The following table summarizes the fair value of derivative instruments designated as cash flow hedges at July 2, 2010 and October 2, 2009:
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
|
Fair Value
|
|
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
July 2,
2010
|
|
|
October 2,
2009
|
|
|
|
July2,
2010
|
|
|
October 2,
2009
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
(1,109
|
)
|
|
$
|
(1,766
|
)
|
Interest rate contracts
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
-
|
|
|
|
(557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
Prepaid and other current assets
|
|
$
|
659
|
|
|
$
|
3,467
|
|
Accrued expenses
|
|
|
(20
|
)
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
659
|
|
|
$
|
3,467
|
|
|
|
$
|
(1,129
|
)
|
|
$
|
(2,323
|
)
|
As of July 2, 2010 and October 2, 2009, all of the Company’s derivative instruments were classified as hedging instruments in accordance with ASC 815.
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
The following table summarizes the effect of derivative instruments on the condensed consolidated statements of income and comprehensive income for the three and nine months ended July 2, 2010 and July 3, 2009:
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of
(Loss) Gain Recognized
in OCI on Derivative
(Effective Portion)
|
|
Location of
(Loss) Gain Reclassified from Accumulated
OCI into Income
(Effective Portion)
|
|
Amount of
(Loss) Gain Reclassified from Accumulated OCI into Income
(Effective Portion)
|
|
Location of
(Loss) Gain Recognized in Income on Derivative (Ineffective and Excluded Portion)
|
|
Amount of (Loss) Gain
Recognized in Income on Derivative
(Ineffective and Excluded Portion )
|
|
|
|
Three Months Ended
|
|
|
|
Three Months Ended
|
|
|
|
Three Months Ended
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
Interest rate contracts
|
|
$
|
(33
|
)
|
|
$
|
(302
|
)
|
Interest expense, net
|
|
$
|
(443
|
)
|
|
$
|
(528
|
)
|
Interest expense, net
|
|
$
|
(9
|
)
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
|
(667
|
)
|
|
|
3,591
|
|
Cost of sales
|
|
|
149
|
|
|
|
(62
|
)
|
General and administrative
(a)
|
3
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
65
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
94
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
69
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(700
|
)
|
|
$
|
3,289
|
|
|
|
$
|
1,064
|
|
|
$
|
(2,045
|
)
|
|
|
$
|
(6
|
)
|
|
$
|
(72
|
)
|
(a) The amount of gain recognized in income during the three months ended July 2, 2010 represents a $3 loss related to the amount excluded from the assessment of hedge effectiveness. The amount of loss recognized in income during the three months ended July 3, 2009 represents a $64 loss related to the amount excluded from the assessment of hedge effectiveness, net of $4 gain related to the ineffective portion of the hedging relationships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
|
|
Interest rate contracts
|
|
$
|
(281
|
)
|
|
$
|
(1,889
|
)
|
Interest expense, net
|
|
$
|
(1,495
|
)
|
|
$
|
(1,228
|
)
|
Interest expense, net
|
|
$
|
(28
|
)
|
|
$
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
|
888
|
|
|
|
(2,791
|
)
|
Cost of sales
|
|
|
1805
|
|
|
|
(3,167
|
)
|
General and administrative
(b)
|
51
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
307
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
134
|
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
185
|
|
|
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
607
|
|
|
$
|
(4,680
|
)
|
|
|
$
|
936
|
|
|
$
|
(4,956
|
)
|
|
|
$
|
23
|
|
|
$
|
(325
|
)
|
(b) The amount of gain recognized in income during the nine months ended July 2, 2010 represents a $62 gain related to the ineffective portion of the hedging relationships, net of a $11 loss related to the amount excluded from the assessment of hedge effectiveness. The amount of loss recognized in income during the nine months ended July 3, 2009 represents a $286 loss related to the amount excluded from the assessment of hedge effectiveness, net of a $1 gain related to the ineffective portion of the hedging relationships.
|
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
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.
When the Company’s derivatives are in a net asset position, such as the case with the majority of the Company’s forward foreign exchange contract derivatives at July 2, 2010, the Company is exposed to credit loss from nonperformance by the counterparty. If the counterparty fails to perform, credit risk with such counterparty is equal to the extent of the fair value gain in the derivative. At July 2, 2010, the Company’s interest rate contract derivative was in a liability position, and the Company, therefore, was not exposed to the interest rate contract counterparty credit risk.
7. Commitments and Contingencies
Leases:
The Company is committed to minimum rentals under non-cancelable operating lease agreements, primarily for land and facility space, that expire on various dates through 2050. Certain of the leases provide for escalating lease payments. Future minimum lease payments for all non-cancelable operating lease agreements at July 2, 2010 were as follows:
|
|
|
|
2010 (remaining three months)
|
|
$
|
482
|
|
2011
|
|
|
1,324
|
|
2012
|
|
|
1,125
|
|
2013
|
|
|
633
|
|
2014
|
|
|
420
|
|
Thereafter
|
|
|
2,634
|
|
|
|
$
|
6,618
|
|
Real estate taxes, insurance, and maintenance are also obligations of the Company. Rental expense under non-cancelable operating leases amounted to $0.6 million and $1.8 million for the three and nine months ended July 2, 2010, respectively, and $0.6 million and $2.0 million for the corresponding periods of fiscal year 2009. Assets subject to capital leases at July 2, 2010 and October 2, 2009 were not material.
Guarantees:
The Company has restricted cash of $1.0 million and $1.6 million as of July 2, 2010 and October 2, 2009, respectively, consisting primarily of bank guarantees from customer advance payments to the Company’s international subsidiaries. The bank guarantees become unrestricted cash when performance under the sales or supply contract is complete.
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
Purchase commitments:
As of July 2, 2010, the Company had the following known purchase commitments, which include primarily future purchases for inventory-related items under various purchase arrangements as well as other obligations in the ordinary course of business that the Company cannot cancel or where it would be required to pay a termination fee in the event of cancellation:
|
|
|
|
2010 (remaining nine months)
|
|
$
|
20,253
|
|
2011
|
|
|
9,710
|
|
2012
|
|
|
166
|
|
2013
|
|
|
37
|
|
2014
|
|
|
25
|
|
|
|
$
|
30,191
|
|
Contingent Earnout Consideration:
Under the terms of the purchase agreement for the acquisition of Malibu Research, Inc. (“Malibu”) in August 2007, in addition to the $20.5 million of net cash consideration paid for the acquisition, the Company could have also been required to pay a potential earnout to the former stockholders of Malibu of up to $14.0 million based on the achievement of certain financial objectives over the three years following the acquisition, ending July 2, 2010 (“Financial Earnout”). Based on financial performance through July 2, 2010, no Financial Earnout was earned for any of the three earnout periods.
In addition, the Company could have also been required to pay a discretionary earnout of up to $1.0 million to the former stockholders of Malibu contingent upon achievement of certain succession planning goals by June 30, 2010. However, the Company has determined that such goals were not attained and, as a result, no discretionary earnout was ultimately paid.
Merger Expense Commitment:
For services rendered in connection with the merger agreement with Comtech, the Company has agreed to pay J.P. Morgan Securities, Inc. (“J.P. Morgan” ) a fee estimated to be approximately $5.0 million, of which $1.4 million has been accrued (accrued expenses) and $3.6 million will become payable only if the proposed merger is consummated. The Company has also agreed to reimburse J.P. Morgan for certain expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities, including liabilities arising under the federal securities laws.
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.
On July 1, 2010, a putative stockholder class action complaint was filed against the Company, the members of the Company’s board of directors, and Comtech. The lawsuit concerns the proposed merger between the Company and Comtech, and generally asserts claims alleging, among other things, that each member of the Company’s board of directors breached his fiduciary duties by agreeing to the terms of the proposed merger and by failing to provide stockholders with allegedly material information related to the proposed merger, and that Comtech aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Company’s board of directors. The lawsuit seeks, among other things, class action certification and monetary relief. On July 28, 2010, the plaintiff filed an amended complaint, making
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
generally the same claims against the same defendants, and seeking the same relief. In addition, the amended complaint generally alleges that the consideration to be paid to the Company’s stockholders under the terms of the proposed merger is inadequate. The Company believes all claims asserted in the lawsuit to be without merit.
During fiscal year 2009, the Company received a notice from a customer purporting to terminate a sales contract due to alleged nonperformance. In April 2010, the Company received another notice from the customer claiming additional cost incurred due to the alleged nonperformance. The Company plans to contest this matter vigorously. The Company recorded certain costs in fiscal year 2008 as a result of the termination; however, at this time, the Company cannot estimate the range of any further possible loss or gain with respect to this matter or whether an unfavorable resolution of this matter would have a material adverse effect on the Company's consolidated results of operations and cash flows.
8. Stock-based Compensation Plans
Stock Options:
The following table summarizes the status of the Company’s stock option awards as of July 2, 2010 and October 2, 2009 and changes during the nine months ended July 2, 2010 under the Company’s stock option plans:
|
|
Oustanding Options
|
|
|
Exercisable Options
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance at October 2, 2009
|
|
|
3,382,763
|
|
|
$
|
6.38
|
|
|
|
4.95
|
|
|
$
|
20,362
|
|
|
|
2,845,996
|
|
|
$
|
4.73
|
|
|
|
4.43
|
|
|
$
|
20,227
|
|
Granted
|
|
|
108,000
|
|
|
|
9.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(122,795
|
)
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
|
(17,125
|
)
|
|
|
16.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 2, 2010
|
|
|
3,350,843
|
|
|
$
|
6.60
|
|
|
|
4.49
|
|
|
$
|
30,435
|
|
|
|
2,912,134
|
|
|
$
|
5.58
|
|
|
|
4.00
|
|
|
$
|
29,230
|
|
The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on the Company’s closing stock price of $15.38 as of July 2, 2010, which would have been received by the option holders had all option holders exercised their options and sold the shares received upon such exercises as of that date. As of July 2, 2010, approximately 2.6 million exercisable options were in-the-money.
During the three and nine months ended July 2, 2010, cash received from option exercises was approximately $0.1 million and $0.2 million, respectively, and the total intrinsic value of options exercised was $0.9 million and $1.5 million, respectively. During the three and nine months ended July 3, 2009, cash received from option exercises was $46,448 and $82,451, respectively, and the total intrinsic value of options exercised was approximately $0.4 million. As of July 2, 2010, there was approximately $2.0 million of total unrecognized compensation costs related to nonvested stock options, which is expected to be recognized over a weighted-average vesting period of 1.3 years.
Stock Purchase Plan:
Employees purchased 15,662 shares for $0.2 million and 49,127 shares for $0.6 million in the three and nine months ended July 2, 2010, respectively, and 22,180 shares for $0.2 million and 93,031 shares for $0.8 million for the corresponding periods of fiscal year 2009 under the 2006 Employee Stock Purchase Plan (the “2006 ESPP”). As of July 2, 2010, there were no unrecognized compensation costs related to rights to acquire stock under the 2006 ESPP.
Restricted Stock and Restricted Stock Units:
There were 311,341 and 218,298 shares outstanding of nonvested restricted stock and restricted stock units granted to directors and employees as of July 2, 2010 and October 2, 2009, respectively. The restricted stock and restricted stock units generally vest over periods of one to four years. Upon vesting, each restricted stock unit will automatically convert into one share of common stock of CPI International.
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
A summary of the status of the Company’s nonvested restricted stock and restricted stock unit awards as of July 2, 2010 and October 2, 2009 and of changes during the nine months ended July 2, 2010 is presented below:
|
|
Number of
Shares
|
|
|
Weighted-Average Grant-Date Fair Value Per Share
|
|
Nonvested at October 2, 2009
|
|
|
218,298
|
|
|
$
|
11.27
|
|
Granted
|
|
|
163,307
|
|
|
$
|
10.04
|
|
Vested
|
|
|
(65,914
|
)
|
|
$
|
11.87
|
|
Forfeited
|
|
|
(4,350
|
)
|
|
$
|
10.62
|
|
Nonvested at July 2, 2010
|
|
|
311,341
|
|
|
$
|
10.51
|
|
During the first quarter of fiscal year 2010, the Company granted 104,800 restricted stock units with time vesting criteria to certain of its non-executive employees and 36,000 restricted stock units with performance vesting criteria to its officers.
During the second quarter of fiscal year 2010, the Company granted certain members of its board of directors a total of 22,507 shares of restricted stock which will vest within the following three years.
Aggregate intrinsic value of the nonvested restricted stock and restricted stock unit awards at July 2, 2010 and October 2, 2009 was $4.8 million and $2.5 million, respectively. As of July 2, 2010, there was $2.6 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 awards is estimated on the date of grant using the Monte Carlo simulation technique in a risk-neutral framework.
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
Stock Options.
Assumptions used in the Black-Scholes model to estimate the fair value of time-based option grants during the nine months ended July 2, 2010 (specifically, the first quarter of fiscal year 2010) are presented below.
