiscal
year 2009
|
||||||||
|
First
fiscal quarter (October 4, 2008 to January 2, 2009)
|
$ | 10.97 | $ | 5.67 | ||||
|
Second
fiscal quarter (January 3, 2009 to April 3, 2009)
|
$ | 9.66 | $ | 5.75 | ||||
|
Third
fiscal quarter (April 4, 2009 to July 3, 2009)
|
$ | 12.87 | $ | 7.80 | ||||
|
Fourth
fiscal quarter (July 4, 2009 to October 2, 2009)
|
$ | 12.00 | $ | 8.75 | ||||
As of December 1, 2009,
there were 93 stockholders of record of our common stock and 16,607,483
shares of common stock outstanding.
No
dividends were paid in fiscal years 2009 and 2008. 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 2, 2009. 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.
| 4/06 | 6/06 | 9/06 | 12/06 | 3/07 | 6/07 | 9/07 | 12/07 | 3/08 | 6/08 | 9/08 | 12/08 | 3/09 | 6/09 | 9/09 | ||||||||||||||||||
|
CPI
International, Inc
|
100.00 | 80.56 | 73.17 | 83.33 | 106.78 | 110.17 | 105.61 | 95.00 | 55.11 | 68.33 | 80.44 | 48.11 | 52.22 | 48.28 | 62.17 | |||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 93.99 | 98.10 | 105.47 | 106.03 | 113.42 | 115.76 | 113.32 | 97.25 | 97.97 | 88.13 | 66.90 | 65.17 | 78.49 | 90.87 | |||||||||||||||||
|
NASDAQ
Electronic Components
|
100.00 | 88.16 | 91.00 | 92.59 | 90.29 | 103.84 | 110.84 | 107.80 | 88.55 | 93.76 | 77.05 | 54.94 | 58.28 | 67.46 | 79.55 |
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.
The
selected consolidated financial and other data for CPI International and
subsidiaries as of October 2, 2009 and October 3, 2008, and for the fiscal years
ended October 2, 2009, October 3, 2008 and September 28, 2007 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 28, 2007, September 29, 2006 and
September 30, 2005 and for the fiscal years ended September 29, 2006 and
September 30, 2005 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 | ||||||||||||||||||||
|
October
2,
|
October
3,
|
September 28, | September 29, |
September
30,
|
||||||||||||||||
|
2009
|
2008
|
2007 | 2006 | 2005 | ||||||||||||||||
|
Statement of Income Data:
|
||||||||||||||||||||
|
Sales
|
$ | 332,876 | $ | 370,014 | $ | 351,090 | $ | 339,717 | $ | 320,732 | ||||||||||
|
Cost
of sales(1)
|
239,385 | 261,086 | 237,789 | 236,063 | 216,031 | |||||||||||||||
|
Gross
profit
|
93,491 | 108,928 | 113,301 | 103,654 | 104,701 | |||||||||||||||
|
Research
and development
|
10,520 | 10,789 | 8,558 | 8,550 | 7,218 | |||||||||||||||
|
Selling
and marketing
|
19,466 | 21,144 | 19,258 | 19,827 | 18,547 | |||||||||||||||
|
General
and administrative
|
20,757 | 22,951 | 21,648 | 23,004 | 28,329 | |||||||||||||||
|
Amortization
of acquisition-related intangible assets
|
2,769 | 3,103 | 2,316 | 2,190 | 7,487 | |||||||||||||||
|
Total
operating costs and expenses
|
53,512 | 57,987 | 51,780 | 53,571 | 61,581 | |||||||||||||||
|
Operating
income
|
39,979 | 50,941 | 61,521 | 50,083 | 43,120 | |||||||||||||||
|
Interest
expense, net
|
16,979 | 19,055 | 20,939 | 23,806 | 20,310 | |||||||||||||||
|
(Gain)
loss on debt extinguishment(2)
|
(248 | ) | 633 | 6,331 | - | - | ||||||||||||||
|
Income
tax (benefit) expense
|
(218 | ) | 10,804 | 11,748 | 9,058 | 9,138 | ||||||||||||||
|
Net
income
|
$ | 23,466 | $ | 20,449 | $ | 22,503 | $ | 17,219 | $ | 13,672 | ||||||||||
|
Earnings
per share(3)
|
||||||||||||||||||||
|
Basic
|
$ | 1.44 | $ | 1.25 | $ | 1.39 | $ | 1.20 | $ | 1.05 | ||||||||||
|
Diluted
|
$ | 1.34 | $ | 1.16 | $ | 1.27 | $ | 1.09 | $ | 0.98 | ||||||||||
|
Shares
used to calculate net earnings per share(4)
|
||||||||||||||||||||
|
Basic
|
16,343 | 16,356 | 16,242 | 14,311 | 13,079 | |||||||||||||||
|
Diluted
|
17,478 | 17,697 | 17,721 | 15,789 | 13,974 | |||||||||||||||
|
Cash
dividend per share(5)
|
$ | - | $ | - | $ | - | $ | 1.19 | $ | 5.80 | ||||||||||
|
Other
Financial Data:
|
||||||||||||||||||||
|
EBITDA(6)
|
$ | 51,021 | $ | 61,271 | $ | 64,288 | $ | 59,096 | $ | 57,297 | ||||||||||
|
EBITDA
margin(7)
|
15.30 | % | 16.60 | % | 18.30 | % | 17.40 | % | 17.90 | % | ||||||||||
|
Operating
income margin(8)
|
12.00 | % | 13.80 | % | 17.50 | % | 14.70 | % | 13.40 | % | ||||||||||
|
Net
income margin(9)
|
7.00 | % | 5.50 | % | 6.40 | % | 5.10 | % | 4.30 | % | ||||||||||
|
Depreciation
and amortization(10)
|
$ | 10,794 | $ | 10,963 | $ | 9,098 | $ | 9,013 | $ | 14,177 | ||||||||||
|
Capital
expenditures(11)
|
$ | 3,365 | $ | 4,262 | $ | 8,169 | $ | 10,913 | $ | 17,131 | ||||||||||
|
Ratio
of earnings to fixed charges(12)
|
2.30 | x | 2.57 | x | 2.59 | x | 2.08 | x | 2.10 | x | ||||||||||
|
Net
cash provided by operating activities
|
$ | 30,114 | $ | 33,881 | $ | 21,659 | $ | 10,897 | $ | 31,349 | ||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Working
capital
|
$ | 92,380 | $ | 88,103 | $ | 81,547 | $ | 77,113 | $ | 65,400 | ||||||||||
|
Total
assets
|
$ | 458,254 | $ | 466,948 | $ | 476,222 | $ | 441,759 | $ | 454,544 | ||||||||||
|
Long-term
debt
|
$ | 194,922 | $ | 224,660 | $ | 245,567 | $ | 245,067 | $ | 284,231 | ||||||||||
|
Total
stockholders’ equity
|
$ | 173,553 | $ | 143,865 | $ | 125,906 | $ | 99,673 | $ | 52,667 | ||||||||||
|
(1)
|
Includes
charges for the amortization of inventory write-up of $351 incurred in
connection with the Econco acquisition for fiscal year
2005.
|
|
(2)
|
The
repurchase of $8,000 of our 8% senior subordinated notes during fiscal
year 2009 resulted in a gain on debt extinguishment of $248 which was
comprised of a discount of $392, partially offset by a non-cash write-off
of $144 unamortized debt issue costs. The redemption of $10,000 of our
floating rate senior notes in fiscal year 2008 resulted in a loss on debt
extinguishment of approximately $633, including non-cash write-offs of
$420 of unamortized debt issue costs and issue discount costs and $213 in
cash payments primarily for call premiums. The debt refinancing during
fiscal year 2007 resulted in a loss on debt extinguishment of
approximately $6,331, including non-cash write-offs of $4,659 of
unamortized debt issue costs and issue discount costs and $1,953 in cash
payments for call premiums, partially offset by $281 of cash proceeds from
the early termination of the related interest rate swap
agreement.
|
|
(3)
|
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.
|
|
(4)
|
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 periods
presented herein have been retroactively restated to reflect the stock
split.
|
|
(5)
|
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.
|
|
(6)
|
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 this 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 measures used by our management team to make
day-to-day operating decisions;
|
|
|
•
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and therefore is a component
of the measures used by the management to facilitate internal comparisons
to competitors’ results and our industry in general;
and
|
|
|
•
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
|
|
Other
companies may define EBITDA differently and, as a result, our measure of
EBITDA may not be directly comparable to EBITDA of other companies.
Although we use EBITDA as a financial measure to assess the performance of
our business, the use of EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to operate
our business. When analyzing our performance, EBITDA should be considered
in addition to, and not as a substitute for or superior to, net income,
cash flows from operating activities or other statements of income or
statements of cash flows data prepared in accordance with
GAAP.
|
|
The following table reconciles net income to
EBITDA:
|
| Year Ended | ||||||||||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
September
29,
|
September
30,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Net
income
|
$ | 23,466 | $ | 20,449 | $ | 22,503 | $ | 17,219 | $ | 13,672 | ||||||||||
|
Depreciation
and amortization(10)
|
10,794 | 10,963 | 9,098 | 9,013 | 14,177 | |||||||||||||||
|
Interest
expense, net
|
16,979 | 19,055 | 20,939 | 23,806 | 20,310 | |||||||||||||||
|
Income
tax (benefit) expense
|
(218 | ) | 10,804 | 11,748 | 9,058 | 9,138 | ||||||||||||||
|
EBITDA
|
$ | 51,021 | $ | 61,271 | $ | 64,288 | $ | 59,096 | $ | 57,297 | ||||||||||
|
(7)
|
EBITDA
margin represents EBITDA divided by
sales.
|
|
(8)
|
Operating
income margin represents operating income divided by
sales.
|
|
(9)
|
Net
income margin represents net income divided by
sales.
|
|
(10)
|
Depreciation
and amortization excludes amortization of deferred debt issuance costs,
which are included in interest expense,
net.
|
|
(11)
|
Fiscal
years 2007 and 2006 include approximately $4,100 and $2,300, respectively,
of capital expenditures for the expansion of our building in Georgetown,
Ontario, Canada. Fiscal years 2006 and 2005 include capital expenditures
of approximately $4,700 and $13,100, respectively, resulting from the
relocation of our former San Carlos, California facility to Palo Alto,
California and Mountain View,
California.
|
|
(12)
|
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.
|
Item 7. 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 2009
comprises the 52-week period ending October 2, 2009, fiscal year 2008 comprised
the 53-week period ended October 3, 2008, and fiscal year 2007 comprised the
52-week period ended September 28, 2007. The following discussion should be read
in conjunction with 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.
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 2009 and 2008 are summarized as follows
(dollars in millions):
|
Fiscal
Year Ended
|
||||||||||||||||||||||||
|
October
2, 2009
|
October
3, 2008
|
Increase
(Decrease)
|
||||||||||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Amount
|
Orders
|
Amount
|
Orders
|
Amount
|
Percent
|
|||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 142.2 | 40 | % | $ | 141.5 | 38 | % | $ | 0.7 | - | % | ||||||||||||
|
Medical
|
66.9 | 19 | 67.7 | 18 | (0.8 | ) | (1 | ) | ||||||||||||||||
|
Communications
|
119.2 | 33 | 127.1 | 34 | (7.9 | ) | (6 | ) | ||||||||||||||||
|
Industrial
|
21.2 | 6 | 24.8 | 7 | (3.6 | ) | (15 | ) | ||||||||||||||||
|
Scientific
|
6.5 | 2 | 13.1 | 3 | (6.6 | ) | (50 | ) | ||||||||||||||||
|
Total
|
$ | 356.0 | 100 | % | $ | 374.2 | 100 | % | $ | (18.2 | ) | (5 | ) % | |||||||||||
In the
first six months of fiscal year 2009, our defense markets, which include our
radar and electronic warfare markets, were negatively impacted by delays in the
receipt of orders. These delays resulted in a near-term decrease in demand for
our products to support defense programs during that time. In the last six
months of fiscal year 2009, our defense markets stabilized.
Our
commercial markets, which include our medical, commercial communications,
industrial and scientific markets, were negatively impacted in fiscal year 2009
by the weakening of the U.S. and foreign economies. Many of the commercial
programs in which we participate depend on customers upgrading their current
equipment or expanding their infrastructures. With the softening of global
economies, many of our customers delayed, reduced or cancelled their upgrade or
expansion plans. We believe that the weak global economies resulted in a
near-term decrease in demand for our products to support commercial programs in
fiscal year 2009, but we have seen signs of improvement in our medical and
commercial communications markets in recent months.
Orders of
$356.0 million for fiscal year 2009 were $18.2 million, or 5%, lower than orders
of $374.2 million for fiscal year 2008. Explanations for the order change by
market for fiscal year 2009 compared to fiscal year 2008 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, and the timing of these orders may vary from year to year. On a
combined basis, orders for the radar and electronic warfare markets were
essentially unchanged, totaling $142.2 in fiscal year 2009 as compared to
$141.5 million in fiscal year 2008. In fiscal year 2009, increases in
orders to support various domestic and foreign electronic warfare
programs, as well as the receipt of several large development orders to
support various radar programs, were partially offset by decreases in
orders for products to support certain other radar
programs.
|
|
·
|
Medical: Orders for our
medical products consist of orders for medical imaging applications, such
as x-ray imaging, MRI and PET applications, and for radiation therapy
applications for the treatment of cancer. The approximately 1% decrease in
medical orders from fiscal year 2008 to fiscal year 2009 was due primarily
to a decrease in demand for products to support x-ray imaging applications
due to the weakness of global economies. This decrease was partially
offset by increased demand for products to support MRI
applications.
|
|
·
|
Communications: Orders
for our communications products consist of orders for commercial
communications applications and military communications applications. The
approximately 6% decrease in communications orders was primarily
attributable to decreases in orders to support commercial communications
applications, including direct-to-home broadcast, satellite news gathering
and commercial radio broadcast applications. We believe that these
decreases were largely due to the weakness of global economies. These
decreases were partially offset by an increase in orders for military
communications programs, including a $13.4 million increase in orders for
the Warfighter Information Network – Tactical (“WIN-T”) program due to
order timing for that program. Military communications is a relatively new
sector of the overall communications market for us. We expect our
participation in military communications programs to continue to
grow.
|
|
·
|
Industrial: Orders in
the industrial market are cyclical and are generally tied to the state of
the economy. The $3.6 million decrease in industrial orders was
attributable to decreases in orders for products used in a wide variety of
industrial applications.
|
|
·
|
Scientific: Orders in
the scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $6.6 million decrease in
scientific orders was primarily the result of the receipt of a multi-year
$5.6 million order in fiscal year 2008 for products to support a new
accelerator project for fusion research at an international scientific
institute. This order was not expected to, and did not, repeat in fiscal
year 2009; shipments for this order are scheduled to be completed in
fiscal year 2011.
|
Incoming
order levels can fluctuate significantly on a quarterly or annual basis, and a
particular quarter’s or year’s order rate may not be indicative of future order
levels. In addition, our sales are highly dependent upon manufacturing
scheduling and performance and, accordingly, it is not possible to accurately
predict when orders will be recognized as sales.
Backlog
As of
October 2, 2009, we had an order backlog of $225.7 million compared to an order
backlog of $201.3 million as of October 3, 2008. Because our orders for
government end-use products generally have much longer delivery terms than our
orders for commercial business (which require quicker turn-around), our backlog
is primarily composed of government orders.
Backlog
represents the cumulative balance, at a given point in time, of recorded
customer sales orders that have not yet been shipped or recognized as sales.
Backlog is increased when an order is received, and backlog is decreased when we
recognize sales. We believe that backlog and orders information is helpful to
investors because this information may be indicative of future sales results.
Although backlog consists of firm orders for which goods and services are yet to
be provided, customers can, and sometimes do, terminate or modify these orders.
However, historically the amount of modifications and terminations has not been
material compared to total contract volume.
Results
of Operations
We derive
our revenue primarily from the sale of microwave and radio frequency products,
including high-power microwave amplifiers, satellite communications amplifiers,
medical x-ray imaging subsystems and other related products. Our products
generally have selling prices ranging from $2,000 to $200,000, with certain
limited products priced up to $1,000,000.
Cost of
goods sold generally includes costs for raw materials, manufacturing costs,
including allocation of overhead and other indirect costs, charges for reserves
for excess and obsolete inventory, warranty claims and losses on fixed price
contracts. Operating expenses generally consist of research and development,
selling and marketing and general and administrative expenses.
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
| Year Ended | ||||||||||||||||||||||||
| October 2, 2009 | October 3, 2008 | September 28, 2007 | ||||||||||||||||||||||
|
%
of
|
%
of
|
%
of
|
||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||||||||
|
Sales
|
$ | 332.9 | 100.0 | % | $ | 370.0 | 100.0 | % | $ | 351.1 | 100.0 | % | ||||||||||||
|
Cost
of sales
|
239.4 | 71.9 | 261.1 | 70.6 | 237.8 | 67.7 | ||||||||||||||||||
|
Gross
profit
|
93.5 | 28.1 | 108.9 | 29.4 | 113.3 | 32.3 | ||||||||||||||||||
|
Research
and development
|
10.5 | 3.2 | 10.8 | 2.9 | 8.6 | 2.4 | ||||||||||||||||||
|
Selling
and marketing
|
19.5 | 5.9 | 21.1 | 5.7 | 19.3 | 5.5 | ||||||||||||||||||
|
General
and administrative
|
20.8 | 6.2 | 22.9 | 6.2 | 21.6 | 6.2 | ||||||||||||||||||
|
Amortization
of acquisition-related
intangibles
|
2.8 | 0.8 | 3.1 | 0.8 | 2.3 | 0.7 | ||||||||||||||||||
|
Operating
income
|
40.0 | 12.0 | 50.9 | 13.8 | 61.5 | 17.5 | ||||||||||||||||||
|
Interest
expense, net
|
17.0 | 5.1 | 19.1 | 5.2 | 20.9 | 6.0 | ||||||||||||||||||
|
(Gain)
loss on debt extinguishment
|
(0.2 | ) | (0.1 | ) | 0.6 | 0.2 | 6.3 | 1.8 | ||||||||||||||||
|
Income
before taxes
|
23.2 | 7.0 | 31.3 | 8.5 | 34.3 | 9.8 | ||||||||||||||||||
|
Income
tax (benefit) expense
|
(0.2 | ) | (0.1 | ) | 10.8 | 2.9 | 11.7 | 3.3 | ||||||||||||||||
|
Net
income
|
$ | 23.5 | 7.1 | % | $ | 20.4 | 5.5 | % | $ | 22.5 | 6.4 | % | ||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||
|
EBITDA(1)
|
$ | 51.0 | 15.3 | % | $ | 61.3 | 16.6 | % | $ | 64.3 | 18.3 | % | ||||||||||||
|
Note: Totals
may not equal the sum of the components due to independent rounding.
Percentages are calculated based on rounded dollar amounts
presented.
|
|
(1)
|
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 this
covenant;
|
|
|
•
|
EBITDA
is a component of the measures used by our management team to make
day-to-day operating decisions;
|
|
|
•
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and, therefore, is a
component of the measures used by the management to facilitate internal
comparisons to competitors’ results and our industry in general;
and
|
|
|
•
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
|
|
Other
companies may define EBITDA differently and, as a result, our measure of
EBITDA may not be directly comparable to EBITDA of other companies.
Although we use EBITDA as a financial measure to assess the performance of
our business, the use of EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to operate
our business. When analyzing our performance, EBITDA should be considered
in addition to, and not as a substitute for or superior to, net income,
cash flows from operating activities or other statements of income or
statements of cash flows data prepared in accordance with
GAAP.
|
|
|
For
a reconciliation of Net Income to EBITDA, see footnote 6 under Selected
Financial Data above.
|
Our
results for fiscal year 2009 compared to our results for fiscal year
2008
Sales: Our sales by market
for fiscal years 2009 and 2008 are summarized as follows (dollars
millions):
| Year Ended | |||||||||||||||||||||||||
| October 2, 2009 | October 3, 2008 | Decrease | |||||||||||||||||||||||
|
%
of
|
%
of
|
||||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Percent
|
||||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 135.9 | 41 | % | $ | 151.8 | 40 | % | $ | (15.9 | ) | (10 | ) % | ||||||||||||
|
Medical
|
61.2 | 18 | 65.8 | 18 | (4.6 | ) | (7 | ) | |||||||||||||||||
|
Communications
|
106.4 | 32 | 117.8 | 32 | (11.4 | ) | (10 | ) | |||||||||||||||||
|
Industrial
|
20.2 | 6 | 25.1 | 7 | (4.9 | ) | (20 | ) | |||||||||||||||||
|
Scientific
|
9.2 | 3 | 9.5 | 3 | (0.3 | ) | (3 | ) | |||||||||||||||||
| Total |
|
$ | 332.9 | 100 | % | $ | 370.0 | 100 | % | $ | (37.1 | ) | (10 | ) % | |||||||||||
In the
first six months of fiscal year 2009, product shipments in our defense markets,
which include our radar and electronic warfare markets, were delayed due to
delays in the receipt of orders, having a negative effect on our near-term
defense sales. In the last six months of fiscal year 2009, the order levels in
our defense markets stabilized, but certain defense programs have experienced
delays in orders and subsequent sales.
