UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
ANNUAL
REPORT
PURSUANT
TO SECTIONS 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark
One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended October 3, 2008
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ______to______
Commission
file number: 000-51928
CPI
International, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
(State
or Other Jurisdiction of Incorporation or Organization)
|
75-3142681
(I.R.S.
Employer Identification No.)
|
|
811
Hansen Way, Palo Alto, California 94303
(Address
of Principal Executive Offices and Zip Code)
|
|
|
(650)
846-2900
(Registrant’s
telephone number, including area code)
|
|
|
Securities
registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of each
Class
|
|
Name of Each Exchange on Which
Registered
|
|||
|
Common
Stock, par value $0.01 per share
|
|
The
Nasdaq Stock Market LLC
|
|
|
Securities
registered pursuant to Section 12(g) of the Act: None
|
|
Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
|
Yes
¨ No
x
|
||||
|
Indicate by
check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
|
Yes
¨ No
x
|
||||
|
Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|
Yes
x No
¨
|
||||
|
Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form
10-K.
|
x
|
||||
|
Indicate by
check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.
|
|||||
|
Large
accelerated filer
|
¨
|
Accelerated
filer
|
x
|
||
|
Non-accelerated
filer
|
¨
(Do not check if a smaller reporting company)
|
Smaller
reporting company
|
¨
|
||
|
Indicate by
check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
|
Yes
¨ No
x
|
||||
|
The
aggregate market value of common stock held by non-affiliates of the
registrant as of March 28, 2008 (the last business day of the registrant’s
most recently completed second fiscal quarter) was approximately $73
million, based on the closing sale price of $9.98 per share of common
stock as reported on the Nasdaq Stock Market.
|
|||||
|
Indicate the
number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 16,360,349 shares of the
registrant’s common stock, par value $0.01 per share, were outstanding at
December 1, 2008.
|
|||||
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of
the registrant’s definitive 2009 proxy statement, anticipated to be filed with
the Securities and Exchange Commission within 120 days after the close of the
registrant’s fiscal year, are incorporated by reference into Part III of this
Form 10-K.
TABLE
OF CONTENTS
| Page |
|
|
PART I |
|
4
|
|
||
|
|
Risk Factors |
|
17 | ||
| Item 1B. | Unresolved Staff Comments | 30 | |||
| Item 2. | Properties |
30
|
|||
| Item 3. | Legal Proceedings |
30
|
|||
| Item 4. | Submission of Matters to a Vote of Security Holders | 30 | |||
|
|
PART II | 31 |
|
|
|
72 |
|
|
PART IV | 73 |
|
Cautionary
Statements Regarding Forward-Looking Statements
This
document contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that relate to future events or our future
financial performance. In some cases, readers can identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the
negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. Forward-looking statements are subject to known and unknown risks
and uncertainties, which could cause actual results to differ materially from
the results projected, expected or implied by the forward-looking statements.
These risk factors include, without limitation, competition in our end markets;
our significant amount of debt; changes or reductions in the United States
defense budget; currency fluctuations; goodwill impairment considerations;
customer cancellations of sales contracts; U.S. Government contracts laws and
regulations; changes in technology; the impact of unexpected costs; the impact
of environmental laws and regulations; and inability to obtain raw materials and
components. All written and oral forward-looking statements made in connection
with this report that are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the foregoing risk factors and other
cautionary statements included herein and in our other filings with the
Securities and Exchange Commission (“SEC”). We are under no duty to update any
of the forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.
The
information in this report is not a complete description of our business or the
risks and uncertainties associated with an investment in our securities. You
should carefully consider the various risks and uncertainties that impact our
business and the other information in this report and in our other filings with
the SEC before you decide to invest in our securities or to maintain or increase
your investment.
| Item 1. |
Business
|
Background
We are a
provider of microwave and radio frequency (“RF”), power and control products for
critical defense, communications, medical, scientific and other applications. We
develop, manufacture and distribute products used to generate, amplify, transmit
and receive high-power/high-frequency microwave and RF signals and/or provide
power and control for various applications.
Approximately
half of our product sales for fiscal year 2008 were for United States and
foreign government and military end use, particularly for radar and electronic
warfare applications. We are one of three companies in the U.S. that have the
facilities and expertise to produce a broad range of high-power microwave
products to the demanding specifications required for advanced military
applications. Our products are critical elements of high-priority U.S. and
foreign military programs and platforms, including numerous planes, ships and
ground-based platforms. Defense applications of our products include
transmitting and receiving radar signals for locating and tracking threats,
weapons guidance and navigation, as well as transmitting decoy and jamming
signals for electronic warfare and transmitting signals for satellite
communications. The U.S. Government is our only customer that accounted for more
than 10% of our sales in the last three fiscal years.
In
addition to our strong presence in defense applications, we have successfully
applied our key technologies to commercial end markets, including
communications, medical, industrial and scientific applications, which provide
us with a diversified base of sales. Approximately half of our product sales for
fiscal year 2008 were for commercial applications.
We
continue to develop higher-power, wider-bandwidth and higher-frequency microwave
products that enable significant technological advances for our defense and
commercial customers. In fiscal year 2008, we generated approximately 58% of our
total sales from products for which we believe we are the sole provider to our
customers, enhancing our reputation and the stability of our
business.
Having
average lives of between three and seven years, many of our products “wear out”
and require replacement. We estimate that approximately 45% of our total sales
for fiscal year 2008 were generated from recurring sales of replacements, spares
and repairs, including upgraded replacements for existing products, providing us
with a stable, predictable business that is partially insulated from dramatic
shifts in market conditions. We regularly work with our customers to create
upgraded products with enhanced bandwidth, power and reliability. We estimate
that our products are installed on more than 125 U.S. defense systems and more
than 180 commercial systems. This installed base and our sole-provider
positioning on high-profile U.S. military and commercial programs provide us
with a reputation and market visibility that we believe will help us generate
profitable future sales growth.
In 1948,
Russell and Sigurd Varian, the historical founders of our business and the
inventors of the klystron, founded Varian Associates, Inc. and introduced the
klystron as its first commercial product. The klystron is still a foundation of
modern high-power microwave applications and makes possible the generation,
amplification and transmission of high-fidelity electronic signals at high-power
levels and high frequencies. Varian Associates’ first products became the
progenitors of our current product lines. Over time, Varian Associates, through
internal development and acquisition, developed new devices and new uses for its
products, including applications for the radar and electronic warfare,
communications, medical, industrial and scientific markets.
In 1995,
a private equity fund, together with members of management, purchased the
electron device business from Varian Associates and formed our predecessor,
Communications & Power Industries Holding Corporation, which was the parent
company of Communications and Power Industries, Inc. In November 2003, CPI
Acquisition Corp., which, at the time, was wholly owned by The Cypress Group
(“Cypress), was incorporated in Delaware. In January 2004, CPI
Acquisition Corp. acquired our predecessor in a merger and changed its name from
CPI Acquisition Corp. to CPI Holdco, Inc. In January 2006, CPI Holdco, Inc.
changed its name to CPI International, Inc. On May 3, 2006, we completed the
initial public offering of the common stock of CPI International.
Unless
otherwise noted or dictated by context, (1) “CPI International” or “successor”
means CPI International, Inc., (2) “predecessor” means Communications &
Power Industries Holding Corporation, the predecessor to CPI International, (3)
“Communications & Power Industries” means Communications & Power
Industries, Inc., the direct, wholly owned operating subsidiary of CPI
International and (4) “merger” or the “January 2004 merger” means the January
23, 2004 merger pursuant to which CPI International acquired the predecessor.
The terms “we,” “us,” and “our” refer to CPI International and its direct and
indirect subsidiaries on a consolidated basis after the merger, or to the
predecessor and its direct and indirect subsidiaries on a consolidated basis
prior to the merger, as applicable.
We are
organized into six operating divisions: Microwave Power Products Division (Palo
Alto, California), Beverly Microwave Division (Beverly, Massachusetts), Satcom
Division (Ontario, Canada), Communications & Medical Products
Division (Ontario, Canada), Econco Division (Woodland, California) and Malibu
Division (Camarillo, California). In fiscal year 2006, we moved the operations
of our Eimac business (“Eimac”), which was formerly a separate division, from
San Carlos, California into our facility in nearby Palo Alto, California, and
integrated those operations into our Microwave Power Products Division in order
to realize increased efficiencies and achieve additional cost
savings.
In August
2007, we purchased all outstanding common stock of Malibu Research Associates,
Inc. (“Malibu”), a privately held company, in order to expand our product
offering to both new and existing customers in the radar and electronic warfare
and communications markets. As a result of this acquisition, we formed the
Malibu Division.
Markets
We
develop, manufacture and distribute products used to generate, amplify, transmit
and receive high-power/high-frequency microwave and RF signals and/or provide
power and control for various applications in defense and commercial markets. We
serve five end markets: the radar and electronic warfare, communications,
medical, industrial and scientific markets. Certain of our products are sold in
more than one end market depending on the specific power and frequency
requirements of the application and the physical operating conditions of the end
product. End-use applications of these systems include:
|
·
|
the
transmission of radar signals for navigation and
location;
|
|
·
|
the
transmission of deception signals for electronic
countermeasures;
|
|
·
|
the
transmission, reception and amplification of voice, data and video signals
for broadcasting, data links, Internet, flight testing and other types of
commercial and military
communications;
|
|
·
|
providing
power and control for medical diagnostic
imaging;
|
|
·
|
generating
microwave energy for radiation therapy in the treatment of cancer;
and
|
|
·
|
generating
microwave energy for various industrial and scientific
applications.
|
Our end
markets are described below.
Radar
and Electronic Warfare Market
We supply
products used in various types of military radar systems, including search, fire
control, tracking and weather radar systems. In radar systems, our products are
used to generate or amplify electromagnetic energy pulses, which are transmitted
via the radar system’s antenna through the air until they strike a target. The
return “echo” is read and analyzed by the receiving portion of the radar system,
which then enables the user to locate and identify the target. Our products have
been an integral element of radar systems for more than five
decades.
We supply
microwave power amplifiers to the electronic warfare market. Electronic warfare
systems provide protection for ships, aircraft and high-value land targets
against radar-guided weapons by interfering with, deceiving or disabling the
threats. Electronic warfare systems include onboard electronic equipment, pods
that attach under aircraft wings and expendable decoys. Within an electronic
warfare system, our components amplify low-level incoming signals received from
enemy radar or enemy communications systems and amplify or modify those signals
to enable the electronic warfare system either to jam or deceive the threat. We
believe that we are a leading provider of microwave power sources for the
electronic warfare market, having sold thousands of devices into the market, and
we believe that we have a sole provider position in products for certain
high-power phased array systems and expendable decoys. The electronic warfare
market also includes devices and subsystems being developed or supplied for
high-power microwave applications, such as systems to disable and destroy
improvised explosive devices (“IEDs”) and Active Denial (a new system, currently
in testing, that uses microwave energy to deter unfriendly personnel). Many of
the electronic warfare programs on which we are a qualified supplier are
well-entrenched current programs for which we believe that there is ongoing
demand.
Our radar
and electronic warfare products include microwave and power grid sources,
microwave amplifiers, receiver protectors, multifunction integrated microwave
assemblies, as well as complete transmitter subsystems consisting of the
microwave amplifier, power supply and control system. With our acquisition of
Malibu, our product offering has expanded to include advanced antenna systems
for radar and radar simulators. Our products are used in airborne, unmanned
aerial vehicles (“UAVs”), ground and shipboard radar systems. We believe that we
are a leading provider of power grid and microwave power sources for government
radar and electronic warfare applications, with an installed base of products on
more than 125 systems and a sole provider position in numerous landmark
programs.
Our sales
in the radar and electronic warfare market were $151.8 million, $144.2 million
and $146.7 million in fiscal years 2008, 2007 and 2006, respectively. On
average, approximately two-thirds of our sales in the radar and
electronic warfare markets are generated from recurring sales of replacements,
spares and repairs, including upgraded replacements for existing
products.
Medical
Market
Within
the medical market, we focus on diagnostic and treatment applications. For
diagnostic applications, we provide products for medical imaging applications,
such as x-ray imaging, positron emission tomography (“PET”) and magnetic
resonance imaging (“MRI”). For these applications, we provide x-ray generators,
subsystems, software and user interfaces, including state-of-the-art,
high-efficiency, compact power supplies and modern microprocessor-based controls
and operator consoles for
diagnostic
imaging. X-ray generators are used to generate and control the electrical energy
being supplied to an x-ray vacuum electron device (“VED”) and, therefore,
control the dose of radiation delivered to the patient during an x-ray imaging
procedure. In addition, these x-ray generators include a user interface to
control the operation of the equipment, including exposure times and the
selection of the anatomic region of the body to be examined. These generators
are interfaced with, and often power and control, auxiliary devices such as
patient positioners, cameras and automatic exposure controls to synchronize the
x-ray examination with this other equipment. We also provide power grid devices
for PET Isotope production systems. These systems are linac-based proton
accelerators used in the detection of cancer and other diseases.
For
treatment applications, we provide klystron VEDs and electron guns for high-end
radiation therapy machines. Klystrons provide the microwave energy to accelerate
a beam of energy toward a cancerous tumor.
Sales in
the medical market were $65.8 million, $67.6 million and $57.6 million in fiscal
years 2008, 2007 and 2006, respectively.
Since
1995, when Varian Associates sold its electron devices business to us, we have
been the sole provider of klystron high-power microwave devices to Varian
Medical Systems Inc.’s oncology systems division for use in its High Energy
Clinac® radiation therapy machines for the treatment of cancer, and we expect
this relationship to continue. We also provide x-ray generators for use on the
On-Board Imager accessory for the Clinac and Trilogy™ medical linear
accelerators. This automated system for image-guided radiation therapy uses
high-resolution x-ray images to pinpoint tumor sites. More than 5,000 of Varian
Medical Systems’ Clinac and Trilogy medical linear accelerators for cancer
radiotherapy are in service around the world, delivering more than 30 million
cancer treatments each year.
The
market for our x-ray generators and associated products is broad, ranging from
dealers who buy only a few generators per year, up to large original equipment
manufacturers (“OEMs”) who buy hundreds per year. We sell our x-ray generators
and associated equipment worldwide and have been growing both our geographic
presence and our product portfolio. We believe that we are a leading independent
supplier of x-ray generators in the world, and we believe that this market
provides continued long-term growth opportunities for us.
We have
traditionally focused on hospital, or “mid- to high-end” applications, and have
become a premier supplier to this part of the market. However, there exists
substantial demand for private clinic, or “lower-end” applications, and we have
introduced new families of products that allow us to participate more fully in
this part of the market.
Communications
Market
In the
communications market, we provide microwave amplifiers for communications links
for broadcast, video, voice and data transmission. We divide the communications
market into satellite, terrestrial broadcast, data link and over-the-horizon
communications applications. Our sales in the communications market were $117.8
million, $112.3 million and $106.7 million in fiscal years 2008, 2007 and 2006,
respectively. The communications market is the most volatile of our end markets,
and sales can vary significantly from quarter to quarter due, in part, to the
timing and size of our shipments for specific infrastructure programs, including
direct-to-home satellite communications applications, during a particular
quarter. Historically, we have focused on commercial communications
applications, but we have recently expanded our focus to include military
communications applications, as we believe that there is a significant and
growing market for our products for these applications.