Expected term (in years)
|
|
|
7.79
|
|
Expected volatility
|
|
|
60.50
|
%
|
Risk-free rate
|
|
|
3.00
|
%
|
Dividend yield
|
|
|
0
|
%
|
There were no time-based options granted during the three months ended July 2, 2010 nor during the three and nine months ended July 3, 2009.
Assumptions used in the Monte Carlo simulation model to estimate the fair value of time- and market performance-based options granted during the nine months ended July 3, 2009 (specifically, the first quarter of fiscal year 2009) are presented below.
Contractual term (in years)
|
|
|
10.00
|
|
Expected volatility
|
|
|
51.50
|
%
|
Risk-free rate
|
|
|
3.53
|
%
|
Dividend yield
|
|
|
0
|
%
|
There were no time- and market performance-based options granted during the three and nine months ended July 2, 2010 nor during the three months ended July 3, 2009.
The weighted-average grant-date fair value of all the options granted during the nine months ended July 2, 2010 and July 3, 2009 was $6.25 and $5.61 per share, respectively.
Stock Purchase Plan.
Based on the 15% discount received by the employees, the weighted-average fair value of shares issued under the 2006 ESPP was $2.31 and $2.08 per share during the three and nine months ended July 2, 2010, respectively, and $1.40 and $1.48 per share for the corresponding periods of fiscal year 2009.
Restricted Stock and Restricted Stock Units.
The fair value of each time-based restricted stock and restricted stock unit award and of each performance-based restricted stock unit award is calculated using the market price of the Company’s common stock on the date of grant. The fair value of each performance-based restricted stock unit award assumes that the relevant performance criteria will be met and the target payout level will be achieved. Compensation cost is adjusted for subsequent changes in the outcome of performance-related conditions until the award vests.
Assumptions used in the Monte Carlo simulation model to estimate the fair value of time- and market performance-based restricted stock and restricted stock units granted during the nine months ended July 3, 2009 (specifically, the first quarter of fiscal year 2009) are presented below.
Expected volatility
|
|
|
51.50
|
%
|
Risk-free rate
|
|
|
3.54
|
%
|
Dividend yield
|
|
|
0
|
%
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
There were no time- and market performance-based restricted stock and restricted stock units granted during the three and nine months ended July 2, 2010 nor during the three months ended July 3, 2009.
The weighted-average estimated fair value of all restricted stock and restricted stock units granted during the nine months ended July 2, 2010 and July 3, 2009 was $10.04 and $8.87, respectively.
As stock-based compensation expense recognized in the condensed consolidated statements of income and comprehensive income for the three and nine months ended July 2, 2010 and for the corresponding periods of fiscal year 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FASB ASC 718, “Compensation—Stock Compensation,” requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes stock-based compensation expense for the three and nine months ended July 2, 2010 and July 3, 2009, which was allocated as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
Share-based compensation cost recognized in the
income statement by caption:
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
152
|
|
|
$
|
131
|
|
|
$
|
432
|
|
|
$
|
375
|
|
Research and development
|
|
|
51
|
|
|
|
43
|
|
|
|
161
|
|
|
|
130
|
|
Selling and marketing
|
|
|
74
|
|
|
|
75
|
|
|
|
214
|
|
|
|
216
|
|
General and administrative
|
|
|
505
|
|
|
|
453
|
|
|
|
1,493
|
|
|
|
1,303
|
|
|
|
$
|
782
|
|
|
$
|
702
|
|
|
$
|
2,300
|
|
|
$
|
2,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation cost capitalized in inventory
|
|
$
|
153
|
|
|
$
|
131
|
|
|
$
|
444
|
|
|
$
|
386
|
|
Share-based compensation cost remaining in inventory
at end of period
|
|
$
|
98
|
|
|
$
|
87
|
|
|
$
|
98
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
460
|
|
|
$
|
455
|
|
|
$
|
1,375
|
|
|
$
|
1,327
|
|
Restricted stock and units
|
|
|
286
|
|
|
|
215
|
|
|
|
823
|
|
|
|
599
|
|
Stock purchase plan
|
|
|
36
|
|
|
|
32
|
|
|
|
102
|
|
|
|
98
|
|
|
|
$
|
782
|
|
|
$
|
702
|
|
|
$
|
2,300
|
|
|
$
|
2,024
|
|
The tax benefit realized from option exercises and restricted stock vesting totaled approximately $0.4 million and $0.8 million during the three and nine months ended July 2, 2010, respectively. The tax benefit realized from option exercises and restricted stock vesting totaled approximately $0.2 million for the corresponding periods of fiscal year 2009.
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
9. Income Taxes
Income tax expense of $5.9 million for the nine months ended July 2, 2010 and income tax benefit of $2.2 million for the nine months ended July 3, 2009 reflect estimated federal, foreign and state taxes. The effective tax rate for the nine months ended July 2, 2010 was 32.1% and diverged from the federal and state statutory rate primarily due to approximately $0.8 million for discrete income tax benefits, including $0.3 million to true-up the fiscal year 2009 tax provision estimate to the filed fiscal year 2009 U.S. income tax return and $0.3 million to adjust deferred tax accounts for a reduction to future Canadian income tax rates.
The effective tax rate for the nine months ended July 3, 2009 was a negative 17% and diverged from the federal and state statutory rate primarily due to several significant discrete tax benefits: (1) $5.1 million of unrecognized tax benefit relating to the Company’s position with regard to an outstanding audit by the Canada Revenue Agency (“CRA”), (2) $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 attribute taxable income to California for tax years beginning on or after January 1, 2011 and (3) $0.9 million for adjustments to Canadian deferred tax accounts. The $0.9 million adjustment to Canadian deferred tax accounts includes a $0.6 million tax benefit to reflect the reduction to Canadian corporate income tax rates and a $0.3 million tax benefit to correct the computation of certain deferred tax accounts. The $0.6 million adjustment should have been recorded in the first quarter of fiscal year 2008 rather than in the first quarter of fiscal year 2009 and the $0.3 million adjustment should have been recorded in several prior year financial results. These adjustments are deemed immaterial to the Company’s results of operations and financial condition in the affected periods.
The effective tax rate for the three months ended July 2, 2010 was 27.1% and diverged from the federal and state statutory rate primarily due to approximately $0.3 million for discrete income tax benefits to true-up the fiscal year 2009 tax provision estimate to the filed fiscal year 2009 US income tax return. The effective tax rate for the three months ended July 3, 2009 was 43.7% and diverged from the federal and state statutory rate primarily due to approximately $0.3 million for several non-recurring discrete income tax expense items and $0.2 million from foreign currency translation losses, primarily from Canadian tax accounts.
The Company files U.S. federal income tax returns, as well as income tax returns in California and other U.S. states, Canada and other foreign jurisdictions. Generally, fiscal years 2006 to 2009 remain open to examination by the various taxing jurisdictions. The Company has not been audited for U.S. federal income tax matters. The Company has income tax audits in progress in Canada and in several international jurisdictions in which it operates. The years under examination by the Canadian taxing authorities are fiscal years 2001 and 2002.
The total unrecognized tax benefit, which excludes any related interest accruals, was $3.3 million as of July 2, 2010. Of the total unrecognized tax benefit balance, $2.4 million of unrecognized tax benefits would reduce the effective tax rate if recognized as of July 2, 2010. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the condensed consolidated statement of income and comprehensive income and totaled approximately $0.1 million for the nine months ended July 2, 2010. Accrued interest and penalties, net of interest benefits accrued on receivables anticipated as a result of the change in the U.S.-Canada treaty, were approximately $0.7 million as of July 2, 2010. The Company had minimal penalties accrued in income tax expense
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
The Company believes that it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by $2.7 million as audits close, statutes expire and tax payments are made. Any prospective adjustments to the Company’s unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to the Company’s effective tax rate. Accordingly, the Company’s effective tax rate could fluctuate materially from period to period.
10. Earnings Per Share
Earnings per share is computed using the two-class method, which is an earnings allocation method for computing earnings per share that treats a participating security as having rights to earnings that would otherwise have been available to common stockholders. Certain of the Company’s stock-based compensation awards pay nonforfeitable dividends to the participants during the vesting period and, as such, are deemed participating securities. Basic earnings per share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares, pursuant to the treasury stock method.
Earnings per share for the respective periods were calculated as follows (amounts and shares in thousands, except per share data):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 2, 2010
|
|
|
July 3, 2009
1
|
|
|
July 2, 2010
|
|
|
July 3, 2009
1
|
|
Basic Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,211
|
|
|
$
|
3,870
|
|
|
$
|
12,544
|
|
|
$
|
15,214
|
|
Income allocated to participating securities
|
|
|
(78
|
)
|
|
|
(52
|
)
|
|
|
(222
|
)
|
|
|
(175
|
)
|
Net income available to common shareholders
|
|
$
|
4,133
|
|
|
$
|
3,818
|
|
|
$
|
12,322
|
|
|
$
|
15,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
16,631
|
|
|
|
16,362
|
|
|
|
16,534
|
|
|
|
16,316
|
|
Net income per common share - Basic
|
|
$
|
0.25
|
|
|
$
|
0.23
|
|
|
$
|
0.75
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,211
|
|
|
$
|
3,870
|
|
|
$
|
12,544
|
|
|
$
|
15,214
|
|
Income allocated to participating securities
|
|
|
(72
|
)
|
|
|
(49
|
)
|
|
|
(206
|
)
|
|
|
(164
|
)
|
Net income available to common shareholders
|
|
$
|
4,139
|
|
|
$
|
3,821
|
|
|
$
|
12,338
|
|
|
$
|
15,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
16,631
|
|
|
|
16,362
|
|
|
|
16,534
|
|
|
|
16,316
|
|
Effect of dilutive stock options
|
|
|
1,330
|
|
|
|
1,173
|
|
|
|
1,253
|
|
|
|
1,086
|
|
Diluted weighted average common shares outstanding
|
|
|
17,961
|
|
|
|
17,535
|
|
|
|
17,787
|
|
|
|
17,402
|
|
Net income per common share - Diluted
|
|
$
|
0.23
|
|
|
$
|
0.22
|
|
|
$
|
0.69
|
|
|
$
|
0.86
|
|
1
Restated in accordance with ASC 260.
|
|
|
|
|
The calculation of diluted net income per share excludes all anti-dilutive shares from stock options. For the three and nine months ended July 2, 2010, the number of anti-dilutive shares, as calculated based on the weighted average price of the Company’s common stock for the periods, was
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
approximately 0.6 million and 0.8 million shares, respectively. For the three and nine months ended July 3, 2009, the number of anti-dilutive shares, as calculated based on the weighted average price of the Company’s common stock for the periods, was approximately 0.9 million shares.
11. Segments, Geographic and Customer Information
The Company’s reportable segments are VED and satcom equipment. The VED segment develops, manufactures and distributes high-power/high-frequency microwave and radio frequency signal components. The satcom equipment segment manufactures and supplies high-power amplifiers and networks for satellite communication uplink and industrial applications. Segment information reported below is consistent with the manner in which it is reviewed and evaluated by the Company’s chief operating decision maker (“CODM”), its chief executive officer, and is based on the nature of the Company’s operations and products offered to customers.