Our
commercial markets, which include our medical, commercial communications,
industrial and scientific markets, were negatively impacted in fiscal year 2009
by the weakening of the U.S. and foreign economies. Many of the commercial
programs in which we participate depend on customers upgrading their current
equipment or expanding their infrastructures. With the softening of global
economies, many of our customers delayed, reduced or cancelled their upgrade or
expansion plans. We believe that the weak global economies resulted in a
near-term decrease in demand for our products to support commercial programs in
fiscal year 2009, but we have seen signs of improvement in our medical and
commercial communications markets in recent months.
Sales of
$332.9 million for fiscal year 2009 were $37.1 million, or approximately 10%,
lower than sales of $370.0 million for fiscal year 2008. Explanations for the
sales decrease by market are as follows:
|
·
|
Radar and Electronic Warfare:
The majority of our sales in the radar and electronic warfare
markets are products for domestic and international defense and government
end uses. The timing of the receipt of orders and subsequent shipments in
these markets may vary from year to year. On a combined basis, sales for
these two markets decreased approximately 10% from $151.8 million in
fiscal year 2008 to $135.9 million in fiscal year 2009, primarily due to
an expected $8.7 million decrease in shipments of products to support the
Aegis weapons system and decreases in sales for several other radar and
electronic warfare programs due to the timing of order receipts for those
programs. These decreases were partially offset by the shipment of
products from development programs to support radar
applications.
|
|
|
Demand for our products to
support ships with the Aegis weapons system has two components: we support
new ship builds and we provide spare and repair products for previously
fielded ships. Over the past several years, we have seen high demand for
products to support a significant number of funded new ship builds for the
Aegis weapons program for U.S. and international military customers. We
have now completed supplying our products required to support these funded
new ship builds, and, as a result, we expect the near-term demand to be
primarily for spare and repair products and the near-term sales to be
roughly half of the approximately $20 million fiscal year 2008 sales
level. We expect demand for our products to increase again in several
years as the new ships are commissioned, deployed and added to the
installed base, after which they also will require spare and repair
products.
|
|
·
|
Medical: Sales of our
medical products consist of sales for medical imaging applications, such
as x-ray imaging, MRI and PET applications, and for radiation therapy
applications for the treatment of cancer. The 7% decrease in medical
product sales was due to decreased sales of x-ray imaging products to
international customers as a result of the weakness of global economies.
Our sales of products to support MRI and radiation therapy applications
remained stable in fiscal year
2009.
|
|
·
|
Communications: Sales of
our communications products consist of sales for commercial communications
applications and military communications applications. The 10% decrease in
sales in the communications market was primarily attributable to decreases
in sales to support certain commercial communications applications,
including satellite news gathering and direct-to-home broadcast
applications. We believe the decreases were largely due to the weakness of
global economies. These decreases were partially offset by an increase in
sales of products for military communications programs, which is a
relatively new sector of the overall communications market for us. We
expect our participation in military communications programs to continue
to grow.
|
|
·
|
Industrial: Sales in the
industrial market are cyclical and are generally tied to the state of the
economy. The $4.9 million decrease in industrial sales was attributable to
decreases in sales of products used in a wide variety of industrial
applications.
|
|
·
|
Scientific: Sales in the
scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $0.3 million decrease in
scientific sales was primarily the result of the timing of certain
scientific programs.
|
Cost-reduction Initiatives in Fiscal
Year 2009. In fiscal year 2009, we implemented a number of temporary and
permanent cost-saving measures to counter the impact of lower sales due to the
worldwide economic slowdown, including reducing its worldwide workforce by
approximately 7%, or 120 people, since the beginning of fiscal year 2009. In
addition, we implemented a salary freeze and salary reductions, temporary
shutdowns of facilities, increased employees’ mandatory time off, initiated
work-share programs and reduced its contributions to certain employee retirement
plans.
Gross Profit. Gross profit was
$93.5 million, or 28.1% of sales, for fiscal year 2009 as compared to $108.9
million, or 29.4% of sales, for fiscal year 2008. Gross profit is influenced by
numerous factors including sales volume and mix, pricing, raw material and
manufacturing costs, and warranty costs. The primary reason for the reduction in
gross profit in fiscal year 2009 as compared to fiscal year 2008 was lower sales
volume and, therefore, lower manufacturing cost absorption due to the reduction
in sales volume. This decrease was partially offset by improved gross margins at
our Malibu division and lower expenses from cost-reduction initiatives in fiscal
year 2009.
In fiscal
year 2009 gross profit as a percentage of sales increased each quarter during
the fiscal year due primarily to increases in each quarter’s sales as compared
to the immediately preceding quarter, as well as due to cost-savings measures.
Gross profit as a percentage of sales from the first quarter through the fourth
quarter of fiscal year 2009 was, respectively, 25.8%, 26.6%, 29.4% and
30.1%.
Research and Development.
Company-sponsored research and development expenses were $10.5 million, or 3.2%
of sales, for fiscal year 2009 and $10.8 million, or 2.9% of sales for fiscal
year 2008. Customer-sponsored research and development expenses were $17.5
million in fiscal year 2009, an increase of $5.5 million as compared to fiscal
year 2008, representing an increase of approximately 46%. This increase was
primarily in advanced antenna system products used for telemetry and tactical
common data link (“TCDL”) applications.
Total
spending on research and development, including customer-sponsored research and
development, was as follows (in millions):
|
Year Ended
|
||||||||
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Company
sponsored
|
$ | 10.5 | $ | 10.8 | ||||
|
Customer
sponsored, charged to cost of sales
|
17.5 | 12.0 | ||||||
| $ | 28.0 | $ | 22.8 | |||||
Selling and Marketing. Selling
and marketing expenses were $19.5 million, or 5.9% of sales, for fiscal year
2009, a $1.6 million decrease from the $21.1 million in fiscal year 2008. The
reduction in selling and marketing expenses in fiscal year 2009 as compared to
fiscal year 2008 was primarily due to lower expenses from cost-reduction
initiatives and the favorable impact from currency translation of our
foreign-based expenses in fiscal year 2009.
General and Administrative.
General and administrative expenses were $20.8 million, or 6.2% of sales, for
fiscal year 2009, a $2.1 million decrease from the $22.9 million, or 6.2% of
sales, for fiscal year 2008. The decrease in general and administrative expenses
in fiscal year 2009 as compared to fiscal year 2008 was primarily due to lower
expenses related to the implementation of cost-reduction initiatives during the
current year.
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 $2.8 million for fiscal year
2009 and $3.1 million for fiscal year 2008. The $0.3 million decrease in
amortization of acquisition-related intangibles in fiscal year 2009 was
primarily due to completed amortization of customer backlog in fiscal year 2008
for our Malibu division, which was acquired in August 2007. Amortizable
acquisition-related intangible assets are amortized over periods of up to 50
years.
Interest Expense, net (“Interest
Expense”). Interest Expense of $17.0 million for fiscal year 2009 was
$2.1 million lower than interest expense of $19.1 million for fiscal year 2008.
The reduction in interest expense in fiscal year 2009 as compared to fiscal year
2008 was primarily due to repayments of debt over the past year.
(Gain) Loss on Debt
Extinguishment. The gain on debt extinguishment of $0.2 million in fiscal
year 2009 resulted from the repurchase of $8.0 million of our 8% senior
subordinated notes at a discount of $0.4 million, partially offset by a $0.2
million non-cash write-off of deferred debt issue costs. The loss on debt
extinguishment of $0.6 million in fiscal year 2008 resulted from the early
redemption of $10.0 million of our floating rate senior notes, consisting of
$0.4 million in non-cash write-off of deferred debt issue costs and issue
discount costs and $0.2 million in cash payments for call premiums.
Income Tax (Benefit) Expense.
We recorded an income tax benefit of $0.2 million for fiscal year 2009 and an
income tax expense of $10.8 million for fiscal year 2008. Our effective tax
rates were a negative 0.9% for fiscal year 2009 and 34.6% for fiscal year
2008.
The
income tax benefit for fiscal year 2009 included several significant discrete
tax benefits: (1) $4.9 million relating to our position with regard to an
outstanding audit by the Canada Revenue Agency (“CRA”), (2) $1.7 million for the
correction of immaterial errors to tax accounts that should have been recorded
in prior year’s financial statements, (3) $0.7 million related to certain
provisions of the California Budget Act of 2008 signed on February 20, 2009,
which will allow a taxpayer to elect an alternative method to apportion taxable
income to California for tax years beginning on or after January 1, 2011, and
(4) $0.6 million for refunds claimed on prior year income tax returns based on
the results of a foreign nexus study. In fiscal year 2009, we also recorded a
$0.4 million U.S. research and development tax credit.
In
December 2008, a new tax treaty protocol between Canada and the U.S. became
effective. The new treaty requires mandatory arbitration for the resolution of
double taxation disputes not settled through the competent authority process. As
a result of this new treaty, our tax position on an outstanding audit by the CRA
became more favorable, and we reduced our tax contingency reserve in Canada by
$2.8 million, and established an income tax receivable and recognized an income
tax benefit in the U.S for $2.8 million; this tax benefit was partially offset
by a related increase in deferred tax liabilities of $0.7 million.
The $1.7
million correction to prior year’s financial statements in fiscal year 2009
comprises $0.9 million for changes in foreign income tax rates that were not
updated in a timely manner and $0.8 million recorded in the fourth quarter to
true-up the 2008 income tax provision. 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 deferred taxes for
warranty expenses in a foreign tax jurisdiction. We believe that the impact of
these corrections was not material to our consolidated financial statements in
the current year or in any of the prior year consolidated financial
statements.
Net Income. Net income was
$23.5 million, or 7.1% of sales, for fiscal year 2009 as compared to $20.4
million, or 5.5% of sales, for fiscal year 2008. The $3.1 million increase in
net income in fiscal year 2009 as compared to fiscal year 2008 was primarily due
to discrete income tax benefits, lower expenses from the implementation of
cost-reduction initiatives and lower interest expense in fiscal year 2009,
partially offset by lower gross profit from the reduction in sales volume in
fiscal year 2009.
EBITDA. EBITDA was $51.0
million, or 15.3% of sales, for fiscal year 2009 as compared to $61.3 million,
or 16.6% of sales, in fiscal year 2008. The $10.3 million decrease in EBITDA in
fiscal year 2009 as compared to fiscal year 2008 was due primarily to lower
gross profit from the reduction in sales volume, partially offset by lower
expenses from the implementation of cost-reduction initiatives in fiscal year
2009.
Calculation of Management
Bonuses. Management bonuses were $1.2 million in fiscal year 2009
compared to $1.9 million in fiscal year 2008. Management bonuses for fiscal
years 2009 and 2008 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 2009
was $53.5 million compared to $64.0 million in fiscal year 2008. The
non-recurring and non-cash charges that were excluded from EBITDA in calculating
management bonuses were (a) for fiscal year 2009, gain on debt extinguishment of
$0.2 million and stock-based compensation expense of $2.7 million, and (b) for
fiscal year 2008, loss on debt extinguishment of $0.6 million and stock-based
compensation expense of $2.1 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 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 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, which was acquired in August 2007, 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 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.
|
|
·
|
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 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 WIN-T’s predecessor
program, the now-completed Joint Network Node (“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 roducts 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.
|
|
·
|
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.
|
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 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 included a large number of new product and engineering development
programs. 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 included an approximately $0.6 million reduction to
cost of sales to capitalize inventory that had been improperly expensed in prior
periods.
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 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 $22.9 million, or 6.2% of sales, for
fiscal year 2008, a $1.3 million increase from the $21.6 million, or 6.2% 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 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 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.
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
Malibu division, the shipment of lower-margin products, incremental operating
expenses for the 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 Malibu division,
the shipment of lower margin products, incremental operating expenses for the
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 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 were (a) for fiscal year 2008, loss on debt extinguishment of $0.6
million and stock-based compensation expense of $2.1 million, and (b) for fiscal
year 2007, 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.
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
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
and cash equivalents
|
$ | 26.2 | $ | 28.7 | $ | 20.5 | ||||||
|
Working
capital
|
$ | 92.4 | $ | 88.1 | $ | 81.5 | ||||||
We invest
cash balances in excess of operating requirements in overnight U.S. Government
securities and money market accounts. In addition to the above cash and cash
equivalents, we have restricted cash of $1.6 million as of October 2, 2009,
consisting primarily of bank guarantees from customer advance payments to our
international subsidiaries. The bank guarantees become unrestricted cash when
performance under the sales contract is complete.
The
significant factors underlying the $2.5 million net decrease in cash and cash
equivalents during fiscal
year 2009 were the senior term loan repayment of $22.7 million and senior
subordinated notes repurchase of $7.6 million, net of $0.4 million discount, and
capital expenditures of $3.3 million. This decrease in cash and cash equivalents
was substantially offset by the net cash provided by our operating activities of
$30.1 million and proceeds of $1.0 million from employee stock purchases and
exercise of stock options.
We had
total principal amount of debt outstanding of $195.0 million and $225.7 million
as of October 2, 2009 and October 3, 2008, respectively. As of October 2, 2009,
we had borrowing availability of $54.5 million under the revolver under our
senior credit facilities.
As more
fully described below, our most significant debt covenant compliance requirement
is maintaining a secured leverage ratio of 3.75:1. Our current secured leverage
ratio is approximately 0.75:1. With this low secured leverage ratio, we do not
anticipate any need to restructure our debt or reenter the capital markets until
fiscal year 2011 when our Senior Credit Facilities will mature unless we
refinance our 8% senior subordinated notes due 2012 prior to July 31,
2011.
Historical
Operating, Investing and Financing Activities
In
summary, our cash flows were as follows (in millions):
|
Year
Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 30.1 | $ | 33.9 | $ | 21.7 | ||||||
|
Net
cash used in investing activities
|
(3.3 | ) | (2.8 | ) | (30.4 | ) | ||||||
|
Net
cash used in financing activities
|
(29.3 | ) | (22.9 | ) | (1.0 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
$ | (2.5 | ) | $ | 8.2 | $ | (9.7 | ) | ||||
Operating
Activities
In fiscal years 2009,
2008 and 2007, 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 $30.1 million in fiscal year 2009 was
attributable to net income of $23.5 million, depreciation, amortization and
other non-cash charges of $13.9 million, partially offset by $7.3 million net
cash used for working capital. The primary working capital uses of cash in
fiscal year 2009 were the change in income tax payable primarily attributable to
discrete tax benefits related to an outstanding audit by the Canada Revenue
Agency, a decrease in accrued expenses and an increase in inventories. The
decrease in accrued expenses related primarily to the timing of payroll and
employee vacations and to lower incentive compensation accruals. The increase in
inventories was due mainly to more work in process for fiscal year 2010 sales.
These uses of cash were slightly offset by decreases in receivables and an
increase in accounts payable. Accounts receivables decreased as a result
primarily by decreased sales. The increase in accounts payable was attributable
primarily to the timing of vendor payments.
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 returns for the prior years to reflect a change in reporting Canadian income
earned in the U.S.
Investing
Activities
Investing
activities for fiscal year 2009 consisted of $3.3 million capital
expenditures.
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 Research, Inc. (“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.
Financing
Activities
Net cash
used in financing activities for fiscal year 2009 consisted primarily of senior
term loan repayment of $22.7 million and senior subordinated notes repurchase of
$7.6 million, net of $0.4 million discount, partially offset by $1.0 million in
proceeds from employee stock purchases and stock option exercises.
Net cash
used in financing activities for fiscal year 2008 consisted primarily of $2.8
million of 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 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 $100.7
million of 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 then new term loan facility. Cash used in financing activities was
partially offset by $100.0 million of proceeds from borrowings under our 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.
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 2009,
no excess cash flow payment is expected to be made in fiscal year 2010. There
was no excess cash flow payment due for fiscal years 2008 and 2007, and,
therefore, no excess cash flow payment was made in fiscal years 2009 and
2008.
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
in the 12 months following the announcement, funded entirely from cash on hand.
The stock repurchase program has expired. Repurchases made under the program
were subject to the terms and limitations of our debt covenants, as well as
market conditions and share price, and were made at management’s discretion in
open market trades, through block trades or in privately negotiated
transactions. During fiscal year 2009, we did not repurchase any shares of
common stock under the program. 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 as of October
2, 2009 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
|
$ | 6,503 | $ | 1,848 | $ | 1,315 | $ | 738 | $ | 2,602 | ||||||||||
|
Purchase
commitments
|
32,173 | 29,572 | 2,601 | - | - | |||||||||||||||
|
Debt
obligations
|
195,000 | - | 183,000 | - | 12,000 | |||||||||||||||
|
Interest
on debt obligations
|
32,111 | 14,017 | 16,236 | 1,603 | 255 | |||||||||||||||
|
Obligations
under FASB ASC 740, "Income Taxes"
|
3,630 | 3,630 | - | - | - | |||||||||||||||
|
Total
cash obligations
|
$ | 269,417 | $ | 49,067 | $ | 203,152 | $ | 2,341 | $ | 14,857 | ||||||||||
|
Standby
letters of credit
|
$ | 5,544 | $ | 5,544 | ||||||||||||||||
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 2, 2009 remain constant for future periods, and (3) a debt level based
on mandatory repayments according to the contractual amortization
schedule.
The
expected timing of payment amounts of the obligations in the above table is
estimated based on current information; timing of payments and actual amounts
paid may be different.
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.
Assets subject to capital leases as of October 2, 2009 were not
material.
Purchase
Commitments: As of October 2, 2009,
we had known purchase commitments of $31.9 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
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Term
loan, expiring 2014
|
$ | 66,000 | $ | 88,750 | ||||
|
8%
Senior subordinated notes due 2012
|
117,000 | 125,000 | ||||||
|
Floating
rate senior notes due 2015, net of
issue discount of $78 and $90
|
11,922 | 11,910 | ||||||
| 194,922 | 225,660 | |||||||
|
Less: Current
portion
|
- | 1,000 | ||||||
|
Long-term
portion
|
$ | 194,922 | $ | 224,660 | ||||
|
Standby
letters of credit
|
$ | 5,544 | $ | 4,609 | ||||
Senior Credit
Facilities: The senior credit
facilities of Communications & Power Industries (“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, 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 8%
Senior Subordinated Notes due 2012, both the Term Loan and the Revolver will
mature on August 1, 2011.
In August
2007, 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 is
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 varies
depending on Communications & Power Industries’ leverage ratio, as defined
in the Senior Credit Facilities, and ranges 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 $22.8 million, $11.0
million and $0.2 million during fiscal years 2009, 2008 and 2007, respectively,
leaving a principal balance of $66.0 million as of October 2, 2009.
At
October 2, 2009, the amount available for borrowing under the Revolver, after
taking into account Communications & Power Industries’ outstanding letters
of credit of $5.5 million, was approximately $54.5 million.
8% Senior
Subordinated Notes due 2012 of Communications & Power
Industries: As of October 2, 2009, Communications & Power
Industries had $117.0 million in aggregate principal amount of its 8% Senior
Subordinated Notes due 2012 (the “8% Notes”) after giving effect to the
repurchase of a total of $8.0 million during fiscal year 2009. Communications
& Power Industries repurchased $3.0 million aggregate principal amount of
the 8% Notes in January 2009 at a discount of 8.5% to par value. Communications
& Power Industries paid approximately $2.9 million, including accrued
interest of $0.1 million, for the repurchase and realized a net gain of
approximately $0.2 million. Communications & Power Industries also
repurchased $5.0 million aggregate principal amount of the 8% Notes in June 2009
at a discount of 2.75% to par value. Communications & Power Industries paid
approximately $5.0 million, including accrued interest of $0.2 million, for the
repurchase and realized a net gain of approximately $0.1 million. 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 Communications & Power Industries’ 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 Communications & Power Industries, 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 Communications & Power
Industries’ senior debt.