In each
of the satellite, terrestrial broadcast, data link and over-the-horizon
communications markets, our products amplify and transmit signals within an
overall communications system. Ground-based satellite communications
transmission systems use our products to enable the transmission of microwave
signals, carrying either analog or digital information, from a ground-based
station to the transponders on an orbiting satellite by boosting the power of
the low-level original signal to desired power levels for transmission over
hundreds or thousands of miles to the satellite. The signal is received by the
satellite transponder, converted to the downlink frequency and retransmitted to
a ground-based receiving station. Terrestrial broadcast systems use our products
to amplify and transmit signals, including television and radio signals at very
high (“VHF”) and ultra high (“UHF”) frequencies, or other signals at a variety
of frequencies. Over-the-horizon (also referred to as “troposcatter”) systems
use our amplifiers to send a signal through the atmosphere, bouncing the signal
off the troposphere, the lowest atmospheric layer, and enabling receipt of the
signal tens of miles to hundreds of miles away. With our acquisition of Malibu
in fiscal year 2007, our product offering in the communications market has
expanded to include the airborne and ground nodes of the tactical common data
link (“TCDL”) network for various platforms, including UAVs. TCDL is a
high-bandwidth digital data link that transmits and receives real-time command
and control, intelligence, surveillance and reconnaissance data between manned
and unmanned airborne platforms and their associated ground-based and ship-based
terminals.
Satellite
Communications
The
majority of our communications products are sold into the satellite
communications market. We believe that we are a leading producer of power
amplifiers, amplifier subsystems and high-power microwave devices for satellite
uplinks. We believe that we have a worldwide installed base of more than 25,000
amplifiers. We believe that we offer one of the industry’s most comprehensive
lines of satellite communications amplifiers, with offerings for virtually every
currently applicable frequency and power requirement for both fixed and mobile
satellite communications applications in the military and commercial arena. Our
technological expertise, our well-established worldwide service network and our
ability to design and manufacture both the fully integrated amplifier and either
the associated high-power microwave device or the solid-state RF device allow us
to provide a superior overall service to our customers.
We
believe that we are well equipped to participate in the newest growth areas,
including: amplifiers for the 30 gigahertz (GHz) band (Ka-band), which is
projected to be one of the major new satellite communications growth areas for
both commercial and military applications; the growing application of
conventional and high-definition television for direct-to-home satellite
broadcast; the use of satellite communications for broadband data
communications; and specialized amplifiers for the military communications
market, such as multi-band amplifiers, which operate at multiple discrete
frequency bands.
Terrestrial
Broadcast Communications
We serve
the AM, FM and shortwave radio and VHF and UHF television broadcast market with
high-quality, reliable and efficient high-power microwave and RF devices. Eimac,
which is part of our Microwave Power Products Division, supplies these products
to transmitter OEMs directly and offers immediate delivery of products to end
users through our distributors. Our Econco Division is a provider of rebuilding
services for high-power power grid devices, allowing broadcasters to extend the
life of their devices at a cost that is lower than buying a new device. Although
the terrestrial broadcast industry is considered a mature market, we believe
that emerging shortwave digital radio technology will provide new opportunity
for our high-power products. Through the years, we have established a customer
base of several thousand customers in the broadcast market, providing us with
opportunities for replacement, spares, upgrade and rebuilding
business.
Data
Link Communications
Data link
applications use our products to transmit signals from an airborne platform to
the ground or other airborne or satellite platforms, or vice versa.
Over-the-horizon
Communications
We
provide high-power amplifiers and traveling wave tubes for over-the-horizon, or
troposcatter, communications applications. The over-the-horizon communications
market involves over-the-horizon, microwave-based communication systems. These
systems transmit voice, video and data signals for up to several hundred miles
by bouncing the signals off the troposphere, the lowest atmospheric layer, which
is approximately six miles above the earth’s surface. Since no satellite is
required, these systems can provide an easy-to-install, relocatable and
cost-efficient alternative to satellite-based communications.
Industrial
Market
The
industrial market includes applications for a wide range of systems used for
material processing, instrumentation and voltage generation. We offer a number
of specialized product lines to address this diverse market. We produce fully
integrated amplifiers that include the associated high-power microwave devices
used in instrumentation applications for electromagnetic interference and
compatibility testing. Our products are also installed in the power supply
modules of industrial equipment using RF energy to perform pipe and plastic
welding, textile drying and semiconductor wafer fabrication. We have a line of
industrial RF generators that use high-power microwave technology for various
industrial heating and material processing applications. Our sales in the
industrial market were $25.1 million, $20.5 million and $22.1 million in fiscal
years 2008, 2007 and 2006, respectively.
Scientific
Market
The
scientific market consists primarily of equipment used in reactor fusion
programs and accelerators for the study of high-energy particle physics,
referred to as “Big Science.” Generally, in scientific applications, our
products are used to generate high levels of microwave or RF energy to
accelerate a beam of electrons in order to study the atom and its elementary
particles. Our products are also used in research related to the generation of
electricity from fusion reactions. Our sales in the scientific market were $9.5
million, $6.5 million and $6.6 million in fiscal years 2008, 2007 and 2006,
respectively.
Geographic
Markets
We sell
our products in more than 90 countries. In fiscal year 2008, sales to customers
in the U.S., Europe and Asia accounted for approximately 64%, 18% and 14% of our
total sales, respectively. No country other than the U.S. accounted for more
than 10% of our sales in fiscal year 2008. See “Sales, Marketing and Service.”
For financial information about geographic areas, see Note 11 to the
accompanying audited consolidated financial statements.
Products
We have
an extensive portfolio of over 4,500 products that includes a wide range of
microwave and power grid VEDs, in addition to products such as:
|
·
|
satellite
communications amplifier
subsystems;
|
|
·
|
radar
and electronic warfare subsystems;
|
|
·
|
specialized
antenna subsystems;
|
|
·
|
solid-state
integrated microwave assemblies;
|
|
·
|
medical
x-ray generators and control
systems;
|
|
·
|
modulators
and transmitters; and
|
|
·
|
various
electronic power supply and control equipment and
devices.
|
Additionally,
we have developed complementary, more highly integrated, subsystems that contain
additional integrated components for medical imaging and for satellite
communications applications. These integrated subsystems generally sell for
higher prices.
Generally, our
products are used to:
|
·
|
generate
or amplify (multiply) various forms of electromagnetic energy (these
products are generally referred to as VEDs, vacuum electron devices, or
simply as devices);
|
|
·
|
transmit,
direct, measure and control electromagnetic
energy;
|
|
·
|
provide
the voltages and currents to power and control devices that generate
electromagnetic energy; or
|
|
·
|
provide
some combination of the above
functions.
|
VEDs were
initially developed for defense applications but have since been applied to many
commercial markets. We use tailored variations of this key technology to address
the different frequency and power requirements in each of our target markets.
Generally our VED products derive from, or are enhancements to, the original VED
technology on which our company was founded. Most of our other products were
natural offshoots of the original VED technology and were developed in response
to the opportunities and requirements in the market for more fully integrated
products and services. The type of device selected for a specific application is
based on the operating parameters required by the system. Our products generally
have selling prices ranging from $2,000 to $100,000, with certain, limited
products priced up to $1,000,000.
We sell
several categories of VEDs, including:
|
·
|
Klystrons
and gyrotrons: Klystrons are typically high-power VEDs that
operate over a narrow range of frequencies, with power output ranges from
hundreds of watts to megawatts and frequencies from 500 kilohertz to over
30 GHz. We produce and manufacture klystrons for a variety of radar,
communications, medical, industrial
and
|
| scientific applications. Gyrotron oscillators and amplifiers operate at very high-power and very high frequencies. Power output of one megawatt has been achieved at frequencies greater than 100 GHz. These devices are used in areas such as fusion research, electronic warfare and high-resolution radar. |
|
·
|
Helix
traveling wave tubes: Helix traveling wave tubes are VEDs that
operate over a wide range of frequencies at moderate output power levels
(tens of watts to thousands of watts). These devices are ideal for
terrestrial and satellite communications and electronic warfare
applications.
|
|
·
|
Coupled
cavity traveling wave tubes: Coupled cavity traveling wave
tubes are VEDs that combine some of the power generating capability of a
klystron with some of the increased bandwidth (wider frequency range)
properties of a helix traveling wave tube. These amplifiers are medium
bandwidth, high-power devices, since power output levels can be as high as
one megawatt. These devices are used primarily for high-power and
multi-function radars, including front line radar
systems.
|
|
·
|
Magnetrons: Magnetron
oscillators are VEDs capable of generating high-power output at relatively
low cost. Magnetrons generate power levels as high as 20 megawatts and
cover frequencies up to the 40 GHz range. We design and manufacture
magnetrons for radar, electronic warfare and missile programs within the
defense market. Shipboard platforms include search and air traffic control
radar on most aircraft carriers, cruisers and destroyers of NATO-country
naval fleets. Ground-based installations include various military and
civil search and air traffic control radar systems. We are also a supplier
of magnetrons for use in commercial weather radar. Potential new uses for
magnetrons include high-power microwave systems for disruption of enemy
electronic equipment and the disabling or destruction of roadside bombs
and other IEDs.
|
|
·
|
Cross-field
amplifiers: Cross-field amplifiers are VEDs used for high-power
radar applications because they have power output capability as high as 10
megawatts. Our cross-field amplifiers are primarily used to support the
Aegis radar system used by the U.S. Navy and select foreign naval vessels.
We supply units for both new ships and
replacements.
|
|
·
|
Power
grid devices: Power grid devices are lower frequency VEDs that
are used to generate, amplify and control electromagnetic energy. These
devices are used in commercial and military communications systems and
radio and television broadcasting. We also supply power grid devices for
the shortwave broadcast market. Our products are also widely used in
equipment that serves the industrial markets such as textile drying, pipe
welding and semiconductor wafer
fabrication.
|
|
|
In
addition to VEDs, we also sell:
|
|
·
|
Microwave
transmitter subsystems: Our microwave transmitter subsystems
are integrated assemblies generally built around our VED products. These
subsystems incorporate specialized high-voltage power supplies to power
the VED, plus cooling and control systems that are uniquely designed to
work in conjunction with our devices to maximize life, performance and
reliability. Microwave transmitter subsystems are used in a variety of
defense and commercial applications. Our transmitter subsystems are
available at frequencies ranging from one GHz all the way up to 100 GHz
and beyond.
|
|
·
|
Satellite
communications amplifiers: Satellite communications amplifiers
provide integrated power amplification for the transmission of voice,
broadcast, data, Internet and other communications signals from ground
stations to satellites in all frequency bands. We provide a broad line of
complete, integrated satellite communications amplifiers that consist of a
VED or solid-state microwave amplifier, a power supply to power the
device, radio frequency conditioning circuitry, cooling equipment,
electronics to control the amplifier and enable it to interface with the
satellite ground station, and a cabinet. These amplifiers are often
combined in sub-system configurations with other components to meet
specific customer requirements. We offer amplifiers for both defense and
commercial applications. Our products include amplifiers based on
traveling wave tubes, klystrons, solid-state devices and millimeter wave
devices.
|
|
·
|
Receiver
protectors and control components: Receiver protectors are used
in the defense market in radar systems to protect sensitive receivers from
extraneous high-power signals, thereby preventing damage to the receiver.
We have been designing and manufacturing receiver protector products for
more than 50 years. We believe that we are the world’s largest
manufacturer of receiver protectors and the only manufacturer offering the
full range of available technologies. We also manufacture a wide range of
other components used to control the RF energy in the customer’s system.
Our receiver protectors and control components are integrated into
prominent fielded military programs. As radar systems have evolved to
improve performance and reduce size and weight, we have invested in
solid-state technology to develop the microwave control components to
allow us to offer more fully integrated products, referred to as
multifunction assemblies, as required by modern radar
systems.
|
|
·
|
Medical
x-ray imaging systems: We design and manufacture x-ray
generators for medical imaging applications. These consist of power
supplies, cooling, control and display subsystems that drive the x-ray
equipment used by healthcare providers for medical imaging. The energy in
an x-ray imaging system is generated by an x-ray tube which is another
version of a VED operating in a different region of the electromagnetic
spectrum. These generators use the high-voltage and control systems
expertise originally developed by us while designing power systems to
drive our other VEDs. We also provide the electronics and software
subsystems that control and tie together much of the other ancillary
equipment in a typical x-ray imaging
system.
|
|
·
|
Antenna
systems: We design and manufacture antenna systems for a variety of
applications, including, radar, electronic warfare, communications and
telemetry. Along with a variety of antenna types, including phased array,
edge and tilt scanning antennas, conformal electronic scanning antennas,
stabilized shipboard tracking antennas and our trademark FLAPS (“Flat
Parabolic Surface”) antennas, the antenna systems also include the highly
efficient harmonic drive pedestals used to support them. The antenna
systems used on airborne, shipboard and ground-based platforms are
designed to enable high performance, high data rate transmission at
frequencies ranging from one GHz to
100GHz.
|
Backlog
As of
October 3, 2008, we had an order backlog of $201.3 million compared to an order
backlog of $196.4 million as of September 28, 2007. Backlog represents the
cumulative balance, at a given point in time, of recorded customer sales orders
that have not yet been shipped or recognized as sales. Backlog is increased when
an order is received, and backlog is reduced when we recognize sales. We believe
that backlog and orders information is helpful to investors because this
information may be indicative of future sales results. Although backlog consists
of firm orders for which goods and services are yet to be provided, customers
can, and sometimes do, terminate or modify these orders. Historically, however,
the amount of modifications and terminations has not been material compared to
total contract volume. Approximately 90% of our backlog as of October 3, 2008 is
expected to be filled within fiscal year 2009.
Sales,
Marketing and Service
Our
global distribution system provides us with the capability to introduce, sell
and service our products worldwide. Our distribution system primarily uses our
direct sales professionals throughout the world. We have direct sales offices
throughout North America and Europe, as well as in India, Singapore, China and
Australia. As of October 3, 2008, we had 136 direct sales, marketing and
technical support individuals on staff. Our wide-ranging distribution
capabilities enable us to serve our growing international markets, which
accounted for approximately 36% of our sales in fiscal year 2008.
Our sales
professionals receive extensive technical training and focus exclusively on our
products. As a result, they are able to provide knowledgeable assistance to our
customers regarding product applications, the introduction and implementation of
new technology and at the same time provide local technical
support.
In
addition to our direct sales force, we use approximately 54 external sales
organizations and one significant stocking distributor, Richardson Electronics,
Ltd., to service the needs of customers in certain markets. The majority of the
third-party sales organizations that we use are located outside the U.S. and
Europe and focus primarily on customers in South America, Southeast Asia, the
Middle East, Africa and Eastern Europe. Through the use of third-party sales
organizations, we are better able to meet the needs of our foreign customers by
establishing a local presence in lower volume markets. Using both our direct
sales force and our largest distributor, Richardson Electronics, we are able to
market our products to both end users and system integrators around the world
and are able to deliver our products with short turn-around times.
Given the
complexity of our products, their critical function in customers’ systems and
the unacceptably high costs to our customers of system failure and downtime, we
believe that our customers view our product breadth, reliability and superior
responsive service as key points of differentiation. We offer comprehensive
customer support, with direct technical support provided by 17 strategically
located service centers, primarily serving satellite communications customers.
These service centers are located in the U.S. (California and New Jersey),
Canada (Georgetown, Ontario), Brazil, China (two), India (three), Indonesia,
Japan, Peru, Russia, Singapore, South Africa, Taiwan and The Netherlands. The
service centers enable us to provide extensive technical support and rapid
response to customers’ critical spare parts and service requirements throughout
the world. In addition, we offer on-site installation assistance, on-site
service contracts, a 24-hour technical support hotline and complete product
training at our facilities, our service centers or customer sites. We believe
that many of our customers specify our products in competitive bids due to our
responsive global support and product quality.
Competition
The
industries and markets in which we operate are competitive. We encounter
competition in most of our business areas from numerous other companies,
including units of L-3 Communications and Thales Electron Devices, e2v
technologies plc and Comtech Xicom Technology, Inc., a subsidiary of Comtech
Telecommunications Corporation. Some of our competitors have parent entities
that have resources substantially greater than ours. In certain markets, some of
these competitors are also our customers and/or our suppliers, particularly for
products for satellite communications applications. Our ability to compete in
our markets depends to a significant extent on our ability to provide
high-quality products with shorter lead times at competitive prices and our
readiness in facilities, equipment and personnel.