Amounts not reported as VED or satcom equipment are reported as Other. In accordance with quantitative and qualitative guidelines established by FASB ASC 280, “Segment Reporting,” Other includes the activities of the Company’s Malibu division and unallocated corporate expenses, such as business combination-related expenses, share-based compensation expense and certain non-recurring or unusual expenses. The Malibu division is a designer, manufacturer and integrator of advanced antenna systems for radar, radar simulators and telemetry systems, as well as for data links used in ground, airborne, unmanned aerial vehicles (“UAVs”) and shipboard systems.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Sales to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$
|
66,701
|
|
|
$
|
62,572
|
|
|
$
|
191,006
|
|
|
$
|
180,269
|
|
Satcom equipment
|
|
|
21,621
|
|
|
|
15,704
|
|
|
|
62,666
|
|
|
|
49,329
|
|
Other
|
|
|
5,554
|
|
|
|
4,244
|
|
|
|
11,323
|
|
|
|
11,971
|
|
|
|
$
|
93,876
|
|
|
$
|
82,520
|
|
|
$
|
264,995
|
|
|
$
|
241,569
|
|
Intersegment product transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$
|
5,853
|
|
|
$
|
3,536
|
|
|
$
|
18,257
|
|
|
$
|
13,323
|
|
Satcom equipment
|
|
|
94
|
|
|
|
-
|
|
|
|
95
|
|
|
|
9
|
|
|
|
$
|
5,947
|
|
|
$
|
3,536
|
|
|
$
|
18,352
|
|
|
$
|
13,332
|
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$
|
17,744
|
|
|
$
|
15,248
|
|
|
$
|
47,862
|
|
|
$
|
37,449
|
|
Satcom equipment
|
|
|
1,737
|
|
|
|
1,078
|
|
|
|
6,455
|
|
|
|
3,123
|
|
Other
|
|
|
(7,160
|
)
|
|
|
(2,545
|
)
|
|
|
(16,080
|
)
|
|
|
(6,514
|
)
|
|
|
$
|
12,321
|
|
|
$
|
13,781
|
|
|
$
|
38,237
|
|
|
$
|
34,058
|
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
EBITDA is the measure used by the CODM to evaluate segment profit or loss. EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. The Company believes that EBITDA is a more meaningful representation of segment operating performance for leveraged businesses like its own and therefore uses this metric as its internal measure of profitability. For the reasons listed below, the Company believes EBITDA provides investors better understanding of the Company’s financial performance in connection with their analysis of the Company’s business:
|
•
|
EBITDA is a component of the measures used by the Company’s board of directors and management team to evaluate the Company’s operating performance;
|
|
•
|
the Company’s Senior Credit Facilities contain a covenant that requires the Company to maintain a senior secured leverage ratio that contains EBITDA as a component, and the Company’s management team uses EBITDA to monitor compliance with this covenant;
|
|
•
|
EBITDA is a component of the measures used by the Company’s management team to make day-to-day operating decisions;
|
|
•
|
EBITDA facilitates comparisons between the Company’s operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the Company’s management to facilitate internal comparisons to competitors’ results and the Company’s industry in general; and
|
|
•
|
the payment of management bonuses is contingent upon, among other things, the satisfaction by the Company of certain targets that contain EBITDA as a component.
|
Other companies may define EBITDA differently and, as a result, the Company’s measure of EBITDA may not be directly comparable to EBITDA of other companies. Although the Company uses EBITDA as a financial measure to assess the performance of its business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate the Company’s business. When analyzing the Company’s performance, EBITDA should be considered in addition to, and not as a substitute for or superior to, operating income, net income, cash flows from operating activities or other statements of income or statements of cash flows data prepared in accordance with U.S. GAAP. Operating income by the Company’s reportable segments was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
VED
|
|
$
|
16,232
|
|
|
$
|
13,788
|
|
|
$
|
43,367
|
|
|
$
|
33,128
|
|
Satcom equipment
|
|
|
1,566
|
|
|
|
894
|
|
|
|
5,927
|
|
|
|
2,568
|
|
Other
|
|
|
(8,245
|
)
|
|
|
(3,655
|
)
|
|
|
(19,310
|
)
|
|
|
(9,966
|
)
|
|
|
$
|
9,553
|
|
|
$
|
11,027
|
|
|
$
|
29,984
|
|
|
$
|
25,730
|
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
The following table reconciles net income to EBITDA:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
Net income
|
|
$
|
4,211
|
|
|
$
|
3,870
|
|
|
$
|
12,544
|
|
|
$
|
15,214
|
|
Depreciation and amortization
|
|
|
2,768
|
|
|
|
2,703
|
|
|
|
8,253
|
|
|
|
8,080
|
|
Interest expense, net
|
|
|
3,780
|
|
|
|
4,204
|
|
|
|
11,516
|
|
|
|
12,965
|
|
Income tax expense (benefit)
|
|
|
1,562
|
|
|
|
3,004
|
|
|
|
5,924
|
|
|
|
(2,201
|
)
|
EBITDA
|
|
$
|
12,321
|
|
|
$
|
13,781
|
|
|
$
|
38,237
|
|
|
$
|
34,058
|
|
12. Supplemental Guarantors Condensed Consolidating Financial Information (Unaudited)
Issued on January 23, 2004, CPI’s 8% Senior Subordinated Notes due 2012 (“8% Notes”), the current balance of which is $117.0 million, are guaranteed by CPI International and all of CPI’s domestic subsidiaries. Separate financial statements of the guarantors are not presented because (i) the guarantors are wholly owned and have fully and unconditionally guaranteed the 8% Notes on a joint and several basis and (ii) the Company’s management has determined that such separate financial statements are not material to investors. Instead, presented below are the consolidating financial statements of: (a) the parent, CPI International, (b) the issuer, CPI, (c) the guarantor subsidiaries (all of the domestic subsidiaries), (d) the non-guarantor subsidiaries, (e) the consolidating elimination entries, and (f) the consolidated totals. The accompanying consolidating financial information should be read in connection with the condensed consolidated financial statements of CPI International.
Investments in subsidiaries are accounted for based on the equity method. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, intercompany transactions and intercompany sales.
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
As of July 2, 2010
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
689
|
|
|
$
|
33,092
|
|
|
$
|
683
|
|
|
$
|
12,719
|
|
|
$
|
-
|
|
|
$
|
47,183
|
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
|
|
952
|
|
|
|
88
|
|
|
|
-
|
|
|
|
1,040
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
19,403
|
|
|
|
9,490
|
|
|
|
14,540
|
|
|
|
-
|
|
|
|
43,433
|
|
Inventories
|
|
|
-
|
|
|
|
47,715
|
|
|
|
10,119
|
|
|
|
21,175
|
|
|
|
(602
|
)
|
|
|
78,407
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
10,467
|
|
|
|
2
|
|
|
|
16
|
|
|
|
-
|
|
|
|
10,485
|
|
Intercompany receivable
|
|
|
-
|
|
|
|
6,687
|
|
|
|
9,776
|
|
|
|
9,882
|
|
|
|
(26,345
|
)
|
|
|
-
|
|
Prepaid and other current assets
|
|
|
25
|
|
|
|
3,052
|
|
|
|
476
|
|
|
|
768
|
|
|
|
-
|
|
|
|
4,321
|
|
Total current assets
|
|
|
714
|
|
|
|
120,416
|
|
|
|
31,498
|
|
|
|
59,188
|
|
|
|
(26,947
|
)
|
|
|
184,869
|
|
Property, plant and equipment, net
|
|
|
-
|
|
|
|
39,413
|
|
|
|
2,902
|
|
|
|
12,335
|
|
|
|
-
|
|
|
|
54,650
|
|
Deferred debt issue costs, net
|
|
|
302
|
|
|
|
2,305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,607
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
53,534
|
|
|
|
13,074
|
|
|
|
6,610
|
|
|
|
-
|
|
|
|
73,218
|
|
Goodwill
|
|
|
-
|
|
|
|
93,307
|
|
|
|
20,973
|
|
|
|
47,945
|
|
|
|
-
|
|
|
|
162,225
|
|
Other long-term assets
|
|
|
-
|
|
|
|
3,559
|
|
|
|
227
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,786
|
|
Investment in subsidiaries
|
|
|
229,313
|
|
|
|
117,007
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(346,320
|
)
|
|
|
-
|
|
Total assets
|
|
$
|
230,329
|
|
|
$
|
429,541
|
|
|
$
|
68,674
|
|
|
$
|
126,078
|
|
|
$
|
(373,267
|
)
|
|
$
|
481,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2
|
|
|
$
|
11,223
|
|
|
$
|
2,611
|
|
|
$
|
7,328
|
|
|
$
|
-
|
|
|
$
|
21,164
|
|
Accrued expenses
|
|
|
2,417
|
|
|
|
19,142
|
|
|
|
1,801
|
|
|
|
4,595
|
|
|
|
-
|
|
|
|
27,955
|
|
Product warranty
|
|
|
-
|
|
|
|
2,378
|
|
|
|
823
|
|
|
|
1,629
|
|
|
|
-
|
|
|
|
4,830
|
|
Income taxes payable
|
|
|
-
|
|
|
|
(82
|
)
|
|
|
201
|
|
|
|
3,489
|
|
|
|
-
|
|
|
|
3,608
|
|
Deferred income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
328
|
|
|
|
-
|
|
|
|
328
|
|
Advance payments from customers
|
|
|
-
|
|
|
|
4,261
|
|
|
|
4,492
|
|
|
|
4,146
|
|
|
|
-
|
|
|
|
12,899
|
|
Intercompany payable
|
|
|
26,345
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,345
|
)
|
|
|
-
|
|
Total current liabilities
|
|
|
28,764
|
|
|
|
36,922
|
|
|
|
9,928
|
|
|
|
21,515
|
|
|
|
(26,345
|
)
|
|
|
70,784
|
|
Deferred income taxes, non-current
|
|
|
-
|
|
|
|
20,064
|
|
|
|
-
|
|
|
|
3,933
|
|
|
|
-
|
|
|
|
23,997
|
|
Long-term debt
|
|
|
11,931
|
|
|
|
183,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194,931
|
|
Other long-term liabilities
|
|
|
-
|
|
|
|
1,319
|
|
|
|
36
|
|
|
|
654
|
|
|
|
-
|
|
|
|
2,009
|
|
Total liabilities
|
|
|
40,695
|
|
|
|
241,305
|
|
|
|
9,964
|
|
|
|
26,102
|
|
|
|
(26,345
|
)
|
|
|
291,721
|
|
Common stock
|
|
|
170
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
170
|
|
Parent investment
|
|
|
-
|
|
|
|
54,939
|
|
|
|
43,167
|
|
|
|
59,077
|
|
|
|
(157,183
|
)
|
|
|
-
|
|
Additional paid-in capital
|
|
|
79,257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,211
|
)
|
|
|
8,211
|
|
|
|
79,257
|
|
Accumulated other comprehensive income
|
|
|
506
|
|
|
|
506
|
|
|
|
-
|
|
|
|
786
|
|
|
|
(1,292
|
)
|
|
|
506
|
|
Retained earnings
|
|
|
112,501
|
|
|
|
132,791
|
|
|
|
15,543
|
|
|
|
48,324
|
|
|
|
(196,658
|
)
|
|
|
112,501
|
|
Treasury stock, at cost
|
|
|
(2,800
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,800
|
)
|
Total stockholders’ equity
|
|
|
189,634
|
|
|
|
188,236
|
|
|
|
58,710
|
|
|
|
99,976
|
|
|
|
(346,922
|
)
|
|
|
189,634
|
|
Total liabilities and stockholders' equity
|
|
$
|
230,329
|
|
|
$
|
429,541
|
|
|
$
|
68,674
|
|
|
$
|
126,078
|
|
|
$
|
(373,267
|
)
|
|
$
|
481,355
|
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
As of October 2, 2009
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10
|
|
|
$
|
15,055
|
|
|
$
|
759
|
|
|
$
|
10,328
|
|
|
$
|
-
|
|
|
$
|
26,152
|
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
|
|
1,467
|
|
|
|
94
|
|
|
|
-
|
|
|
|
1,561
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
18,456
|
|
|
|
12,581
|
|
|
|
14,108
|
|
|
|
-
|
|
|
|
45,145
|
|
Inventories
|
|
|
-
|
|
|
|
41,877
|
|
|
|
7,622
|
|
|
|
18,117
|
|
|
|
(620
|
)
|
|
|
66,996
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
8,494
|
|
|
|
2
|
|
|
|
156
|
|
|
|
-
|
|
|
|
8,652
|
|
Intercompany receivable
|
|
|
-
|
|
|
|
9,033
|
|
|
|
6,751
|
|
|
|
10,534
|
|
|
|
(26,318
|
)
|
|
|
-