At any
time or from time to time, Communications & Power Industries, 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
|
|||
|
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% 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
Communications & Power Industries 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
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 2, 2009, $12.0
million of aggregate principal amount remained outstanding under CPI
International’s Floating Rate Senior Notes due 2015 (the “FR Notes”) after
giving effect to the redemption of $10.0 million aggregate principal amount and
$58.0 million aggregate principal amount 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, 2010 is 6.68%
per annum. CPI International may, at its option, elect to pay interest through
the issuance of additional FR Notes for any interest payment date on or before
February 1, 2010. If CPI International elects to pay interest through the
issuance of additional FR Notes, the annual interest rate on the FR Notes will
increase by an additional 1% step-up, with the step-up increasing by an
additional 1% for each interest payment made through the issuance of additional
FR Notes (up to a maximum of 4%). The FR Notes will mature on February 1,
2015.
The FR
Notes are general unsecured obligations of CPI International. The FR Notes are
not guaranteed by any of CPI International’s subsidiaries but are structurally
subordinated to all existing and future indebtedness and other liabilities of
CPI International’s subsidiaries. The FR Notes are senior in right of payment to
CPI International’s existing and future indebtedness that is expressly
subordinated to the FR Notes.
Because
CPI International is a holding company with no operations of its own, CPI
International relies on distributions from Communications & Power Industries
to satisfy its obligations under the FR Notes. The Senior Credit Facilities and
the indenture governing the 8% 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 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 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%
Notes) does not exceed a specified amount.
At any
time or from time to time, 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
|
|||
|
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.
Interest Rate
Swaps: To hedge the interest rate exposure associated with the term loan
under our Senior Credit Facilities, in fiscal year 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 such that it is less than the balance of our Term Loan under
the Senior Credit Facilities. The notional value of the interest rate swap was
$50.0 million at October 2, 2009 and represented approximately 76% 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.
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%
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 2, 2009, the
secured leverage ratio for Communications & Power Industries was 0.75:1. 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 2009, Consolidated
Secured Indebtedness was $39.9 million and Consolidated EBITDA was $53.5
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 2009 is
as follows (in millions):
|
EBITDA(a)
|
$ | 51.0 | ||
|
Stock
compensation expense(b)
|
2.7 | |||
|
Gain
on debt extinguishment(c)
|
(0.2 | ) | ||
|
Consolidated
EBITDA
|
$ | 53.5 |
|
(a)
|
For
a reconciliation of net income to EBITDA for fiscal year 2009, see
footnote 6 in “Selected Financial
Data.”
|
|
(b)
|
Represents
a non-cash charge for stock compensation related to stock options,
restricted stock and the discount on our employee stock
purchases.
|
|
(c)
|
Represents
costs associated with our debt refinancing during fiscal year 2009, which
include purchase of our 8% Notes at a discount of $0.4 million and
non-cash write-offs of $0.2 million of unamortized debt issue
costs.
|
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 2, 2009, we are in compliance with the covenants under the indentures
governing our FR Notes, 8% Notes and the agreements governing our Senior Credit
Facilities, and we expect to remain in compliance with those covenants
throughout fiscal year 2010.
Contingent
Income Tax Obligations
Our total
unrecognized tax benefit, excluding any related interest accrual, was $3.6
million as of October 2, 2009 and is reported as a current liability (income
taxes payable) in our consolidated balance sheet because it is expected to be
settled within the next 12 months. See Note 11 to the accompanying
consolidated financial statements for more information.
Contingent
Earnout Consideration
Under the
terms of the purchase agreement for our acquisition of Malibu in August 2007, in
addition to the $20.7 million of cash consideration paid for the acquisition, we
could 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”). In addition, a discretionary earnout of up to
$1.0 million contingent upon achievement of certain succession planning goals by
June 30, 2010 may apply. As of October 2, 2009, we have not accrued any of these
contingent earnout amounts as achievement of the objectives and goals has not
occurred. Any earnout consideration paid based on financial performance will be
recorded as additional goodwill. Any discretionary succession earnout
consideration paid will be recorded as general and administrative expense. No
earnout was earned for the first and second earnout periods; therefore, the
maximum potential Financial Earnout that could be earned over the three years
following the acquisition has been reduced from $14.0 million to $7.7 million
based on the performance in the first and second earnout periods. Based on our
current financial forecasts for Malibu, we expect that no earnout will
ultimately be payable for the third earnout period.
Dividends
from Communications & Power Industries to CPI International
For fiscal years 2009,
2008 and 2007, respectively, Communications & Power Industries paid $0.8
million, $13.6 million and $66.3 million of cash dividends to CPI International.
In fiscal year 2009, CPI International used $0.8 million of the cash dividends
to make cash interest payments on the FR Notes. In fiscal year 2008, CPI
International used $10.0 million of the cash dividends to repurchase and redeem
FR Notes, $2.8 million to repurchase approximately 206,000 shares of our stock,
$0.5 million to make cash interest payments on the FR Notes and $0.2 million for
redemption premiums and other fees and expenses related to the repurchase and
redemption of the FR Notes. In fiscal year 2007, CPI International used $6.3
million of the cash dividends to make cash interest payments on the FR Notes,
$58.0 million to repurchase and redeem FR Notes and $2.0 million for redemption
premiums and other fees and expenses related to the repurchase and redemption of
the FR Notes. Our future ability to make semi-annual cash interest payments on
our FR 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% 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 2, 2009, the ratio of Communications & Power Industries’
Consolidated Cash Flow for the most recent four quarters to Communications
& Power Industries’ Consolidated Interest Expense was
3.61:1.
|
|
·
|
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% 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.
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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 2009 were $3.4 million. In fiscal year 2010, ongoing capital
expenditures are expected to be approximately $4.0 to $5.0 million and to be
funded by cash flows from operating activities.
Recent
Accounting Pronouncements
See Note
2 to the accompanying audited consolidated financial statements for information
regarding the effect of new accounting pronouncements on our 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 that 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 collectability 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
valuation
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 amounts 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 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 periods of varying lengths, 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 audited consolidated 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 the expected costs to repair or replace the products under warranty.
If actual repair and replacement costs differ significantly from our estimates,
then adjustments to recognize additional cost of sales may be
required.
Recoverability
of long-lived assets
We
account for goodwill and other intangible assets in accordance with the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 350, “Intangibles-Goodwill and Other.” ASC 350 requires that
goodwill and identifiable intangible assets with indefinite useful lives be
tested for impairment at least annually. ASC 350 and ASC 360, “Property, Plant
and Equipment,” also require that intangible assets subject to amortization be
amortized over their respective estimated useful lives and reviewed for
impairment. 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 any of these assets 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 2, 2009 and October 3, 2008, the carrying amount of goodwill and other
intangible assets with indefinite useful lives was $165.5 million and $165.8
million, respectively. Based on our test for impairment performed in the fourth
quarter of fiscal year 2009, goodwill and other intangible assets with
indefinite useful lives were determined not to be impaired. We will continue to
evaluate the need for impairment at least annually in the fourth quarter if
changes in circumstances or available information indicate that impairment may
have occurred.
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 fiscal year 2009, largely,
we believe, as a result of the recent global economic downturn and volatility in
the financial markets. If our stock price would again fall below our net asset
value per share, the decline in our market capitalization could trigger the
requirement of performing the impairment test on goodwill, which could result in
an impairment of our goodwill.
At
October 2, 2009 and October 3, 2008, the carrying amount of property, plant and
equipment and finite-lived intangible assets was $130.1 million and $137.8
million, respectively. In accordance with ASC 360 and ASC 350, we review the carrying values of
long-lived assets and finite-lived intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of any of
these assets may not be recoverable. We
assess the recoverability of property, plant and equipment to be held and used
and finite-lived intangible assets 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.
Malibu’s Goodwill Impairment
Analysis. As mentioned above, the impairment analysis performed in the
fourth quarter of fiscal year 2009 indicated no impairment existed as of July 3,
2009. The Malibu division (“Malibu”), one of our reporting units, passed the
goodwill impairment test with a fair value that exceeded its carrying value by
approximately 3%. Goodwill allocated to Malibu as of July 3, 2009 was $15.9
million. We utilize a discounted cash flow approach in estimating the fair value
of Malibu, where the discount reflects a weighted average cost of capital rate.
The key assumptions driving the fair value of Malibu are principally future
sales growth and the discount rate. Malibu’s future sales growth assumptions
were based on current product performance, customer input and long-term industry
expectations. However, actual performance in the near and longer-term could be
materially different from these expectations. This could be caused by events
such as strategic decisions made in response to economic and competitive
conditions, the impact of the economic environment on Malibu’s customer base, or
a material negative change in Malibu’s relationships with its significant
customers. If Malibu does not meet its projected sales growth, or its sales
growth expectations are reduced in the future, then Malibu’s goodwill could
become impaired and a non-cash impairment charge to earnings would be
recorded.
Accounting
for stock-based compensation
We
account for stock-based compensation in accordance with FASB ASC 718,
“Compensation-Stock Compensation.” Under the fair value recognition provisions
of this accounting standard, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense
over the requisite service period, which is generally the vesting
period.
The fair
value of each time-based option award is estimated on the date of grant using
the Black-Scholes model. The fair value of each market performance-based (or
combination of market performance- and time-based) option, restricted stock and
restricted stock unit award is estimated on the date of grant using the Monte
Carlo simulation technique in a risk-neutral framework. The Black-Scholes and
the Monte Carlo simulation valuation models were developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable and require the input of subjective assumptions, including the
expected stock price volatility and estimated option life. For purposes of these
valuation models, no dividends have been assumed.
In
accordance with ASC 718, 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 ASC 718. Since our common stock has not been
publicly traded for a sufficient time period, the expected volatility is based
on expected volatilities of similar companies that have a longer history of
being publicly traded or a blend of our expected volatility based on available
historical data and those of similar companies. The risk-free rates are based on
the U.S. Treasury yield in effect at the time of the grant. Since our historical
data is limited, the expected life of options granted is based on the simplified
method for plain vanilla options in accordance with ASC 718. 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 2009, 2008 and 2007, we
recognized $2.7 million, $2.1 million and $1.2 million, respectively, in
stock-based compensation expense.
Income
taxes
We must
make certain estimates and judgments in determining income tax expense for
financial statement purposes. These estimates and judgments occur in the
calculation of tax credits, tax benefits and deductions and in the calculation
of certain tax assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and financial statement
purposes. Significant changes to these estimates may result in an increase or
decrease to our tax provision in a subsequent period.
We must
assess the likelihood that we will be able to recover our deferred tax assets.
If recovery is not more likely than not, we must increase our provision for
taxes by recording a valuation allowance against the deferred tax assets that we
estimate will not ultimately be recoverable. We believe that all of the deferred
tax assets recorded on our consolidated balance sheets will ultimately be
recovered. However, should there be a change in our ability to recover our
deferred tax assets, our tax provision would increase in the period in which we
determined that the recovery was not more likely than not.
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. In accordance with
FASB ASC 740, “Income Taxes,” we recognize liabilities for uncertain tax
positions based on the two-step process. 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.
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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 2, 2009, we had fixed rate senior subordinated
notes of $117.0 million due in 2012, bearing interest at 8% per year, variable
rate debt consisting of $12.0 million floating rate senior notes due in 2015,
and a $66.0 million term loan under our 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. In September 2007, we entered into an
interest rate swap contract to receive three-month USD-LIBOR-BBA (British
Bankers’ Association)
interest and pay 4.77% fixed rate interest. Net interest positions are
settled quarterly. We have structured the swap with decreasing notional amounts
such that it is less than the balance of the term loan. The notional value of
the swap was $50.0 million at October 2, 2009 and represented approximately 76%
of the aggregate term loan balance. The swap agreement is effective through June
30, 2011. Under the provisions of FASB ASC 815, “Derivatives and Hedging,” this
arrangement was initially designated and qualified as an effective cash flow
hedge of interest rate risk related to the term loan under our senior credit
facilities which permitted recording the fair value of the swap and
corresponding unrealized gain or loss to accumulated other comprehensive income
in the consolidated balance sheets. The interest rate swap gain or loss is
included in the assessment of hedge effectiveness. At October 2, 2009, the fair
value of the short-term and long-term portions of the swap was a liability of
$1.8 million (accrued expenses) and $0.6 million (other long-term liabilities),
respectively.
We
performed a sensitivity analysis to assess the potential loss in future earnings
that a 10% increase in the variable portion of interest rates over a one-year
period would have on our floating rate senior notes and term loan under our
senior credit facilities. The impact was determined based on the hypothetical
change from the end of period market rates over a period of one year and would
result in an immaterial increase in future interest expense.
Foreign
currency exchange risk
Although
the majority of our revenue and expense activities are transacted in U.S.
dollars, we do transact business in foreign countries. Our primary foreign
currency cash flows are in Canada and several European countries. In an effort
to reduce our foreign currency exposure to Canadian dollar denominated expenses,
we enter into Canadian dollar forward contracts to hedge the Canadian dollar
denominated costs for our manufacturing operation in Canada. Our Canadian dollar
forward contracts are designated as a cash flow hedge and are considered highly
effective, as defined by FASB ASC 815. The unrealized gains and losses from
foreign exchange forward contracts are included in accumulated other
comprehensive income in the consolidated balance sheets. If the transaction
being hedged fails to occur, or if a portion of any derivative is ineffective,
then we promptly recognize the gain or loss on the associated financial
instrument in the consolidated statements of income. No ineffective amounts were
recognized due to anticipated transactions failing to occur in fiscal years
2009, 2008 and 2007.
As of
October 30, 2009, we had entered into Canadian dollar forward contracts for
approximately $39.4 million (Canadian dollars), or approximately 75% of our
estimated Canadian dollar denominated expenses for October 2009 through
September 2010, at an average rate of approximately $0.84 U.S. dollar to
Canadian dollar. We estimate the impact of a 1 cent change in the U.S. dollar to
Canadian dollar exchange rate (without giving effect to our Canadian dollar
forward contracts) to be approximately $0.3 million annually to our net income
or approximately 2 cents annually to basic and diluted earnings per
share.
At
October 2, 2009, the fair value of foreign currency forward contracts was a
short-term asset of $3.5 million (prepaid and other current
assets).
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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 13 to the
consolidated financial statements.
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Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
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 2, 2009.
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 2,
2009.
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 2009 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting as of October 2, 2009.
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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 2010 proxy
statement anticipated to be filed with the SEC within 120 days after October 2,
2009.
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Item 11. Executive
Compensation
The information required under this item is
incorporated by reference herein to our definitive 2010 proxy statement
anticipated to be filed with the SEC within 120 days after October 2,
2009.
Item 12. 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 2010 proxy
statement anticipated to be filed with the SEC within 120 days after October 2,
2009.
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Item 13. Certain Relationships and
Related Transactions, and Director Independence
The information required
under this item is incorporated by reference herein to our definitive 2010 proxy
statement anticipated to be filed with the SEC within 120 days after October 2,
2009.
Item 14. Principal Accounting Fees and
Services
The information
required under this item is incorporated by reference herein to our definitive
2010 proxy statement anticipated to be filed with the SEC within 120 days after
October 2, 2009.
Notwithstanding the foregoing,
information appearing in the sections of our 2010 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.
Item 15. Exhibits, Financial Statement
Schedules
(a)
(1) Financial Statements:
The following consolidated financial
statements and schedules are filed as a part of this report:
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Reports
of Independent Registered Public Accounting
Firm
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·
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Consolidated
Balance Sheets
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·
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Consolidated
Statements of Income
|
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·
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Consolidated
Statements of Stockholders’ Equity and Comprehensive
Income
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·
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Consolidated
Statements of Cash Flows
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·
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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 consolidated financial statements or notes
thereto.
(3) The Exhibit Index beginning on
page 127 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 2, 2009 and October 3, 2008, and
the related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended October 2, 2009. 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 2, 2009 and October 3, 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 2, 2009, 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 2, 2009, 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 10, 2009
expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Mountain
View, California
December
10, 2009
/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 2, 2009, 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 2, 2009, 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 2, 2009 and October 3, 2008,
and the related consolidated statements of income, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended October 2, 2009, and our report dated December 10, 2009 expressed
an unqualified opinion on those consolidated financial statements.