We also
continually engage in research and development efforts in order to introduce
innovative new products for technologically sophisticated customers and markets.
There is an inherent risk that advances in existing technology, or the
development of new technology, could adversely affect our market position and
financial condition. We provide both VED and solid-state alternatives to our
customers. Solid-state devices are generally best suited for lower-power
applications, while only VEDs currently serve higher-power and higher-frequency
demands. Because of the small dimensions of solid-state components, solid-state
devices have challenges in dissipating the significant amount of excess heat
energy that is generated in high-power, high-frequency applications. As a
result, we believe that for the foreseeable future, solid-state devices will be
unable to compete on a cost-effective basis in the high-power/high-frequency
markets that represent the majority of our business. The extreme operating
parameters of these applications necessitate heat dissipation capabilities that
are best satisfied by our VED products. We believe VED and solid-state
technology currently each serves its own specialized market without significant
overlap in most applications.
Research
and Development
Total
research and development spending was $22.8 million, $16.3 million and $14.8
million during fiscal years 2008, 2007 and 2006, respectively. Total research
and development spending consisted of company-sponsored research and development
expense of $10.8 million, $8.6 million and $8.6 million during fiscal years
2008, 2007 and 2006, respectively, and customer-sponsored research and
development of $12.0 million, $7.7 million and $6.2 million during fiscal years
2008, 2007 and 2006, respectively. Customer-sponsored research and development
costs are charged to cost of sales to correspond with revenue
recognized.
Manufacturing
We
manufacture our products at six manufacturing facilities in five locations in
North America. We have implemented modern manufacturing methodologies based upon
a continuous improvement philosophy, including just-in-time materials handling,
demand flow technology, statistical process control and value-managed
relationships with suppliers and customers. We obtain certain materials
necessary for the manufacture of our products, such as molybdenum, cupronickel,
oxygen-free high conductivity (“OFHC”) copper and some cathodes, from a limited
group of, or occasionally sole, suppliers. Four of our facilities have achieved
the ISO 9001 international certification standard.
Generally,
each of our manufacturing divisions uses similar manufacturing processes
consisting of product development, procurement of components and/or
sub-assemblies, high-level assembly and testing. For satellite communications
equipment, the process is primarily one of integration, and we use contract
manufacturers to provide sub-assemblies whenever possible. Satellite
communications
equipment
uses both VED and solid-state technology, and the Satcom Division procures
certain of the critical components that it incorporates into its subsystems from
our other manufacturing divisions.
Our
business is dependent, in part, on our intellectual property rights, including
trade secrets, patents and trademarks. We rely on a combination of nondisclosure
and other contractual arrangements as well as trade secret, patent, trademark
and copyright laws to protect our intellectual property rights. We do not
believe that any single patent or other intellectual property right or license
is material to our success as a whole.
On
occasion, we have entered into agreements pursuant to which we license
intellectual property from third parties for use in our business, and we also
license intellectual property to third parties. As a result of contracts with
the U.S. Government, some of which contain patent and/or data rights clauses,
the U.S. Government has acquired royalty-free licenses or other rights in
inventions and technology resulting from certain work done by us on behalf of
the U.S. Government.
U.S.
Government Contracts and Regulations
We deal
with numerous U.S. Government agencies and entities, including the Department of
Defense, and, accordingly, we must comply with and are affected by laws and
regulations relating to the formation, administration and performance of U.S.
Government contracts. We are affected by similar government authorities with
respect to our international business.
U.S.
Government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress usually appropriates funds on a fiscal
year basis even though contract performance may extend over many years.
Therefore, long-term government contracts and related orders are subject to
cancellation if appropriations for subsequent performance periods are not
approved.
In
addition, our U.S. Government contracts may span one or more base years and
multiple option years. The U.S. Government generally has the right not to
exercise option periods and may not exercise an option period if the applicable
U.S. Government agency does not receive funding or is not satisfied with our
performance of the contract. All of our government contracts and most of our
government subcontracts can be terminated by the U.S. Government, or another
relevant government, either for its convenience or if we default by failing to
perform under the contract. Upon termination for convenience of a fixed-price
contract, we normally are entitled to receive the purchase price for delivered
items, reimbursement for allowable costs for work-in-process and an allowance
for profit on the work performed. Upon termination for convenience of a
cost-reimbursement contract, we normally are entitled to reimbursement of
allowable costs plus a portion of the fee. The amount of the fee recovered, if
any, is related to the portion of the work accomplished prior to
termination.
Environmental
Matters
We are
subject to a variety of U.S. federal, state and local, as well as foreign,
environmental laws and regulations relating to, among other things, wastewater
discharge, air emissions, storage and handling of hazardous materials, disposal
of hazardous wastes and remediation of soil and groundwater contamination. We
use a number of chemicals or similar substances and generate wastes that are
classified as hazardous, and we require environmental permits to conduct certain
of our operations. Violation of such laws and regulations can result in fines,
penalties and other sanctions.
In
connection with the sale of Varian Associates, Inc.’s electron devices business
to us in 1995, Varian Medical Systems, Inc. (as successor to Varian Associates)
generally agreed to indemnify us for various environmental liabilities relating
to Varian Associates’ electron devices business prior to August 1995. We are
generally not indemnified by Varian Medical Systems with respect to liabilities
resulting from our operations after August 1995. Pursuant to this agreement,
Varian Medical Systems is undertaking environmental investigation and remedial
work at our two manufacturing facilities in Palo Alto, California and Beverly,
Massachusetts, that are known to require remediation.
To date,
Varian Medical Systems has, generally at its expense, conducted required
investigation and remediation work at our facilities and responded to
environmental claims arising from Varian Medical Systems (or its predecessor’s)
prior operations of the electron devices business.
In
connection with the agreement for the sale of our San Carlos facility in
September 2006, the buyer of the facility obtained insurance to cover the
expected environmental remediation costs and other potential environmental
liabilities at that facility. In addition, in connection with the sale, we
released Varian Medical Systems from certain of its indemnification obligations
with respect to that facility. If the proceeds of the environmental insurance
are insufficient to cover the required remediation costs and potential other
environmental liabilities at that facility, we could be required to bear a
portion of those liabilities.
We
believe that we have been and are in substantial compliance with environmental
laws and regulations, and we do not expect to incur material costs relating to
environmental compliance.
Employees
As of
October 3, 2008, we had approximately 1,650 employees, of which 430 are located
outside the United States (including approximately 400 in Canada). None of our
employees is subject to a collective bargaining agreement although a limited
number of our sales force members located in Europe are members of work councils
or unions. We have not experienced any work stoppages and believe that we have
good relations with our employees.
Financial
Information About Segments
For
financial information about our segments, see Note 11 to the accompanying
audited consolidated financial statements.
Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports are accessible at no cost on
our Web site at www.cpii.com as soon as reasonably practicable after they are
filed or furnished to the Securities and Exchange Commission (the “SEC”). They
are also available by contacting our Investor Relations at
investor.relations@cpii.com and are also accessible on the SEC’s Web site at
www.sec.gov.
Our Web site and the
information contained therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K or our other filings with
the SEC.
| Risk Factors |
Investors
should carefully consider the following risks and other information in this
report and our other filings with the SEC before deciding to invest in us or to
maintain or increase any investment. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties may also
adversely impact and impair our business. If any of the following risks actually
occur, our business, results of operations or financial condition would likely
suffer. In such case, the trading price of our securities could decline and
investors might lose all or part of their investment.
RISKS
RELATING TO OUR BUSINESS
We
face competition in the markets in which we sell our products.
The U.S. and foreign markets in which
we sell our products are competitive. Our ability to compete in these markets
depends on our ability to provide high-quality products with short lead times at
competitive prices, as well our ability to create innovative new products. In
addition, our competitors could introduce new products with greater
capabilities, which could have a material adverse effect on our business.
Certain of our competitors are owned by companies that have substantially
greater financial resources than we do. Also, our foreign competitors may not be
subject to U.S. Government export restrictions, which may make it easier in
certain circumstances for them to sell to foreign customers. If we are unable to
compete successfully against our current or future competitors, our business and
sales will be harmed.
Fluctuations
in our operating results, including quarterly net orders and sales, may result
in volatility in our stock price, which could cause losses to our
stockholders.
We have experienced and, in the future,
expect to experience fluctuations in our quarterly operating results, including
net orders and sales. The timing of customers’ order placement and customers’
willingness to commit to purchase products at any particular time are inherently
difficult to predict or forecast. Once orders are received, factors that may
affect whether these orders become sales and translate into revenues in a
particular quarter include:
|
·
|
delay
in shipments due to various factors, including cancellations by a
customer, delays in a customer’s own production schedules, natural
disasters or manufacturing
difficulties;
|
|
·
|
delay
in a customer’s acceptance of a product;
or
|
|
·
|
a
change in a customer’s financial condition or ability to obtain
financing.
|
The
current global economic and financial markets conditions, including severe
disruptions in the credit markets and the potential for a significant and
prolonged global economic recession, may have an adverse effect on our results
of operations. A prolonged general economic recession and, specifically, a
prolonged recession in the defense, communications or medical markets, or
technological changes, as well as other market factors could intensify
competitive pricing pressure, create an imbalance of industry supply and demand,
or otherwise diminish volumes or profits.
Our
quarterly operating results may also be affected by a number of other factors,
including:
|
·
|
changes
or anticipated changes in third-party reimbursement amounts or policies
applicable to treatments using our
products;
|
|
·
|
revenues
becoming affected by seasonal
influences;
|
|
·
|
changes
in foreign currency exchange rates;
|
|
·
|
changes
in the relative portion of our revenues represented by our various
products;
|
|
·
|
timing
of the announcement, introduction and delivery of new products or product
enhancements by us and by our
competitors;
|
|
·
|
disruptions
in the supply or changes in the costs of raw materials, labor, product
components or transportation
services;
|
|
·
|
the
impact of changing levels of sales to sole purchasers of certain of our
products; and
|
|
·
|
unfavorable
outcome of any litigation.
|
A
significant portion of our sales is, and is expected to continue to be, from
contracts with the U.S. Government, and any significant reduction in the U.S.
defense budget or any disruption or decline in U.S. Government expenditures
could negatively affect our results of operations and cash flows.
Over 35%, 32% and 33% of our sales in
our 2008, 2007 and 2006 fiscal years, respectively, were made to the U.S.
Government, either directly or indirectly through prime contractors or
subcontractors. Because U.S. Government contracts are dependent on the U.S.
defense budget, any significant disruption or decline in U.S. Government
expenditures in the future, changes in U.S. Government spending priorities,
other legislative changes or changes in our relationship with the U.S.
Government could result in the loss of some or all of our government contracts,
which, in turn, could result in a decrease in our sales and cash
flow.
In
addition, U.S. Government contracts are also conditioned upon continuing
congressional approval and the appropriation of necessary funds. Congress
usually appropriates funds for a given program each fiscal year even though
contract periods of performance may exceed one year. Consequently, at the outset
of a major program, multi-year contracts are usually funded for only the first
year, and additional monies are normally committed to the contract by the
procuring agency only as Congress makes appropriations for future fiscal years.
We cannot ensure that any of our government contracts will continue to be funded
from year to year. If such contracts are not funded, our sales may decline,
which could negatively affect our results of operations and result in decreased
cash flows.
We
are subject to risks particular to companies supplying defense-related equipment
and services to the U.S. Government. The occurrence of any of these risks could
cause a loss of or decline in our sales to the U.S. Government.
U.S.
Government contracts contain termination provisions and are subject to audit and
modification
The U.S.
Government has the ability to:
|
·
|
terminate
existing contracts, including for the convenience of the government or
because of a default in our performance of the
contract;
|
|
·
|
reduce
the value of existing contracts;
|
|
·
|
cancel
multi-year contracts or programs;
|
|
·
|
audit
our contract-related costs and fees, including allocated indirect
costs;
|
|
·
|
suspend
or debar us from receiving new contracts pending resolution of alleged
violations of procurement laws or regulations;
and
|
|
·
|
control
and potentially prohibit the export of our products, technology or other
data.
|
All of
our U.S. Government contracts can be terminated by the U.S. Government either
for its convenience or if we default by failing to perform under the contract.
Termination-for-convenience provisions provide only for our recovery of costs
incurred or committed, settlement expenses and profit on the work completed
prior to termination. Termination-for-default provisions may provide for the
contractor to be liable for excess costs incurred by the U.S. Government in
procuring undelivered items from another source. Our contracts with foreign
governments generally contain similar provisions relating to termination at the
convenience of the customer.
The U.S.
Government may review or audit our direct and indirect costs and performance on
certain contracts, as well as our accounting and general business practices, for
compliance with complex statutes and regulations, including the Truth in
Negotiations Act, Federal Acquisition Regulations, Cost Accounting Standards and
other administrative regulations. Like most government contractors, the U.S.
Government audits our costs and performance on a continual basis, and we have
outstanding audits. Based on the results of these audits, the U.S. Government
may reduce our contract-related costs and fees, including allocated indirect
costs. In addition, under U.S. Government regulations, some of our costs,
including certain financing costs, research and development costs and marketing
expenses, may not be reimbursable under U.S. Government contracts.
We
are subject to laws and regulations related to our U.S. Government contracts
business which may impose additional costs on our business.
As a U.S.
Government contractor, we must comply with, and are affected by, laws and
regulations related to our performance of our government contracts and our
business. These laws and regulations may impose additional costs on our
business. In addition, we are subject to audits, reviews and investigations of
our compliance with these laws and regulations. In the event that we are found
to have failed to comply with these laws and regulations, we may be fined, we
may not be reimbursed for costs incurred in performing the contracts, our
contracts may be terminated and we may be unable to obtain new contracts. If a
government review, audit or investigation uncovers improper or illegal
activities, we may be subject to civil or criminal penalties and administrative
sanctions, including forfeiture of claims and profits, suspension of payments,
statutory penalties, fines and suspension or debarment.
In
addition, many of our U.S. Government contracts require our employees to
maintain various levels of security clearances, and we are required to maintain
certain facility clearances. Complex regulations and requirements apply to
obtaining and maintaining security clearances and facility clearances, and
obtaining such clearances can be a lengthy process. To the extent we are not
able to obtain or maintain security clearances or facility clearances, we also
may not be able to seek or perform future classified contracts. If we are unable
to do any of the foregoing, we will not be able to maintain or grow our
business, and our revenue may decline.
As
a result of our U.S. Government business, we may be subject to false claim
suits, and a judgment against us in any of these suits could cause us to be
liable for substantial damages.
Our
business with the U.S. Government, subjects us to “qui tam,” or “whistle
blower,” suits brought by private plaintiffs in the name of the U.S. Government
upon the allegation that we submitted a false claim to the U.S. Government, as
well as to false claim suits brought by the U.S. Government. A judgment against
us in a qui tam or false claim suit could cause us to be liable for substantial
damages (including treble damages and monetary penalties) and could carry
penalties of suspension or debarment, which would make us ineligible to receive
any U.S. Government contracts for a period of up to three years. Any material
judgment, or any suspension or debarment, could result in increased costs, which
could negatively affect our results of operations. In addition, any of the
foregoing could cause a loss of customer confidence and could negatively harm
our business and our future prospects.
Some
of our sole-provider business from the U.S. Government in the future may be
subject to competitive bidding.
Some of
the business that we will seek from the U.S. Government in the future may be
awarded through a competitive bidding process. Competitive bidding on government
contracts presents risks such as:
|
·
|
the
need to bid on programs in advance of contract performance, which may
result in unforeseen performance issues and costs;
and
|
|
·
|
the
expense and delay that may arise if our competitors protest or challenge
the award made to us, which could result in a reprocurement, modified
contract, or reduced work.
|
If we fail to win competitively bid
contracts or fail to perform these contracts in a profitable manner, our sales
and results of operations could suffer.
Our
business and operating results could be adversely affected by losses under
fixed-price contracts.