|
|
Prepaid and other current assets
|
|
|
-
|
|
|
|
5,396
|
|
|
|
475
|
|
|
|
829
|
|
|
|
-
|
|
|
|
6,700
|
|
Total current assets
|
|
|
10
|
|
|
|
98,311
|
|
|
|
29,657
|
|
|
|
54,166
|
|
|
|
(26,938
|
)
|
|
|
155,206
|
|
Property, plant and equipment, net
|
|
|
-
|
|
|
|
42,048
|
|
|
|
3,001
|
|
|
|
12,863
|
|
|
|
-
|
|
|
|
57,912
|
|
Deferred debt issue costs, net
|
|
|
344
|
|
|
|
3,265
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,609
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
54,891
|
|
|
|
13,477
|
|
|
|
7,062
|
|
|
|
-
|
|
|
|
75,430
|
|
Goodwill
|
|
|
-
|
|
|
|
93,307
|
|
|
|
20,973
|
|
|
|
47,945
|
|
|
|
-
|
|
|
|
162,225
|
|
Other long-term assets
|
|
|
-
|
|
|
|
3,645
|
|
|
|
227
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,872
|
|
Intercompany notes receivable
|
|
|
-
|
|
|
|
1,035
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,035
|
)
|
|
|
-
|
|
Investment in subsidiaries
|
|
|
211,575
|
|
|
|
114,416
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(325,991
|
)
|
|
|
-
|
|
Total assets
|
|
$
|
211,929
|
|
|
$
|
410,918
|
|
|
$
|
67,335
|
|
|
$
|
122,036
|
|
|
$
|
(353,964
|
)
|
|
$
|
458,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
(1
|
)
|
|
$
|
11,100
|
|
|
$
|
2,730
|
|
|
$
|
8,836
|
|
|
$
|
-
|
|
|
$
|
22,665
|
|
Accrued expenses
|
|
|
137
|
|
|
|
13,293
|
|
|
|
1,634
|
|
|
|
3,951
|
|
|
|
-
|
|
|
|
19,015
|
|
Product warranty
|
|
|
-
|
|
|
|
1,893
|
|
|
|
452
|
|
|
|
1,500
|
|
|
|
-
|
|
|
|
3,845
|
|
Income taxes payable
|
|
|
-
|
|
|
|
1,683
|
|
|
|
151
|
|
|
|
2,471
|
|
|
|
-
|
|
|
|
4,305
|
|
Advance payments from customers
|
|
|
-
|
|
|
|
7,389
|
|
|
|
4,368
|
|
|
|
1,239
|
|
|
|
-
|
|
|
|
12,996
|
|
Intercompany payable
|
|
|
26,318
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,318
|
)
|
|
|
-
|
|
Total current liabilities
|
|
|
26,454
|
|
|
|
35,358
|
|
|
|
9,335
|
|
|
|
17,997
|
|
|
|
(26,318
|
)
|
|
|
62,826
|
|
Deferred income taxes, non-current
|
|
|
-
|
|
|
|
20,342
|
|
|
|
-
|
|
|
|
4,384
|
|
|
|
-
|
|
|
|
24,726
|
|
Intercompany notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,035
|
|
|
|
(1,035
|
)
|
|
|
-
|
|
Long-term debt, less current portion
|
|
|
11,922
|
|
|
|
183,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194,922
|
|
Other long-term liabilities
|
|
|
-
|
|
|
|
1,720
|
|
|
|
36
|
|
|
|
471
|
|
|
|
-
|
|
|
|
2,227
|
|
Total liabilities
|
|
|
38,376
|
|
|
|
240,420
|
|
|
|
9,371
|
|
|
|
23,887
|
|
|
|
(27,353
|
)
|
|
|
284,701
|
|
Common stock
|
|
|
168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
Parent investment
|
|
|
-
|
|
|
|
52,241
|
|
|
|
43,167
|
|
|
|
58,615
|
|
|
|
(154,023
|
)
|
|
|
-
|
|
Additional paid-in capital
|
|
|
75,630
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(211
|
)
|
|
|
211
|
|
|
|
75,630
|
|
Accumulated other comprehensive gain (loss)
|
|
|
598
|
|
|
|
598
|
|
|
|
-
|
|
|
|
(223
|
)
|
|
|
(375
|
)
|
|
|
598
|
|
Retained earnings
|
|
|
99,957
|
|
|
|
117,659
|
|
|
|
14,797
|
|
|
|
39,968
|
|
|
|
(172,424
|
)
|
|
|
99,957
|
|
Treasury stock
|
|
|
(2,800
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,800
|
)
|
Total stockholders’ equity
|
|
|
173,553
|
|
|
|
170,498
|
|
|
|
57,964
|
|
|
|
98,149
|
|
|
|
(326,611
|
)
|
|
|
173,553
|
|
Total liabilities and stockholders' equity
|
|
$
|
211,929
|
|
|
$
|
410,918
|
|
|
$
|
67,335
|
|
|
$
|
122,036
|
|
|
$
|
(353,964
|
)
|
|
$
|
458,254
|
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended July 2, 2010
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$
|
-
|
|
|
$
|
57,946
|
|
|
$
|
19,237
|
|
|
$
|
35,629
|
|
|
$
|
(18,936
|
)
|
|
$
|
93,876
|
|
Cost of sales
|
|
|
-
|
|
|
|
41,111
|
|
|
|
16,167
|
|
|
|
26,689
|
|
|
|
(19,014
|
)
|
|
|
64,953
|
|
Gross profit
|
|
|
-
|
|
|
|
16,835
|
|
|
|
3,070
|
|
|
|
8,940
|
|
|
|
78
|
|
|
|
28,923
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
1,477
|
|
|
|
12
|
|
|
|
2,053
|
|
|
|
-
|
|
|
|
3,542
|
|
Selling and marketing
|
|
|
-
|
|
|
|
1,849
|
|
|
|
1,068
|
|
|
|
2,261
|
|
|
|
-
|
|
|
|
5,178
|
|
General and administrative
|
|
|
-
|
|
|
|
4,053
|
|
|
|
1,116
|
|
|
|
1,204
|
|
|
|
-
|
|
|
|
6,373
|
|
Amortization of acquisition-related intangible assets
|
-
|
|
|
|
390
|
|
|
|
146
|
|
|
|
152
|
|
|
|
-
|
|
|
|
688
|
|
Merger expenses
|
|
|
2,256
|
|
|
|
1,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,589
|
|
Total operating costs and expenses
|
|
|
2,256
|
|
|
|
9,102
|
|
|
|
2,342
|
|
|
|
5,670
|
|
|
|
-
|
|
|
|
19,370
|
|
Operating income (loss)
|
|
|
(2,256
|
)
|
|
|
7,733
|
|
|
|
728
|
|
|
|
3,270
|
|
|
|
78
|
|
|
|
9,553
|
|
Interest expense (income), net
|
|
|
201
|
|
|
|
3,581
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
3,780
|
|
Income (loss) before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity in income of subsidiaries
|
|
|
(2,457
|
)
|
|
|
4,152
|
|
|
|
728
|
|
|
|
3,272
|
|
|
|
78
|
|
|
|
5,773
|
|
Income tax expense (benefit)
|
|
|
(134
|
)
|
|
|
632
|
|
|
|
258
|
|
|
|
806
|
|
|
|
-
|
|
|
|
1,562
|
|
Equity in income of subsidiaries
|
|
|
6,534
|
|
|
|
3,014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,548
|
)
|
|
|
-
|
|
Net income
|
|
$
|
4,211
|
|
|
$
|
6,534
|
|
|
$
|
470
|
|
|
$
|
2,466
|
|
|
$
|
(9,470
|
)
|
|
$
|
4,211
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended July 3, 2009
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$
|
-
|
|
|
$
|
53,852
|
|
|
$
|
17,956
|
|
|
$
|
30,481
|
|
|
$
|
(19,769
|
)
|
|
$
|
82,520
|
|
Cost of sales
|
|
|
-
|
|
|
|
38,936
|
|
|
|
14,826
|
|
|
|
24,379
|
|
|
|
(19,905
|
)
|
|
|
58,236
|
|
Gross profit
|
|
|
-
|
|
|
|
14,916
|
|
|
|
3,130
|
|
|
|
6,102
|
|
|
|
136
|
|
|
|
24,284
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
881
|
|
|
|
-
|
|
|
|
1,850
|
|
|
|
-
|
|
|
|
2,731
|
|
Selling and marketing
|
|
|
-
|
|
|
|
1,830
|
|
|
|
1,094
|
|
|
|
1,838
|
|
|
|
-
|
|
|
|
4,762
|
|
General and administrative
|
|
|
-
|
|
|
|
2,697
|
|
|
|
805
|
|
|
|
1,571
|
|
|
|
-
|
|
|
|
5,073
|
|
Amortization of acquisition-related intangible assets
|
|
-
|
|
|
|
387
|
|
|
|
152
|
|
|
|
152
|
|
|
|
-
|
|
|
|
691
|
|
Total operating costs and expenses
|
|
|
-
|
|
|
|
5,795
|
|
|
|
2,051
|
|
|
|
5,411
|
|
|
|
-
|
|
|
|
13,257
|
|
Operating income
|
|
|
-
|
|
|
|
9,121
|
|
|
|
1,079
|
|
|
|
691
|
|
|
|
136
|
|
|
|
11,027
|
|
Interest expense, net
|
|
|
237
|
|
|
|
3,955
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
4,204
|
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
(51
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(51
|
)
|
(Loss) income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity in income of subsidiaries
|
|
|
(237
|
)
|
|
|
5,217
|
|
|
|
1,079
|
|
|
|
679
|
|
|
|
136
|
|
|
|
6,874
|
|
Income tax (benefit) expense
|
|
|
(88
|
)
|
|
|
4,231
|
|
|
|
209
|
|
|
|
(1,348
|
)
|
|
|
-
|
|
|
|
3,004
|
|
Equity in income of subsidiaries
|
|
|
4,019
|
|
|
|
3,033
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,052
|
)
|
|
|
-
|
|
Net income
|
|
$
|
3,870
|
|
|
$
|
4,019
|
|
|
$
|
870
|
|
|
$
|
2,027
|
|
|
$
|
(6,916
|
)
|
|
$
|
3,870
|
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Nine Months Ended July 2, 2010
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$
|
-
|
|
|
$
|
159,203
|
|
|
$
|
54,612
|
|
|
$
|
109,759
|
|
|
$
|
(58,579
|
)
|
|
$
|
264,995
|
|
Cost of sales
|
|
|
-
|
|
|
|
116,279
|
|
|
|
46,420
|
|
|
|
81,808
|
|
|
|
(58,597
|
)
|
|
|
185,910
|
|
Gross profit
|
|
|
-
|
|
|
|
42,924
|
|
|
|
8,192
|
|
|
|
27,951
|
|
|
|
18
|
|
|
|
79,085
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
2,911
|
|
|
|
79
|
|
|
|
6,297
|
|
|
|
-
|
|
|
|
9,287
|
|
Selling and marketing
|
|
|
-
|
|
|
|
5,248
|
|
|
|
3,415
|
|
|
|
6,729
|
|
|
|
-
|
|
|
|
15,392
|
|
General and administrative
|
|
|
1
|
|
|
|
11,462
|
|
|
|
3,055
|
|
|
|
4,042
|
|
|
|
-
|
|
|
|
18,560
|
|
Amortization of acquisition-related intangible assets
|
|
-
|
|
|
|
1,170
|
|
|
|
439
|
|
|
|
453
|
|
|
|
-
|
|
|
|
2,062
|
|
Merger expenses
|
|
|
2,256
|
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,800
|
|
Total operating costs and expenses
|
|
|
2,257
|
|
|
|
22,335
|
|
|
|
6,988
|
|
|
|
17,521
|
|
|
|
-
|
|
|
|
49,101
|
|
Operating (loss) income
|
|
|
(2,257
|
)
|
|
|
20,589
|
|
|
|
1,204
|
|
|
|
10,430
|
|
|
|
18
|
|
|
|
29,984
|
|
Interest expense (income), net
|
|
|
626
|
|
|
|
10,840
|
|
|
|
(2
|
)
|
|
|
52
|
|
|
|
-
|
|
|
|
11,516
|
|
(Loss) income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity in income of subsidiaries
|
|
|
(2,883
|
)
|
|
|
9,749
|
|
|
|
1,206
|
|
|
|
10,378
|
|
|
|
18
|
|
|
|
18,468
|
|
Income tax (benefit) expense
|
|
|
(295
|
)
|
|
|
3,737
|
|
|
|
460
|
|
|
|
2,022
|
|
|
|
-
|
|
|
|
5,924
|
|
Equity in income of subsidiaries
|
|
|
15,132
|
|
|
|
9,120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,252
|
)
|
|
|
-
|
|
Net income
|
|
$
|
12,544
|
|
|
$
|
15,132
|
|
|
$
|
746
|
|
|
$
|
8,356
|
|
|
$
|
(24,234
|
)
|
|
$
|
12,544
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Nine Months Ended July 3, 2009
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Sales
|
|
$
|
-
|
|
|
$
|
152,707
|
|
|
$
|
54,740
|
|
|
$
|
92,714
|
|
|
$
|
(58,592
|
)
|
|
$
|
241,569
|
|
Cost of sales
|
|
|
-
|
|
|
|
115,000
|
|
|
|
45,563
|
|
|
|
73,690
|
|
|
|
(58,650
|
)
|
|
|
175,603
|
|
Gross profit
|
|
|
-
|
|
|
|
37,707
|
|
|
|
9,177
|
|
|
|
19,024
|
|
|
|
58
|
|
|
|
65,966
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
2,639
|
|
|
|
3
|
|
|
|
5,429
|
|
|
|
-
|
|
|
|
8,071
|
|
Selling and marketing
|
|
|
-
|
|
|
|
5,392
|
|
|
|
3,329
|
|
|
|
5,831
|
|
|
|
-
|
|
|
|
14,552
|
|
General and administrative
|
|
|
-
|
|
|
|
10,648
|
|
|
|
2,959
|
|
|
|
1,930
|
|
|
|
-
|
|
|
|
15,537
|
|
Amortization of acquisition-related intangible assets
|
|
-
|
|
|
|
1,167
|
|
|
|
456
|
|
|
|
453
|
|
|
|
-
|
|
|
|
2,076
|
|
Total operating costs and expenses
|
|
|
-
|
|
|
|
19,846
|
|
|
|
6,747
|
|
|
|
13,643
|
|
|
|
-
|
|
|
|
40,236
|
|
Operating income
|
|
|
-
|
|
|
|
17,861
|
|
|
|
2,430
|
|
|
|
5,381
|
|
|
|
58
|
|
|
|
25,730
|
|
Interest expense (income), net
|
|
|
768
|
|
|
|
12,153
|
|
|
|
(8
|
)
|
|
|
52
|
|
|
|
-
|
|
|
|
12,965
|
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
(248
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(248
|
)
|
(Loss) income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and equity in income of subsidiaries
|
|
|
(768
|
)
|
|
|
5,956
|
|
|
|
2,438
|
|
|
|
5,329
|
|
|
|
58
|
|
|
|
13,013
|
|
Income tax (benefit) expense
|
|
|
(291
|
)
|
|
|
146
|
|
|
|
595
|
|
|
|
(2,651
|
)
|
|
|
-
|
|
|
|
(2,201
|
)
|
Equity in income of subsidiaries
|
|
|
15,691
|
|
|
|
9,881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,572
|
)
|
|
|
-
|
|
Net income
|
|
$
|
15,214
|
|
|
$
|
15,691
|
|
|
$
|
1,843
|
|
|
$
|
7,980
|
|
|
$
|
(25,514
|
)
|
|
$
|
15,214
|
|
CPI INTERNATIONAL, INC.