Mountain
View, California
December
10, 2009
/s/ KPMG
LLP
(in
thousands, except per share data)
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 26,152 | $ | 28,670 | ||||
|
Restricted
cash
|
1,561 | 776 | ||||||
|
Accounts
receivable, net
|
45,145 | 47,348 | ||||||
|
Inventories
|
66,996 | 65,488 | ||||||
|
Deferred
tax assets
|
8,652 | 11,411 | ||||||
|
Prepaid
and other current assets
|
6,700 | 3,823 | ||||||
|
Total
current assets
|
155,206 | 157,516 | ||||||
|
Property,
plant, and equipment, net
|
57,912 | 62,487 | ||||||
|
Deferred
debt issue costs, net
|
3,609 | 4,994 | ||||||
|
Intangible
assets, net
|
75,430 | 78,534 | ||||||
|
Goodwill
|
162,225 | 162,611 | ||||||
|
Other
long-term assets
|
3,872 | 806 | ||||||
|
Total
assets
|
$ | 458,254 | $ | 466,948 | ||||
|
Liabilities
and stockholders’ equity
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Current
portion of long-term debt
|
$ | - | $ | 1,000 | ||||
|
Accounts
payable
|
22,665 | 21,109 | ||||||
|
Accrued
expenses
|
19,015 | 23,044 | ||||||
|
Product
warranty
|
3,845 | 4,159 | ||||||
|
Income
taxes payable
|
4,305 | 7,766 | ||||||
|
Advance
payments from customers
|
12,996 | 12,335 | ||||||
|
Total
current liabilities
|
62,826 | 69,413 | ||||||
|
Deferred
income taxes
|
24,726 | 27,321 | ||||||
|
Long-term
debt, less current portion
|
194,922 | 224,660 | ||||||
|
Other
long-term liabilities
|
2,227 | 1,689 | ||||||
|
Total
liabilities
|
284,701 | 323,083 | ||||||
|
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;
16,807 and 16,538 shares issued; 16,601
and 16,332 shares outstanding)
|
168 | 165 | ||||||
|
Additional
paid-in capital
|
75,630 | 71,818 | ||||||
|
Accumulated
other comprehensive income (loss)
|
598 | (1,809 | ) | |||||
|
Retained
earnings
|
99,957 | 76,491 | ||||||
|
Treasury
stock, at cost (206 shares)
|
(2,800 | ) | (2,800 | ) | ||||
|
Total
stockholders’ equity
|
173,553 | 143,865 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 458,254 | $ | 466,948 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF
INCOME
(in
thousands, except per share data)
|
Year Ended
|
|||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
|||||||||||
|
2009
|
2008
|
2007
|
|||||||||||
|
Sales
|
$ | 332,876 | $ | 370,014 | $ | 351,090 | |||||||
|
Cost
of sales
|
239,385 | 261,086 | 237,789 | ||||||||||
|
Gross
profit
|
93,491 | 108,928 | 113,301 | ||||||||||
|
Operating
costs and expenses:
|
|||||||||||||
|
Research and
development
|
10,520 | 10,789 | 8,558 | ||||||||||
|
Selling and
marketing
|
19,466 | 21,144 | 19,258 | ||||||||||
|
General and
administrative
|
20,757 | 22,951 | 21,648 | ||||||||||
|
Amortization of
acquisition-related intangible
assets
|
2,769 | 3,103 | 2,316 | ||||||||||
|
Total
operating costs and expenses
|
53,512 | 57,987 | 51,780 | ||||||||||
|
Operating
income
|
39,979 | 50,941 | 61,521 | ||||||||||
|
Interest
expense, net
|
16,979 | 19,055 | 20,939 | ||||||||||
|
(Gain)
loss on debt extinguishment
|
(248 | ) | 633 | 6,331 | |||||||||
|
Income
before taxes
|
23,248 | 31,253 | 34,251 | ||||||||||
|
Income
tax (benefit) expense
|
(218 | ) | 10,804 | 11,748 | |||||||||
|
Net
income
|
$ | 23,466 | $ | 20,449 | $ | 22,503 | |||||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$ | 1.44 | $ | 1.25 | $ | 1.39 | |||||||
|
Diluted
|
$ | 1.34 | $ | 1.16 | $ | 1.27 | |||||||
|
Shares
used to calculate earnings per share:
|
|||||||||||||
|
Basic
|
16,343 | 16,356 | 16,242 | ||||||||||
|
Diluted
|
17,478 | 17,697 | 17,721 | ||||||||||
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 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 expense
of $233
|
- | - | - | 431 | - | - | - | 431 | |||||||||||||||||
|
Total
comprehensive income
|
22,934 | ||||||||||||||||||||||||
|
Adoption
of SFAS No. 158, net of tax benefit of $106
|
- | - | - | (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 benefit
of $1,652
|
- | - | - | (2,697 | ) | - | - | - | (2 ,697 | ) | |||||||||||||||
|
Unrealized
actuarial loss and prior service credit for
pension liability,
|
|||||||||||||||||||||||||
|
net
of tax benefit of $30
|
- | - | - | (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 | ||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 23,466 | - | - | 23,466 | |||||||||||||||||
|
Unrealized
gain on cash flow hedges, net of tax expense
of $1,471
|
- | - | - | 2,415 | - | - | - | 2,415 | |||||||||||||||||
|
Unrealized
actuarial loss and prior service credit for pension
liability,
|
|||||||||||||||||||||||||
|
net
of tax expense of $52
|
- | - | - | (8 | ) | - | - | - | (8 | ) | |||||||||||||||
|
Total
comprehensive income
|
25,873 | ||||||||||||||||||||||||
|
Stock-based
compensation cost
|
- | - | 2,729 | - | - | - | - | 2,729 | |||||||||||||||||
|
Exercise
of stock options
|
57 | 1 | 83 | - | - | - | - | 84 | |||||||||||||||||
|
Tax
benefit related to stock option exercises
|
- | - | 48 | - | - | - | - | 48 | |||||||||||||||||
|
Issuance
of common stock under employee
stock purchase plan
|
111 | 1 | 952 | - | - | - | - | 953 | |||||||||||||||||
|
Issuance
of restricted stock awards
|
106 | 1 | - | - | - | - | 1 | ||||||||||||||||||
|
Forfeiture
of restricted stock awards
|
(5 | ) | - | - | - | - | - | - | - | ||||||||||||||||
|
Balances,
October 2, 2009
|
16,807 | $ | 168 | $ | 75,630 | $ | 598 | $ | 99,957 | (206 | ) | $ | (2,800 | ) | $ | 173,553 | |||||||||
The accompanying notes are an integral
part of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
income
|
$ | 23,466 | $ | 20,449 | $ | 22,503 | ||||||
|
Adjustments
to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Depreciation
|
7,773 | 7,607 | 6,562 | |||||||||
|
Amortization of
intangibles
|
3,021 | 3,356 | 2,536 | |||||||||
|
Write-off of patent application
fees
|
83 | - | - | |||||||||
|
Amortization of deferred debt issue
costs
|
1,241 | 1,197 | 1,401 | |||||||||
|
Amortization of discount on
floating rate senior notes
|
12 | 15 | 49 | |||||||||
|
Non-cash loss on debt
extinguishment
|
144 | 420 | 4,659 | |||||||||
|
Discount on repayment of
debt
|
(392 | ) | - | - | ||||||||
|
Non-cash defined benefit pension
expense
|
39 | 55 | - | |||||||||
|
Stock-based compensation
expense
|
2,679 | 2,135 | 1,239 | |||||||||
|
Allowance for doubtful
accounts
|
6 | - | (329 | ) | ||||||||
|
Deferred income
taxes
|
(1,000 | ) | (1,360 | ) | (561 | ) | ||||||
|
Net
loss on the disposition of assets
|
130 | 205 | 129 | |||||||||
|
Tax
benefit from stock option exercises
|
212 | 50 | 1,281 | |||||||||
|
Excess
tax benefit on stock option exercises
|
(54 | ) | (18 | ) | (781 | ) | ||||||
|
Changes
in operating assets and liabilities, net
of acquired assets and assumed liabilities:
|
||||||||||||
|
Restricted cash
|
(785 | ) | 1,479 | (509 | ) | |||||||
|
Accounts receivable
|
2,197 | 5,241 | (7,388 | ) | ||||||||
|
Inventories
|
(1,495 | ) | 1,986 | (8,473 | ) | |||||||
|
Prepaid
and other current assets
|
841 | (470 | ) | (811 | ) | |||||||
|
Other
long-term assets
|
(3,167 | ) | (208 | ) | 476 | |||||||
|
Accounts payable
|
1,556 | (685 | ) | (215 | ) | |||||||
|
Accrued
expenses
|
(4,107 | ) | (4,953 | ) | (320 | ) | ||||||
|
Product
warranty
|
(314 | ) | (1,419 | ) | (653 | ) | ||||||
|
Income
taxes payable
|
(3,461 | ) | (779 | ) | (2,262 | ) | ||||||
|
Advance
payments from customers
|
661 | 203 | 2,202 | |||||||||
|
Other
long-term liabilities
|
828 | (625 | ) | 924 | ||||||||
|
Net
cash provided by operating activities
|
30,114 | 33,881 | 21,659 | |||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Capital
expenditures
|
(3,365 | ) | (4,262 | ) | (8,169 | ) | ||||||
|
Acquisitions, net of cash
acquired
|
- | 1,615 | (22,174 | ) | ||||||||
|
Payment
of patent application fees
|
- | (147 | ) | - | ||||||||
|
Net
cash used in investing activities
|
(3,365 | ) | (2,794 | ) | (30,343 | ) | ||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Proceeds from issuance of
debt
|
- | - | 100,000 | |||||||||
|
Proceeds from stock purchase plan
and exercises of stock options
|
1,037 | 891 | 1,436 | |||||||||
|
Repayments of debt
|
(30,358 | ) | (21,000 | ) | (100,750 | ) | ||||||
|
Debt
issuance costs
|
- | - | (2,462 | ) | ||||||||
|
Purchase of treasury
stock
|
- | (2,800 | ) | - | ||||||||
|
Excess
tax benefit on stock option exercises
|
54 | 18 | 781 | |||||||||
|
Net
cash used in financing activities
|
(29,267 | ) | (22,891 | ) | (995 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,518 | ) | 8,196 | (9,679 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
28,670 | 20,474 | 30,153 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 26,152 | $ | 28,670 | $ | 20,474 | ||||||
|
Supplemental
cash flow disclosures
|
||||||||||||
|
Cash
paid for interest
|
$ | 16,081 | $ | 18,720 | $ | 22,255 | ||||||
|
Cash
paid for income taxes, net of refunds
|
$ | 6,539 | $ | 13,099 | $ | 13,631 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
- 74
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular 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 2009 comprises the 52-week period ending
October 2, 2009, fiscal year 2008 comprised the 53-week period ended October 3,
2008, and fiscal year 2007 comprised the 52-week period ended September 28,
2007. 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
income, 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 income.
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 revenue recognition; inventory valuation; product warranty; 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 the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” Subtopic 35,
“Construction-Type and Production-Type Contracts.” These contracts have
represented not more than 4% of the Company’s sales during fiscal years 2009,
2008 and 2007, 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.
Cash and Cash
Equivalents: The Company considers all highly liquid
short-term investments with original maturities of three months or less, readily
convertible to known amounts of cash to be cash equivalents.
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.
- 76
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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 25, 20 and 12
years, respectively. Machinery and equipment are depreciated generally over 7 to
12 years. Office furniture and equipment are depreciated generally over 5 to 10
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 in which intangible assets
acquired are recognized and reported apart from goodwill.
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
FASB ASC 350, “Intangibles-Goodwill and Other.” ASC 350 requires that goodwill
and identifiable intangible assets with indefinite useful lives be tested for
impairment at least annually. ASC 350 also requires that intangible assets
subject to amortization be amortized over their respective estimated useful
lives and reviewed for impairment. 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 2009, 2008 and 2007.
Long-Lived
Assets: The Company accounts for long-lived assets
in accordance with FASB ASC 360, “Property, Plant and Equipment,” and ASC 350,
which requires that long-lived and finite-lived 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 2009, 2008 and
2007.
- 77
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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 four years, eight years and ten years, respectively. As a
result of the Company’s debt repurchase, prepayment or refinancing transactions
as discussed in Note 6, $0.2 million, $0.3 million and $4.2 million of
unamortized deferred debt issue costs were written off and charged to (gain)
loss on debt extinguishment in the consolidated statement of income for fiscal
years 2009, 2008 and 2007, respectively. As of October 2, 2009 and October 3,
2008, gross deferred debt issue costs were $7.9 million and $8.3 million, and
accumulated amortization was $4.3 million and $3.3 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 FASB ASC 815, “Derivatives
and Hedging.” In accordance with this standard, 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 income 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
applications, 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.
- 78
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
CPI
Sponsored
|
$ | 10,520 | $ | 10,789 | $ | 8,558 | ||||||
|
Customer
Sponsored
|
17,526 | 12,028 | 7,738 | |||||||||
| $ | 28,046 | $ | 22,817 | $ | 16,296 | |||||||
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 guidance issued by FASB and now codified as ASC 718,
“Compensation-Stock Compensation” for its existing stock option plans using 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 ASC 718. Previously, the Company applied the
intrinsic-value method of accounting, under which compensation expense was
recorded only if the market price of the stock exceeded the stock option
exercise price at the measurement date. The Company has continued to account for
stock option awards outstanding at September 30, 2005 using the intrinsic-value
method of measuring equity share options. See Note 10 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 11 for further discussion on
income taxes.
Comprehensive
Income: The Company has adopted the accounting
treatment prescribed by FASB ASC 220, “Comprehensive Income.” 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 difference
between net income and comprehensive income for the Company arises primarily
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.
- 79
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The
following table is a reconciliation of the shares used to calculate basic and
diluted earnings per share (in thousands):
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Weighted
average shares outstanding - Basic
|
16,343 | 16,356 | 16,242 | |||||||||
|
Effect
of dilutive stock options and
|
||||||||||||
|
nonvested restricted stock shares
and units
|
1,135 | 1,341 | 1,479 | |||||||||
|
Weighted
average shares outstanding - Diluted
|
17,478 | 17,697 | 17,721 | |||||||||
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
958,000 shares, 781,000 shares and 484,000 shares for fiscal years 2009,
2008 and 2007, respectively.
Subsequent
Events: The Company performs an evaluation of
events that occur after a balance sheet date, but before financial statements
are issued or available to be issued, for potential recognition or disclosure of
such events in its financial statements. The Company evaluated all events or
transactions that occurred from October 3, 2009 through December 10, 2009, the
date the Company issued these financial statements. During this period, the
Company did not have any material recognizable or non-recognizable subsequent
events.
2. Recently Issued
Accounting Standards
In
September 2006, the FASB issued guidance now codified as ASC 820, “Fair Value
Measurements and Disclosures,” 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). The guidance was effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. In
February 2008, the FASB released additional guidance under ASC 820, which
provides for exclusion of ASC 840, “Leases,” that address leasing transactions
and also delayed application of certain guidance related to non-financial assets
and non-financial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually), until fiscal years beginning after November 15, 2008, and interim
periods within those years. Effective October 4, 2008, the Company adopted
provisions of ASC 820 for financial assets and liabilities recognized at fair
value on a recurring basis. The adoption of ASC 820 did not have a significant
impact on the Company’s consolidated financial statements, and the resulting
fair values calculated under ASC 820 after adoption were not significantly
different than the fair values that would have been calculated under previous
guidance. See Note 4 for further details on the Company’s fair value
measurements.
- 80
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
In
February 2007, the FASB issued guidance now codified as ASC 825, “Financial
Instruments.” ASC 825 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 ASC 825 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. ASC 825 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
ASC 825 was effective for fiscal years beginning after November 15, 2007. The
Company adopted ASC 825 effective October 4, 2008. The Company currently does
not have any instruments for which it has elected the fair value option under
ASC 825. Therefore, the adoption of ASC 825 has not impacted the Company’s
consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued guidance now codified under ASC 805, “Business
Combinations.” ASC 805 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. ASC 805 is effective for fiscal years
beginning after December 15, 2008. The Company will be required to adopt ASC 805
in its fiscal year 2010 commencing October 3, 2009.
In March
2008, the FASB issued additional guidance under ASC 815, “Derivatives and
Hedging,” which 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 ASC 815 and its related interpretations; and (3) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. This guidance was effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with earlier application encouraged. The Company adopted this
guidance in the second quarter of fiscal year 2009. Since this guidance under
ASC 815 only required additional disclosure, the adoption did not have an impact
on the Company’s consolidated financial position, results of operations or cash
flows. See Note 8 for further details on the Company’s derivative instruments
and hedging activities.
In
October 2008, the FASB issued guidance now codified under ASC 715,
“Compensation—Retirement Benefits,” which requires that an employer disclose the
following information about the fair value of plan assets: (1) the level within
the fair value hierarchy in which fair value measurements of plan assets fall;
(2) information about the inputs and valuation techniques used to measure the
fair value of plan assets; and (3) a reconciliation of beginning and ending
balances for fair value measurements of plan assets using significant
unobservable inputs. This guidance is effective for fiscal years ending after
December 15, 2009, with early application permitted. The Company will be
required to adopt this new guidance in its fiscal year 2010 commencing October
3, 2009. At initial adoption, application of this guidance would not be required
for earlier periods that are presented for comparative purposes. The Company is
currently evaluating the potential impact of adopting this new guidance in ASC
715 on the disclosures in its consolidated financial statements.
- 81
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
In April
2009, the FASB released an amendment to guidance now codified under ASC 805,
“Business Combinations,” which requires an acquirer to recognize at fair value,
at the acquisition date, an asset acquired or a liability assumed that arises
from a contingency if the acquisition date fair value of that asset or liability
can be determined during the measurement period. If the acquisition date fair
value cannot be determined during the measurement period, an asset or liability
shall be recognized at the acquisition date if (1) information available before
the end of the measurement period indicates that it is probable that an asset
existed or that a liability had been incurred at the acquisition date, and (2)
the amount of the asset or liability can be reasonably estimated. This amendment
to ASC 805 is effective for contingent assets and contingent liabilities
acquired in business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company will apply the amended provisions of ASC 805 if
and when a future acquisition occurs.
In April
2009, the FASB issued additional guidance under ASC 820, which relates to
evaluating certain factors that are indicative of a significant decrease in the
volume and level of activity for an asset or liability when compared to normal
market activity. Additionally, this guidance clarifies the circumstances to
consider when evaluating whether a transaction is not orderly, in which quoted
prices may not be determinative of fair value. This guidance is applied
prospectively to all fair value measurements where appropriate and was effective
for interim and annual periods ending after June 15, 2009. The Company adopted
the provisions of this guidance under ASC 820 effective April 4, 2009. The
adoption did not have an impact on the Company’s results of operations and
financial position.
In April
2009, the FASB issued guidance for fair value disclosures in accordance with ASC
825, “Financial Instruments.” This guidance requires disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This guidance was effective
for interim reporting periods ending after June 15, 2009. Accordingly, the
Company adopted these new provisions of ASC 825 in the third quarter of fiscal
year 2009. Since this guidance only requires additional disclosures, the
adoption did not have an impact on the Company’s consolidated financial
position, results of operations or cash flows. See Note 4.
In May
2009, the FASB issued guidance now codified as ASC 855, “Subsequent Events,”
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. In particular, this guidance sets forth:
(1) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; (2) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements; and (3) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. ASC 855 was effective for interim or
annual financial periods ending after June 15, 2009. The Company adopted the
provisions of ASC 855 in the third quarter of fiscal year 2009. Since this
guidance only requires additional disclosures, the adoption did not have an
impact on the Company’s consolidated financial position, results of operations
or cash flows. See Note 1 under the caption “Subsequent Events.”
- 82
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
In June
2009, the FASB issued guidance related to accounting for transfers of financial
assets. This guidance was issued to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. This guidance is effective for the first annual reporting
period that begins after November 15, 2009. The application of this guidance
will only apply and be effective should the Company transfer financial assets
after October 2, 2010. The adoption of this guidance is not expected to have a
material effect on the Company’s results of operations, financial position or
cash flows.
In June
2009, the FASB issued guidance now codified as ASC 105, “Generally Accepted
Accounting Principles,” which establishes only two levels of U.S. generally
accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The
FASB Accounting Standards Codification (the “Codification”) will become the
source of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the Securities and Exchange Commission (“SEC”), which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the Codification will become
nonauthoritative. This standard is effective for financial statements for
interim or annual reporting periods ending after September 15, 2009. The Company
began to use the new guidelines and numbering system prescribed by the
Codification when referring to GAAP in the fourth quarter of fiscal year 2009.
As the Codification was not intended to change or alter existing GAAP, it did
not have any impact on the Company’s results of operations, financial position
or cash flows.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, an update to
ASC 820. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of liabilities. Among other
provisions, this update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using one or more of the
valuation techniques described in ASU 2009-05. ASU 2009-05 is effective for the
first interim or annual reporting period beginning after its issuance. The
Company will adopt ASU 2009-05 in the first quarter of fiscal year 2010. The
Company does not expect the adoption of ASU 2009-05 will have a material effect
on its financial statements.
In
October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605):
Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging
Issues Task Force.” This update provides application guidance on whether
multiple deliverables exist, how the deliverables should be separated and how
the consideration should be allocated to one or more units of accounting. This
update establishes a selling price hierarchy for determining the selling price
of a deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence, if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor-specific or third-party evidence is available. ASU 2009-13
will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and
early adoption will be permitted. The Company will early adopt ASU 2009-13
effective October 3, 2009. The Company is currently evaluating the potential
impact that this update may have on its financial statements but does not expect
it to have a material effect.
- 83
-
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
In
September 2009, the FASB issued ASU 2009-14, “Certain Revenue Arrangements
That Include Software Elements,” which is included in the ASC 985, “Software.”
ASU 2009-14 amends previous software revenue recognition to exclude
(a) non-software components of tangible products and (b) software
components of tangible products that are sold, licensed, or leased with tangible
products when the software components and non-software components of the
tangible product function together to deliver the tangible product’s essential
functionality. ASU 2009-14 is effective for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and
shall be applied on a prospective basis. Earlier application is permitted as of
the beginning of an entity’s fiscal year. The Company is currently evaluating
the potential impact that this update may have on its financial statements but
does not expect it to have a material effect.