Most of
our governmental and commercial contracts are fixed-price
contracts. Fixed-price contracts require us to perform all work under the
contract for a specified lump-sum price. Fixed-price contracts expose us to a
number of risks, including underestimation of costs, ambiguities in
specifications, unforeseen costs or difficulties, problems with new
technologies, delays beyond our control, failure of subcontractors to perform
and economic or other changes that may occur during the contract period. In
addition, some of our fixed-price contracts contain termination provisions that
permit our customer to terminate the contract if we are unsuccessful in
fulfilling our obligations under the contract. In that event, we could be liable
for the excess costs incurred by our customer in completing the
contract.
Laws
and regulations governing the export of our products could adversely impact our
business.
Licenses
for the export of many of our products are required from government agencies in
accordance with various regulations, including the United States Export
Administration Regulations and the International Traffic In Arms Regulations
(“ITAR”). Under these regulations, we must obtain a license or permit from the
U.S. Government before transferring export-controlled technical data to a
foreign person or exporting certain of our products that have been designated as
important for national security. These laws and regulations could adversely
impact our sales and business in the following scenarios:
|
·
|
In
order to obtain the license for the sale of such a product, we are
required to obtain information from the potential customer and provide it
to the U.S. Government. If the U.S. Government determines that the sale
presents national security risks, it may not approve the
sale.
|
|
·
|
Delays
caused by the requirement to obtain a required license or other
authorization may cause delays in our production, sales and export
activities, and may cause us to lose potential
sales.
|
|
·
|
If
we violate these laws and regulations, we could be subject to fines or
penalties, including debarment as an exporter and/or a government
contractor.
|
We
generate sales from contracts with foreign governments, and significant changes
in government policies or to appropriations of those governments could have an
adverse effect on our business, results of operations and financial
condition.
We
estimate that approximately 12%, 15% and 16% of our sales in fiscal years 2008,
2007 and 2006, respectively, were made directly or indirectly to foreign
governments. Significant changes to appropriations or national defense policies,
disruptions of our relationships with foreign governments or terminations of our
foreign government contracts could have an adverse effect on our business,
results of operations and financial condition.
Our
international operations subject us to the social, political and economic risks
of doing business in foreign countries.
We
conduct a substantial portion of our business, employ a substantial number of
employees, and use external sales organizations, in Canada and in other
countries outside of the United States. As a result, we are subject to risks of
doing business internationally. Direct sales to customers located outside the
United States were 36%, 41% and 37% in fiscal years 2008, 2007 and 2006,
respectively. Circumstances and developments related to international operations
that could negatively affect our business, results of operations and financial
condition include the following:
|
·
|
changes
in currency rates with respect to the U.S.
dollar;
|
|
·
|
changes
in regulatory requirements;
|
|
·
|
potentially
adverse tax consequences;
|
|
·
|
U.S.
and foreign government policies;
|
|
·
|
currency
restrictions, which may prevent the transfer of capital and profits to the
United States;
|
|
·
|
restrictions
imposed by the U.S. Government on the export of certain products and
technology;
|
|
·
|
the
responsibility of complying with multiple and potentially conflicting
laws;
|
|
·
|
difficulties
and costs of staffing and managing international
operations;
|
|
·
|
the
impact of regional or country specific business cycles and economic
instability; and
|
|
·
|
geopolitical
developments and conditions, including international hostilities, acts of
terrorism and governmental reactions, trade relationships and military and
political alliances.
|
Limitations on imports, currency
exchange control regulations, transfer pricing regulations and tax laws and
regulations could adversely affect our international operations, including the
ability of our non-U.S. subsidiaries to declare dividends or otherwise transfer
cash among our subsidiaries to pay interest and principal on our
debt.
We
are subject to risks of currency fluctuations and related hedging
operations.
A portion of our business is conducted
in currencies other than the U.S. dollar. In particular, we incur significant
expenses in Canadian dollars in connection with our Canadian operations, but do
not receive significant revenues in Canadian dollars. Changes in exchange rates
among certain currencies, such as the Canadian dollar and the U.S. dollar, will
affect our cost of sales, operating margins and
revenues. Specifically, if the Canadian dollar strengthens relative
to the U.S. dollar, our expenses will increase, and our results of operations
will suffer. We use financial instruments, primarily Canadian dollar forward
contracts, to hedge a portion of the Canadian dollar denominated costs for our
manufacturing operation in Canada. If these hedging activities are not
successful or we change or reduce these hedging activities in the future, we may
experience significant unexpected expenses from fluctuations in exchange
rates.
Our
business, results of operations and financial condition may be adversely
affected by increased or unexpected costs incurred by us on our contracts and
sales orders.
The terms
of virtually all of our contracts and sales orders require us to perform the
work under the contract or sales order for a predetermined fixed price. As a
result, we bear the risk of increased or unexpected costs associated with a
contract or sales order, which may reduce our profit or cause us to sustain
losses. Future increased or unexpected costs on a significant number of our
contracts and sales orders could adversely affect our business, results of
operations and financial condition.
The
end markets in which we operate are subject to technological change, and changes
in technology could adversely affect our sales.
Our defense and commercial end markets
are subject to technological change. Advances in existing technology, or the
development of new technology, could adversely affect our business and results
of operations. Historically, we have relied on a combination of internal
research and development and customer-funded research and development
activities. To succeed in the future, we must continually engage in effective
and timely research and development efforts in order to introduce innovative new
products for technologically sophisticated customers and end markets and to
benefit from the activities of our customers. If we fail to adapt successfully
to technological changes or fail to obtain access to important technologies, our
sales could suffer.
Environmental
laws and regulations and other obligations relating to environmental matters
could subject us to liability for fines, clean-ups and other damages, require us
to incur significant costs to modify our operations and/or increase our
manufacturing costs.
Environmental
laws and regulations could limit our ability to operate as we are currently
operating and could result in additional costs.
We are
subject to a variety of U.S. federal, state and local, as well as foreign,
environmental laws and regulations relating, among other things, to wastewater
discharge, air emissions, storage and handling
of
hazardous materials, disposal of hazardous wastes and remediation of soil and
groundwater contamination. We use a number of chemicals or similar substances
and generate wastes that are classified as hazardous. We require environmental
permits to conduct many of our operations. Violations of environmental laws and
regulations could result in substantial fines, penalties and other sanctions.
Changes in environmental laws or regulations (or in their enforcement) affecting
or limiting, for example, our chemical uses, certain of our manufacturing
processes or our disposal practices, could restrict our ability to operate as we
are currently operating or impose additional costs. In addition, we may
experience releases of certain chemicals or discover existing contamination,
which could cause us to incur material cleanup costs or other
damages.
We
could be subject to significant liabilities if the obligations associated with
existing environmental contamination are not satisfied by Varian Medical Systems
or by insurance proceeds.
When we
purchased our electron devices business in 1995, Varian Medical Systems
generally agreed to indemnify us for various environmental liabilities relating
to the business prior to the sale, with certain exceptions and limitations.
Varian Medical Systems is undertaking the environmental investigation and
remedial work at our manufacturing facilities that are known to require
environmental remediation. In addition, Varian Medical Systems has been sued or
threatened with suit with respect to environmental obligations related to these
manufacturing facilities. If Varian Medical Systems does not comply fully with
its indemnification obligations to us or does not continue to have the financial
resources to comply fully with those obligations, we could be subject to
significant liabilities.
In
connection with the sale of our former San Carlos facility, the buyer of the
facility obtained insurance to cover the expected environmental remediation
costs and other potential environmental liabilities at that facility, and we
released Varian Medical Systems from certain of its indemnification obligations
with respect to that facility. If the proceeds of the environmental insurance
are insufficient to cover the required remediation costs at that facility and
potential third party claims, we could be subject to material
liabilities.
We
have only a limited ability to protect our intellectual property rights, which
are important to our success.
Our
success depends, in part, upon our ability to protect our proprietary technology
and other intellectual property. We rely on a combination of trade secrets,
confidentiality policies, nondisclosure and other contractual arrangements and
patent, copyright and trademark laws to protect our intellectual property
rights. The steps we take to protect our intellectual property may not be
adequate to prevent or deter infringement or other violations of our
intellectual property, and we may not be able to detect unauthorized use or take
appropriate and timely steps to enforce our intellectual property rights. In
addition, we cannot be certain that our processes and products do not or will
not infringe or otherwise violate the intellectual property rights of others.
Infringement or other violations of intellectual property rights could cause us
to incur significant costs, prevent us from selling our products and have a
material adverse effect on our business, results of operations and financial
condition.
Our
inability to obtain certain necessary raw materials and key components could
disrupt the manufacture of our products and cause our sales and results of
operations to suffer.
We obtain
certain raw materials and key components necessary for the manufacture of our
products, such as molybdenum, cupronickel, OFHC copper and some cathodes from a
limited group of, or occasionally sole, suppliers. If any of our suppliers fails
to meet our needs, we may not have readily available alternatives. Delays in
component deliveries could cause delays in product shipments and require the
redesign of certain products. If we are unable to obtain necessary raw materials
and key
components
from our suppliers under favorable purchase terms and/or on a timely basis or to
develop alternative sources, our ability to manufacture products could be
disrupted or delayed, and our sales and results of operations could
suffer.
If
we are unable to retain key management and other personnel, our business and
results of operations could be adversely affected.
Our business and future performance
depends on the continued contributions of key management personnel. Our current
management team has an average of more than 25 years experience with us in
various capacities. Since assuming their current leadership roles in 2002, this
team has increased our sales, reduced our costs and grown our business. The
unanticipated departure of any key member of our management team could have an
adverse effect on our business and our results of operations. In addition, some
of our technical personnel, such as our key engineers, could be difficult to
replace.
We
may not be successful in implementing part of our growth strategy if we are
unable to identify and acquire suitable acquisition targets or integrate
acquired companies successfully.
Finding
and consummating acquisitions is one of the components of our growth strategy.
Our ability to grow by acquisition depends on the availability of acquisition
candidates at reasonable prices and our ability to obtain additional acquisition
financing on acceptable terms. In making acquisitions, we may experience
competition from larger companies with significantly greater resources. We are
likely to use significant amounts of cash, issue additional equity securities
and/or incur additional debt in connection with future acquisitions, each of
which could have a material adverse effect on our business. There can be no
assurance that we will be able to obtain the necessary funds to carry out
acquisitions on commercially reasonable terms, or at all.
In
addition, acquisitions could place demands on our management and/or our
operational and financial resources and could cause or result in the
following:
|
·
|
difficulties
in assimilating and integrating the operations, technologies and products
acquired;
|
|
·
|
the
diversion of our management’s attention from other business
concerns;
|
|
·
|
our
operating and financial systems and controls being inadequate to deal with
our growth; and
|
|
·
|
the
potential loss of key employees.
|
Future
acquisitions of companies may also provide us with challenges in implementing
the required processes, procedures and controls in our acquired operations.
Acquired companies may not have disclosure controls and procedures or internal
control over financial reporting that are as thorough or effective as those
required by securities law in the United States.
Goodwill
and other intangibles resulting from our acquisitions could become
impaired.
As of October 3, 2008, our
goodwill, developed and core technology and other intangibles amounted to $241.1
million, net of accumulated amortization. We will amortize approximately $3.0
million in each of fiscal years 2009, 2010, 2011 and 2012, $2.9 million in
fiscal year 2013, and $60.4 million thereafter. To the extent we do not generate
sufficient cash flows to recover the net amount of any investment in goodwill
and other intangibles recorded, the investment could be considered impaired and
subject to write off. We expect to record further goodwill and other intangible
assets as a result of any
future
acquisitions we may complete. Future amortization of such other intangible
assets or impairments, if any, of goodwill would adversely affect our results of
operations in any given period.
Our market capitalization has
historically exceeded our net asset value, although recently it has been
particularly volatile. Our market capitalization has dropped below our net asset
value in certain days of October, November and December 2008 largely, we
believe, as a result of the recent global economic downturn and
volatility in the financial markets. If our stock price continuously
falls below our net asset value per share, the decline in our market
capitalization could trigger the requirement of performing the impairment test
on goodwill in fiscal year 2009, which could result in an impairment of our
goodwill.
Our
backlog is subject to modifications and terminations of orders, which could
negatively impact our sales.
Backlog
represents firm orders for which goods and services are yet to be provided,
including with respect to government contracts that are cancelable at will. As
of October 3, 2008, we had an order backlog of $201.3 million. Although
historically the amount of modifications and terminations of our orders has not
been material compared to our total contract volume, customers can, and
sometimes do, terminate or modify these orders. Cancellations of purchase orders
or reductions of product quantities in existing contracts could substantially
and materially reduce our backlog and, consequently, our future sales. Our
failure to replace canceled or reduced backlog could negatively impact our sales
and results of operations.
Changes
in our effective tax rate may have an adverse effect on our results of
operations.
Our
future effective tax rates may be adversely affected by a number of factors
including:
|
·
|
the
jurisdictions in which profits are determined to be earned and
taxed;
|
|
·
|
the
resolution of issues arising from tax audits with various tax
authorities;
|
|
·
|
changes
in the valuation of our deferred tax assets and
liabilities;
|
|
·
|
adjustments
to estimated taxes upon finalization of various tax
returns;
|
|
·
|
increases
in expenses not deductible for tax
purposes;
|
|
·
|
changes
in available tax credits;
|
|
·
|
changes
in share-based compensation
expense;
|
|
·
|
changes
in tax laws or the interpretation of such tax laws and changes in
generally accepted accounting principles;
and/or
|
|
·
|
the
repatriation of non-U.S. earnings for which we have not previously
provided for U.S. taxes.
|
Any significant increase in our future
effective tax rates could adversely impact net income for future
periods.
RISKS
RELATED TO OUR INDEBTEDNESS
We
have a substantial amount of debt, and we may incur substantial additional debt
in the future, which could adversely affect our financial health, our ability to
obtain financing in the future and our ability to react to changes in our
business.
We have a
substantial amount of debt and may incur additional debt in the future. As of
October 3, 2008, our total consolidated indebtedness was $225.75 million and we
had $55.4 million of additional borrowings available under the revolver under
our senior credit facilities. Our substantial amount of debt could have
important consequences to us and our stockholders, including, without
limitation, the following:
|
·
|
it
will require us to dedicate a substantial portion of our cash flow from
operations, in the near term, to make interest payments on our
indebtedness, and in the longer term, to repay the outstanding principal
amount of our indebtedness, each of which will reduce the funds available
for working capital, capital expenditures and other general corporate
expenses;
|
|
·
|
it
could limit our flexibility in planning for or reacting to changes in our
business, the markets in which we compete and the economy at
large;
|
|
·
|
it
could limit our ability to borrow additional funds in the future, if
needed, because of applicable financial and restrictive covenants of our
indebtedness; and
|
|
·
|
it
could make us more vulnerable to interest rate increases because a portion
of our borrowings is, and will continue to be, at variable rates of
interest.
|
A default
under our debt obligations could result in the acceleration of those
obligations. We may not have the ability to fund our debt obligations in the
event of such a default. This may adversely affect our ability to operate our
business and therefore could adversely affect our results of operations and
financial condition and, consequently, the price of our common stock. In
addition, we may incur additional debt in the future. If debt levels increase,
the related risks that we and our stockholders face could
intensify.
The
agreements and instruments governing our debt contain restrictions and
limitations that could limit our flexibility in operating our
business.
Our
senior credit facilities and the indentures governing our outstanding notes have
a number of customary covenants that, among other things, restrict our ability
to:
|
·
|
incur
additional indebtedness;
|
|
·
|
sell
assets or consolidate or merge with or into other
companies;
|
|
·
|
pay
dividends or repurchase or redeem capital
stock;
|
|
·
|
make
certain investments;
|
|
·
|
issue
capital stock of our subsidiaries;
|
|
·
|
incur
liens; and
|
|
·
|
enter
into certain types of transactions with our
affiliates.
|
These
covenants could have the effect of limiting our flexibility in planning for or
reacting to changes in our business and the markets in which we
compete.