and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All tabular dollar amounts in thousands except share and per share amounts)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended July 2, 2010
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
(CPI Int'l)
|
|
|
(CPI)
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(444
|
)
|
|
$
|
19,972
|
|
|
$
|
199
|
|
|
$
|
2,789
|
|
|
$
|
-
|
|
|
$
|
22,516
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
-
|
|
|
|
(2,187
|
)
|
|
|
(239
|
)
|
|
|
(398
|
)
|
|
|
-
|
|
|
|
(2,824
|
)
|
Payment of patent application fees
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(36
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(2,187
|
)
|
|
|
(275
|
)
|
|
|
(398
|
)
|
|
|
-
|
|
|
|
(2,860
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock to employees
|
|
|
579
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
Proceeds from exercise of stock options
|
|
|
214
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
214
|
|
Excess tax benefit on stock option exercises
|
|
|
-
|
|
|
|
582
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
582
|
|
Intercompany dividends
|
|
|
330
|
|
|
|
(330
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
1,123
|
|
|
|
252
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,375
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
679
|
|
|
|
18,037
|
|
|
|
(76
|
)
|
|
|
2,391
|
|
|
|
-
|
|
|
|
21,031
|
|
Cash and cash equivalents at beginning of period
|
|
|
10
|
|
|
|
15,055
|
|
|
|
759
|
|
|
|
10,328
|
|
|
|
-
|
|
|
|
26,152
|
|
Cash and cash equivalents at end of period
|
|
$
|
689
|
|
|
$
|
33,092
|
|
|
$
|
683
|
|
|
$
|
12,719
|
|
|
$
|
-
|
|
|
$
|
47,183
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended July 3, 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
|
|
$
|
(1,266
|
)
|
|
$
|
19,527
|
|
|
$
|
423
|
|
|
$
|
1,624
|
|
|
$
|
-
|
|
|
$
|
20,308
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
-
|
|
|
|
(2,053
|
)
|
|
|
(215
|
)
|
|
|
(81
|
)
|
|
|
-
|
|
|
|
(2,349
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(2,053
|
)
|
|
|
(215
|
)
|
|
|
(81
|
)
|
|
|
-
|
|
|
|
(2,349
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt
|
|
|
-
|
|
|
|
(12,358
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,358
|
)
|
Proceeds from issuance of common stock to employees
|
|
|
781
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
781
|
|
Proceeds from exercise of stock options
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
|
Excess tax benefit on stock option exercises
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
Intercompany dividends / loan repayments
|
|
|
396
|
|
|
|
(8,607
|
)
|
|
|
-
|
|
|
|
8,211
|
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
1,259
|
|
|
|
(20,914
|
)
|
|
|
-
|
|
|
|
8,211
|
|
|
|
-
|
|
|
|
(11,444
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7
|
)
|
|
|
(3,440
|
)
|
|
|
208
|
|
|
|
9,754
|
|
|
|
-
|
|
|
|
6,515
|
|
Cash and cash equivalents at beginning of period
|
|
|
84
|
|
|
|
26,272
|
|
|
|
493
|
|
|
|
1,821
|
|
|
|
-
|
|
|
|
28,670
|
|
Cash and cash equivalents at end of period
|
|
$
|
77
|
|
|
$
|
22,832
|
|
|
$
|
701
|
|
|
$
|
11,575
|
|
|
$
|
-
|
|
|
$
|
35,185
|
|
Item 2.
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 years 2010 and 2009 comprise the 52-week period ending October 1, 2010 and October 2, 2009, respectively.
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, and the notes thereto, of CPI International, Inc.
Overview
The discussion below represents the current business overview and strategy of the Company as of the date of this 10-Q filing. Our future business activities and strategy may be subject to change upon consummation of the proposed merger with Comtech. See Note 4 of our condensed consolidated financial statements appearing elsewhere in this Form 10-Q, which provides further information on the proposed merger.
CPI International, headquartered in Palo Alto, California, is the parent company of Communications & Power Industries, a provider of microwave, radio frequency, power and control solutions for critical defense, communications, medical, scientific and other applications. Communications & Power Industries develops, manufactures and distributes products used to generate, amplify, transmit and receive high-power/high-frequency microwave and radio frequency signals and/or provide power and control for various applications. End-use applications of these systems include the transmission of radar signals for navigation and location; transmission of deception signals for electronic countermeasures; transmission and amplification of voice, data and video signals for broadcasting, Internet and other types of commercial and military communications; providing power and control for medical diagnostic imaging; and generating microwave energy for radiation therapy in the treatment of cancer and for various industrial and scientific applications.
Unless the context otherwise requires, “CPI International” means CPI International, Inc., and “CPI” means Communications & Power Industries, Inc. CPI is a direct subsidiary of CPI International. CPI International is a holding company with no operations of its own. The terms “we,” “us,” “our” and the “Company” refer to CPI International and its direct and indirect subsidiaries on a consolidated basis.
Orders
We sell our products into five end markets: defense (radar and electronic warfare), medical, communications, industrial and scientific.
Our customer sales contracts are recorded as orders when we accept written customer purchase orders or contracts. Customer purchase orders with an undefined delivery schedule, or blanket purchase orders, are not reported as orders until the delivery date is determined. Our government sales contracts are not reported as orders until we have been notified that the contract has been funded. Total orders for a fiscal period represent the total dollar amount of customer orders recorded by us during the fiscal period, reduced by the dollar amount of any order cancellations or terminations during the fiscal period.
Our orders by market for the nine months ended July 2, 2010 and July 3, 2009 are summarized as follows (dollars in millions):
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Orders
|
|
|
Amount
|
|
|
Percent
|
|
Radar and Electronic Warfare
|
|
$
|
102.6
|
|
|
|
36
|
%
|
|
$
|
113.0
|
|
|
|
42
|
%
|
|
$
|
(10.4
|
)
|
|
|
(9
|
) %
|
Medical
|
|
|
52.5
|
|
|
|
19
|
|
|
|
49.5
|
|
|
|
18
|
|
|
|
3.0
|
|
|
|
6
|
|
Communications
|
|
|
98.3
|
|
|
|
35
|
|
|
|
91.0
|
|
|
|
33
|
|
|
|
7.3
|
|
|
|
8
|
|
Industrial
|
|
|
18.0
|
|
|
|
6
|
|
|
|
15.9
|
|
|
|
6
|
|
|
|
2.1
|
|
|
|
13
|
|
Scientific
|
|
|
12.0
|
|
|
|
4
|
|
|
|
1.9
|
|
|
|
1
|
|
|
|
10.1
|
|
|
|
532
|
|
Total
|
|
$
|
283.4
|
|
|
|
100
|
%
|
|
$
|
271.3
|
|
|
|
100
|
%
|
|
$
|
12.1
|
|
|
|
4
|
%
|
Orders of $283.4 million for the nine months ended July 2, 2010 were $12.1 million, or approximately 4%, higher than orders of $271.3 million for the nine months ended July 3, 2009. Explanations for the order increase or decrease by market for the first nine months of fiscal year 2010 compared to the first nine months of fiscal year 2009 are as follows:
·
|
Radar and Electronic Warfare:
The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. Orders in these markets are characterized by many smaller orders in the $0.5 million to $3.0 million range by product or program, and the timing of these orders may vary from year to year. On a combined basis, orders for the radar and electronic warfare markets decreased approximately 9% from an aggregate of $113.0 million in the first nine months of fiscal year 2009 to an aggregate of $102.6 million in the first nine months of fiscal year 2010. The decrease in orders for these combined markets was primarily due to the timing of orders to support certain radar and electronic warfare systems, including a foreign radar program, several airborne electronic countermeasure systems and the HAWK missile system. In the first nine months of fiscal year 2009, we received $4.1 million in orders for a foreign radar program; this large order was not expected to, and did not, repeat in the first nine months of fiscal year 2010.
|
·
|
Medical:
Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, magnetic resonance imaging (“MRI”) and positron emission tomography (“PET”) applications, and for radiation therapy applications for the treatment of cancer. The 6% increase in medical orders resulted from an increase in demand for products to support MRI applications, and was partially offset by a decrease in orders of products to support radiation therapy applications. In fiscal year 2009, orders to support radiation therapy applications were higher than the historical average, while sales of these products remained at normal levels.
|
·
|
Communications:
Orders for our communications products consist of orders for commercial communications applications and military communications applications. The 8% increase in communications orders was primarily due to increases in orders to support commercial communications applications, such as fixed satellite broadcast and commercial radio broadcast applications. Excluding the Warfighter Information Network – Tactical (“WIN-T”) military communications program, demand for products to support military communications programs also increased during the most recent period. Orders for the WIN-T program decreased $20 million in the most recent period due to the atypical receipt of multiple large orders in the first nine months of fiscal year 2009; the size and frequency of these large orders were not expected to, and did not, repeat in the first nine months of fiscal year 2010. Military communications is a relatively new sector of the overall communications market for us, and,
|
|
with the exception of the WIN-T program, is characterized by numerous programs that are relatively modest in size and for which the timing may vary from year to year. Over the long-term, we expect our participation in military communications programs to continue to grow.
|
·
|
Industrial:
Orders in the industrial market are cyclical and are generally tied to the state of the economy. The $2.1 million increase in industrial orders was primarily due to an increase in demand for products used in semiconductor and liquid crystal display (“LCD”) screen manufacturing applications.
|
·
|
Scientific:
Orders in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $10.1 million increase in scientific orders was primarily the result of the receipt of orders for products to support fusion research and scientific accelerators at domestic and European laboratories.
|
Incoming order levels can fluctuate significantly on a quarterly or annual basis, and a particular quarter’s or year’s order rate may not be indicative of future order levels. In addition, our sales are highly dependent upon manufacturing scheduling and performance and, accordingly, it is not possible to accurately predict when orders will be recognized as sales.
Backlog
As of July 2, 2010, we had an order backlog of $245.5 million compared to an order backlog of $232.1 million as of July 3, 2009. Because our orders for government end-use products generally have much longer delivery terms than our orders for commercial business (which require quicker turn-around), our backlog is primarily composed of government orders.
Backlog represents the cumulative balance, at a given point in time, of recorded customer sales orders that have not yet been shipped or recognized as sales. Backlog is increased when an order is received, and backlog is decreased when we recognize sales. We believe that backlog and orders information is helpful to investors because this information may be indicative of future sales results. Although backlog consists of firm orders for which goods and services are yet to be provided, customers can, and sometimes do, terminate or modify these orders. However, historically the amount of modifications and terminations has not been material compared to total contract volume.
Results of Operations
We derive our revenue primarily from the sale of microwave and radio frequency products, including high-power microwave amplifiers, satellite communications amplifiers, medical x-ray imaging subsystems and other related products. Our products generally have selling prices ranging from $2,000 to $200,000, with certain limited products priced up to $1,000,000.
Cost of goods sold generally includes costs for raw materials, manufacturing costs, including allocation of overhead and other indirect costs, charges for reserves for excess and obsolete inventory, warranty claims and losses on fixed price contracts. Operating expenses generally consist of research and development, selling and marketing and general and administrative expenses.