3. Supplemental
Balance Sheet Information
Accounts
Receivable: Accounts receivable are stated net of
allowances for doubtful accounts as follows:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Accounts
receivable
|
$ | 45,240 | $ | 47,437 | ||||
|
Less:
Allowance for doubtful accounts
|
(95 | ) | (89 | ) | ||||
|
Accounts receivable,
net
|
$ | 45,145 | $ | 47,348 | ||||
The
following table sets forth the changes in allowance for doubtful account during
fiscal years 2009, 2008 and 2007:
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
at beginning of period
|
$ | 89 | $ | 89 | $ | 494 | ||||||
|
Provision
(recoveries) for doubtful accounts charged
|
||||||||||||
|
to general
and administrative expense
|
17 | 19 | (329 | ) | ||||||||
|
Write-offs
against allowance
|
(11 | ) | (19 | ) | (76 | ) | ||||||
|
Balance
at end of period
|
$ | 95 | $ | 89 | $ | 89 | ||||||
Inventories: The
following table provides details of inventories:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Raw
material and parts
|
$ | 38,205 | $ | 40,187 | ||||
|
Work
in process
|
20,542 | 17,622 | ||||||
|
Finished
goods
|
8,249 | 7,679 | ||||||
| $ | 66,996 | $ | 65,488 | |||||
- 84 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Reserve for loss
contracts: The following table summarizes the activity
related to reserves for loss contracts during fiscal years 2009 and
2008:
|
Year Ended
|
||||||||
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Balance
at beginning of period
|
$ | 1,928 | $ | 2,700 | ||||
|
Provision
for loss contracts, charged to cost of sales
|
4,173 | 2,810 | ||||||
|
Credit
to cost of sales upon revenue recognition
|
(2,033 | ) | (3,582 | ) | ||||
|
Balance
at end of period
|
$ | 4,068 | $ | 1,928 | ||||
|
|
||||||||
Reserve for loss contracts are reported in
the consolidated balance sheet in the following accounts:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Inventories
|
$ | 3,967 | $ | 1,640 | ||||
|
Accrued
expenses
|
101 | 288 | ||||||
| $ | 4,068 | $ | 1,928 | |||||
Property, Plant and Equipment,
Net: The following table provides details of
property, plant and equipment, net:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Land
and land leaseholds
|
$ | 4,798 | $ | 4,775 | ||||
|
Buildings
|
40,630 | 40,068 | ||||||
|
Machinery
and equipment
|
45,935 | 43,501 | ||||||
|
Construction
in progress
|
640 | 638 | ||||||
| 92,003 | 88,982 | |||||||
|
Less:
accumulated depreciation and amortization
|
(34,091 | ) | (26,495 | ) | ||||
|
Property,
plant and equipment, net
|
$ | 57,912 | $ | 62,487 | ||||
- 85 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Intangible Assets: The following tables
present the details of the Company’s total acquisition-related intangible
assets:
|
Weighted Average
|
October 2, 2009
|
October 3, 2008
|
||||||||||||||||||||
|
Useful Life
(in years)
|
Cost
|
Accumulated Amortization
|
Net
|
Cost
|
Accumulated Amortization
|
Net
|
||||||||||||||||
|
VED
Core Technology
|
50 | $ | 30,700 | $ | (3,501 | ) | $ | 27,199 | $ | 30,700 | $ | (2,887 | ) | $ | 27,813 | |||||||
|
VED
Application Technology
|
25 | 19,800 | (4,505 | ) | 15,295 | 19,800 | (3,713 | ) | 16,087 | |||||||||||||
|
X-ray
Generator and Satcom
|
||||||||||||||||||||||
|
Application
Technology
|
15 | 8,000 | (3,042 | ) | 4,958 | 8,000 | (2,508 | ) | 5,492 | |||||||||||||
|
Antenna
and Telemetry Technology
|
25 | 5,300 | (453 | ) | 4,847 | 5,300 | (241 | ) | 5,059 | |||||||||||||
|
Customer
backlog
|
1 | 580 | (580 | ) | - | 580 | (580 | ) | - | |||||||||||||
|
Land
lease
|
46 | 11,810 | (1,434 | ) | 10,376 | 11,810 | (1,181 | ) | 10,629 | |||||||||||||
|
Tradename
|
20 - Indefinite
|
7,600 | (275 | ) | 7,325 | 7,600 | (55 | ) | 7,545 | |||||||||||||
|
Customer
list and programs
|
24 | 6,280 | (1,218 | ) | 5,062 | 6,280 | (950 | ) | 5,330 | |||||||||||||
|
Noncompete
agreement
|
5 | 640 | (336 | ) | 304 | 640 | (208 | ) | 432 | |||||||||||||
|
Patent
application fees
|
- | 64 | - | 64 | 147 | - | 147 | |||||||||||||||
| $ | 90,774 | $ | (15,344 | ) | $ | 75,430 | $ | 90,857 | $ | (12,323 | ) | $ | 78,534 | |||||||||
Intangible assets, net
as of October 2, 2009 include a total of approximately $0.1 million of
application costs and associated legal costs incurred to obtain certain patents.
Once obtained, these patents will be amortized on a straight-line basis and
charged to operations over their estimated useful lives, not to exceed 17
years.
The amortization of intangible assets
amounted to $3.0 million, $3.4 million and $2.5 million for fiscal years 2009,
2008 and 2007, respectively.
The estimated future amortization expense of
intangible assets, excluding the Company’s unamortized tradenames, is as
follows:
|
Fiscal Year
|
Amount
|
|||
|
2010
|
3,001 | |||
|
2011
|
3,001 | |||
|
2012
|
2,987 | |||
|
2013
|
2,895 | |||
|
2014
|
2,895 | |||
|
Thereafter
|
57,451 | |||
| $ | 72,230 | |||
- 86 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Goodwill: The
following table sets forth the changes in goodwill by reportable segment during
fiscal years 2009 and 2008:
|
Reportable Segments
|
||||||||||||||||
|
VED
|
Satcom
|
Other
|
Total
|
|||||||||||||
|
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 | ||||||||||||
|
Purchase
accounting adjustment
|
(276 | ) | (110 | ) | - | (386 | ) | |||||||||
|
Balance
at October 2, 2009
|
$ | 132,621 | $ | 13,720 | $ | 15,884 | $ | 162,225 | ||||||||
The total
purchase accounting adjustment for fiscal year 2009 comprised (1) $0.3 million
in correction of income tax rates that were used to establish Canadian deferred
tax accounts in connection with the January 23, 2004 merger pursuant to which
CPI International acquired Communications & Power Industries Holding
Corporation (the “January 2004 Merger”), and (2) $0.1 million tax benefit
realized from the exercise of certain fully vested stock options that were
acquired in connection with the January 2004 Merger.
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.
Accrued
Expenses: The following table provides details of
accrued expenses:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Payroll
and employee benefits
|
$ | 11,015 | $ | 12,758 | ||||
|
Accrued
interest
|
1,786 | 2,001 | ||||||
|
Other
accruals
|
6,214 | 8,285 | ||||||
| $ | 19,015 | $ | 23,044 | |||||
Product
Warranty: The following table summarizes the
activity related to product warranty during fiscal years 2009 and
2008:
|
Year Ended
|
||||||||
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Beginning
accrued warranty
|
$ | 4,159 | $ | 5,578 | ||||
|
Actual
costs of warranty claims
|
(4,524 | ) | (4,329 | ) | ||||
|
Estimates
for product warranty, charged to cost of sales
|
4,210 | 2,910 | ||||||
|
Ending
accrued warranty
|
$ | 3,845 | $ | 4,159 | ||||
- 87 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
FASB ASC
825 establishes a framework for measuring fair value and expands disclosures
about fair value measurements by establishing a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and lowest
priority to unobservable inputs (Level 3 measurements). The three levels of the
fair value hierarchy under ASC 825 are described below:
|
Level
1
|
Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
|
|
Level
2
|
Inputs
reflect quoted prices for identical assets or liabilities in markets that
are not active; quoted prices for similar assets or liabilities in active
markets; inputs other than quoted prices that are observable for the asset
or the liability; or inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
|
|
Level
3
|
Unobservable
inputs reflecting the Company’s own assumptions incorporated in valuation
techniques used to determine fair value. These assumptions are required to
be consistent with market participant assumptions that are reasonably
available.
|
Fair
value is the price that would be received upon sale of an asset or paid upon
transfer of a liability in an orderly transaction between market participants at
the measurement date and in the principal or most advantageous market for that
asset or liability. The fair value should be calculated based on assumptions
that market participants would use in pricing the asset or liability, not on
assumptions specific to the entity. In addition, the fair value of liabilities
should include consideration of non-performance risk, including the Company’s
own credit risk.
The
Company measures certain financial assets and liabilities at fair value on a
recurring basis, including cash equivalents, restricted cash, available-for-sale
securities and derivative instruments. As of October 2, 2009, financial assets
utilizing Level 1 inputs included cash equivalents, such as money market and
overnight U.S. Government securities and available-for-sale securities, such as
mutual funds. Financial assets and liabilities utilizing Level 2 inputs included
foreign currency derivatives and interest rate swap derivatives. The Company
does not have any financial assets or liabilities requiring the use of Level 3
inputs.
- 88 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The
following table sets forth financial instruments carried at fair value within
the ASC 825 hierarchy as of October 2, 2009:
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Money
market and overnight U.S. Government securities1
|
$ | 22,464 | $ | 22,464 | $ | - | $ | - | ||||||||
|
Mutual
funds2
|
152 | 152 | - | - | ||||||||||||
|
Foreign
exchange forward derivatives3
|
3,467 | - | 3,467 | - | ||||||||||||
|
Total
assets at fair value
|
$ | 26,083 | $ | 22,616 | $ | 3,467 | - | |||||||||
|
Liabilities:
|
||||||||||||||||
|
Interest
rate swap derivative4
|
$ | 2,323 | $ | - | $ | 2,323 | $ | - | ||||||||
|
Total
liabilities at fair value
|
$ | 2,323 | $ | - | $ | 2,323 | $ | - | ||||||||
|
1
The money market and overnight U.S. Government securities are
classified as part of cash and cash equivalents and restricted cash in the
consolidated balance sheet.
|
|
|
2
The mutual funds are classified as part of other long-term assets
in the consolidated balance sheet.
|
|
|
3
The foreign currency derivatives are classified as part of prepaid
and other current assets in the consolidated balance
sheet.
|
|
|
4
The interest rate swap derivatives are classified as part of
accrued expenses and other long-term liabilities in the consolidated
balance sheet.
|
Investments
Other Than Derivatives
In
general and where applicable, the Company uses quoted prices in active markets
for identical assets or liabilities to determine fair value. This pricing
methodology applies to the Company’s Level 1 investments, such as money market,
U.S. Government securities and mutual funds.
If quoted
prices in active markets for identical assets or liabilities are not available
to determine fair value, then the Company would use quoted prices for similar
assets and liabilities or inputs other than the quoted prices that are
observable either directly or indirectly. These investments would be included in
Level 2.
Derivatives
The
Company executes foreign exchange forward contracts to purchase Canadian dollars
and holds a pay-fixed receive-variable interest rate swap contract, all executed
in the retail market with its relationship banks. For recognizing the most
appropriate value, the Company uses an in-exchange valuation premise which
considers the assumptions that market participants would use in pricing the
derivatives. The Company has elected to use the income approach and uses
observable (Level 2) market expectations at the measurement date and standard
valuation techniques to convert future amounts to a single present amount. Level
2 inputs for derivative valuations are midmarket quoted prices for similar
assets or liabilities in active markets and inputs other than quoted prices that
are observable for the asset or liability.
- 89 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Key
inputs for currency derivatives are spot rates, forward rates, interest rates
and credit derivative rates. The spot rate for the Canadian dollar is the same
spot rate used for all balance sheet translations at the measurement date.
Forward premiums/discounts and interest rates are interpolated from commonly
quoted intervals. Once valued, each forward is identified as either an asset or
liability. Assets are further discounted using counterparty annual credit
default rates, and liabilities are valued using the Company’s credit as
reflected in the spread paid over LIBOR on the term loan under the Company’s
senior credit facilities.
Key
inputs for valuing the interest rate swap are the cash rates used for the short
term (under 3 months), futures rates for up to three years and LIBOR swap rates
for periods beyond. These inputs are used to derive variable resets for the swap
as well as to discount future fixed and variable cash flows to present value at
the measurement date. A credit spread is used to further discount each net cash
flow using, for assets, counterparty credit default rates and, for liabilities,
the Company’s credit spread over LIBOR on the term loan under the Company’s
senior credit facilities.
See Note
8 for further information regarding the Company’s derivative
instruments.
Other
Financial Instruments
The
Company’s other financial instruments include cash, restricted cash, accounts
receivable, accounts payable and long-term debt. Except for long-term debt, the
carrying value of these financial instruments approximates fair values because
of their relatively short maturity.
The fair
values of the Company’s long-term debt were estimated using quoted market prices
where available. For long-term debt not actively traded, fair values were
estimated using discounted cash flow analyses, based on the Company’s current
estimated incremental borrowing rates for similar types of borrowing
arrangements. The estimated fair value of the Company’s long-term debt was
$188.5 million and $217.8 million as of October 2, 2009 and October 3, 2008,
respectively. See Note 6 for the carrying value of the long-term
debt.
5. Malibu Acquisition
On August
10, 2007, the Company acquired all outstanding common stock of the privately
held Malibu Research Associates, Inc. (“Malibu”) for a net cash purchase price
of approximately $20.7 million. 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.
- 90 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
In
accordance with the acquisition agreement, the Company could also 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”).
In addition, a discretionary earnout of up to $1.0 million contingent upon
achievement of certain succession planning goals by June 30, 2010 may apply. As
of October 2, 2009, the Company has not accrued any of these contingent earnout
amounts as achievement of the objectives and goals has not occurred. Any earnout
consideration paid based on financial performance will be recorded as additional
goodwill. Any discretionary succession earnout consideration paid will be
recorded as general and administrative expense. No earnout was earned for the
first and second earnout periods, therefore, the maximum potential Financial
Earnout that could be earned over the 3 years following the acquisition has been
reduced from $14.0 million to $7.7 million based on the performance in the first
and second earnout periods. Based on its current financial forecasts for Malibu,
the Company expects that no earnout will ultimately be payable for the third
earnout period.
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 FASB ASC 350, goodwill and indefinite lived intangibles are not
amortized but are tested for impairment at least annually.
The
Company’s consolidated financial statements include Malibu’s financial results
from the acquisition date. The pro forma effects of Malibu on the Company’s
operations were not material.
- 91 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
6. Long-Term
Debt
Long-term
debt comprises the following:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Term
loan, expiring 2014
|
$ | 66,000 | $ | 88,750 | ||||
|
8%
Senior subordinated notes due 2012
|
117,000 | 125,000 | ||||||
|
Floating
rate senior notes due 2015, net of
issue discount of $78 and $90
|
11,922 | 11,910 | ||||||
| 194,922 | 225,660 | |||||||
|
Less: Current
portion
|
- | 1,000 | ||||||
|
Long-term
portion
|
$ | 194,922 | $ | 224,660 | ||||
|
Standby
letters of credit
|
$ | 5,544 | $ | 4,609 | ||||
Senior Credit
Facilities: CPI’s senior credit
facilities (“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 8% Senior Subordinated Notes due
2012, both the Term Loan and the Revolver will mature on August 1,
2011.
In August
2007, 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 is 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 varies depending on CPI’s leverage ratio,
as defined in the Senior Credit Facilities and ranges from 0.25% to
0.50%.
- 92 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The
Senior Credit Facilities require that CPI repay $250,000 of the Term Loan at the
end of each fiscal quarter prior to the maturity date of the Term Loan, with the
remainder due on the maturity date. CPI is required to prepay its outstanding
loans under the Senior Credit Facilities, subject to certain exceptions and
limitations, with net cash proceeds received from certain events, including,
without limitation, (1) all such proceeds received from certain asset sales by
CPI International, CPI or any of CPI’s subsidiaries, (2) all such proceeds
received from issuances of debt (other than certain specified permitted debt) or
preferred stock by CPI International, CPI or any of CPI’s subsidiaries, and (3)
all such proceeds paid to CPI International, CPI or any of CPI’s subsidiaries
from casualty and condemnation events in excess of amounts applied to replace,
restore or reinvest in any properties for which proceeds were paid within a
specified period.
If CPI’s
leverage ratio, as defined in the Senior Credit Facilities, exceeds 3.5:1 at the
end of any fiscal year, CPI will also be required to make an annual prepayment
within 90 days after the end of such fiscal year equal to 50% of excess cash
flow, as defined in the Senior Credit Facilities, less optional prepayments made
during the fiscal year. CPI can make optional prepayments on the outstanding
loans at any time without premium or penalty, except for customary “breakage”
costs with respect to LIBOR loans.
The
Senior Credit Facilities contain a number of covenants that, among other things,
restrict, subject to certain exceptions, the ability of CPI International, CPI
or any of CPI’s subsidiaries to: sell assets; engage in mergers and
acquisitions; pay dividends and distributions or repurchase their capital stock;
incur additional indebtedness or issue equity interests; make investments and
loans; create liens or further negative pledges on assets; engage in certain
transactions with affiliates; enter into sale and leaseback transactions; amend
agreements or make prepayments relating to subordinated indebtedness; and amend
or waive provisions of charter documents in a manner materially adverse to the
lenders. CPI and its subsidiaries must comply with a maximum capital expenditure
limitation and a maximum total secured leverage ratio, each calculated on a
consolidated basis for CPI.
CPI made
repayments on the Term Loan of $22.8 million, $11.0 million and $0.2 million
during fiscal years 2009, 2008 and 2007, respectively, leaving a principal
balance of $66.0 million as of October 2, 2009.
At
October 2, 2009, the amount available for borrowing under the Revolver, after
taking into account the Company‘s outstanding letters of credit of $5.5 million,
was approximately $54.5 million.
8% Senior
Subordinated Notes due 2012 of CPI: As of October 2, 2009, CPI
had $117.0 million in aggregate principal amount of its 8% Senior Subordinated
Notes due 2012 (the “8% Notes”) after giving effect to the repurchase of a total
of $8.0 million during fiscal year 2009. The Company repurchased $3.0 million
aggregate principal amount of the 8% Notes in January 2009 at a discount of 8.5%
to par value. The Company paid approximately $2.9 million, including accrued
interest of $0.1 million, for the repurchase and realized a net gain of
approximately $0.2 million. The Company also repurchased $5.0 million aggregate
principal amount of the 8% Notes in June 2009 at a discount of 2.75% to par
value. The Company paid approximately $5.0 million, including accrued interest
of $0.2 million, for the repurchase and realized a net gain of approximately
$0.1 million. The 8% Notes have no sinking fund requirements.
- 93 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The 8%
Notes bear interest at the rate of 8.0% per year, payable on February 1 and
August 1 of each year. The 8% Notes will mature on February 1, 2012. The 8%
Notes are unsecured obligations, jointly and severally guaranteed by CPI
International and each of CPI’s domestic subsidiaries. The payment of all
obligations relating to the 8% Notes are subordinated in right of payment to the
prior payment in full in cash or cash equivalents of all senior debt (as defined
in the indenture governing the 8% Notes) of CPI, including debt under the Senior
Credit Facilities. Each guarantee of the 8% Notes is and will be subordinated to
guarantor senior debt (as defined in the indenture governing the 8% Notes) on
the same basis as the 8% Notes are subordinated to CPI’s senior
debt.
At any
time or from time to time, 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
|
|||
|
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 2, 2009, $12.0
million of aggregate principal amount remained outstanding under CPI
International’s Floating Rate Senior Notes due 2015 (the “FR Notes”) after
giving effect to the redemption of $10.0 million aggregate principal amount and
$58.0 million aggregate principal amount in fiscal years 2008 and 2007,
respectively. The FR Notes were originally issued at a 1% discount and have no
sinking fund requirements.
- 94 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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, 2010 is 6.68%
per annum. CPI International may, at its option, elect to pay interest through
the issuance of additional FR Notes for any interest payment date on or before
February 1, 2010. If CPI International elects to pay interest through the
issuance of additional FR Notes, the annual interest rate on the FR Notes will
increase by an additional 1% step-up, with the step-up increasing by an
additional 1% for each interest payment made through the issuance of additional
FR Notes (up to a maximum of 4%). The FR Notes will mature on February 1,
2015.
The FR
Notes are general unsecured obligations of CPI International. The FR Notes are
not guaranteed by any of CPI International’s subsidiaries but are structurally
subordinated to all existing and future indebtedness and other liabilities of
CPI International’s subsidiaries. The FR Notes are senior in right of payment to
CPI International’s existing and future indebtedness that is expressly
subordinated to the FR Notes.
Because
CPI International is a holding company with no operations of its own, CPI
International relies on distributions from 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, 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
|
|||
|
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.
- 95 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Events of
default under the indenture governing the FR Notes include: failure to make
payments on the FR Notes when due; failure to comply with covenants in the
indenture governing the FR Notes; a default under certain other indebtedness of
CPI International or any of its restricted subsidiaries that is caused by a
failure to make payments on such indebtedness or that results in the
acceleration of the maturity of such indebtedness; the existence of certain
final judgments or orders against CPI International or any of the restricted
subsidiaries; and the occurrence of certain insolvency or bankruptcy
events.
Debt
Maturities: As of October 2, 2009, maturities on
long-term debt were as follows:
|
Fiscal Year
|
Term
Loan
|
8% Senior
Subordinated Notes
|
Floating Rate
Senior Notes
|
Total
|
||||||||||||
|
2010
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
2011
|
66,000 | - | - | 66,000 | ||||||||||||
|
2012
|
- | 117,000 | - | 117,000 | ||||||||||||
|
2013
|
- | - | - | - | ||||||||||||
|
2014
|
- | - | - | - | ||||||||||||
|
Thereafter
|
- | - | 12,000 | 12,000 | ||||||||||||
| $ | 66,000 | $ | 117,000 | $ | 12,000 | $ | 195,000 | |||||||||
The above
table assumes (1) that the respective debt instruments will be outstanding until
their scheduled maturity dates, except for the Term Loan under the Senior Credit
Facilities, which is assumed to mature on the earlier date of August 1, 2011 as
described above under “Senior Credit Facilities,” and (2) a debt level based on
mandatory repayments according to the contractual amortization schedule. The
above table also excludes any optional prepayments.
As of
October 2, 2009, the Company was in compliance with the covenants under the
indentures governing the 8% Notes and FR Notes and the agreements governing the
Senior Credit Facilities.