Under our
senior credit facilities, we are required to satisfy and maintain specified
financial ratios and tests. Events beyond our control may affect our ability to
comply with those provisions, and we may not be able to meet those ratios and
tests, which would result in a default under our senior credit facilities. In
addition, our senior credit facilities and the indenture governing
Communications & Power Industries’ 8% senior subordinated notes restrict
Communications & Power Industries’ ability to make distributions to CPI
International. Because we are a holding company with no operations of our own,
we rely on distributions from Communications & Power Industries, our wholly
owned subsidiary, to satisfy our obligations under our floating rate senior
notes. If Communications & Power Industries is unable make distributions to
us, and we cannot obtain other funds to satisfy our obligations under our
floating rate senior notes, a default under our floating rate senior notes could
result.
The
breach of any covenants or obligations in our senior credit facilities and the
indentures governing our outstanding notes could result in a default under the
applicable debt agreement or instrument and could trigger acceleration of (or
the right to accelerate) the related debt. Because of cross-default provisions
in the agreements and instruments governing our indebtedness, a default under
one agreement or instrument could result in a default under, and the
acceleration of, our other indebtedness. In addition, the lenders under our
senior credit facilities could proceed against the collateral securing that
indebtedness. If any of our indebtedness were to be accelerated, it could
adversely affect our ability to operate our business or we may be unable to
repay such debt, and, therefore, such acceleration could adversely affect our
results of operations, financial condition and, consequently, the price of our
common stock.
The
current disruptions in the financial markets could affect our ability to obtain
debt financing and have other adverse effects on us.
The U.S.
credit markets have recently experienced historic dislocations and liquidity
disruptions which have caused financing to be unavailable in many cases. These
circumstances have materially impacted liquidity in the debt markets, making
financing terms less attractive for borrowers who are able to find financing,
and in many cases have resulted in the unavailability of certain types of debt
financing. Continued uncertainty in the credit markets may negatively impact our
ability to access funds through our existing revolving credit facilities with
certain lending institutions. If we were to need to access funds through our
existing revolving credit facilities but were unable to do so, that failure
could have a material adverse affect on our financial condition and results of
operations.
Our
outstanding notes and our senior credit facilities are subject to
change-of-control provisions. We may not have the ability to raise funds
necessary to fulfill our obligations under our debt following a change of
control, which could place us in default.
We may
not have the ability to raise the funds necessary to fulfill our obligations
under our outstanding notes and our senior credit facilities following a
change-of-control. Under the indentures governing our notes, upon the occurrence
of specified change of control events, we are required to offer to repurchase
the notes. However, we may not have sufficient funds at the time of the
change-of-control event to make the required repurchase of our notes. In
addition, a change of control under our senior credit facilities would result in
an event of default thereunder and permit the acceleration of the outstanding
obligations under the senior credit facilities.
RISKS
RELATED TO OUR COMMON STOCK
The
price of our common stock may fluctuate, which could negatively affect the value
of stockholders’ investments.
The
market price of our common stock may fluctuate widely as a result of various
factors, such as period-to-period fluctuations in our actual or anticipated
operating results, sales of our common stock by our existing equity investors,
developments in our industry, the failure of securities analysts to cover our
common stock or changes in financial estimates by analysts, failure to meet
financial estimates by analysts, competitive factors, general economic and
securities market conditions and other external factors. Also, securities
markets worldwide experience significant price and volume fluctuations. This
market volatility, as well as general economic or market conditions and market
conditions affecting the common stock of companies in our industry in
particular, could reduce the market price of our common stock in spite of our
operating performance. Stockholders may be unable to resell their shares of our
common stock at or above the purchase price for their shares or at
all.
If
our share price is volatile, we may be the target of securities litigation,
which is costly and time-consuming to defend.
In the
past, following periods of market volatility in the price of a company’s
securities, securityholders have sometimes instituted class action litigation.
If the market value of our common stock experiences adverse fluctuations and we
become involved in this type of litigation, regardless of the outcome, we could
incur substantial legal costs and our management’s attention could be diverted
from the operation of our business, causing our business to suffer.
Future
sales of shares of our common stock in the public market could depress our stock
price and make it difficult for stockholders to recover the full value of their
investment.
We cannot
predict the effect, if any, that market sales of shares of common stock or the
availability of shares of common stock for sale will have on the market price of
our common stock from time to time. Future sales, or the perception or
availability for sale in the public market, of substantial amounts of our common
stock could adversely affect the market price of our common stock.
In
addition, we may issue a substantial number of shares of our common stock under
our stock incentive and stock purchase plans. As of October 3, 2008, we had
options outstanding to purchase 3,349,294 shares of our common stock under our
2000 Stock Option Plan, our 2004 Stock Incentive Plan and our 2006 Equity and
Performance Incentive Plan, of which 2,556,762 were exercisable as of such date.
In addition, as of October 3, 2008, our 2006 Equity and Performance Incentive
Plan and 2006 Employee Stock Purchase Plan provide for the issuance of up to an
additional 1,188,598 shares of our common stock to employees, directors and
consultants. The issuance of significant additional shares of our common stock
upon the exercise of outstanding options or otherwise pursuant to these stock
plans could have a material adverse effect on the market price of our common
stock and could significantly dilute the interests of other
stockholders.
The
controlling position of Cypress will limit other stockholders’ ability to
influence corporate matters.
As of
October 3, 2008, entities affiliated with Cypress collectively own approximately
54% of our outstanding shares of common stock. Accordingly, the entities
affiliated with Cypress have significant influence over our management, affairs
and most matters requiring stockholder approval, including the election of
directors and the approval of significant corporate transactions. The
entities
affiliated
with Cypress will also be able to deter any attempted change of control. This
concentrated control will limit other stockholders’ ability to influence
corporate matters and, as a result, we may take actions that some of our
stockholders may not view as beneficial. Accordingly, the market price of our
common stock could be adversely affected.
Our
anti-takeover provisions could prevent or delay a change in control of our
company, even if such change of control would be beneficial to our
stockholders.
Provisions
of our amended and restated certificate of incorporation and amended and
restated bylaws, as well as provisions of Delaware law, could discourage, delay
or prevent a merger, acquisition or other change in control of our company.
These provisions include:
|
·
|
a
board of directors that is classified such that only one-third of
directors are elected each year;
|
|
·
|
“blank
check” preferred stock that could be issued by our board of directors to
increase the number of outstanding shares and thwart a takeover
attempt;
|
|
·
|
limitations
on the ability of stockholders to call special meetings of
stockholders;
|
|
·
|
prohibiting
stockholder action by written consent and requiring all stockholder
actions to be taken at a meeting of our
stockholders;
|
|
·
|
establishing
advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon by stockholders
at stockholder meetings; and
|
|
·
|
requiring
that the affirmative vote of the holders of at least two-thirds (66.7%) of
the voting power of our issued and outstanding capital stock entitled to
vote in the election of directors be obtained to amend certain provisions
of our amended and restated certificate of
incorporation.
|
In
addition, Section 203 of the Delaware General Corporation Law, which will apply
to us after affiliates of Cypress collectively cease to own at least 15% of the
total voting power of our common stock, limits business combination transactions
with 15% stockholders that have not been approved by the board of directors.
These provisions and other similar provisions make it more difficult for a third
party to acquire us without negotiation. These provisions may apply even if the
transaction may be considered beneficial by some stockholders.
|
Item 1B. Unresolved
Staff Comments
|
None.
|
Item 2. Properties
|
We own,
lease or sublease manufacturing, assembly, warehouse, service and office
properties having an aggregate floor space of approximately 954,000 square feet,
of which approximately 1,080 square feet are leased or subleased to a third
party. The table that follows provides summary information regarding principal
properties owned or leased by us:
|
Square
Footage
|
||||||||||
|
Location
|
Owned
|
Leased/
Subleased
|
Segment
Using the Property
|
|||||||
|
Beverly,
Massachusetts
|
174,000 |
(a)
|
VED
|
|||||||
|
Georgetown,
Ontario, Canada
|
192,000 |
(b)
|
22,000 |
VED
and satcom equipment
|
||||||
|
Woodland,
California
|
36,900 | 9,900 |
VED
|
|||||||
|
Palo
Alto, California
|
418,300 |
(c)
|
VED
and satcom equipment
|
|||||||
|
Mountain
View, California
|
42,500 |
VED
|
||||||||
|
Camarillo,
California
|
37,700 |
Other
|
||||||||
|
Various
other locations
|
21,000 |
(d)
|
VED
and satcom equipment
|
|||||||
|
|
|
(a)
|
The
Beverly, Massachusetts square footage also includes
approximately 1,080 square feet leased to a
tenant.
|
|
(b)
|
Includes
a facility expansion completed in fiscal year 2007 that added
approximately 63,000 square feet.
|
|
(c)
|
Includes
49,100 square feet that are subleased from Varian, Inc. Varian, Inc.
subleases the land from Varian Medical Systems, Inc. and Varian Medical
Systems leases the land from Stanford University.
|
|
(d)
|
Leased
facilities occupied by our field sales and service
organizations.
|
The
lenders under our senior credit facilities have a security interest in certain
of our interests in the real property that we own and lease. Our headquarters
and one principal complex, including one of our manufacturing facilities,
located in Palo Alto, California, are subleased from Varian Medical Systems or
one of its affiliates or former affiliates. Therefore, our occupancy rights are
dependent on our sublessor’s fulfillment of its responsibilities to the master
lessor, including its obligation to continue environmental remediation
activities under a consent order with the California Environmental Protection
Agency. The consequences of the loss by us of such occupancy rights could
include the loss of valuable improvements and favorable lease terms, the
incurrence of substantial relocation expenses and the disruption of our business
operations.
|
Item 3. Legal
Proceedings
|
We may be
involved from time to time in various legal proceedings and various cost
accounting and other government pricing claims. We do not expect that the legal
proceedings and government pricing claims in which we are currently involved
will individually or in the aggregate have a significant impact on our business,
financial condition, results of operation or liquidity.
Item 4. Submission of Matters
to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of fiscal year 2008.
|
Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Our
common stock, par value $0.01 per share, has traded on the Nasdaq Stock Market
LLC under the symbol “CPII” since April 28, 2006. Prior to April 28, 2006, there
was no established public trading market for our stock. The following table sets
forth the high and low closing sale prices for our common stock as reported by
The Nasdaq Stock Market from September 30, 2006, through October 3,
2008.
|
High
|
Low
|
|||||||
|
Fiscal
year 2007
|
||||||||
|
First
fiscal quarter (September 30, 2006 to December 29, 2006)
|
$ | 15.46 | $ | 13.04 | ||||
|
Second
fiscal quarter (December 30, 2006 to March 30, 2007)
|
$ | 19.76 | $ | 14.96 | ||||
|
Third
fiscal quarter (March 31, 2007 to June 29, 2007)
|
$ | 21.11 | $ | 18.81 | ||||
|
Fourth
fiscal quarter (June 30, 2007 to September 28, 2007)
|
$ | 20.72 | $ | 16.20 | ||||
|
Fiscal
year 2008
|
||||||||
|
First
fiscal quarter (September 29, 2007 to December 28, 2007)
|
$ | 20.77 | $ | 16.35 | ||||
|
Second
fiscal quarter (December 29, 2007 to March 28, 2008)
|
$ | 17.22 | $ | 9.09 | ||||
|
Third
fiscal quarter (March 29, 2008 to June 27, 2008)
|
$ | 14.00 | $ | 9.40 | ||||
|
Fourth
fiscal quarter (June 28, 2008 to October 3, 2008)
|
$ | 16.02 | $ | 12.13 | ||||
As of
December 1, 2008, there were 20 stockholders of record of our common stock
and 16,360,349 shares of common stock outstanding.
No
dividends were paid in fiscal years 2008 and 2007. We currently expect to retain
any future earnings for use in the operation and expansion of our business and
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Any payment of cash dividends on our common stock will be
dependent upon the ability of Communications & Power Industries, our wholly
owned subsidiary, to pay dividends or make cash payments or advances to us. The
indenture governing Communications & Power Industries’ 8% senior
subordinated notes imposes restrictions on Communications & Power
Industries’ ability to make distributions to us, and the agreements governing
our senior credit facilities generally do not permit Communications & Power
Industries to make distributions to us for the purpose of paying dividends to
our stockholders. In addition, the indenture governing our floating rate senior
notes due 2015 also imposes restrictions on our ability to pay dividends or make
distributions to our stockholders. Our future dividend policy will also depend
on the requirements of any future financing agreements to which we may be a
party and other factors considered relevant by our board of directors, including
the Delaware General Corporation Law, which provides that dividends are only
payable out of surplus or current net profits.
The
disclosure required by Item 201(d) of Regulation S-K is incorporated by
reference to the definitive proxy statement for our 2009 Annual Meeting of
Stockholders anticipated to be filed with the SEC within 120 days after the end
of the fiscal year covered by this Annual Report under the heading “Equity Compensation Plan
Information.”
Stock Performance
Graph
The
following graph shows the value of an investment of $100 on April 28, 2006
(the first day our common stock was traded) in each of our common stock, The
Nasdaq Composite Index and the Nasdaq Electronic Components Stocks
Index for the period from April 28, 2006 to October 3, 2008. All
values assume reinvestment of the pre-tax value of dividends.
The
comparisons in the graph below are based upon historical data and are not
indicative of, nor intended to forecast, future performance of our common
stock.
The information contained
under the heading “Stock Performance Graph” above shall not be deemed to be
“soliciting material” or to be filed with the SEC or subject to Regulations 14A
or 14C or to the liabilities of the Section 18 of the Securities Exchange
Act of 1934, as amended, and shall not be incorporated
by reference in any filing of CPI International under the Securities Act,
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
Issuer
Purchases of Equity Securities
The table
below shows repurchases of our common stock during the three months ended
October 3, 2008:
|
Period
|
Total
Number of Shares Purchased
|
Average Price Paid per
Share1
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs
(in thousands)2
|
||||||||||||
|
June
28-August 1, 2008
|
- | $ | - | - | $ | 10,200 | ||||||||||
|
August
2-August 29, 2008
|
31,200 | $ | 14.18 | 31,200 | $ | 9,757 | ||||||||||
|
August
30-October 3, 2008
|
38,828 | $ | 14.30 | 38,828 | $ | 9,200 | ||||||||||
| 70,028 | $ | 14.25 | 70,028 | $ | 9,200 | |||||||||||
|
|
||
|
1
Excludes brokerage commission of $0.03
per
share.
|
||
|
2
On May 28,
2008, we announced the approval of our common stock repurchase program,
which authorizes us to repurchase up to $12.0 million of our common stock
from time to time through May 23, 2009. The program may be modified or
terminated by our board of directors at any time.
|
||
|
Item 6. Selected
Financial Data
|
The
selected consolidated financial and other data for CPI International and
subsidiaries as of October 3, 2008 and September 28, 2007, and for the fiscal
years ended October 3, 2008, September 28, 2007 and September 29, 2006 have been
derived from our audited consolidated financial statements included elsewhere in
this Annual Report. The selected consolidated financial and other data for CPI
International and subsidiaries as of September 29, 2006, September 30, 2005 and
October 1, 2004 and for the fiscal year ended September 30, 2005 and the 36-week
period ended October 1, 2004, and for Communications & Power Industries
Holding Corporation, our predecessor, and subsidiaries for the 16-week period
ended January 22, 2004 have been derived from our audited consolidated financial
statements not included elsewhere in this Annual Report. The audited
consolidated financial statements as of the dates and periods noted above have
been audited by KPMG LLP, an independent registered public accounting
firm.
All
fiscal years presented comprised 52 weeks each except for fiscal year 2008 which
comprised 53 weeks ended October 3, 2008.