Three Months Ended July 2, 2010 Compared to Three Months Ended July 3, 2009
The following table sets forth our historical results of operations for each of the periods indicated (dollars in millions):
|
|
Three Months Ended
|
|
|
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
Sales
|
|
$
|
93.9
|
|
|
|
100.0
|
%
|
|
$
|
82.5
|
|
|
|
100.0
|
%
|
|
$
|
11.4
|
|
Cost of sales
|
|
|
65.0
|
|
|
|
69.2
|
|
|
|
58.2
|
|
|
|
70.5
|
|
|
|
6.8
|
|
Gross profit
|
|
|
28.9
|
|
|
|
30.8
|
|
|
|
24.3
|
|
|
|
29.5
|
|
|
|
4.6
|
|
Research and development
|
|
|
3.5
|
|
|
|
3.7
|
|
|
|
2.7
|
|
|
|
3.3
|
|
|
|
0.8
|
|
Selling and marketing
|
|
|
5.2
|
|
|
|
5.5
|
|
|
|
4.8
|
|
|
|
5.8
|
|
|
|
0.4
|
|
General and administrative
|
|
|
6.4
|
|
|
|
6.8
|
|
|
|
5.1
|
|
|
|
6.2
|
|
|
|
1.3
|
|
Amortization of acquisition-
related intangibles
|
0.7
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
-
|
|
Merger expenses
|
|
|
3.6
|
|
|
|
3.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.6
|
|
Operating income
|
|
|
9.6
|
|
|
|
10.2
|
|
|
|
11.0
|
|
|
|
13.3
|
|
|
|
(1.4
|
)
|
Interest expense, net
|
|
|
3.8
|
|
|
|
4.0
|
|
|
|
4.2
|
|
|
|
5.1
|
|
|
|
(0.4
|
)
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
Income before taxes
|
|
|
5.8
|
|
|
|
6.2
|
|
|
|
6.9
|
|
|
|
8.4
|
|
|
|
(1.1
|
)
|
Income tax expense
|
|
|
1.6
|
|
|
|
1.7
|
|
|
|
3.0
|
|
|
|
3.6
|
|
|
|
(1.4
|
)
|
Net income
|
|
$
|
4.2
|
|
|
|
4.5
|
%
|
|
$
|
3.9
|
|
|
|
4.7
|
%
|
|
$
|
0.3
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$
|
12.3
|
|
|
|
13.1
|
%
|
|
$
|
13.8
|
|
|
|
16.7
|
%
|
|
$
|
(1.5
|
)
|
Note: Totals may not equal the sum of the components due to independent rounding. Percentages are calculated based on rounded dollar amounts presented.
|
(a)
|
EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. For the reasons listed below, we believe that U.S. generally accepted accounting principles (“GAAP”) based financial
|
|
information for leveraged businesses such as ours should be supplemented by EBITDA so that investors better understand our financial performance in connection with their analysis of our business:
|
|
•
|
EBITDA is a component of the measures used by our board of directors and management team to evaluate our operating performance;
|
|
•
|
our senior credit facilities contain a covenant that requires us to maintain a senior secured leverage ratio that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with this covenant;
|
|
•
|
EBITDA is a component of the measures used by our management team to make day-to-day operating decisions;
|
|
•
|
EBITDA facilitates comparisons between our operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the management to facilitate internal comparisons to competitors’ results and our industry in general; and
|
|
•
|
the payment of management bonuses is contingent upon, among other things, the satisfaction by us of certain targets that contain EBITDA as a component.
|
|
Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. When analyzing our performance, EBITDA should be considered in addition to, and not as a substitute for or superior to, net income, cash flows from operating activities or other statements of income or statements of cash flows data prepared in accordance with GAAP.
|
|
For a reconciliation of Net Income to EBITDA, see Note 11 of the accompanying unaudited condensed consolidated financial statements.
|
Sales:
Our sales by market for the three months ended July 2, 2010 and July 3, 2009 are summarized as follows (dollars in millions):
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar and Electronic Warfare
|
|
$
|
35.4
|
|
|
|
37
|
%
|
|
$
|
35.7
|
|
|
|
43
|
%
|
|
$
|
(0.3
|
)
|
|
|
(1
|
) %
|
Medical
|
|
|
17.7
|
|
|
|
19
|
|
|
|
15.5
|
|
|
|
19
|
|
|
|
2.2
|
|
|
|
14
|
|
Communications
|
|
|
32.6
|
|
|
|
35
|
|
|
|
24.0
|
|
|
|
29
|
|
|
|
8.6
|
|
|
|
36
|
|
Industrial
|
|
|
5.6
|
|
|
|
6
|
|
|
|
5.9
|
|
|
|
7
|
|
|
|
(0.3
|
)
|
|
|
(5
|
)
|
Scientific
|
|
|
2.6
|
|
|
|
3
|
|
|
|
1.4
|
|
|
|
2
|
|
|
|
1.2
|
|
|
|
86
|
|
Total
|
|
$
|
93.9
|
|
|
|
100
|
%
|
|
$
|
82.5
|
|
|
|
100
|
%
|
|
$
|
11.4
|
|
|
|
14
|
%
|
Sales of $93.9 million for the three months ended July 2, 2010 were $11.4 million, or approximately 14%, higher than sales of $82.5 million for the three months ended July 3, 2009. Explanations for the sales increase or decrease by market for the third quarter of fiscal year 2010 as compared to the third quarter of fiscal year 2009 are as follows:
·
|
Radar and Electronic Warfare:
The majority of our products in the radar and electronic warfare markets are for domestic and international defense and government end uses. The timing of orders receipts and subsequent shipments in these markets may vary from year to year. On a combined basis, at $35.4 million in the three months ended July 2, 2010, sales for these two markets were essentially unchanged from the $35.7 million in the three months ended July 3, 2009. An increase in sales of products to support the Aegis weapons system and electronic warfare systems in the most recent period largely offset a decrease in sales of products to support the APN-245 Automatic Carrier Landing System and the HAWK missile system.
|
·
|
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 14% increase in sales of our medical products in the three months ended July 2, 2010 was due to increased sales of products to support MRI and x-ray imaging applications.
|
·
|
Communications:
Sales of our communications products consist of sales for commercial communications applications and military communications applications. The 36% increase in sales in the communications market was due to increases in sales to support commercial communications applications, particularly fixed satellite broadcast applications, as well as increases in sales to support a variety of military communications applications, including the WIN-T program. Military communications is a relatively new sector of the overall communications market for us, and, with the exception of the WIN-T program, is characterized by numerous programs that are relatively modest in size and for which the timing may vary from year to year. Over the long-term, we expect our participation in military communications programs to continue to grow.
|
·
|
Industrial:
Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $0.3 million decrease in sales of industrial products in the most recent period was primarily due to decreased sales of products for instrumentation applications, partially offset by increased sales to support semiconductor manufacturing applications.
|
·
|
Scientific:
Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $1.2 million increase in scientific sales was primarily the result of increased sales for a fusion research program.
|
Gross Profit
. Gross profit was $28.9 million, or 30.8% of sales, for the three months ended July 2, 2010 as compared to $24.3 million, or 29.5% of sales, for the three months ended July 3, 2009. The $4.6 million increase in gross profit in the three months ended July 2, 2010 as compared to the three months ended July 3, 2009 was primarily due to higher shipments and improved operating efficiencies from the higher shipment volume and the favorable impact from translation of Canadian costs, net of currency hedge contracts.
Research and Development
. Research and development expenses were $3.5 million, or 3.7% of sales, for the three months ended July 2, 2010, and $2.7 million, or 3.3% of sales, for the three months ended July 3, 2009. Total spending on research and development, including customer-sponsored research and development, was as follows (in millions):
|
|
Three Months Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2009
|
|
Company sponsored
|
|
$
|
3.5
|
|
|
$
|
2.7
|
|
Customer sponsored, charged to cost of sales
|
|
|
4.0
|
|
|
|
4.8
|
|
|
|
$
|
7.5
|
|
|
$
|
7.5
|
|
Selling and Marketing
. Selling and marketing expenses were $5.2 million, or 5.5% of sales, for the three months ended July 2, 2010, a $0.4 million increase from the $4.8 million, or 5.8% of sales, for the three months ended July 3, 2009. The increase in selling and marketing expenses in the three months ended July 2, 2010 was primarily due to higher sales incentive expenses and expiration of certain cost reduction initiatives.
General and Administrative
. General and administrative expenses were $6.4 million, or 6.8% of sales, for the three months ended July 2, 2010, a $1.3 million increase from the $5.1 million, or 6.2% of sales, for the three months ended July 3, 2009. The increase in general and administrative expenses in the three months ended July 2, 2010 was primarily due to higher management incentive expense as a result of improved operating performance in the three months ended July 2, 2010.
Amortization of Acquisition-related Intangibles
. Amortization of acquisition-related intangibles consists of purchase accounting charges for technology and other intangible assets. Amortization of acquisition-related intangibles was $0.7 million for the third quarter of fiscal years 2010 and 2009.
Merger Expenses
. Merger expenses of $3.6 million for the three months ended July 2, 2010 comprised
non-recurring transaction costs, such as fees for investment bankers, attorneys and other professional services rendered in connection with the Comtech merger agreement.
Interest Expense, Net (“Interest Expense”)
. Interest Expense was $3.8 million, or 4.0% of sales, for the three months ended July 2, 2010, a $0.4 million decrease from the $4.2 million, or 5.1% of sales, for the three months ended July 3, 2009. The reduction in interest expense for the three months ended July 2, 2010 was primarily due to repayments of debt over the past year, which resulted in lower outstanding debt obligations during the three months ended July 2, 2010 compared to the three months ended July 3, 2009.
Gain on Debt Extinguishment
. The gain on debt extinguishment of $0.1 million in the three months ended July 3, 2009 resulted from the repurchase of $5.0 million of our 8% senior subordinated notes at a discount of $138,000, or 2.75% of par value, partially offset by an $86,000 non-cash write-off of deferred debt issue costs.
Income Tax Expense
. We recorded an income tax expense of $1.6 million for the three months ended July 2, 2010 and an income tax expense of $3.0 million for the three months ended July 3, 2009. Our effective tax rate was approximately 27% for the three months ended July 2, 2010 as compared to approximately 44% for the three months ended July 3, 2009.
Income tax expense for the three months ended July 2, 2010 includes approximately $0.3 million for a discrete income benefit to true-up the fiscal year 2009 tax provision estimate to the filed fiscal year 2009 U.S. income tax return tax. Income tax expense for the three months ended July 3, 2009 included approximately $0.3 million for several non-recurring discrete income tax expense items and $0.2 million from foreign currency translation losses primarily from Canadian tax accounts.
Net Income
. Net income was $4.2 million, or 4.5% of sales, in the three months ended July 2, 2010 as compared to $3.9 million, or 4.7% of sales, in the three months ended July 3, 2009. The $0.3 million increase in net income in the three months ended July 2, 2010 as compared to the three months ended July 3, 2009 was primarily due to higher shipment volume, the favorable impact of Canadian dollar hedge contracts and lower income tax expense, partially offset by $3.6 million of transaction expenses related to the Comtech merger agreement and higher research and development, selling and marketing expenses and management incentive expenses in the three months ended July 2, 2010.
EBITDA
. EBITDA was $12.3 million, or 13.1% of sales, for the three months ended July 2, 2010 as compared to $13.8 million, or 16.7% of sales, for the three months ended July 3, 2009. The $1.5 million decrease in EBITDA in the three months ended July 2, 2010 as compared to the three months ended July 3, 2009 was primarily due to $3.6 million of transaction expenses related to the Comtech merger agreement and higher research and development expenses, selling and marketing expenses and management incentive expenses in the three months ended July 2, 2010, partially offset by higher shipment volume and the favorable impact of Canadian dollar hedges.