(Gain) loss on
debt extinguishment: The repurchase of $8.0 million of the 8% Notes
during fiscal year 2009, as discussed above, resulted in a gain on debt
extinguishment of $0.2 million which was comprised of a discount of $0.4
million, partially offset by a non-cash write-off of $0.2 million deferred debt
issue costs. The redemption of $10.0 million of the FR Notes in fiscal year 2008
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 8 for information on the interest rate swap
agreements entered into by the Company to hedge the interest rate exposure
associated with the Term Loan.
- 96 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
7. Employee
Benefit Plans
Retirement
Plans: The Company provides a qualified 401(k)
investment plan covering substantially all of its domestic employees and a
pension contribution plan covering substantially all of its Canadian employees.
Discontinued as of end of fiscal year 2008, a profit sharing plan had also been
provided by the Company, covering substantially all of its Econco employees.
These plans provided for the Company to contribute an amount based on a
percentage of each participant’s base pay. The Company 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
$0.3 million and $0.2 million as of October 2, 2009 and October 3, 2008,
respectively. For all of the Company’s current retirement plans, all participant
contributions and Company matching contributions are 100% vested. Total CPI
contributions to these retirement plans were $2.6 million, $3.7 million and $3.7
million for fiscal years 2009, 2008 and 2007, respectively. The Company’s
contributions were lower in fiscal year 2009 as the Company reduced its
contributions to the retirement plans as a cost savings measure and which will
likely be restored to prior levels at a future date.
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.
At
October 2, 2009 and October 3, 2008, the Company recorded a liability of
$0.3 million, which approximates the excess of the projected benefit
obligation over plan assets of $0.8 million and $0.7 million, respectively.
Additionally, the Company recorded an unrealized loss of $0.2 million, net
of tax of $0.1 million, to “accumulated other comprehensive income” in the
consolidated balance sheets as of October 2, 2009 and October 3,
2008.
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.
8. Derivative Instruments
and Hedging Activities
Foreign Exchange
Forward Contracts: Although the majority of the Company’s revenue and
expense activities are transacted in U.S. dollars, the Company does transact
business in foreign countries. The Company’s primary foreign currency cash flows
are in Canada and several European countries. In an effort to reduce its foreign
currency exposure to Canadian dollar denominated expenses, the Company enters
into Canadian dollar forward contracts to hedge the Canadian dollar denominated
costs for its manufacturing operation in Canada. The Company does not engage in
currency speculation.
- 97 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The
Company’s Canadian dollar forward contracts in effect as of October 2, 2009 have
durations of 15 to 17 months. These contracts are designated as a cash flow
hedge and are considered highly effective, as defined by FASB ASC 815.
Unrealized gains and losses from foreign exchange forward contracts are included
in accumulated other comprehensive income (loss) in the consolidated balance
sheets. At October 2, 2009, the unrealized gain, net of tax of $1.4 million, was
$2.3 million. The Company anticipates recognizing the entire unrealized gain or
loss in operating earnings within the next four fiscal quarters. Changes in the
fair value of foreign currency forward contracts due to changes in time value
are excluded from the assessment of effectiveness and are immediately recognized
in general and administrative expenses in the consolidated statements of income.
The time value was not material for fiscal years 2009, 2008 and 2007. If the
transaction being hedged fails to occur, or if a portion of any derivative is
ineffective, then the Company immediately recognizes the gain or loss on the
associated financial instrument in general and administrative expenses in the
consolidated statements of income. No ineffective amounts were recognized due to
anticipated transactions failing to occur in fiscal years 2009, 2008 and
2007.
As of
October 2, 2009, the Company had entered into Canadian dollar forward contracts
for approximately $31.9 million (Canadian dollars), or approximately 61% of
estimated Canadian dollar denominated expenses for October 2009 through
September 2010, at an average rate of approximately 0.82 U.S. dollar to Canadian
dollar.
Interest Rate
Contracts: The Company also uses derivative instruments in order to
manage interest costs and risk associated with its long-term debt. During fiscal
year 2007, the Company entered into an interest rate swap contract (the “2007
Swap”) to receive three-month USD-LIBOR-BBA (British Bankers’ Association)
interest and pay 4.77% fixed rate interest. Net interest positions are settled
quarterly. The Company has structured the 2007 Swap with decreasing notional
amounts such that it is less than the balance of its Term Loan under the Senior
Credit Facilities discussed in Note 6. The notional value of the 2007 Swap was
$50.0 million at October 2, 2009 and represented approximately 76% of the
aggregate Term Loan balance. The Swap agreement is effective through June 30,
2011. Under the provisions of ASC 815, this arrangement was initially designated
and qualified as an effective cash flow hedge of interest rate risk related to
the Term Loan, which permitted recording the fair value of the 2007 Swap and
corresponding unrealized gain or loss to accumulated other comprehensive income
(loss) in the consolidated balance sheets. At October 2, 2009, the unrealized
loss, net of tax of $0.9 million, was $1.4 million. The interest rate swap gain
or loss is included in the assessment of hedge effectiveness. Gains and losses
representing hedge ineffectiveness are immediately recognized in interest
expense, net in the consolidated statements of income.
See Note
4, Financial Instruments, for further information regarding the Company’s
derivative instruments.
- 98 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The
following table summarizes the fair value of derivative instruments designated
as cash flow hedges at October 2, 2009:
|
Asset
Derivatives
|
Liability
Derivatives
|
||||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
||||||||
|
Derivatives
designated as hedging instruments
|
|||||||||||
|
Interest
rate contracts
|
Prepaid
and other current assets
|
$ | - |
Accrued
expenses
|
$ | (1,766 | ) | ||||
|
Interest
rate contracts
|
Other
long-term assets
|
- |
Other
long-term liabilities
|
(557 | ) | ||||||
|
Forward
contracts
|
Prepaid
and other current assets
|
3,467 |
Accrued
expenses
|
- | |||||||
|
Total
derivatives designated as hedging instruments
|
$ | 3,467 | $ | (2,323 | ) | ||||||
As of
October 2, 2009, all of the Company’s derivative instruments were classified as
hedging instruments under ASC 815.
The
following table summarizes the effect of derivative instruments on the
consolidated statement of income for fiscal year 2009:
|
Derivatives
in Cash Flow Hedging Relationships
|
Amount
of
Loss
Recognized
in
OCI on Derivative
(Effective
Portion)
|
Location
of
Loss
Reclassified from Accumulated
OCI
into Income
(Effective
Portion)
|
Amount
of
Loss
Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Location
of
Loss
Recognized in
Income
on Derivative
(Ineffective
and Excluded Portion)
|
Amount
of Loss Recognized in Income on Derivative (Ineffective and Excluded
Portion )
|
||||||||||
|
Interest
rate contracts
|
$ | (2,173 | ) |
Interest
expense, net
|
$ | (1,797 | ) |
Interest
expense, net
|
$ | (51 | ) | ||||
|
Forward
contracts
|
(315 | ) |
Cost
of sales
|
(3,963 | ) |
General
and administrative
|
(321 | )(a) | |||||||
|
Forward
contracts
|
Research
and development
|
(192 | ) | ||||||||||||
|
Forward
contracts
|
Selling
and marketing
|
(106 | ) | ||||||||||||
|
Forward
contracts
|
General
and administrative
|
(317 | ) | ||||||||||||
|
Total
|
$ | (2,488 | ) | $ | (6,375 | ) | $ | (372 | ) | ||||||
| (a) |
The
amount of loss recognized in income represents a $323 loss related to the
amount excluded from the assessment of hedge effectiveness, net of a $2
gain related to the ineffective portion of the hedging
relationships.
|
As a
result of the use of derivative instruments, the Company is exposed to the risk
that counterparties to derivative contracts will fail to meet their contractual
obligations. The Company does not hold collateral or other security from its
counterparties supporting its derivative instruments. To mitigate the
counterparty credit risk, the Company has a policy of only entering into
contracts with carefully selected major financial institutions based upon their
credit ratings and other factors. The Company regularly reviews its credit
exposure balances as well as the creditworthiness of its
counterparties.
In
addition, the Company’s interest rate swap contract is subject to an
International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA
Master Agreement”). The ISDA Master Agreement allows for the aggregation of the
market exposures and termination of all transactions between the Company and its
counterparties in the event a default (as defined in the ISDA Master Agreement)
occurs in respect of either party.
- 99 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
When the Company’s
derivatives are in a net asset position, such as the case with the Company’s
forward foreign exchange contract derivatives at October 2, 2009, the Company is
exposed to credit loss from nonperformance by the counterparty. If the
counterparty fails to perform, credit risk with such counterparty is equal to
the extent of the fair value gain in the derivative. At October 2, 2009, the
Company’s interest rate contract derivatives were in a net liability position,
and the Company, therefore, was not exposed to the interest rate contract
counterparty credit risk.
9. 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 2, 2009 were as follows:
|
Fiscal
Year
|
Operating
Leases
|
|||
|
2010
|
$ | 1,848 | ||
|
2011
|
749 | |||
|
2012
|
566 | |||
|
2013
|
421 | |||
|
2014
|
317 | |||
|
Thereafter
|
2,602 | |||
| $ | 6,503 | |||
Real
estate taxes, insurance, and maintenance are also obligations of the Company.
Rental expense under non-cancelable operating leases amounted to $2.5 million,
$2.5 million and $1.9 million for fiscal years 2009, 2008 and 2007,
respectively. Assets subject to capital leases at October 2, 2009 and October 3,
2008 were not material.
Guarantees: The Company has
restricted cash of $1.6 million and $0.8 million as of October 2, 2009 and
October 3, 2008, respectively, consisting primarily of bank guarantees from
customer advance payments to the Company’s international subsidiaries. The bank
guarantees become unrestricted cash when performance under the sales or supply
contract is complete.
Purchase commitments: As of
October 2, 2009, the Company had the following known purchase commitments, which
include primarily future purchases for inventory-related items under various
purchase arrangements as well as other obligations in the ordinary course of
business that the Company cannot cancel or where it would be required to pay a
termination fee in the event of cancellation:
|
Fiscal
Year
|
Purchase
Contracts
|
|||
|
2010
|
$ | 29,572 | ||
|
2011
|
2,427 | |||
|
2012
|
174 | |||
|
2013
|
- | |||
|
2014
|
- | |||
| $ | 32,173 | |||
- 100 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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 the Company’s products. The term of these indemnification agreements is
generally perpetual after execution of the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. Management believes that the likelihood
of loss under these agreements is remote.
Employment Agreements: The
Company has entered into employment agreements with certain members of the
executive management, which include provisions for the continued payment of
salary, benefits and a pro-rata portion of an annual bonus for periods ranging
from 12 months to 30 months upon certain terminations of
employment.
Contingencies: From time to
time, the Company may be subject to claims that arise in the ordinary course of
business. Except as noted below, in the opinion of management, all such matters
involve amounts that would not have a material adverse effect on the Company's
consolidated financial position if unfavorably resolved.
During
the first quarter of fiscal year 2009, the Company received a notice from a
customer purporting to terminate a sales contract due to alleged nonperformance.
The Company plans to contest this matter vigorously. The Company recorded
certain costs in the fourth quarter of fiscal year 2008 as a result of the
termination; however, at this time, the Company cannot estimate the range of any
further possible loss or gain with respect to this matter or whether an
unfavorable resolution of this matter would have a material adverse effect on
the Company's results of operations and cash flows.
See Note
5 for details on contingent earnout consideration payable to the former
stockholders of Malibu.
10. Stockholders’
Equity
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 2, 2009 and October
3, 2008, there were no shares of Preferred Stock outstanding.
- 101 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Treasury Stock: In
May 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 in the 12 months following the
announcement, funded entirely from cash on hand. The stock repurchase program
has expired. Repurchases made under the program were subject to the terms and
limitations of Company's debt covenants, as well as market conditions and share
price, and were made at management's discretion in open market trades, through
block trades or in privately negotiated transactions. During fiscal year 2009,
the Company did not repurchase any shares of common stock under the program.
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 2,800,000 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. Effective
February 2009, future share-based awards (other than option and stock
appreciation right awards) made under the 2006 Plan will count as two shares for
purposes of determining whether the cap on the total number of shares issuable
under the 2006 Plan has been exceeded. Approximately 1,695,000 shares were
available for grant as of October 2, 2009.
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. 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 either 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 as determined by
the Compensation Committee. Under the 2006 ESPP, approximately 526,000 shares of
common stock were available for issuance as of October 2, 2009.
- 102 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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 2, 2009 are
as follows:
|
Number of Shares
|
Weighted-Average Price
|
Weighted-Average Remaining Contractual Term
(Years)
|
Aggregate Intrinsic Value
|
|||||||||||||
|
Vested
|
2,845,996 | $ | 4.73 | 4.4 | $ | 20,227 | ||||||||||
|
Expected
to vest
|
520,664 | 15.10 | 7.7 | 131 | ||||||||||||
|
Total
|
3,366,660 | 6.34 | 4.9 | $ | 20,358 | |||||||||||
Options
outstanding that are expected to vest are net of estimated future option
forfeitures in accordance with the provisions of FASB ASC 718
Additional
information with respect to stock option activity is as follows:
|
Oustanding Options
|
Exercisable Options
|
||||||||||||||||||||||||
|
Number of Shares
|
Weighted-Average Exercise
Price
|
Weighted-Average Remaining Contractual Term
(Years)
|
Aggregate Intrinsic Value
|
Number of Shares
|
Weighted-Average Exercise
Price
|
Weighted-Average Remaining Contractual Term
(Years)
|
Aggregate Intrinsic Value
|
||||||||||||||||||
|
Balance
at September 29, 2006
|
3,163,057 | $ | 4.51 | 7.24 | $ | 28,799 | 2,345,833 | $ | 2.85 | 6.90 | $ | 24,199 | |||||||||||||
|
Granted
|
316,500 | 14.71 | |||||||||||||||||||||||
|
Exercised
|
(262,123 | ) | 2.76 | ||||||||||||||||||||||
|
Forfeited
or cancelled
|
(46,353 | ) | 9.19 | ||||||||||||||||||||||
|
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 | |||||||||||||
|
Granted
|
108,000 | 10.00 | |||||||||||||||||||||||
|
Exercised
|
(57,382 | ) | 1.44 | ||||||||||||||||||||||
|
Forfeited
or cancelled
|
(17,149 | ) | 16.85 | ||||||||||||||||||||||
|
Balance
at October 2, 2009
|
3,382,763 | $ | 6.38 | 4.95 | $ | 20,362 | 2,845,996 | $ | 4.73 | 4.43 | $ | 20,227 | |||||||||||||
- 103 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
During
the first quarter of fiscal year 2009, the Company granted its officers 108,000
shares of stock options that are subject to time vesting and market performance
vesting conditions. All of such shares are broken up into two tranches (each a
"Tranche"), each consisting of one-half of the nonvested shares. The nonvested
shares in each Tranche become fully vested only if both the time vesting
conditions and the performance conditions are satisfied with respect to such
nonvested shares. The time vesting conditions with respect to 25% of the
nonvested shares in each Tranche generally will be satisfied on each of the
first four anniversaries of the grant date. The market performance conditions of
each Tranche are based on specified price thresholds reached by the Company's
common stock. The nonvested shares in Tranche One are subject to a $13.50 stock
price threshold, and the nonvested shares in Tranche Two are subject to a $16.00
stock price threshold. In order for the market performance conditions to be
satisfied with respect to a Tranche, the average closing share price of the
Company's common stock must be at or above the applicable stock price threshold
amount for 20 consecutive trading days. The stock options have a term of ten
years at the grant date.
The
aggregate intrinsic value in the preceding table represents the total intrinsic
value, based on the Company’s closing stock price of $11.25 as of October 2,
2009 or $12.64 as of October 3, 2008, 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 2,
2009, approximately 2.5 million exercisable options were
in-the-money.
During
fiscal years 2009, 2008 and 2007, cash received from option exercises was
approximately $0.1 million, $38,000 and $0.7 million, and the total intrinsic
value of options exercised was approximately $0.4 million, $0.1 million and $3.6
million, respectively. As of October 2, 2009, there was approximately $2.7
million of total unrecognized compensation costs related to nonvested stock
options, which is expected to be recognized over a weighted-average vesting
period of 1.4 years.
Outstanding
and exercisable options presented by exercise price at October 2, 2009 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 | 619,109 | 3.4 | 619,109 | 3.4 | ||||||||||
| $ | 0.74 | 120,743 | 1.0 | 120,743 | 1.0 | ||||||||||
| $ | 1.08 | 8,000 | 4.3 | 8,000 | 4.3 | ||||||||||
| $ | 4.32 | 1,689,223 | 4.5 | 1,689,223 | 4.5 | ||||||||||
| $ | 6.61 | 49,032 | 5.0 | 49,032 | 5.0 | ||||||||||
| $ | 6.98 | 23,706 | 5.5 | 23,706 | 5.5 | ||||||||||
| $ | 10.00 | 108,000 | 9.2 | - | - | ||||||||||
| $ | 14.22 | 279,500 | 7.2 | 140,750 | 7.2 | ||||||||||
| $ | 16.79 | 195,950 | 8.2 | 49,558 | 8.2 | ||||||||||
| $ | 16.94 | 1,500 | 8.2 | 375 | 8.2 | ||||||||||
| $ | 17.09 | 6,000 | 7.4 | 4,000 | 7.4 | ||||||||||
| $ | 18.00 | 271,000 | 6.6 | 139,500 | 6.6 | ||||||||||
| $ | 19.53 | 7,000 | 8.0 | - | - | ||||||||||
| $ | 19.80 | 4,000 | 7.6 | 2,000 | 7.6 | ||||||||||
|
Total
|
3,382,763 | 5.0 | 2,845,996 | 4.4 | |||||||||||
- 104 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Stock Purchase
Plan: Employees purchased approximately 111,000 shares, 72,000
shares and 51,000 shares in fiscal years 2009, 2008 and 2007, respectively, for
$1.0 million, $0.9 million and $0.8 million, respectively, under the 2006 ESPP.
As of October 2, 2009, there were no unrecognized compensation costs related to
rights to acquire stock under the 2006 ESPP.
Restricted Stock and Restricted Stock
Units: As of October 2, 2009 and October 3, 2008, there were outstanding
218,298 and 117,154, respectively, of nonvested restricted stock and restricted
stock units, and as of September 28, 2007, there were 11,466 shares of nonvested
restricted stock, in each case granted to directors and employees. The
restricted stock and restricted stock units generally vest over periods of one
to four years. Upon vesting, each restricted stock unit will automatically
convert into one share of common stock of CPI International.
Additional information with respect to
outstanding restricted stock and restricted stock unit activity is as
follows:
|
Number of Shares
|
Weighted-Average Grant-Date Fair Value Per
Share
|
Aggregate Fair Value*
|
||||||||||
|
Nonvested
at September 29, 2006
|
9,999 | $ | 18.00 | |||||||||
|
Granted
|
7,022 | $ | 17.09 | |||||||||
|
Vested
|
(5,555 | ) | $ | 18.00 | $ | 97 | ||||||
|
Forfeited
|
- | $ | - | |||||||||
|
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 | |||||||||
|
Granted
|
142,721 | $ | 8.87 | |||||||||
|
Vested
|
(36,377 | ) | $ | 14.81 | $ | 233 | ||||||
|
Forfeited
|
(5,200 | ) | $ | 10.85 | ||||||||
|
Nonvested
at October 2, 2009
|
218,298 | $ | 11.27 | |||||||||
|
*
Based on the value of the Company's stock on the date that the restricted
stock units vest.
|
||
During
the first quarter of fiscal year 2009, the Company granted its officers and
certain other employees, respectively, 36,000 and 102,900 shares of restricted
stock or restricted stock units. The restricted stock and restricted stock units
granted to the Company’s officers are subject to time vesting and market
performance vesting conditions similar to those applicable to the stock option
grants described above, except the time vesting conditions with respect to 25%
of the nonvested shares will be satisfied on the third trading day following the
Company's issuance of its press release reporting first quarter financial
results in each of 2010, 2011, 2012 and 2013, but no later than the end of
February in each year. The restricted stock and restricted stock units granted
to certain other employees of the Company are only subject to time vesting
similar to that applicable to restricted stock and restricted stock units
granted to the Company’s officers.
During
the second quarter of fiscal year 2009, the Company granted a member of its
board of directors 3,821 shares of restricted stock which will vest after one
year.
- 105 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Aggregate
intrinsic value of the nonvested restricted stock and restricted stock unit
awards at October 2, 2009 was $2.5 million. As of October 2, 2009, there was
$1.7 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 1.8 years.
The
Company settles stock option exercises, restricted stock awards and restricted
stock units with newly issued common shares.