You
should read the following data in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and the related notes included elsewhere in this Annual
Report.
|
FIVE-YEAR
SELECTED FINANCIAL DATA
|
||||||||||||||||||||||||
|
(in
thousands, except per share amounts)
|
||||||||||||||||||||||||
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
36-Week
|
16-Week
|
|||||||||||||||||||
|
October
3,
2008
(Successor)
|
September
28,
2007
(Successor)
|
September
29,
2006
(Successor)
|
September
30,
2005
(Successor)
|
Period
Ended
October 1,
2004 (Successor)
|
Period
Ended
January
22, 2004 (Predecessor)
|
|||||||||||||||||||
|
Statement of Operations Data:
|
||||||||||||||||||||||||
|
Sales
|
$ | 370,014 | $ | 351,090 | $ | 339,717 | $ | 320,732 | $ | 202,266 | $ | 79,919 | ||||||||||||
|
Cost
of sales(1)
|
261,086 | 237,789 | 236,063 | 216,031 | 141,172 | 56,189 | ||||||||||||||||||
|
Gross
profit
|
108,928 | 113,301 | 103,654 | 104,701 | 61,094 | 23,730 | ||||||||||||||||||
|
Research
and development
|
10,789 | 8,558 | 8,550 | 7,218 | 5,253 | 2,200 | ||||||||||||||||||
|
Selling
and marketing
|
21,144 | 19,258 | 19,827 | 18,547 | 11,082 | 4,352 | ||||||||||||||||||
|
General
and administrative
|
22,746 | 21,519 | 22,418 | 27,883 | 12,499 | 6,026 | ||||||||||||||||||
|
Merger
expenses(2)
|
- | - | - | - | - | 6,374 | ||||||||||||||||||
|
Amortization
of acquisition-related intangible assets
|
3,103 | 2,316 | 2,190 | 7,487 | 13,498 | - | ||||||||||||||||||
|
Acquired
in-process research and development(3)
|
- | - | - | - | 2,500 | - | ||||||||||||||||||
|
Net
loss on disposition of fixed assets
|
205 | 129 | 586 | 446 | 197 | 7 | ||||||||||||||||||
|
Total
operating costs and expenses
|
57,987 | 51,780 | 53,571 | 61,581 | 45,029 | 18,959 | ||||||||||||||||||
|
Operating
income
|
50,941 | 61,521 | 50,083 | 43,120 | 16,065 | 4,771 | ||||||||||||||||||
|
Interest
expense, net
|
19,055 | 20,939 | 23,806 | 20,310 | 10,518 | 8,902 | ||||||||||||||||||
|
Loss
on debt extinguishment(4)
|
633 | 6,331 | - | - | - | - | ||||||||||||||||||
|
Income
tax expense
|
10,804 | 11,748 | 9,058 | 9,138 | 2,899 | 439 | ||||||||||||||||||
|
Net
income (loss)
|
$ | 20,449 | $ | 22,503 | $ | 17,219 | $ | 13,672 | $ | 2,648 | $ | (4,570 | ) | |||||||||||
|
Earnings
per share(5)
|
||||||||||||||||||||||||
|
Basic
|
$ | 1.25 | $ | 1.39 | $ | 1.20 | $ | 1.05 | $ | 0.20 | N/A | (6) | ||||||||||||
|
Diluted
|
$ | 1.16 | $ | 1.27 | $ | 1.09 | $ | 0.98 | $ | 0.19 | N/A | (6) | ||||||||||||
|
Shares
used to calculate net earnings per share(7)
|
||||||||||||||||||||||||
|
Basic
|
16,356 | 16,242 | 14,311 | 13,079 | 13,063 | N/A | (6) | |||||||||||||||||
|
Diluted
|
17,697 | 17,721 | 15,789 | 13,974 | 13,700 | N/A | (6) | |||||||||||||||||
|
Cash
dividend per share(8)
|
$ | - | $ | - | $ | 1.19 | $ | 5.80 | $ | - | $ | - | ||||||||||||
|
Other
Financial Data:
|
||||||||||||||||||||||||
|
EBITDA(9)
|
$ | 61,271 | $ | 64,288 | $ | 59,096 | $ | 57,297 | $ | 32,816 | $ | 6,549 | ||||||||||||
|
EBITDA
margin(10)
|
16.6 | % | 18.3 | % | 17.4 | % | 17.9 | % | 16.2 | % | 8.2 | % | ||||||||||||
|
Operating
income margin(11)
|
13.8 | % | 17.5 | % | 14.7 | % | 13.4 | % | 7.9 | % | 6.0 | % | ||||||||||||
|
Net
income (loss) margin(12)
|
5.5 | % | 6.4 | % | 5.1 | % | 4.3 | % | 1.3 | % | (5.7) | % | ||||||||||||
|
Depreciation
and amortization(13)
|
$ | 10,963 | $ | 9,098 | $ | 9,013 | $ | 14,177 | $ | 16,751 | $ | 1,778 | ||||||||||||
|
Capital
expenditures(14)
|
$ | 4,262 | $ | 8,169 | $ | 10,913 | $ | 17,131 | $ | 3,317 | $ | 459 | ||||||||||||
| Ratio of earnings to fixed charges(15) | 2.57 | x | 2.59 | x | 2.08 | x | 2.10 | x | 1.51 | x | - | |||||||||||||
|
Net
cash provided by operating activities
|
$ | 33,881 | $ | 21,659 | $ | 10,897 | $ | 31,349 | $ | 12,203 | $ | 6,574 | ||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||||
|
Working
capital
|
$ | 88,103 | $ | 81,547 | $ | 77,113 | $ | 65,400 | $ | 72,385 | $ | - | ||||||||||||
|
Total
assets
|
$ | 466,948 | $ | 476,222 | $ | 441,759 | $ | 454,544 | $ | 431,207 | $ | - | ||||||||||||
|
Long-term
debt
|
$ | 224,660 | $ | 245,567 | $ | 245,067 | $ | 284,231 | $ | 210,606 | $ | - | ||||||||||||
|
Total
stockholders’ equity
|
$ | 143,865 | $ | 125,906 | $ | 99,673 | $ | 52,667 | $ | 107,594 | $ | - | ||||||||||||
|
(1)
|
Includes
charges for the amortization of inventory write-up of $351 incurred in
connection with the Econco acquisition for fiscal year 2005, and $5,500
incurred during the 36-week period ended October 1, 2004 in connection
with our January 2004 merger.
|
|
(2)
|
Represents
merger expenses resulting from our January 2004
merger.
|
|
(3)
|
Represents
a write off of in-process research and development resulting from our
January 2004 merger.
|
|
(4)
|
Resulted
from early repayment of our previous senior credit facilities in
connection with the amendment and restatement of such facilities and early
extinguishment of $10 million and $58 million of our floating rates senior
notes in fiscal years 2008 and 2007, respectively. For fiscal year 2008,
the amount of loss includes non-cash write-offs of $0.4 million
of unamortized debt issue costs and issue discount costs and $0.2 million
in cash payments for call premiums. For fiscal year 2007, the amount of
loss includes non-cash write-offs of $4.7 million of
unamortized debt issue costs and issue discount costs and $1.9 million in
cash payments for call premiums, partially offset by $0.3 million of cash
proceeds from the early termination of the related interest rate swap
agreement.
|
|
(5)
|
Basic
earnings per share represents net income divided by weighted average
common shares outstanding, and diluted earnings per share represents net
income divided by weighted average common and common equivalent shares
outstanding.
|
|
(6)
|
Due
to the significant change in capital structure at the closing date of its
January 2004 merger, the predecessor amount has not been presented because
it is not considered comparable to the amount for CPI
International.
|
|
(7)
|
On
April 7, 2006, in connection with the amendment and restatement of the
certificate of incorporation of CPI International, we effected a
3.059-to-1 stock split of the outstanding shares of common stock of CPI
International as of such date. All share and per share amounts for
Successor periods herein have been retroactively restated to reflect the
stock split.
|
|
(8)
|
In
February 2005 and in December 2005 we paid special cash dividends of
$75,809 and $17,000, respectively, to stockholders of CPI International.
Cash dividend per share is calculated by dividing the dollar amount of the
dividend by weighted average common shares
outstanding.
|
|
(9)
|
EBITDA represents earnings before
net interest expense, provision for income taxes and depreciation and
amortization. For the reasons listed below, we believe that GAAP-based
financial information for leveraged businesses such as ours should
be supplemented by EBITDA so that investors better
understand our financial performance in connection with their analysis of
our business:
|
|
·
|
EBITDA
is a component of the measure used by our board of directors and
management team to evaluate our operating
performance;
|
|
·
|
our
senior credit facilities contain a covenant that requires us to maintain a
senior secured leverage ratio that contains EBITDA as a component, and our
management team uses EBITDA to monitor compliance with such covenant; see
“Management’s discussion and analysis of financial condition and results of operations-Liquidity and
Capital Resources-Covenant
compliance;”
|
|
·
|
EBITDA
is a component of the measure used by our management team to make
day-to-day operating decisions;
|
|
·
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and therefore is a component
of the measure used by the management to facilitate internal comparisons
to competitors’ results and our industry in general;
and
|
|
·
|
the
payment of bonuses to certain members of management is contingent upon,
among other things, the satisfaction by us of certain targets that contain
EBITDA as a component.
|
|
|
Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. When analyzing our performance, EBITDA should be considered in addition to, and not as a substitute for, net income, cash flows from operating activities or other statements of operations or statements of cash flows data prepared in accordance with GAAP. |
The following table
reconciles net income (loss) to EBITDA:
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
36-Week
|
16-Week
|
|||||||||||||||||||
|
October
3,
|
September
28,
|
September
29,
|
September
30,
|
Period
Ended
|
Period
Ended
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
October
1, 2004
|
January
22, 2004
|
|||||||||||||||||||
|
(Successor)
|
(Successor)
|
(Successor)
|
(Successor)
|
(Successor)
|
(Predecessor)
|
|||||||||||||||||||
|
Net
income (loss)
|
$ | 20,449 | $ | 22,503 | $ | 17,219 | $ | 13,672 | $ | 2,648 | $ | (4,570 | ) | |||||||||||
|
Depreciation
and amortization(13)
|
10,963 | 9,098 | 9,013 | 14,177 | 16,751 | 1,778 | ||||||||||||||||||
|
Interest
expense, net
|
19,055 | 20,939 | 23,806 | 20,310 | 10,518 | 8,902 | ||||||||||||||||||
|
Income
tax expense
|
10,804 | 11,748 | 9,058 | 9,138 | 2,899 | 439 | ||||||||||||||||||
|
EBITDA
|
$ | 61,271 | $ | 64,288 | $ | 59,096 | $ | 57,297 | $ | 32,816 | $ | 6,549 | ||||||||||||
| (10) | EBITDA margin represents EBITDA divided by sales. |
|
(11)
|
Operating
income margin represents operating income divided by
sales.
|
|
(12)
|
Net
income (loss) margin represents net income (loss) divided by
sales.
|
|
(13)
|
Depreciation
and amortization excludes amortization of deferred debt issuance costs,
which are included in interest expense,
net.
|
|
(14)
|
Fiscal
years 2007 and 2006 include $4.1 million and $2.3 million, respectively,
of capital expenditures for the expansion of our building in Georgetown,
Ontario, Canada. Fiscal years 2006 and 2005 include capital expenditures
of $4.7 million and $13.1 million, respectively, resulting from the
relocation of our San Carlos, California facility to Palo Alto, California
and Mountain View, California.
|
|
(15)
|
For
purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and fixed
charges less capitalized interest. Fixed charges consist of interest
expense, including amortization of debt issuance costs and that portion of
rental expenses that management considers to be a reasonable approximation
of interest. Earnings were insufficient to cover fixed charges by $4,131
for the 16-week period ended January 22,
2004.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Our fiscal years are the 52- or
53-week periods that end on the Friday nearest September 30. Fiscal year 2008
comprised the 53-week period ending October 3, 2008; fiscal year 2007 comprised
the 52-week period ended September 28, 2007; and fiscal year 2006 comprised the
52-week period ended September 29, 2006. The following discussion should be read
in conjunction with our consolidated financial statements, and the notes
thereto, included elsewhere in this Annual Report.
Overview
CPI International,
headquartered in Palo Alto, California, is the parent company of
Communications & Power Industries, a provider of microwave, radio frequency,
power and control solutions for critical defense, communications, medical,
scientific and other applications. Communications & Power Industries
develops, manufactures and distributes products used to generate, amplify,
transmit and receive high-power/high-frequency microwave and radio frequency
signals and/or provide power and control for various applications. End-use
applications of these systems include the transmission of radar signals for
navigation and location; transmission of deception signals for electronic
countermeasures; transmission and amplification of voice, data and video signals
for broadcasting, Internet and other types of commercial and military
communications; providing power and control for medical diagnostic imaging; and
generating microwave energy for radiation therapy in the treatment of cancer and
for various industrial and scientific applications.
Acquisition
of Malibu Research Associates, Inc.
On August
10, 2007, we completed the acquisition of all of the outstanding common stock of
Malibu. Malibu, headquartered in Camarillo, California, is a designer,
manufacturer and integrator of advanced antenna systems for radar, radar
simulators and telemetry systems, as well as for data links used in ground,
airborne, unmanned aerial vehicles (“UAVs”) and shipboard systems. Under the
terms of the purchase agreement, at the closing of the acquisition, we paid cash
of approximately $22.4 million, which included $2.3 million and $1.0 million
placed into indemnity and working capital escrow accounts, respectively. The
indemnity escrow amount was provided to ensure funds are available to satisfy
potential indemnification claims asserted prior to January 1, 2009, and the
working capital escrow amount was provided to satisfy any negative differences
between the estimated working capital amount as of the acquisition closing date
and the actual working capital amount at the acquisition closing
date.
During
the second quarter of fiscal year 2008, the valuation of Malibu’s net working
capital amount as of the acquisition closing date was finalized, resulting in a
disbursement of cash to us of $1.6 million from the escrow accounts and in an
adjusted cash purchase price of approximately $20.7 million.
Additionally,
we may be required to pay a potential earnout to the former stockholders of
Malibu of up to $14.0 million, which is primarily contingent upon the
achievement of certain financial objectives over the three years following the
acquisition (“Financial Earnout”), and a discretionary earnout of up to $1.0
million contingent upon achievement of certain succession planning goals. No
earnout was earned for the first earnout period, and the maximum
potential Financial Earnout that could be earned over the three years following
the acquisition has been reduced from $14.0 million to $12.3 million based on
the performance in the first earnout period.
Eimac
Relocation
After relocating Eimac
from our former facility in San Carlos, California to Palo Alto, California in
fiscal year 2006, we made organizational changes and consolidated Eimac into our
Microwave Power Products division, located in Palo Alto, California, in June
2006. The Eimac integration was completed in January 2007. As part of this
relocation and integration, Eimac experienced planned manufacturing disruptions
stemming from the decommissioning of our production equipment in San Carlos and
the required reconfiguration, installation and testing of that equipment prior
to production readiness in Palo Alto. During fiscal year 2005, in anticipation
of these planned disruptions, customers accelerated the placement of orders with
Eimac. This order acceleration in fiscal year 2005, and the subsequent
acceleration of product shipments, caused a reduction of customers’ demand
requirements from Eimac during fiscal year 2006, particularly in our medical,
communications and industrial markets.
Eimac orders
and sales for fiscal year 2006 reflected the negative impact of the Eimac
relocation and integration. In addition, during fiscal year 2006, we incurred
move-related expenses and Eimac experienced unfavorable overhead absorption and
manufacturing variances due to the reduction in sales volume and relocation
disruptions. By the first quarter of fiscal year 2007, orders and sales rates
for Eimac had recovered to near their historical levels.
Orders
We sell
our products into five end markets: radar and electronic warfare, medical,
communications, industrial and scientific.