Nine months ended July 2, 2010 Compared to Nine months ended July 3, 2009
The following table sets forth our historical results of operations for each of the periods indicated (dollars in millions):
|
|
Nine Months Ended
|
|
|
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
Sales
|
|
$
|
265.0
|
|
|
|
100.0
|
%
|
|
$
|
241.6
|
|
|
|
100.0
|
%
|
|
$
|
23.4
|
|
Cost of sales
|
|
|
185.9
|
|
|
|
70.2
|
|
|
|
175.6
|
|
|
|
72.7
|
|
|
|
10.3
|
|
Gross profit
|
|
|
79.1
|
|
|
|
29.8
|
|
|
|
66.0
|
|
|
|
27.3
|
|
|
|
13.1
|
|
Research and development
|
|
|
9.3
|
|
|
|
3.5
|
|
|
|
8.1
|
|
|
|
3.4
|
|
|
|
1.2
|
|
Selling and marketing
|
|
|
15.4
|
|
|
|
5.8
|
|
|
|
14.6
|
|
|
|
6.0
|
|
|
|
0.8
|
|
General and administrative
|
|
|
18.6
|
|
|
|
7.0
|
|
|
|
15.6
|
|
|
|
6.5
|
|
|
|
3.0
|
|
Amortization of acquisition-
related intangibles
|
|
|
2.1
|
|
|
|
0.8
|
|
|
|
2.1
|
|
|
|
0.9
|
|
|
|
-
|
|
Merger expense
|
|
|
3.8
|
|
|
|
1.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.8
|
|
Operating income
|
|
|
30.0
|
|
|
|
11.3
|
|
|
|
25.7
|
|
|
|
10.6
|
|
|
|
4.3
|
|
Interest expense, net
|
|
|
11.5
|
|
|
|
4.3
|
|
|
|
13.0
|
|
|
|
5.4
|
|
|
|
(1.5
|
)
|
Gain on debt extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
Income before taxes
|
|
|
18.5
|
|
|
|
7.0
|
|
|
|
13.0
|
|
|
|
5.4
|
|
|
|
5.5
|
|
Income tax expense (benefit)
|
|
|
5.9
|
|
|
|
2.2
|
|
|
|
(2.2
|
)
|
|
|
(0.9
|
)
|
|
|
8.1
|
|
Net income
|
|
$
|
12.5
|
|
|
|
4.7
|
%
|
|
$
|
15.2
|
|
|
|
6.3
|
%
|
|
$
|
(2.7
|
)
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(a)
|
|
$
|
38.2
|
|
|
|
14.4
|
%
|
|
$
|
34.1
|
|
|
|
14.1
|
%
|
|
$
|
4.1
|
|
Note: Totals may not equal the sum of the components due to independent rounding. Percentages are calculated based on rounded dollar amounts presented.
|
(a)
|
EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. For the reasons listed below, we believe that U.S. generally accepted accounting principles (“GAAP”) based financial information for leveraged businesses such as ours should be supplemented by EBITDA so that investors better understand our financial performance in connection with their analysis of our business:
|
|
•
|
EBITDA is a component of the measures used by our board of directors and management team to evaluate our operating performance;
|
|
•
|
our senior credit facilities contain a covenant that requires us to maintain a senior secured leverage ratio that contains EBITDA as a component, and our management team uses EBITDA to monitor compliance with this covenant;
|
|
•
|
EBITDA is a component of the measures used by our management team to make day-to-day operating decisions;
|
|
•
|
EBITDA facilitates comparisons between our operating results and those of competitors with different capital structures and, therefore, is a component of the measures used by the management to facilitate internal comparisons to competitors’ results and our industry in general; and
|
|
•
|
the payment of management bonuses is contingent upon, among other things, the satisfaction by us of certain targets that contain EBITDA as a component.
|
|
Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. When analyzing our performance, EBITDA should be considered in addition to, and not as a substitute for or superior to, net income, cash flows from operating activities or other statements of income or statements of cash flows data prepared in accordance with GAAP.
|
|
For a reconciliation of Net Income to EBITDA, see Note 11 of the accompanying unaudited condensed consolidated financial statements.
|
Sales.
Our sales by market for the nine months ended July 2, 2010 and July 3, 2009 are summarized as follows (dollars in millions):
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
July 2,
2010
|
|
|
July 3,
2009
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Percent
|
|
Radar and Electronic Warfare
|
|
$
|
96.9
|
|
|
|
36
|
%
|
|
$
|
98.0
|
|
|
|
41
|
%
|
|
$
|
(1.1
|
)
|
|
|
(1
|
) %
|
Medical
|
|
|
54.6
|
|
|
|
21
|
|
|
|
46.9
|
|
|
|
19
|
|
|
|
7.7
|
|
|
|
16
|
|
Communications
|
|
|
90.4
|
|
|
|
34
|
|
|
|
75.5
|
|
|
|
31
|
|
|
|
14.9
|
|
|
|
20
|
|
Industrial
|
|
|
16.0
|
|
|
|
6
|
|
|
|
15.8
|
|
|
|
7
|
|
|
|
0.2
|
|
|
|
1
|
|
Scientific
|
|
|
7.1
|
|
|
|
3
|
|
|
|
5.4
|
|
|
|
2
|
|
|
|
1.7
|
|
|
|
31
|
|
Total
|
|
$
|
265.0
|
|
|
|
100
|
%
|
|
$
|
241.6
|
|
|
|
100
|
%
|
|
$
|
23.4
|
|
|
|
10
|
%
|
Sales of $265.0 million for the nine months ended July 2, 2010 were $23.4 million, or approximately 10%, higher than sales of $241.6 million for the nine months ended July 3, 2009. Explanations for the sales increase or decrease by market are as follows:
·
|
Radar and Electronic Warfare:
The majority of our sales in the radar and electronic warfare markets are for products for domestic and international defense and government end uses. The timing of the receipt of orders and subsequent shipments in these markets may vary from year to year. On a combined basis, sales for these markets were essentially unchanged at $96.9 million in the nine months ended July 2, 2010 as compared to $98.0 million in the nine months ended July 3, 2009. In the most recent period, an increase in sales to support electronic warfare systems and certain radar systems partially offset a decrease in sales to support foreign radar systems and the HAWK missile system.
|
·
|
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 16% increase in sales of our medical products was primarily due to increased sales to support MRI applications. Sales of products for x-ray imaging applications also increased.
|
·
|
Communications:
The 20% increase in sales in the communications market was attributable to increases in sales to support a variety of commercial communications applications, particularly fixed satellite broadcast applications, and military communications applications, including the WIN-T program. Military communications is a relatively new sector of the overall communications market for us, and, with the exception of the WIN-T program, is characterized by numerous programs that are relatively modest in size and for which the timing may vary from year to year. Over the long term, we expect our participation in military communications programs to continue to grow.
|
·
|
Industrial:
Sales in the industrial market are cyclical and are generally tied to the state of the economy. The $0.2 million increase in industrial sales was due to an increase in sales of products for cargo screening and semiconductor manufacturing applications, partially offset by a decrease in sales of products for instrumentation applications.
|
·
|
Scientific:
Sales in the scientific market are historically one-time projects and can fluctuate significantly from period to period. The $1.7 million increase in scientific sales was primarily the result of increased sales for a fusion research program.
|
Gross Profit
. Gross profit was $79.1 million, or 29.8% of sales, for the nine months ended July 2, 2010, a $13.1 million increase from $66.0 million, or 27.3% of sales, in the nine months ended July 3, 2009. The increase in gross profit for the nine months ended July 2, 2010 as compared to the nine months ended July 3, 2009 was primarily due to higher shipments and improved operating efficiencies from the higher shipment volume and the favorable impact from translation of Canadian costs, net of currency hedge contracts.
Research and Development
. Research and development expenses were $9.3 million, or 3.5% of sales, for the nine months ended July 2, 2010, a $1.2 million increase from $8.1 million, or 3.4% of sales, for the nine months ended July 3, 2009. The increase in research and development for the nine months ended July 2, 2010 was primarily due to development efforts on broadband communication products and solid state devices for commercial and military applications.
Total spending on research and development, including customer-sponsored research and development, was as follows (in millions):
|
|
Nine Months Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2009
|
|
Company sponsored
|
|
$
|
9.3
|
|
|
$
|
8.1
|
|
Customer sponsored, charged to cost of sales
|
|
|
11.7
|
|
|
|
12.1
|
|
|
|
$
|
21.0
|
|
|
$
|
20.2
|
|
Selling and Marketing
. Selling and marketing expenses were $15.4 million, or 5.8% of sales, for the nine months ended July 2, 2010, a $0.8 million increase from the $14.6 million, or 6.0% of sales, for the nine months ended July 3, 2009. The increase in selling and marketing expenses in the nine months ended July 2, 2010 was primarily due to higher sales incentive expenses and the expiration of certain cost reduction initiatives.
General and Administrative
. General and administrative expenses were $18.6 million, or 7.0% of sales, for the nine months ended July 2, 2010, a $3.0 million increase from the $15.6 million, or 6.5% of sales, for the nine months ended July 3, 2009. The increase in general and administrative expenses in the nine months ended July 2, 2010 was primarily due unfavorable currency translation expense and higher management incentive expense as a result of improved operating performance in the nine months ended July 2, 2010.
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 $2.1 million for the nine months ended July 2, 2010 and the nine months ended July 3, 2009.
Merger Expenses
. Merger expenses of $3.8 million for the nine months ended July 2, 2010 comprised
non-recurring transaction costs, such as fees for investment bankers, attorneys and other professional services, rendered in connection with the Comtech merger agreement.
Interest Expense, Net (“Interest Expense”)
. Interest Expense of $11.5 million for the nine months ended July 2, 2010 was $1.5 million lower than interest expense of $13.0 million for the nine months ended July 3, 2009. The reduction in interest expense for the nine months ended July 2, 2010 was primarily due to repayments of debt over the past year which resulted in lower interest expense during the nine months ended July 2, 2010 as compared to the nine months ended July 3, 2009.
Gain on Debt Extinguishment
. The gain on debt extinguishment of $0.2 million in the nine months ended July 3, 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.
Income Tax (Benefit) Expense
. We recorded an income tax expense of $5.9 million for the nine months ended July 2, 2010 and an income tax benefit of $2.2 million for the nine months ended July 3, 2009. Our estimated effective income tax rate for fiscal year 2010 is expected to be approximately 34.0% to 34.5%.
Income tax expense for the nine months ended July 2, 2010 includes approximately $0.8 million for discrete income tax benefits, including $0.3 million to true-up the fiscal year 2009 tax provision estimate to the filed fiscal year 2009 U.S. income tax return and $0.3 million to adjust deferred tax accounts for a reduction to future Canadian income tax rates.
The nine months ended July 2, 2009 included several significant discrete tax benefits: (1) $5.1 million of unrecognized tax benefit related to an outstanding audit by the Canada Revenue Agency (“CRA”), (2) $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 attribute taxable income to California for tax years beginning on or after January 1, 2011, and (3) $0.9 million for adjustments to Canadian deferred tax accounts.
In December 2008, a new tax treaty protocol between Canada and the U.S. became effective. The new treaty requires mandatory arbitration for the resolution of double taxation disputes not settled through the competent authority process. As a result of this new treaty, our tax position on an outstanding audit by the CRA has become more favorable, and we reduced our tax contingency reserve in Canada by $3.0 million, and established an income tax receivable and recognized an income tax benefit in the U.S. for $2.8 million; this tax benefit was partially offset by a related increase in deferred tax liabilities of $0.7 million.
The $0.9 million adjustment to Canadian deferred tax accounts included a $0.6 million tax benefit to reflect the reduction to Canadian corporate income tax rates, and a $0.3 million tax benefit to correct the computation of certain deferred tax accounts. The $0.6 million adjustment should have been recorded in the first quarter of fiscal year 2008 rather than in the nine months ended July 3, 2009, and the $0.3 adjustment million should have been recorded in several prior year’s financial results. These adjustments are deemed immaterial to our results of operations and financial condition for all affected periods.
Net Income
. Net income was $12.5 million, or 4.7% of sales, in the nine months ended July 2, 2010 as compared to $15.2 million, or 6.3% of sales, in the nine months ended July 3, 2009. The decrease in net income in the nine months ended July 2, 2010 as compared to the nine months ended July 3, 2009 was primarily due to discrete income tax benefits that were recorded in the nine months ended July 3, 2009. Excluding discrete income tax benefits that were recorded in the nine months ended July 3, 2009, the higher net income in the nine months ended July 2, 2010 was primarily due to higher shipment volume, the favorable impact of Canadian dollar hedge contracts and lower interest expense, partially offset by $3.8 million of transaction expenses related to the Comtech merger agreement, and higher research and development, selling and marketing expenses, management incentive expenses and unfavorable currency translation expense in the nine months ended July 2, 2010.
EBITDA
. EBITDA was $38.2 million, or 14.4% of sales, for the nine months ended July 2, 2010 as compared to $34.1 million, or 14.1% of sales, for the nine months ended July 3, 2009. The $4.1 million increase in EBITDA for the nine months ended July 2, 2010 as compared to the corresponding period of fiscal year 2009 was primarily due to higher shipment volume and the favorable impact of Canadian dollar hedge contracts, partially offset by $3.8 million of transaction expenses related to the Comtech merger agreement, and higher research and development expenses, selling and marketing expenses, management incentive expenses and unfavorable currency translation expense in the nine months ended July 2, 2010.
Liquidity and Capital Resources
Overview
Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and others that are related to uncertainties in the markets in which we compete and other global economic factors. We have historically financed, and intend to continue to finance, our capital and working capital requirements including debt service and internal growth, through a combination of cash flows from our operations and borrowings under our senior credit facilities. Our primary uses of cash are cost of sales, operating expenses, debt service and capital expenditures.
We believe that we have the financial resources to meet our business requirements, including capital expenditures and working capital requirements, for the next 12 months.
Cash and Working Capital
The following summarizes our cash and cash equivalents and working capital (in millions):
|
|
July 2,
|
|
|
October 2,
|
|
|
|
2010
|
|
|
2009
|
|
Cash and cash equivalents
|
|
$
|
47.2
|
|
|
$
|
26.2
|
|
Working capital
|
|
$
|
114.1
|
|
|
$
|
92.4
|
|
We invest cash balances in excess of operating requirements in overnight U.S. Government securities and money market accounts. In addition to the above cash and cash equivalents, we have restricted cash of $1.0 million as of July 2, 2010, consisting primarily of bank guarantees from customer advance payments to our international subsidiaries. The bank guarantees become unrestricted cash when performance under the sales contract is complete.