Valuation
and Expense Information
The fair
value of the Company’s time-based option awards is estimated on the date of
grant using the Black-Scholes model. The fair value of each market
performance-based (or combination of market performance- and time-based) option,
restricted stock and restricted stock unit award is estimated on the date of
grant using the Monte Carlo simulation technique in a risk-neutral
framework.
The
Black-Scholes and the Monte Carlo simulation valuation models were developed for
use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable and require the input of subjective
assumptions, including the expected stock price volatility and estimated option
life. The Company currently does not intend to pay dividends and, accordingly,
no dividends have been assumed in its Black-Scholes calculation and Monte Carlo
simulation. Since the Company’s common stock has not been publicly traded for a
sufficient time period, the expected volatility used in prior periods was based
on expected volatilities of similar companies that have a longer history of
being publicly traded. Beginning with fiscal year 2009, the expected volatility
is based on a blend of expected volatilities of similar companies and that of
the Company based on its available historical data. The risk-free rates are
based on the U.S. Treasury yield in effect at the time of the grant. Since the
Company’s historical data is limited, the expected term of time-based options
granted is based on the simplified method for plain vanilla options in
accordance with ASC 718. The Company will continue to use the simplified method
until it has enough historical experience to provide a reasonable estimate of
expected term.
There
were no time-based options granted during fiscal year 2009.
Assumptions
used in the Black-Scholes model to estimate the fair value of time-based option
grants during fiscal years 2008 and 2007 are presented below.
|
Year Ended
|
||||||||
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Expected
term (in years)
|
6.25 | 6.25 | ||||||
|
Expected
volatility
|
41.20 | % | 49.33 | % | ||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | ||||
|
Risk-free
rate
|
3.8 | % | 4.7 | % | ||||
- 106 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Assumptions
used in the Monte Carlo simulation model to estimate the fair value of time- and
market performance-based options first granted during fiscal year 2009 are
presented below.
|
Contractual
term (in years)
|
10.00 | |||
|
Expected
volatility
|
51.50 | % | ||
|
Risk-free
rate
|
3.5 | % | ||
|
Dividend
yield
|
0 | % |
There
were no time- and market performance-based options granted during fiscal years
2008 and 2007.
The
weighted-average grant-date fair value of all the options granted during fiscal
years 2009, 2008 and 2007 was $5.61, $7.83 and $8.98 per share,
respectively.
Based on
the 15% discount received by the employees, the weighted-average fair value of
shares issued under the 2006 ESPP was $1.51, $2.08 and $2.47 per share during
fiscal years 2009, 2008 and 2007, respectively.
Assumptions
used in the Monte Carlo simulation model to estimate the fair value of time- and
market performance-based restricted stock and restricted stock units first
granted during fiscal year 2009 are presented below.
|
Expected
volatility
|
51.50 | % | ||
|
Risk-free
rate
|
3.5 | % | ||
|
Dividend
yield
|
0 | % |
There
were no time- and market performance-based restricted stock and restricted stock
units granted during fiscal years 2008 and 2007.
The
weighted-average estimated fair value of restricted stock and restricted stock
units granted was $8.87, $15.22 and $17.09 per share during fiscal years 2009,
2008 and 2007, respectively.
As
stock-based compensation expense recognized in the consolidated statement of
income for all fiscal years presented is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures. FASB ASC 718,
“Compensation—Stock Compensation,” requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
- 107 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The
following table summarizes stock-based compensation expense for fiscal years
2009, 2008 and 2007, which was allocated as follows:
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Share-based
compensation cost recognized in the statement
of income by caption:
|
||||||||||||
|
Cost of
sales
|
$ | 506 | $ | 425 | $ | 274 | ||||||
|
Research and
development
|
174 | 153 | 94 | |||||||||
|
Selling and
marketing
|
262 | 229 | 122 | |||||||||
|
General and
administrative
|
1,737 | 1,328 | 749 | |||||||||
| $ | 2,679 | $ | 2,135 | $ | 1,239 | |||||||
|
Share-based
compensation cost capitalized in inventory
|
$ | 516 | $ | 453 | $ | 297 | ||||||
|
Share-based
compensation cost remaining in inventory at
end of period
|
$ | 86 | $ | 76 | $ | 48 | ||||||
|
Share-based
compensation expense by type of award:
|
||||||||||||
|
Stock
options
|
$ | 1,746 | $ | 1,544 | $ | 1,006 | ||||||
|
Restricted stock
and restricted stock units
|
804 | 438 | 110 | |||||||||
|
Stock purchase
plan
|
129 | 153 | 123 | |||||||||
| $ | 2,679 | $ | 2,135 | $ | 1,239 | |||||||
The tax
benefit realized from option exercises and restricted stock vesting totaled
approximately $0.2 million, $50,000 and $1.3 million during fiscal years 2009,
2008 and 2007, respectively.
Income
before income taxes consisted of the following:
|
Year
Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
U.S.
|
$ | 15,206 | $ | 20,405 | $ | 20,466 | ||||||
|
Foreign
|
8,042 | 10,848 | 13,785 | |||||||||
| $ | 23,248 | $ | 31,253 | $ | 34,251 | |||||||
- 108 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Income
tax expense consisted of the following:
|
Year
Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 1,263 | $ | 6,904 | $ | 4,946 | ||||||
|
State
|
1,083 | 1,980 | 2,320 | |||||||||
|
Foreign
|
(1,201 | ) | 3,035 | 4,693 | ||||||||
| 1,145 | 11,919 | 11,959 | ||||||||||
|
Deferred
|
||||||||||||
|
Federal
|
(99 | ) | (934 | ) | 117 | |||||||
|
State
|
(738 | ) | (208 | ) | (143 | ) | ||||||
|
Foreign
|
(526 | ) | 27 | (185 | ) | |||||||
| (1,363 | ) | (1,115 | ) | (211 | ) | |||||||
|
Income
tax expense
|
$ | (218 | ) | $ | 10,804 | $ | 11,748 | |||||
The
differences between the effective income tax rate and the federal statutory
income tax rate were as follows:
|
Year
Ended
|
||||||||||||
|
October
2,
2009
|
October
3,
2008
|
September
28,
2007
|
||||||||||
|
Statutory
federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Domestic
manufacturing deduction
|
(1.7 | ) | (1.5 | ) | (0.7 | ) | ||||||
|
Foreign
tax rate differential
|
(2.8 | ) | (2.3 | ) | (1.8 | ) | ||||||
|
State
taxes
|
4.3 | 3.7 | 3.8 | |||||||||
|
Research
and development credit
|
(1.3 | ) | - | - | ||||||||
|
Change
in foreign filing position
|
- | - | (5.3 | ) | ||||||||
|
Tax
contingency reserve (reversal)/accrual
|
(14.6 | ) | 0.5 | 0.1 | ||||||||
|
Correction
of error from prior year
|
(7.2 | ) | (1.4 | ) | 2.6 | |||||||
|
New
state legislation
|
(2.9 | ) | - | - | ||||||||
|
Tax
treaty benefits
|
(12.1 | ) | - | - | ||||||||
|
Other
differences
|
2.4 | 0.6 | 0.6 | |||||||||
|
Effective
tax rate
|
(0.9 | ) % | 34.6 | % | 34.3 | % | ||||||
The effective tax rate
for fiscal year 2009 was a negative 0.9% and diverged from the federal and state
statutory rate primarily due to several significant discrete tax benefits: (1)
$4.9 million relating to the Company’s position with regard to an outstanding
audit by the Canada Revenue Agency (“CRA”), (2) $1.7 million for the correction
of immaterial errors to tax accounts that should have been recorded in prior
year’s financial statements, (3) $0.7 million related to certain provisions of
the California Budget Act of 2008 signed on February 20, 2009, which will allow
a taxpayer to elect an alternative method to apportion taxable income to
California for tax years beginning on or after January 1, 2011, and (4) $0.6
million for state refunds claimed on prior year income tax returns based on the
results of a foreign nexus study.
- 109 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
On
December 15, 2008, the Treasury Department announced that the Fifth Protocol
("Protocol") to the U.S.-Canada Income Tax Treaty ("Treaty") entered into force.
The new treaty mandates arbitration for the resolution of double taxation
disputes that are not settled through the competent authority process. As a
result, the Company’s U.S. tax position related to the issues raised in the
outstanding tax audit by the CRA became more favorable, and the Company recorded
income tax benefits of $4.9 million in fiscal year 2009. This tax benefit was
recorded through a $2.8 million reduction of Canadian tax contingency reserves,
inclusive of interest and the recognition of a $2.8 million income tax
receivable in the U.S., partially offset by a $0.7 million increase in related
deferred tax liabilities.
The $1.7
million correction to prior year’s financial statements in fiscal year 2009
comprises $0.9 million for changes in foreign income tax rates that were not
updated in a timely manner and $0.8 million recorded in the fourth quarter to
true-up the 2008 income tax provision. 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 deferred taxes for
warranty expenses in a foreign tax jurisdiction. 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 these corrections was not material to its consolidated financial
statements in the current year or in any of the prior year consolidated
financial statements.
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
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Inventory
and other reserves
|
$ | 7,121 | $ | 6,347 | ||||
|
Accrued
vacation
|
1,607 | 2,120 | ||||||
|
Deferred
compensation and other accruals
|
5,338 | 4,263 | ||||||
|
Other comprehensive
income
|
- | 1,102 | ||||||
|
Debt issuance
costs
|
525 | 684 | ||||||
|
Foreign
jurisdictions
|
1,974 | 558 | ||||||
|
Land lease
amortization
|
654 | 663 | ||||||
|
State
taxes
|
158 | 521 | ||||||
|
Gross deferred tax
assets
|
17,377 | 16,258 | ||||||
|
Valuation
allowance
|
- | - | ||||||
|
Total
deferred tax assets
|
$ | 17,377 | $ | 16,258 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Accelerated
depreciation
|
$ | (6,475 | ) | $ | (7,491 | ) | ||
|
Acquisition-related
intangibles
|
(23,659 | ) | (23,450 | ) | ||||
|
Other comprehensive
income
|
(432 | ) | - | |||||
|
Foreign
jurisdictions
|
(2,885 | ) | (1,091 | ) | ||||
|
Total
deferred tax liabilities
|
$ | (33,451 | ) | $ | (32,032 | ) | ||
|
Net
deferred tax liabilities
|
$ | (16,074 | ) | $ | (15,774 | ) | ||
- 110 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Current
deferred tax assets
|
$ | 8,652 | $ | 11,411 | ||||
|
Long-term
deferred tax assets (other long-term assets)
|
- | 136 | ||||||
|
Long-term
deferred tax liabilities
|
(24,726 | ) | (27,321 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (16,074 | ) | $ | (15,774 | ) | ||
The
Company has not provided deferred taxes on approximately $26 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.
Effective
September 29, 2007, the Company adopted FASB ASC 740, “Income Taxes,” which
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return.
This accounting principle also provides guidance on derecognition of income tax
assets and liabilities, classification of current and deferred income tax assets
and liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods and income tax
disclosures. Income tax-related interest expense and income tax-related
penalties have continued to be reported as a component of the provision for
income taxes in the consolidated statement of income. In connection with the
Company’s adoption of this guidance, there was no cumulative effect adjustment
necessary to the September 29, 2007 balance of retained
earnings.
The total
unrecognized tax benefits, excluding any related interest accrual, are reported
in the consolidated balance sheet in the following accounts:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Income
taxes payable
|
$ | 2,713 | $ | 5,609 | ||||
|
Other
long-term liabilities
|
615 | - | ||||||
| $ | 3,328 | $ | 5,609 | |||||
Of the
total unrecognized tax benefit balance, $2.4 million and $4.6 million would
reduce the effective tax rate if recognized as of October 2, 2009 and
October 3, 2008, respectively. The Company believes that it is reasonably
possible that, in the next 12 months, the amount of unrecognized tax benefits
related to the resolution of federal, state and foreign matters could be reduced
by $3.6 million as audits close, statutes expire and amended tax returns are
filed.
- 111 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
As of
October 2, 2009 and October 3, 2008, the Company had $0.6 million and $1.8
million of accrued income tax related interest and penalties on unrecognized tax
benefits, respectively. Interest included in the Company’s provision for income
taxes was a benefit of $1.2 million for fiscal year 2009 and an expense of $0.5
million for fiscal year 2008. If the accrued interest and penalties do not
ultimately become payable, amounts accrued will be reduced in the period that
such determination is made, and reflected as a reduction of the income tax
provision.
A
reconciliation of the beginning and ending balances of the total amount of
unrecognized tax benefits, excluding accrued interest and penalties is as
follows:
|
Year
Ended
|
|||||||
|
October
2,
|
October
3,
|
||||||
|
2009
|
2008
|
||||||
|
Unrecognized
tax benefits - beginning of year
|
$ | 5,609 | $ | 4,954 | |||
|
Settlements
and effective settlements with tax authorities and related
remeasurements
|
(75 | ) | - | ||||
|
Increase
in balances related to tax positions taken in current year
|
228 | 1,183 | |||||
|
Decrease
in balances related to tax positions taken in prior years
|
(2,964 | ) | - | ||||
|
Increase
in balances related to tax positions taken in prior years
|
512 | (235 | ) | ||||
|
Changes
due to translation of foreign currency
|
18 | (293 | ) | ||||
|
Unrecognized
tax benefits - end of year
|
$ | 3,328 | $ | 5,609 | |||
The Company files U.S. federal, California and other U.S. states, Canada and other foreign jurisdictions income tax returns. Generally, fiscal years 2005 to 2008 remain open to examination by the various taxing jurisdictions and the Company has not been audited for U.S. federal income tax matters. The Company has income tax audits in progress in Canada and in several international jurisdictions in which it operates. The years under examination by the Canadian taxing authorities are 2001 to 2002.
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 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 the accounting guidance for uncertainty in income taxes.
- 112 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
The
Company’s reportable segments are VED and satcom equipment. The VED segment
develops, manufactures and distributes high-power/high-frequency microwave and
radio frequency signal components. The satcom equipment segment manufactures and
supplies high-power amplifiers and networks for satellite communication uplink
and industrial applications. Segment information reported below is consistent
with the manner in which it is reviewed and evaluated by the Company’s chief
operating decision maker (“CODM”), its chief executive officer, and is based on
the nature of the Company’s operations and products offered to
customers.
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 FASB ASC 280,
“Segment Reporting.” Other includes the activities of the Company’s Malibu
division and unallocated corporate expenses, such as business
combination-related expenses, share-based compensation expense and certain
non-recurring or unusual expenses. The Malibu division is a designer,
manufacturer and integrator of advanced antenna systems for radar, radar
simulators and telemetry systems, as well as for data links used in ground,
airborne, unmanned aerial vehicles (“UAVs”) and shipboard systems.
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.
- 113 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Summarized
financial information concerning the Company’s reportable segments is shown in
the following tables:
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Sales
from external customers
|
||||||||||||
|
VED
|
$ | 246,717 | $ | 279,364 | $ | 280,010 | ||||||
|
Satcom
equipment
|
69,534 | 74,264 | 67,965 | |||||||||
|
Other
|
16,625 | 16,386 | 3,115 | |||||||||
| $ | 332,876 | $ | 370,014 | $ | 351,090 | |||||||
|
Intersegment
product transfers
|
||||||||||||
|
VED
|
$ | 18,070 | $ | 27,462 | $ | 22,898 | ||||||
|
Satcom
equipment
|
9 | 116 | 23 | |||||||||
| $ | 18,079 | $ | 27,578 | $ | 22,921 | |||||||
|
Capital
expenditures
|
||||||||||||
|
VED
|
$ | 2,536 | $ | 2,659 | $ | 7,649 | ||||||
|
Satcom
equipment
|
141 | 692 | 341 | |||||||||
|
Other
|
688 | 911 | 179 | |||||||||
| $ | 3,365 | $ | 4,262 | $ | 8,169 | |||||||
|
EBITDA
|
||||||||||||
|
VED
|
$ | 54,791 | $ | 69,923 | $ | 75,230 | ||||||
|
Satcom
equipment
|
5,598 | 5,997 | 6,056 | |||||||||
|
Other
|
(9,368 | ) | (14,649 | ) | (16,998 | ) | ||||||
| $ | 51,021 | $ | 61,271 | $ | 64,288 | |||||||
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
Total
assets
|
||||||||
|
VED
|
$ | 324,490 | $ | 324,483 | ||||
|
Satcom
equipment
|
46,720 | 48,219 | ||||||
|
Other
|
87,044 | 94,246 | ||||||
| $ | 458,254 | $ | 466,948 | |||||
EBITDA is
the measure used by the CODM to evaluate segment profit or loss. EBITDA
represents earnings before net interest expense, provision for income taxes and
depreciation and amortization. The Company believes that EBITDA is a more
meaningful representation of segment operating performance for leveraged
businesses like its own and therefore uses this metric as its internal measure
of profitability. For the reasons listed below, the Company believes EBITDA
provides investors better understanding of the Company’s financial performance
in connection with their analysis of the Company’s business:
|
|
·
|
EBITDA
is a component of the measures used by the Company’s board of directors
and management team to evaluate the Company’s operating
performance;
|
|
|
·
|
the
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;
|
- 114 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
|
·
|
EBITDA
is a component of the measures used by the Company’s management team to
make day-to-day operating
decisions;
|
|
|
·
|
EBITDA
facilitates comparisons between the Company’s operating results and those
of competitors with different capital structures and, therefore, is a
component of the measures used by the Company’s management to facilitate
internal comparisons to competitors’ results and the Company’s industry in
general; and
|
|
|
·
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by the Company of certain targets that contain EBITDA as a
component.
|
Other
companies may define EBITDA differently and, as a result, the Company’s measure
of EBITDA may not be directly comparable to EBITDA of other companies. Although
the Company uses EBITDA as a financial measure to assess the performance of its
business, the use of EBITDA is limited because it does not include certain
material costs, such as interest and taxes, necessary to operate the Company’s
business. When analyzing the Company’s performance, EBITDA should be considered
in addition to, and not as a substitute for or superior to, operating income,
net income, cash flows from operating activities or other statements
of income or statements of cash flows data prepared in accordance with
GAAP. Operating income by the Company’s reportable segment was as
follows:
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
income
|
||||||||||||
|
VED
|
$ | 49,006 | $ | 64,431 | $ | 70,938 | ||||||
|
Satcom
equipment
|
4,861 | 5,327 | 5,551 | |||||||||
|
Other
|
(13,888 | ) | (18,817 | ) | (14,968 | ) | ||||||
| $ | 39,979 | $ | 50,941 | $ | 61,521 | |||||||
The
following table reconciles net income to EBITDA:
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income
|
$ | 23,466 | $ | 20,449 | $ | 22,503 | ||||||
|
Depreciation
and amortization
|
10,794 | 10,963 | 9,098 | |||||||||
|
Interest
expense, net
|
16,979 | 19,055 | 20,939 | |||||||||
|
Income
tax (benefit) expense
|
(218 | ) | 10,804 | 11,748 | ||||||||
|
EBITDA
|
$ | 51,021 | $ | 61,271 | $ | 64,288 | ||||||
- 115 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
Net
property, plant and equipment by geographic area were as follows:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
United
States
|
$ | 45,028 | $ | 48,593 | ||||
|
Canada
|
12,831 | 13,843 | ||||||
|
Other
|
53 | 51 | ||||||
|
Total
|
$ | 57,912 | $ | 62,487 | ||||
With the
exception of goodwill, the Company does not identify or allocate assets by
operating segment, nor does its CODM evaluate operating segments using discrete
asset information.
Goodwill
by geographic area was as follows:
|
October
2,
|
October
3,
|
|||||||
|
2009
|
2008
|
|||||||
|
United
States
|
$ | 114,252 | $ | 114,297 | ||||
|
Canada
|
47,973 | 48,314 | ||||||
| $ | 162,225 | $ | 162,611 | |||||
Geographic
sales by customer location were as follows for external customers:
|
Year Ended
|
||||||||||||
|
October
2,
|
October
3,
|
September
28,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
United
States
|
$ | 210,590 | $ | 237,909 | $ | 208,682 | ||||||
|
All
foreign countries
|
122,286 | 132,105 | 142,408 | |||||||||
|
Total
sales
|
$ | 332,876 | $ | 370,014 | $ | 351,090 | ||||||
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 2009, 2008 and 2007. Direct
sales to the United States Government were $49.2 million, $68.6 million and
$56.8 million for fiscal years 2009, 2008 and 2007, respectively. Accounts
receivable from this customer represented 11% and 17% of consolidated accounts
receivable at October 2, 2009 and October 3, 2008, 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.