Our
customer sales contracts are recorded as orders when we accept written customer
purchase orders or contracts. Customer purchase orders with an undefined
delivery schedule, or blanket purchase orders, are not reported as orders until
the delivery date is determined. Our government sales contracts are not reported
as orders until we have been notified that the contract has been funded. Total
orders for a fiscal period represent the total dollar amount of customer orders
recorded by us during the fiscal period, reduced by the dollar amount of any
order cancellations or terminations during the fiscal period.
Our
orders by market for fiscal years 2008 and 2007 are summarized as follows
(dollars in millions):
|
Fiscal
Year Ended
|
||||||||||||||||||||||||
| October 3, 2008 | September 28, 2007 | Increase | ||||||||||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Amount
|
Orders
|
Amount
|
Orders
|
Amount
|
Percent
|
|||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 141.5 | 38 | % | $ | 138.2 | 41 | % | $ | 3.3 | 2 | % | ||||||||||||
|
Medical
|
67.7 | 18 | 66.3 | 19 | 1.4 | 2 | ||||||||||||||||||
|
Communications
|
127.1 | 34 | 106.7 | 31 | 20.4 | 19 | ||||||||||||||||||
|
Industrial
|
24.8 | 7 | 21.8 | 6 | 3.0 | 14 | ||||||||||||||||||
|
Scientific
|
13.1 | 3 | 10.7 | 3 | 2.4 | 22 | ||||||||||||||||||
|
Total
|
$ | 374.2 | 100 | % | $ | 343.7 | 100 | % | $ | 30.5 | 9 | % | ||||||||||||
In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the tactical common data link (“TCDL”) products at our
Malibu division, which we acquired in August 2007. TCDL products support
intelligence, surveillance and reconnaissance (“ISR”) applications. Previously,
orders and sales of our TCDL products were included in our radar and electronic
warfare market. We are now reporting these orders and sales in our
communications market, which we believe is
the more
appropriate category for these products. We reclassified previously reported
orders and sales information to properly reflect TCDL products as an increase in
the communications market and a corresponding decrease in the radar and
electronic warfare market. The reclassified order amounts were $4.1 million in
the first nine months of fiscal year 2008 and $0.4 million in fiscal year 2007.
The table above reflects this change.
In fiscal
year 2008, our Malibu division received orders totaling $18.1 million, of which
approximately 12% was in the radar and electronic warfare market and
approximately 88% was in the communications market. Orders from the Malibu
division were $2.1 million in fiscal year 2007.
Orders
for fiscal year 2008 of $374.2 million were $30.5 million, or 9%, higher than
orders of $343.7 million for fiscal year 2007. Explanations for the order
increase by market for fiscal year 2008 compared to fiscal year 2007 are as
follows:
|
·
|
Radar and Electronic
Warfare: The majority of our orders in the radar and electronic
warfare markets are for products for domestic and international defense
and government end uses. Orders in these markets are characterized by many
smaller orders in the $0.5 million to $3.0 million range by product or
program, with no significant products or programs by themselves explaining
the annual change. Timing of these orders may vary from year to year.
Orders for these markets increased approximately 2% from $138.2 million in
fiscal year 2007 to $141.5 million in fiscal year 2008. In fiscal year
2008, increased demand for products to support the HAWK missile system,
due to delays in the receipt of previously expected orders for this
program, and increased demand for products to support the APN-245
Automatic Carrier Landing System were partially offset by a $5.9 million
decrease in demand for products to support the Aegis weapons system,
continued delays in the placement of defense orders and an expected
decrease in orders to support the EarthCare cloud-profiling radar program
due to the timing of that program.
Demand for our
products to support ships with the Aegis weapons system has two
components: we support new ship builds and we provide spare and repair
products for previously fielded ships. Over the past several years, we
have seen high demand for products to support a significant number of new
ship builds for the Aegis weapons program for U.S. and international
military customers. We have now received all orders for our products
required to support these new ship builds, and, as a result, we expect the
near-term demand to be primarily for spare and repair products. Therefore,
our near-term orders for this program are expected to be at similar or
somewhat lower levels than in fiscal year 2008, and our near-term sales
are expected to be at significantly lower levels than in fiscal year 2008.
We expect demand for our products to increase again in several years as
the new ships are commissioned, deployed and added to the installed base,
after which they also will require spare and repair products.
During fiscal year
2008, previously unexpected delays in the receipt of orders for radar and
electronic warfare programs impacted the timing of our sales for these
programs. We expect these delays to continue for the foreseeable
future.
|
|
·
|
Medical: Orders for our medical products consist of orders for medical imaging applications, such as x-ray imaging, PET and MRI applications, and for radiation therapy applications for the treatment of cancer. The approximately 2% increase in medical orders from fiscal year 2007 to fiscal year 2008 was due primarily to an increase in demand for x-ray generators from one customer and other international customers, as well as an increase in orders for products for radiation therapy applications. This increase was partially offset by the absence |
|
in
fiscal year 2008, due to timing, of a Russian tender program in which we
had participated in fiscal years 2006 and 2007. In fiscal year 2007, we
received approximately $6 million in orders for the Russian tender
program. The program did not recur in fiscal year
2008.
In
addition, in fiscal year 2007, demand for products for MRI applications
was very strong, as a customer ordered a two-year supply of these products
in one fiscal year, and we shipped a significant amount of these products
during that fiscal year. As a result, in fiscal year 2008, orders for
products for MRI applications decreased approximately $5.3 million as
compared to fiscal year 2007.
|
|
|
·
|
Communications: The
approximately 19% increase in communications orders was primarily
attributable to increases in orders for products to support military
communications applications, including the receipt of our first production
orders for Increment One of the Warfighter Information Network Tactical
(“WIN-T”) military communications program, and telemetry and TCDL orders
received by our recently acquired Malibu division. These increases were
partially offset by a decrease in orders for certain military
communications programs, including WIN-T’s predecessor program, the
now-completed Joint Network Node (“JNN”) military communications program
for which we had strong demand in fiscal year 2007, and a decrease in
orders for direct-to-home broadcast applications. We expect our
participation in military communications programs to continue to
grow.
|
|
· |
Industrial: Orders in
the industrial market, one of our smallest markets, are cyclical. The $3.0
million increase in industrial orders was attributable to orders for
products used in a wide variety of industrial applications, including
industrial fabrication applications, international test systems and food
processing, cargo screening and other industrial
applications.
|
| · |
Scientific: Orders in
the scientific market, our smallest market, are historically one-time
projects and can fluctuate significantly from period to period. The $2.4
million increase in scientific orders was primarily the result of orders
for products to support a new accelerator project for fusion research at
an international scientific institute.
|
We believe that the current economic
environment and challenging credit conditions may have a negative impact on our
orders, primarily in our commercial markets, in the foreseeable future. Our
orders in the defense markets may also be impacted by reductions or delays in
the funding of applicable government contracts.
Incoming
order levels fluctuate significantly on a quarterly or annual basis, and a
particular quarter’s or year’s order rate may not be indicative of future order
levels. In addition, our sales are highly dependent upon manufacturing
scheduling and performance and, accordingly, it is not possible to accurately
predict when orders will be recognized as sales.
Backlog
As of October
3, 2008, we had an order backlog of $201.3 million compared to an order backlog
of $196.4 million as of September 28, 2007. Approximately $0.9 million of the
$4.9 million increase in backlog during fiscal year 2008 was due to orders at
our recently acquired Malibu division. Because our orders for government end-use
products generally have much longer delivery terms than our orders for
commercial business (which require quicker turn-around), our backlog is
primarily composed of government orders.
Backlog
represents the cumulative balance, at a given point in time, of recorded
customer sales orders that have not yet been shipped or recognized as sales.
Backlog is increased when an order is received, and backlog is decreased when we
recognize sales. We believe backlog and orders information is helpful to
investors because this information may be indicative of future sales results.
Although backlog consists of firm orders for which goods and services are yet to
be provided, customers can, and sometimes do, terminate or modify these orders.
However, historically the amount of modifications and terminations has not been
material compared to total contract volume.
Results
of Operations
We derive
our revenue primarily from the sale of microwave and radio frequency products,
including high-power microwave amplifiers, satellite communications amplifiers,
medical x-ray imaging subsystems and other related products. Our products
generally have selling prices ranging from $2,000 to $100,000, with certain
limited products priced up to $1,000,000.
Cost of
goods sold generally includes costs for raw materials, manufacturing costs,
including allocation of overhead and other indirect costs, charges for reserves
for excess and obsolete inventory, warranty claims and losses on fixed price
contracts. Operating expenses generally consist of research and development,
selling and marketing and general and administrative expenses.
The
following table sets forth our historical results of operations for each of the
periods indicated (dollars in millions):
|
Year
Ended
|
||||||||||||||||||||||||
|
October
3, 2008
|
September
28, 2007
|
September
29, 2006
|
||||||||||||||||||||||
|
%
of
|
%
of
|
%
of
|
||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Sales
|
|||||||||||||||||||
|
Sales
|
$ | 370.0 | 100.0 | % | $ | 351.1 | 100.0 | % | $ | 339.7 | 100.0 | % | ||||||||||||
|
Cost
of sales
(a)
|
261.1 | 70.6 | 237.8 | 67.7 | 236.1 | 69.5 | ||||||||||||||||||
|
Gross
profit
|
108.9 | 29.4 | 113.3 | 32.3 | 103.7 | 30.5 | ||||||||||||||||||
|
Research
and development
|
10.8 | 2.9 | 8.6 | 2.4 | 8.6 | 2.5 | ||||||||||||||||||
|
Selling
and marketing (a)
|
21.1 | 5.7 | 19.3 | 5.5 | 19.8 | 5.8 | ||||||||||||||||||
|
General
and administrative (a)
|
22.7 | 6.1 | 21.5 | 6.1 | 22.4 | 6.6 | ||||||||||||||||||
|
Amortization
of acquisition-related intangibles
|
3.1 | 0.8 | 2.3 | 0.7 | 2.2 | 0.6 | ||||||||||||||||||
|
Net
loss on disposition of assets
|
0.2 | 0.1 | 0.1 | 0.0 | 0.6 | 0.2 | ||||||||||||||||||
|
Operating
income
|
50.9 | 13.8 | 61.5 | 17.5 | 50.1 | 14.7 | ||||||||||||||||||
|
Interest
expense, net
|
19.1 | 5.2 | 20.9 | 6.0 | 23.8 | 7.0 | ||||||||||||||||||
|
Loss
on debt extinguishment
|
0.6 | 0.2 | 6.3 | 1.8 | - | - | ||||||||||||||||||
|
Income
before taxes
|
31.3 | 8.5 | 34.3 | 9.8 | 26.3 | 7.7 | ||||||||||||||||||
|
Income
tax expense
|
10.8 | 2.9 | 11.7 | 3.3 | 9.1 | 2.7 | ||||||||||||||||||
|
Net
income
|
$ | 20.4 | 5.5 | % | $ | 22.5 | 6.4 | % | $ | 17.2 | 5.1 | % | ||||||||||||
|
Other
Data:
|
||||||||||||||||||||||||
|
EBITDA
(b)
|
$ | 61.3 | 16.6 | % | $ | 64.3 | 18.3 | % | $ | 59.1 | 17.4 | % | ||||||||||||
|
Note: Totals
may not equal the sum of the components due to independent rounding.
Percentages are calculated based on rounded dollar amounts
presented.
|
|
(a)
|
Fiscal
year 2006 includes a special bonus expense (see “Special Bonus” below) of
$3.25 million, allocated as follows: $0.3 million to cost of sales, $0.2
million to selling and marketing and $2.75 million to general and
administrative.
|
|
(b)
|
EBITDA
represents earnings before net interest expense, provision for income
taxes and depreciation and amortization. For the reasons listed below, we
believe that GAAP-based financial information for leveraged businesses
such as ours should be supplemented by EBITDA so that investors better
understand our financial performance in connection with their analysis of
our business:
|
|
|
·
|
EBITDA
is a component of the measures used by our board of directors and
management team to evaluate our operating
performance;
|
|
|
·
|
our
senior credit facilities contain a covenant that requires us to maintain a
senior secured leverage ratio that contains EBITDA as a component, and our
management team uses EBITDA to monitor compliance with such
covenant;
|
|
|
·
|
EBITDA
is a component of the measures used by our management team to make
day-to-day operating decisions;
|
|
|
·
|
EBITDA
facilitates comparisons between our operating results and those of
competitors with different capital structures and therefore is a component
of the measures used by the management to facilitate internal comparisons
to competitors' results and our industry in general;
and
|
|
|
·
|
the
payment of management bonuses is contingent upon, among other things, the
satisfaction by us of certain targets that contain EBITDA as a
component.
|
|
|
Other
companies may define EBITDA differently and, as a result, our measure of
EBITDA may not be directly comparable to EBITDA of other companies.
Although we use EBITDA as a financial measure to assess the performance of
our business, the use of EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to operate
our business. When analyzing our performance, EBITDA should be considered
in addition to, and not as a substitute for, net income, cash flows from
operating activities or other statements of operations or statements of
cash flows data prepared in accordance with
GAAP.
|
| For a reconciliation of Net Income to EBITDA, see Note 11 of the accompanying audited consolidated financial statements. |
Our
results for fiscal year 2008 compared to our results for fiscal year
2007
Sales:
Our sales by market for fiscal years 2008 and 2007 are summarized as follows
(dollars millions):
|
Year
Ended
|
||||||||||||||||||||||||
|
October
3, 2008
|
September
28, 2007
|
Increase
(Decrease)
|
||||||||||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Percent
|
|||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 151.8 | 40 | % | $ | 144.2 | 41 | % | $ | 7.6 | 5 | % | ||||||||||||
|
Medical
|
65.8 | 18 | 67.6 | 19 | (1.8 | ) | (3 | ) | ||||||||||||||||
|
Communications
|
117.8 | 32 | 112.3 | 32 | 5.5 | 5 | ||||||||||||||||||
|
Industrial
|
25.1 | 7 | 20.5 | 6 | 4.6 | 22 | ||||||||||||||||||
|
Scientific
|
9.5 | 3 | 6.5 | 2 | 3.0 | 46 | ||||||||||||||||||
|
Total
|
$ | 370.0 | 100 | % | $ | 351.1 | 100 | % | $ | 18.9 | 5 | % | ||||||||||||
In the fourth quarter of fiscal year 2008, we changed the way in which we categorize orders and sales of the TCDL products at our Malibu division. Previously, orders and sales of our TCDL products were included in our radar and electronic warfare market. We are now reporting these orders and sales in our communications market, which we believe is the more appropriate category for these products. We reclassified previously reported orders and sales information to properly reflect TCDL products as an increase in the communications market and a corresponding decrease in the radar and electronic warfare market. The reclassified sales amounts were $2.5 million in fiscal year 2008 and $1.5 million in fiscal year 2007. The table above reflects this change.
In fiscal year 2008, our new Malibu division generated sales totaling $16.4 million, of which approximately 13% was in the radar and electronic warfare market and approximately 87% was in the communications market. Sales from the Malibu division equaled $3.1 million in fiscal year 2007.
Sales for
fiscal year 2008 of $370.0 million were $18.9 million, or approximately 5%,
higher than sales of $351.1 million for fiscal year 2007. Approximately
45% and 47% of our sales in fiscal years 2008 and 2007,
respectively, were sales of replacements, spares and repairs, including upgraded
replacements for existing products. Explanations for the sales increase or
decrease by market for fiscal year 2008 as compared to fiscal year 2007 are as
follows:
|
·
|
Radar and Electronic Warfare:
The majority of our sales in the radar and electronic warfare
markets are for products for domestic and international defense and
government end uses. Approximately two-thirds of our sales in the
radar and electronic warfare markets are sales of replacements,
spares and repairs. The timing of order receipts and subsequent shipments
in these markets may vary from year to year. On a combined basis, sales
for these two markets increased approximately 5% from $144.2 million in
fiscal year 2007 to $151.8 million in fiscal year 2008. The increase in
sales was due primarily to increased sales to support the HAWK missile
system, increased sales for other radar systems and sales of radar
products by our recently acquired Malibu
division.
|
|
·
|
Medical: Sales
of our medical products consist of sales for medical imaging applications,
such as x-ray imaging, PET and MRI, and for radiation therapy applications
for the treatment of cancer. The 3% decrease in sales of our medical
products was primarily due to a Russian tender program in which we
participated in fiscal years 2006 and 2007 that did not recur in fiscal
year 2008. In fiscal year 2008, sales for the Russian tender program
decreased $5.5 million in comparison to fiscal year
2007.