The significant factors underlying the net increase in cash and cash equivalents during the nine months ended July 2, 2010 were the net cash provided by our operating activities of $22.5 million and proceeds and tax benefits of $1.4 million from employee stock purchases and stock exercises, partially offset by capital expenditures of $2.8 million.
As of July 2, 2010 and October 2, 2009, we had $195.0 million in total principal amount of debt outstanding. As of July 2, 2010, we had borrowing availability of $55.4 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 less than 3.75:1. Our current secured leverage ratio is approximately 0.31:1. Our senior credit facilities will mature in the fourth quarter of fiscal year 2011 unless we refinance our 8% senior subordinated notes due 2012 prior to July 31, 2011.
Historical Operating, Investing and Financing Activities
In summary, our cash flows were as follows (in millions):
|
|
Nine Months Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2009
|
|
Net cash provided by operating activities
|
|
$
|
22.5
|
|
|
$
|
20.3
|
|
Net cash used in investing activities
|
|
|
(2.9
|
)
|
|
|
(2.3
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1.4
|
|
|
|
(11.5
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
21.0
|
|
|
$
|
6.5
|
|
Operating Activities
During the nine months ended July 2, 2010 and July 3, 2009, we funded our operating activities through cash generated internally. Cash provided by operating activities is net income adjusted for certain non-cash items and changes to working capital items.
Net cash provided by operating activities of $22.5 million in the nine months ended July 2, 2010 was attributable to net income of $12.5 million, depreciation, amortization and other non-cash charges of $10.9 million, partially offset by net cash used in working capital of $0.9 million. The primary working capital uses of cash in the nine months ended July 2, 2010 were an increase in inventories and a decrease in accounts payable. The increase in inventories resulted primarily from increased inventory purchases to support increased orders and the higher sales level anticipated for the fourth quarter of fiscal year 2010 and the first half of fiscal year 2011. The decrease in accounts payable was primarily due to timing of payments of vendor invoices. The aforementioned uses of working capital were partially offset by an increase in accrued liabilities due to costs incurred in connection with the Comtech merger agreement, increased payroll and paid-time off accruals and timing of interest payments. The uses of working capital were also partially offset by a decrease in accounts receivable due to the timing of billings and improved cash collections, and an increase in the product warranty liability.
Net cash provided by operating activities of $20.3 million in the nine months ended July 3, 2009 was attributable to net income of $15.2 million, depreciation, amortization and other non-cash charges of $8.8 million, partially offset by $3.7 million net cash used for working capital. The primary working capital uses of cash in the nine months ended July 3, 2009 were the net change in income tax receivable and payable attributable to discrete tax benefits related to an outstanding audit by the Canada Revenue Agency, an increase in inventories and a decrease in accounts payable. The increase in inventories was primarily due to selective increases of certain work-in-progress and finished goods to meet anticipated customer delivery requirements. The decrease in accounts payable related primarily to the timing of vendor payments. These uses of cash were partially offset by a decrease in accounts receivable resulting primarily from decreased sales.
Investing Activities
Investing activities for the nine months ended July 2, 2010 and July 3, 2009 comprised mainly of capital expenditures.
Financing Activities
Net cash provided by financing activities for the nine months ended July 2, 2010 was attributable to $0.6 million in proceeds from employee stock purchases and $0.8 million in proceeds and tax benefit from employee stock option exercises.
Net cash used in financing activities for the nine months ended July 3, 2009 consisted primarily of senior term loan repayment of $4.75 million and senior subordinated notes repurchase of $7.6 million, net of $0.4 million discount, partially offset by $0.9 million in proceeds from employee stock purchases and exercise of stock options.
If the leverage ratio under our amended and restated senior credit facilities exceeds 3.5:1 at the end of any fiscal year, then we are required to make an annual prepayment within 90 days after the end of the fiscal year based on a calculation of excess cash flow, as defined in the senior credit facilities, multiplied by a factor of 50%, less any optional prepayments made during the fiscal year. There was no excess cash flow payment due for fiscal year 2009, and therefore, no excess cash flow payment was made in the nine months ended July 2, 2010.
Contractual Obligations
The following table summarizes our significant contractual obligations as of July 2, 2010 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
Total
|
|
|
2010
(remaining
three months)
|
|
|
|
2011 - 2012
|
|
|
|
2013 - 2014
|
|
|
Thereafter
|
|
Operating leases
|
|
$
|
6,618
|
|
|
$
|
482
|
|
|
$
|
2,449
|
|
|
$
|
1,053
|
|
|
$
|
2,634
|
|
Purchase commitments
|
|
|
30,191
|
|
|
|
20,253
|
|
|
|
9,876
|
|
|
|
62
|
|
|
|
-
|
|
Debt obligations
|
|
|
195,000
|
|
|
|
-
|
|
|
|
183,000
|
|
|
|
-
|
|
|
|
12,000
|
|
Interest on debt obligations
|
|
|
21,011
|
|
|
|
3,358
|
|
|
|
15,963
|
|
|
|
1,452
|
|
|
|
238
|
|
Uncertain tax positions
|
|
|
2,672
|
|
|
|
2,672
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total cash obligations
|
|
$
|
255,492
|
|
|
$
|
26,765
|
|
|
$
|
211,288
|
|
|
$
|
2,567
|
|
|
$
|
14,872
|
|
Standby letters of credit
|
|
$
|
4,571
|
|
|
$
|
4,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts for debt obligations and interest on debt obligations assume (1) that the respective debt instruments will be outstanding until their scheduled maturity dates, except for the term loan under our senior credit facilities, which is assumed to mature on the earlier date of August 1, 2011 as prescribed in the senior credit facilities agreement, (2) that interest rates in effect on July 2, 2010 remain constant for future periods, and (3) a debt level based on mandatory repayments according to the contractual amortization schedule.
Merger Expense Commitment.
In addition to the obligations in the above table, we have agreed to pay J.P. Morgan Securities, Inc. (“J.P. Morgan” ), for services rendered in connection with the merger agreement with Comtech, a fee estimated to be approximately $5.0 million, of which $1.4 million has been accrued (accrued expenses) and $3.6 million will become payable only if the proposed merger is consummated. We have also agreed to reimburse J.P. Morgan for certain expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities, including liabilities arising under the federal securities laws.
The expected timing of payment amounts of the above obligations is estimated based on current information; timing of payments and actual amounts paid may be different.
As of July 2, 2010, there were no material changes to our other contractual obligations from what we disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2009. See also Note 7 of the accompanying unaudited condensed consolidated financial statements for details on certain of our commitments and contingencies.
Capital Expenditures
Our continuing operations typically do not have large recurring capital expenditure requirements. Capital expenditures are generally made to replace existing assets, increase productivity, facilitate cost reductions or meet regulatory requirements. Total capital expenditures for the nine months ended July 2, 2010 were $2.8 million. Total capital expenditures for fiscal year 2010 are expected to be approximately $4.0 to $4.5 million.
Recent Accounting Pronouncements
See Note 2 to the accompanying unaudited condensed consolidated financial statements for information regarding the effect of new accounting pronouncements on our financial statements.
Critical Accounting Policies and Estimates
Our Critical Accounting Policies and Estimates have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended October 2, 2009.
Item 3.
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 July 2, 2010, we had fixed rate senior subordinated notes of $117.0 million due in 2012, bearing interest at 8% per year, variable rate debt consisting of $12.0 million floating rate senior notes due in 2015, and a $66.0 million term loan under our senior credit facilities due in 2014. Our variable rate debt is subject to changes in the prime rate and the LIBOR rate.
We use derivative instruments from time to time in order to manage interest costs and risk associated with our long-term debt. In September 2007, we entered into an interest rate swap contract to receive three-month USD-LIBOR-BBA (British Bankers’ Association) interest and pay 4.77% fixed rate interest. Net interest positions are settled quarterly. We have structured the swap with decreasing notional amounts such that it is less than the balance of the term loan. The notional value of the swap was $35.0 million at July 2, 2010 and represented approximately 53% of the aggregate term loan balance. The swap agreement is effective through June 30, 2011. Under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging,” this arrangement was initially designated and qualified as an effective cash flow hedge of interest rate risk related to the term loan under our senior credit facilities which permitted recording the fair value of the swap and corresponding unrealized gain or loss to accumulated other comprehensive income in the condensed consolidated balance sheets. The interest rate swap gain or loss is included in the assessment of hedge effectiveness. At July 2, 2010, the fair value of the swap was a short-term liability of $1.1 million (accrued expenses).
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 condensed consolidated balance sheets. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then we promptly recognize the gain or loss on the associated financial instrument in general and administrative in the condensed consolidated statements of income. The gain recognized in general and administrative due to hedge ineffectiveness for the three and nine months ended July 2, 2010 was zero and $0.1 million, respectively. No ineffective amounts were recognized due to hedge ineffectiveness for the three and nine months ended July 3, 2009.
As of July 2, 2010, we had entered into Canadian dollar forward contracts for approximately $19.2 million (Canadian dollars), or approximately 58% of our estimated Canadian dollar denominated expenses for July 2010 through March 2011, at an average rate of approximately $0.92 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 common share.
At July 2, 2010, the fair value of foreign currency forward contracts was a short-term asset of $0.7 million (prepaid and other current assets) and a short-term liability of $20,000 (accrued expenses).
Management, including our principal executive officer and principal financial officer, has evaluated, as of the end of the period covered by this report, the effectiveness of the design and operation of our disclosure controls and procedures with respect to the information generated for use in this report. Based upon, and as of the date of that evaluation, the principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There have been no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are not presently involved in any legal proceedings that we believe would have a material adverse effect on our consolidated financial statements. However, we are, from time to time, threatened with, or may become a party to, legal actions and other proceedings, including the matter discussed below.
On July 1, 2010, a putative stockholder class action complaint was filed against CPI International, the members of the CPI International board of directors, and Comtech Telecommunications Corp. (“Comtech”) in the California Superior Court for the County of Santa Clara, entitled Continuum Capital v. Michael Targoff, et al. (Case No. 110CV175940). The lawsuit concerns the proposed merger between us and Comtech, and generally asserts claims alleging, among other things, that each member of our board of directors breached his fiduciary duties by agreeing to the terms of the proposed merger and by failing to provide stockholders with allegedly material information related to the proposed merger, and that Comtech aided and abetted the breaches of fiduciary duty allegedly committed by the members of our board of directors. The lawsuit seeks, among other things, class action certification and monetary relief. On July 28, 2010, the plaintiff filed an amended complaint, making generally the same claims against the same defendants, and seeking the same relief. In addition, the amended complaint generally alleges that the consideration to be paid to CPI International’s stockholders under the terms of the proposed merger is inadequate. We believe all claims asserted in the lawsuit to be without merit.
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended October 2, 2009, except for the additional risk factor below.
On May 8, 2010, we entered into an Agreement and Plan of Merger with Comtech Telecommunications Corp. (“Comtech”) providing for Comtech to acquire the Company in a merger for a purchase price consisting of a mix of cash and Comtech common stock. The Company and its stockholders are exposed to several risks relating to the planned merger between the Company and Comtech, including the following:
·
|
We and Comtech may be unable to obtain the regulatory approvals or satisfy other closing conditions required to complete the merger. We and Comtech have received a request for additional information and documents—often referred to as a second request—from the Department of Justice in connection with the proposed merger. Failure to complete the merger could negatively impact our stock price and our future business and financial results.
|
·
|
Although we and Comtech expect that the merger will result in benefits to the combined company, the combined company may not realize those benefits because of various challenges.
|
·
|
The price of Comtech common stock may decline, which would decrease the value of the total merger consideration to be received by our stockholders in the merger.
|
·
|
The merger agreement limits our ability to pursue alternatives to the merger.
|
·
|
The merger agreement imposes customary restrictions on the conduct of our business outside of the ordinary course prior to the closing of the transaction or the termination of the merger agreement, which may also adversely affect our ability to manage our operations effectively in light of changes in economic or market conditions or to execute our business strategy and meet our financial goals.
|
·
|
The pendency of the proposed merger, whether or not consummated, may result in a diversion of management’s attention from day-to-day operations, a loss of key personnel, and a disruption of our operations. The announcement and pendency of the proposed transaction may also affect our relationships with third parties.
|
·
|
Under certain circumstances, we may be required under the merger agreement to pay Comtech a termination fee of up to $15 million.
|
·
|
Certain of our directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our stockholders.
|
·
|
A lawsuit has been filed and other lawsuits may be filed against us and Comtech challenging the merger, and an adverse ruling in any such lawsuit may prevent the merger from being completed.
|
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
None.