- 116 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
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 2, 2009
|
||||||||||||||||
|
Sales
|
$ | 77,146 | $ | 81,903 | $ | 82,520 | $ | 91,307 | ||||||||
|
Gross
profit
|
19,916 | 21,766 | 24,284 | 27,525 | ||||||||||||
|
Net
income
|
7,655 | 3,689 | 3,870 | 8,252 | ||||||||||||
|
Basic
earnings per share
|
$ | 0.47 | $ | 0.23 | $ | 0.24 | $ | 0.50 | ||||||||
|
Diluted
earnings per share
|
$ | 0.44 | $ | 0.21 | $ | 0.22 | $ | 0.47 | ||||||||
|
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 | ||||||||
Net
income for the first quarter of fiscal year 2009 includes two significant
discrete tax benefits: (1) $5.1 million related to the
Company’s position with regard to an outstanding audit by the Canada Revenue
Agency, and (2) $0.6 million for an adjustment to Canadian tax
accounts.
Net
income for the second quarter of fiscal year 2009 includes a significant
discrete tax benefit of $0.7 million related to certain provisions of the
California Budget Act of 2008 signed in February 2009.
14. Supplemental
Guarantors Condensed Consolidating Financial Information
Issued on
January 23, 2004, CPI’s 8% Notes, the current balance of which is $117.0
million, are guaranteed by CPI International and all of CPI’s domestic
subsidiaries. Separate financial statements of the guarantors are not presented
because (i) the guarantors are wholly owned and have fully and unconditionally
guaranteed the 8% Notes on a joint and several basis and (ii) the Company’s
management has determined that such separate financial statements are not
material to investors. Instead, presented below are the consolidating financial
statements of: (a) the parent, CPI International, (b) the issuer, CPI, (c) the
guarantor subsidiaries (all of the domestic subsidiaries), (d) the non-guarantor
subsidiaries, (e) the consolidating elimination entries, and (f) the
consolidated totals. The accompanying consolidating financial information should
be read in connection with the 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.
- 117 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
| CONDENSED CONSOLIDATING BALANCE SHEET | ||||||||||||||||||||||||
| As of October 2, 2009 | ||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 10 | $ | 15,055 | $ | 759 | $ | 10,328 | $ | - | $ | 26,152 | ||||||||||||
|
Restricted
cash
|
- | - | 1,467 | 94 | - | 1,561 | ||||||||||||||||||
|
Accounts
receivable, net
|
- | 18,456 | 12,581 | 14,108 | - | 45,145 | ||||||||||||||||||
|
Inventories
|
- | 41,877 | 7,622 | 18,117 | (620 | ) | 66,996 | |||||||||||||||||
|
Deferred
tax assets
|
- | 8,494 | 2 | 156 | - | 8,652 | ||||||||||||||||||
|
Intercompany
receivable
|
- | 9,033 | 6,751 | 10,534 | (26,318 | ) | - | |||||||||||||||||
|
Prepaid
and other current assets
|
- | 5,396 | 475 | 829 | - | 6,700 | ||||||||||||||||||
|
Total
current assets
|
10 | 98,311 | 29,657 | 54,166 | (26,938 | ) | 155,206 | |||||||||||||||||
|
Property,
plant and equipment, net
|
- | 42,048 | 3,001 | 12,863 | - | 57,912 | ||||||||||||||||||
|
Deferred
debt issue costs, net
|
344 | 3,265 | - | - | - | 3,609 | ||||||||||||||||||
|
Intangible
assets, net
|
- | 54,891 | 13,477 | 7,062 | - | 75,430 | ||||||||||||||||||
|
Goodwill
|
- | 93,307 | 20,973 | 47,945 | - | 162,225 | ||||||||||||||||||
|
Other
long-term assets
|
- | 3,645 | 227 | - | - | 3,872 | ||||||||||||||||||
|
Intercompany
notes receivable
|
- | 1,035 | - | - | (1,035 | ) | - | |||||||||||||||||
|
Investment
in subsidiaries
|
211,575 | 114,416 | - | - | (325,991 | ) | - | |||||||||||||||||
|
Total
assets
|
$ | 211,929 | $ | 410,918 | $ | 67,335 | $ | 122,036 | $ | (353,964 | ) | $ | 458,254 | |||||||||||
|
Liabilities
and stockholders' equity
|
||||||||||||||||||||||||
|
Accounts
payable
|
$ | (1 | ) | $ | 11,100 | $ | 2,730 | $ | 8,836 | $ | - | $ | 22,665 | |||||||||||
|
Accrued
expenses
|
137 | 13,293 | 1,634 | 3,951 | - | 19,015 | ||||||||||||||||||
|
Product
warranty
|
- | 1,893 | 452 | 1,500 | - | 3,845 | ||||||||||||||||||
|
Income
taxes payable
|
- | 1,683 | 151 | 2,471 | - | 4,305 | ||||||||||||||||||
|
Advance
payments from customers
|
- | 7,389 | 4,368 | 1,239 | - | 12,996 | ||||||||||||||||||
|
Intercompany
payable
|
26,318 | - | - | - | (26,318 | ) | - | |||||||||||||||||
|
Total
current liabilities
|
26,454 | 35,358 | 9,335 | 17,997 | (26,318 | ) | 62,826 | |||||||||||||||||
|
Deferred
income taxes
|
- | 20,342 | - | 4,384 | - | 24,726 | ||||||||||||||||||
|
Intercompany
notes payable
|
- | - | - | 1,035 | (1,035 | ) | - | |||||||||||||||||
|
Long-term
debt, less current portion
|
11,922 | 183,000 | - | - | - | 194,922 | ||||||||||||||||||
|
Other
long-term liabilities
|
- | 1,720 | 36 | 471 | - | 2,227 | ||||||||||||||||||
|
Total
liabilities
|
38,376 | 240,420 | 9,371 | 23,887 | (27,353 | ) | 284,701 | |||||||||||||||||
|
Common
stock
|
168 | - | - | - | - | 168 | ||||||||||||||||||
|
Parent
investment
|
- | 52,241 | 43,167 | 58,615 | (154,023 | ) | - | |||||||||||||||||
|
Additional
paid-in capital
|
75,630 | - | - | (211 | ) | 211 | 75,630 | |||||||||||||||||
|
Accumulated
other comprehensive gain (loss)
|
598 | 598 | - | (223 | ) | (375 | ) | 598 | ||||||||||||||||
|
Retained
earnings
|
99,957 | 117,659 | 14,797 | 39,968 | (172,424 | ) | 99,957 | |||||||||||||||||
|
Treasury
stock
|
(2,800 | ) | - | - | - | - | (2,800 | ) | ||||||||||||||||
|
Total
stockholders’ equity
|
173,553 | 170,498 | 57,964 | 98,149 | (326,611 | ) | 173,553 | |||||||||||||||||
|
Total
liabilities and stockholders' equity
|
$ | 211,929 | $ | 410,918 | $ | 67,335 | $ | 122,036 | $ | (353,964 | ) | $ | 458,254 | |||||||||||
- 118 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
CONDENSED
CONSOLIDATING BALANCE SHEET
|
||||||||||||||||||||||||
|
As
of October 3, 2008
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 84 | $ | 26,272 | $ | 493 | $ | 1,821 | $ | - | $ | 28,670 | ||||||||||||
|
Restricted
cash
|
- | - | 629 | 147 | - | 776 | ||||||||||||||||||
|
Accounts
receivable, net
|
- | 22,453 | 12,353 | 12,542 | - | 47,348 | ||||||||||||||||||
|
Inventories
|
- | 42,066 | 6,759 | 17,653 | (990 | ) | 65,488 | |||||||||||||||||
|
Deferred
tax assets
|
- | 10,853 | 2 | 556 | - | 11,411 | ||||||||||||||||||
|
Intercompany
receivable
|
- | 8,523 | 5,135 | 13,454 | (27,112 | ) | - | |||||||||||||||||
|
Prepaid
and other current assets
|
- | 2,370 | 632 | 821 | - | 3,823 | ||||||||||||||||||
|
Total
current assets
|
84 | 112,537 | 26,003 | 46,994 | (28,102 | ) | 157,516 | |||||||||||||||||
|
Property,
plant and equipment, net
|
- | 45,556 | 3,047 | 13,884 | - | 62,487 | ||||||||||||||||||
|
Deferred
debt issue costs, net
|
392 | 4,602 | - | - | - | 4,994 | ||||||||||||||||||
|
Intangible
assets, net
|
- | 56,700 | 14,168 | 7,666 | - | 78,534 | ||||||||||||||||||
|
Goodwill
|
- | 93,375 | 20,973 | 48,263 | - | 162,611 | ||||||||||||||||||
|
Other
long-term assets
|
- | 383 | 287 | 136 | - | 806 | ||||||||||||||||||
|
Intercompany
notes receivable
|
- | 1,035 | - | - | (1,035 | ) | - | |||||||||||||||||
|
Investment
in subsidiaries
|
182,869 | 101,193 | - | - | (284,062 | ) | - | |||||||||||||||||
|
Total
assets
|
$ | 183,345 | $ | 415,381 | $ | 64,478 | $ | 116,943 | $ | (313,199 | ) | $ | 466,948 | |||||||||||
|
Liabilities
and stockholders' equity
|
||||||||||||||||||||||||
|
Current
portion of long-term debt
|
$ | - | $ | 1,000 | $ | - | $ | - | $ | - | $ | 1,000 | ||||||||||||
|
Accounts
payable
|
272 | 10,893 | 2,116 | 7,828 | - | 21,109 | ||||||||||||||||||
|
Accrued
expenses
|
186 | 14,905 | 3,143 | 4,810 | - | 23,044 | ||||||||||||||||||
|
Product
warranty
|
- | 2,002 | 538 | 1,619 | - | 4,159 | ||||||||||||||||||
|
Income
taxes payable
|
- | 1,280 | 213 | 6,273 | - | 7,766 | ||||||||||||||||||
|
Advance
payments from customers
|
- | 7,624 | 3,132 | 1,579 | - | 12,335 | ||||||||||||||||||
|
Intercompany
payable
|
27,112 | - | - | - | (27,112 | ) | - | |||||||||||||||||
|
Total
current liabilities
|
27,570 | 37,704 | 9,142 | 22,109 | (27,112 | ) | 69,413 | |||||||||||||||||
|
Deferred
income taxes
|
- | 21,922 | - | 5,399 | - | 27,321 | ||||||||||||||||||
|
Intercompany
notes payable
|
- | - | - | 1,035 | (1,035 | ) | - | |||||||||||||||||
|
Long-term
debt, less current portion
|
11,910 | 212,750 | - | - | - | 224,660 | ||||||||||||||||||
|
Other
long-term liabilities
|
- | 1,213 | - | 476 | - | 1,689 | ||||||||||||||||||
|
Total
liabilities
|
39,480 | 273,589 | 9,142 | 29,019 | (28,147 | ) | 323,083 | |||||||||||||||||
|
Common
stock
|
165 | - | - | - | - | 165 | ||||||||||||||||||
|
Parent
investment
|
- | 50,020 | 43,167 | 58,114 | (151,301 | ) | - | |||||||||||||||||
|
Additional
paid-in capital
|
71,818 | - | - | - | - | 71,818 | ||||||||||||||||||
|
Accumulated
other comprehensive loss
|
(1,809 | ) | (1,809 | ) | - | (283 | ) | 2,092 | (1,809 | ) | ||||||||||||||
|
Retained
earnings
|
76,491 | 93,581 | 12,169 | 30,093 | (135,843 | ) | 76,491 | |||||||||||||||||
|
Treasury
stock
|
(2,800 | ) | - | - | - | - | (2,800 | ) | ||||||||||||||||
|
Total
stockholders’ equity
|
143,865 | 141,792 | 55,336 | 87,924 | (285,052 | ) | 143,865 | |||||||||||||||||
|
Total
liabilities and stockholders' equity
|
$ | 183,345 | $ | 415,381 | $ | 64,478 | $ | 116,943 | $ | (313,199 | ) | $ | 466,948 | |||||||||||
- 119 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
CONDENSED
CONSOLIDATING STATEMENT OF INCOME
|
||||||||||||||||||||||||
|
For
the Year Ended October 2, 2009
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Sales
|
$ | - | $ | 209,545 | $ | 75,161 | $ | 128,105 | $ | (79,935 | ) | $ | 332,876 | |||||||||||
|
Cost
of sales
|
- | 155,137 | 63,087 | 101,466 | (80,305 | ) | 239,385 | |||||||||||||||||
|
Gross
profit
|
- | 54,408 | 12,074 | 26,639 | 370 | 93,491 | ||||||||||||||||||
|
Operating
costs and expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
- | 3,323 | 8 | 7,189 | - | 10,520 | ||||||||||||||||||
|
Selling
and marketing
|
- | 7,246 | 4,342 | 7,878 | - | 19,466 | ||||||||||||||||||
|
General
and administrative
|
- | 13,957 | 3,797 | 3,003 | - | 20,757 | ||||||||||||||||||
|
Amortization of acquisition-related intangible assets
|
- | 1,558 | 607 | 604 | - | 2,769 | ||||||||||||||||||
|
Total
operating costs and expenses
|
- | 26,084 | 8,754 | 18,674 | - | 53,512 | ||||||||||||||||||
|
Operating
income
|
- | 28,324 | 3,320 | 7,965 | 370 | 39,979 | ||||||||||||||||||
|
Interest
expense (income), net
|
987 | 15,920 | (9 | ) | 81 | - | 16,979 | |||||||||||||||||
|
Gain
on debt extinguishment
|
- | (248 | ) | - | - | - | (248 | ) | ||||||||||||||||
|
(Loss)
income before income tax expense
|
||||||||||||||||||||||||
|
and
equity in income of subsidiaries
|
(987 | ) | 12,652 | 3,329 | 7,884 | 370 | 23,248 | |||||||||||||||||
|
Income
tax (benefit) expense
|
(375 | ) | 1,447 | 701 | (1,991 | ) | - | (218 | ) | |||||||||||||||
|
Equity
in income of subsidiaries
|
24,078 | 12,873 | - | - | (36,951 | ) | - | |||||||||||||||||
|
Net
income
|
$ | 23,466 | $ | 24,078 | $ | 2,628 | $ | 9,875 | $ | (36,581 | ) | $ | 23,466 | |||||||||||
- 120 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
CONDENSED
CONSOLIDATING STATEMENT OF INCOME
|
||||||||||||||||||||||||
|
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
|
- | 14,572 | 4,180 | 4,199 | - | 22,951 | ||||||||||||||||||
|
Amortization of acquisition-related intangible assets
|
- | 1,391 | 1,108 | 604 | - | 3,103 | ||||||||||||||||||
|
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 | |||||||
- 121 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
CONDENSED
CONSOLIDATING STATEMENT OF INCOME
|
||||||||||||||||||||||||
|
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
|
- | 14,871 | 1,644 | 5,133 | - | 21,648 | ||||||||||||||||||
|
Amortization of acquisition-related intangible assets
|
- | 1,462 | 250 | 604 | - | 2,316 | ||||||||||||||||||
|
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 | |||||||||||
- 122 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
|
||||||||||||||||||||||||
|
For
the Year Ended October 2, 2009
|
||||||||||||||||||||||||
|
Parent
|
Issuer
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||
|
(CPI
Int'l)
|
(CPI)
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
|||||||||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (1,867 | ) | $ | 30,502 | $ | 624 | $ | 855 | $ | - | $ | 30,114 | |||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||||||||||
|
Capital
expenditures
|
- | (2,870 | ) | (358 | ) | (137 | ) | - | (3,365 | ) | ||||||||||||||
|
Net
cash used in investing activities
|
- | (2,870 | ) | (358 | ) | (137 | ) | - | (3,365 | ) | ||||||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||||||||||
|
Proceeds
from stock purchase plan and exercises of stock options
|
1,037 | - | - | - | - | 1,037 | ||||||||||||||||||
|
Repayments
of debt
|
- | (30,358 | ) | - | - | - | (30,358 | ) | ||||||||||||||||
|
Intercompany
dividends / debt
|
756 | (8,545 | ) | - | 7,789 | - | - | |||||||||||||||||
|
Excess
tax benefit on stock option exercises
|
- | 54 | - | - | - | 54 | ||||||||||||||||||
|
Net
cash provided by (used in) financing activities
|
1,793 | (38,849 | ) | - | 7,789 | - | (29,267 | ) | ||||||||||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(74 | ) | (11,217 | ) | 266 | 8,507 | - | (2,518 | ) | |||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
84 | 26,272 | 493 | 1,821 | - | 28,670 | ||||||||||||||||||
|
Cash
and cash equivalents at end of year
|
$ | 10 | $ | 15,055 | $ | 759 | $ | 10,328 | $ | - | $ | 26,152 | ||||||||||||
- 123 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
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 | ||||||||||||
- 124 -
CPI
INTERNATIONAL, INC.
and
subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All
tabular amounts in thousands except share and per share
amounts)
|
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 | ||||||||||||
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 10, 2009 | |||
| By: | /s/ JOEL A. LITTMAN | ||
|
Joel A.
Littman
Chief Financial
Officer, Treasurer and Secretary
(Principal
Financial and Accounting Officer)
|
|||
| Date: December 10, 2009 | |||
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
10, 2009
|
||||
|
O.
Joe Caldarelli |
(Principal Executive Officer) | |||||
| /s/ JOEL A. LITTMAN | Chief Financial Officer, Treasurer | December 10, 2009 | ||||
|
Joel
A. Littman
|
and
Secretary (Principal Financial
and
Accounting Officer)
|
|||||
|
MICHAEL TARGOFF*
|
Chairman
of the Board of Directors
|
December
10, 2009
|
||||
|
Michael
Targoff
|
||||||
|
MICHAEL F. FINLEY*
|
Director
|
December
10, 2009
|
||||
|
Michael
F. Finley
|
||||||
|
JEFFREY P. HUGHES*
|
Director
|
December
10, 2009
|
||||
|
Jeffrey
P. Hughes
|
||||||
|
STEPHEN R. LARSON*
|
Director
|
December
10, 2009
|
||||
|
Stephen
R. Larson
|
||||||
|
WILLIAM P. RUTLEDGE*
|
Director
|
December
10, 2009
|
||||
|
William
P. Rutledge
|
||||||
| *By: | /s/ JOEL A. LITTMAN | ||||||
|
Joel
A. Littman
Attorney-in-fact
|
|||||||
| Exhibit Number |
Exhibit
Description
|
|
2.1
|
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)
|
||
|
2.2
|
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)
|
||
|
2.3
|
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)
|
||
| 2.4 |
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)
|
||
| 4.5 | Specimen common stock certificate of the Registrant (Exhibit 4.5)(15) |
|
Exhibit
Number
|
Exhibit
Description
|
|
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)
|
||
|
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) |
|
Exhibit
Number
|
Exhibit
Description
|
| 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, December 9, 2008 and February 24, 2009
(Exhibit 10.1)(24)
|
||
| 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)
|
||
|
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)
|
|
Exhibit
Number
|
Exhibit
Description
|
| 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
(Exhibit 10.44)(23)
|
||
| 10.45 |
New
Form of Performance Stock Option Agreement (Senior Executives) under 2006
Equity and Performance Incentive Plan (Exhibit
10.45)(23)
|
||
| 10.46 |
New
Form of Performance Stock Option Agreement under 2006 Equity and
Performance Incentive Plan (Exhibit 10.46)(23)
|
||
| 10.47 | New Form of Performance Restricted Stock Agreement (Senior Executives) under 2006 Equity and Performance Incentive Plan (Exhibit 10.47)(23) |
|
Exhibit
Number
|
Exhibit
Description
|
| 10.48 |
New
Form of Performance Restricted Stock Agreement under 2006 Equity and
Performance Incentive Plan (Exhibit 10.48)(23)
|
||
| 10.49 |
New
Form of Performance Restricted Stock Unit Award Agreement (Senior
Executives) under 2006 Equity and Performance Incentive Plan (Exhibit
10.49)(23)
|
||
| 10.50 |
New
Form of Performance Restricted Stock Unit Award Agreement under 2006
Equity and Performance Incentive Plan (Exhibit
10.50)(23)
|
||
| 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
|
| (23) |
Incorporated
by reference to the Registrant’s Form 10-K filed on December 15,
2008
|
| (24) |
Incorporated
by reference to the Registrant’s Form 8-K filed on February 25,
2009
|
- 132 -