In
addition, in fiscal year 2007, a customer ordered a two-year supply of
products for MRI applications in one fiscal year, resulting in unusually
strong demand for these products, and we shipped a significant amount of
these products during that fiscal year. As a result, in fiscal year 2008,
sales of products for MRI applications decreased approximately $2.4
million.
Excluding
the Russian tender program and MRI applications from both fiscal years
2007 and 2008, medical sales increased 12% from $53.4 million in fiscal
year 2007 to $59.6 million in fiscal year
2008.
|
|
·
|
Communications: The 5%
increase in sales in the communications market was primarily the result of
sales of telemetry and TCDL products by our recently acquired Malibu
division, as well as the start of production shipments for Increment One
of the WIN-T military communications program. These increases were
partially offset by a decrease in sales of products for certain military
communications programs, including the now-completed JNN program, and
certain broadcast network applications for which we had strong sales in
fiscal year 2007.
In fiscal year 2008, the $7.3 million
increase in sales of products to support the WIN-T military communications
program was offset by a $3.7 million decrease in sales of products to
support its predecessor, the JNN military communications program, due to
the completion of that program. We expect that our overall participation
levels in the WIN-T program, which ramped up for production in the first
six months of fiscal year 2008, will be significantly higher than our
participation levels in the previous JNN program. Our sales of products
to
|
|
|
support
military communications applications increased in fiscal year 2008, and we
expect our participation in military communications programs to continue
to grow.
|
|
·
|
Industrial:
Sales in the industrial market are cyclical. The $4.6 million
increase in industrial sales was due to sales of products used in a wide
variety of industrial applications, including induction welding, dialectic
heating and instrumentation applications and domestic and international
test systems.
|
|
·
|
Scientific: Sales in the
scientific market are historically one-time projects and can fluctuate
significantly from period to period. The $3.0 million increase in
scientific sales was primarily the result of increased product shipments
for the Spallation Neutron Source at Oakridge National Laboratory. We
received approximately $5 million in orders for this program in fiscal
year 2007 and expect to complete our shipments of products for this
program in the second quarter of fiscal year
2009.
|
We
believe that the current economic environment and challenging credit conditions
may have an impact on our sales, primarily in our commercial markets, in the
foreseeable future. Our sales in the defense markets may also be impacted by
reductions or delays in the funding of applicable government
contracts.
Gross Profit.
Gross profit was $108.9 million, or 29.4% of sales, for fiscal year 2008 as
compared to $113.3 million, or 32.3% of sales, for fiscal year 2007. For fiscal
year 2008 as compared to fiscal year 2007, gross profit was unfavorably impacted
by cost overruns on advanced antenna development programs at our recently
acquired Malibu division, the shipment of lower margin products and the currency
impact from the weakness of the U.S. dollar, partially offset by additional
gross profit from the $18.9 million increase in sales volume. The shipment of
lower margin products in fiscal year 2008 include a large number of new product
and engineering development programs that we expect will grow our business in
the future. The weakness of the U.S. dollar for fiscal year 2008 as compared to
fiscal year 2007 caused a reduction in gross profit of approximately $2.5
million from the translation of Canadian dollar denominated manufacturing
expenses to U.S. dollars, net of currency hedging contracts. In addition, gross
profit for fiscal year 2007 includes an approximately $0.6 million
reduction to cost of sales to capitalize inventory that had been improperly
expensed in prior periods.
In fiscal
year 2008, we engaged in a higher level of new product and engineering
development programs than in fiscal year 2007 in order to continue to grow our
business. These programs typically result in lower gross margins and higher
period-to-period variability of our financial results. Notable new product and
engineering development programs currently include Increment One of the WIN-T
military communications program, the EarthCARE cloud-profiling program and
products to support the Active Denial System, counter-IED systems, cargo
screening programs, high-resolution nuclear magnetic resonance (“NMR”) programs
and next generation weather radar systems and higher-power medical applications.
We believe that our product and engineering development programs will increase
our future growth potential throughout our markets and businesses and expect the
elevated levels of development activity to continue for the foreseeable
future.
Research and Development.
Company-sponsored research and development expenses were $10.8 million, or 2.9%
of sales, for fiscal year 2008 and $8.6 million, or 2.4% of sales for fiscal
year 2007. The increase in research and development expenses for fiscal year
2008 compared to fiscal year 2007 was due primarily to expenditures of $1.0
million on the U.S. Army's WIN-T program and increased spending of $1.0 million
on medical diagnostic imaging products.
Total spending on
research and development, including customer-sponsored research and development,
was as follows (in millions):
|
Year Ended
|
||||||||
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Company
sponsored
|
$ | 10.8 | $ | 8.6 | ||||
|
Customer
sponsored, charged to cost of sales
|
$ | 12.0 | $ | 7.7 | ||||
| $ | 22.8 | $ | 16.3 | |||||
Selling and Marketing. Selling
and marketing expenses were $21.1 million, or 5.7% of sales, for fiscal year
2008, a $1.8 million increase from the $19.3 million, or 5.5% of sales, in
fiscal year 2007. The increase in selling and marketing expenses for fiscal year
2008 compared to fiscal year 2007 primarily reflects selling and marketing
expenses of $1.0 million at our recently acquired Malibu division, as well as
the unfavorable impact of the weaker U.S. dollar on foreign-based
expenses.
General and Administrative.
General and administrative expenses were $22.7 million, or 6.1% of sales, for
fiscal year 2008, a $1.2 million increase from the $21.5 million, or 6.1% of
sales, for fiscal year 2007. The increase in general and administrative expenses
in fiscal year 2008 was primarily due to $1.7 million of expenses for our
recently acquired Malibu division, higher stock-based compensation expenses of
$0.6 million, and higher legal fees of $0.2 million, partially offset by lower
management incentive bonus expense of $0.7 million, lower expenses of $0.6
million associated with the evaluation of potential acquisition candidates in
fiscal year 2007 and the favorable impact from foreign currency transactions of
$0.3 million in fiscal year 2008 compared to fiscal year 2007.
Amortization of Acquisition-Related
Intangibles. Amortization of acquisition-related intangibles consists of
purchase accounting charges for technology and other intangible assets.
Amortization of acquisition-related intangibles was $3.1 million for fiscal year
2008 and $2.3 million for fiscal year 2007. The $0.8 million increase in
amortization of acquisition-related intangibles is primarily due to amortization
of intangible assets for our recently acquired Malibu division. Amortizable
acquisition-related intangible assets are amortized over periods of up to
50 years.
Interest Expense, net (“Interest
Expense”). Interest expense of $19.1 million for fiscal year 2008 was
$1.8 million lower than interest expense of $20.9 million for fiscal year 2007.
The reduction in interest expense for fiscal year 2008 was primarily due to the
redemption of debt during the fourth quarter of fiscal year 2007 and throughout
fiscal year 2008, and lower interest rates on our debt obligations during fiscal
year 2008 compared to fiscal year 2007. The reduction in interest rates was
primarily due to the refinancing of our senior credit facilities during the
fourth quarter of fiscal year 2007.
Loss on Debt Extinguishment.
Loss on debt extinguishment of $0.6 million for fiscal year 2008 was $5.7
million lower than loss on debt extinguishment of $6.3 million for fiscal year
2007. In fiscal year 2008, loss on debt extinguishment resulted from the $10.0
million early redemption of our floating rate senior notes: $6.0 million in
March 2008, $2.0 million in June 2008 and $2.0 million in August 2008. In fiscal
year 2007, loss on debt extinguishment resulted from the $58 million early
redemption of our floating rate senior notes and the termination of our previous
$130 million senior credit facilities in connection with the amendment and
restatement of such facilities.
The loss on debt
extinguishment consists of the following (in millions):
|
Year Ended
|
||||||||
|
October
3,
|
September
28,
|
|||||||
|
2008
|
2007
|
|||||||
|
Non-cash
write-off of deferred debt issue costs and issue discount
costs
|
$ | 0.4 | $ | 4.7 | ||||
|
Cash
payments for call premiums
|
0.2 | 1.9 | ||||||
|
Cash
proceeds from early termination of interest rate swap on floating
rate senior notes
|
- | (0.3 | ) | |||||
| $ | 0.6 | $ | 6.3 | |||||
Income Tax Expense. We
recorded an income tax expense of $10.8 million and $11.7 million for fiscal
years 2008 and 2007, respectively. Our effective tax rates were approximately
34.6% and 34.3% for fiscal years 2008 and 2007, respectively. The effective
income tax rate for fiscal year 2008 includes a discrete tax benefit of $0.4
million that is attributable to fiscal year 2007 and is related to the
correction of an immaterial error in the computation of the warranty expense tax
deduction in a foreign tax jurisdiction. The effective tax rate for fiscal
year 2007 included a discrete tax benefit of $1.8 million related to the filing
of amended income tax returns for prior years to reflect a change in estimate
with regard to reporting Canadian income earned in the U.S., offset by a charge
to deferred income tax expense of approximately $0.9 million that should have
been reported in fiscal year 2006. Our worldwide effective income tax rate,
excluding discrete tax items, was approximately 36% for fiscal year
2008.
Net Income. Net income was
$20.4 million, or 5.5% of sales, for fiscal year 2008 as compared to $22.5
million, or 6.4% of sales, for fiscal year 2007. Lower net income for fiscal
year 2008 was primarily due to cost overruns on development programs at our
recently acquired Malibu division, the shipment of lower-margin products,
incremental operating expenses for the recently acquired Malibu division, the
unfavorable impact from the weakness of the U.S. dollar and higher research and
development expenses, partially offset by additional gross profit from the
increase in sales volume, a smaller loss on debt extinguishment and lower
interest expense.
EBITDA. EBITDA was $61.3
million, or 16.6% of sales, for fiscal year 2008 as compared to $64.3 million,
or 18.3% of sales, in fiscal year 2007. Lower EBITDA for fiscal year 2008 was
primarily due to cost overruns on development programs at our recently acquired
Malibu division, the shipment of lower margin products, incremental operating
expenses for the recently acquired Malibu division, the unfavorable impact from
the weakness of the U.S. dollar and higher research and development expenses,
partially offset by additional gross profit from the increase in sales
volume.
Calculation of Management
Bonuses. Management bonuses were $1.9 million in fiscal year 2008
compared to $2.7 million in fiscal year 2007. Management bonuses for fiscal
years 2008 and 2007 were calculated pursuant to our Management Incentive Plan
(“MIP”) and were based on three factors: (1) EBITDA as adjusted for purposes of
calculating management bonuses; (2) a measure of cash generated by operations;
and (3) individual goals that were customized for certain participating members
of management. The weight given to each of these factors varied for each person.
Generally, for our officers, equal weight was given to the first two factors,
and the third factor was not applicable. For our other members of management,
equal weight was given to each of the three factors described above. Management
bonuses are paid in cash approximately three months after the end of the fiscal
year. EBITDA as adjusted for purposes of calculating management bonuses is equal
to EBITDA for the fiscal year adjusted to exclude the impact of certain
non-recurring or non-cash charges as pre-determined in our MIP for the fiscal
year. EBITDA for purposes of calculating management bonuses for fiscal year
2008
was $64.0
million compared to $71.2 million in fiscal year 2007. The non-recurring and
non-cash charges that were excluded from EBITDA in calculating management
bonuses (a) for fiscal year 2008 were loss on debt extinguishment of $0.6
million and stock-based compensation expense of $2.1 million, and (b) for fiscal
year 2007 were loss on debt extinguishment of $6.3 million and stock-based
compensation expense of $1.2 million, offset by the inventory correction of $0.6
million. We are presenting EBITDA as adjusted for purposes of calculating
management bonuses here to help investors understand how our management bonuses
were calculated, and not as a measure to be used by investors to evaluate our
operating results or liquidity.
Our
results for fiscal year 2007 compared to our results for fiscal year
2006
Sales:
Our sales by market for fiscal years 2007 and 2006 are summarized as follows
(dollars millions):
|
Year
Ended
|
||||||||||||||||||||||||
|
September
28, 2007
|
September
29, 2006
|
Increase
(Decrease)
|
||||||||||||||||||||||
|
%
of
|
%
of
|
|||||||||||||||||||||||
|
Amount
|
Sales
|
Amount
|
Sales
|
Amount
|
Percent
|
|||||||||||||||||||
|
Radar
and Electronic Warfare
|
$ | 144.2 | 41 | % | $ | 146.7 | 43 | % | $ | (2.5 | ) | (2 | ) % | |||||||||||
|
Medical
|
67.6 | 19 | 57.6 | 17 | 10.0 | 17 | ||||||||||||||||||
|
Communications
|
112.3 | 32 | 106.7 | 31 | 5.6 | 5 | ||||||||||||||||||
|
Industrial
|
20.5 | 6 | 22.1 | 7 | (1.6 | ) | (7 | ) | ||||||||||||||||
|
Scientific
|
6.5 | 2 | 6.6 | 2 | (0.1 | ) | (2 | ) | ||||||||||||||||
|
Total
|
$ | 351.1 | 100 | % | $ | 339.7 | 100 | % | $ | 11.4 | 3 | % | ||||||||||||
In the
fourth quarter of fiscal year 2008, we changed the way in which we categorize
orders and sales of the TCDL products at our Malibu division. The table above
reflects the change. Previously, orders and sales of our TCDL products were
included in our radar and electronic warfare market. We are now reporting these
orders and sales in our communications market, which we believe is the more
appropriate category for these products. We reclassified previously reported
orders and sales information to properly reflect TCDL products as an increase in
the communications market and a corresponding decrease in the radar and
electronic warfare market. The reclassified sales amount was $1.5 million in
fiscal year 2007; there was no reclassified sales amount in fiscal year 2006 as
we acquired the Malibu division in August 2007.
In fiscal
year 2007, our new Malibu division generated sales totaling $3.1 million, of
which approximately 17% was in the radar and electronic warfare market and
approximately 83% was in the communications market.
Sales for fiscal year 2007 of $351.1
million were $11.4 million, or approximately 3%, higher than sales of $339.7
million for fiscal year 2006. Explanations for the sales increase or decrease by
market for fiscal year 2007 as compared to fiscal year 2006 are as
follows:
|
·
|
Radar and Electronic Warfare:
The majority of our sales in the radar and electronic warfare
markets are for products for domestic and international defense and
government end uses. The timing of order receipts and subsequent shipments
in these markets may vary from year to year. Sales for these markets were
essentially unchanged, totaling $146.7 million in fiscal year 2006 and
$144.2 million in fiscal year 2007.
|
|
·
|
Medical: Sales of
our medical products consist of sales for medical imaging applications,
such as x-ray imaging, PET and MRI applications, and for radiation therapy
applications for the treatment of cancer. The approximately 17% increase
in sales of our medical imaging and radiation therapy products was
primarily due to a $6.9 million increase in sales of our products used in
x-ray imaging. The increase in sales of x-ray imaging products resulted
from growth in our market share, as well as a $1.9 million increase in
shipments for the second year of a tender program that supported the
expansion of the Russian medical infrastructure. Sales of our products
used in MRI applications also increased $2.4 million, as a customer
ordered a two-year supply of products for MRI applications in one fiscal
year, a significant amount of which we shipped during fiscal year
2007.
|
|
·
|
Communications: The
approximately 5% increase in sales in the communications market was
primarily the result of sales of telemetry and TCDL products by our
recently acquired Malibu division, increased sales of both newer and
traditional satellite communications amplifiers for foreign broadcast
network and direct-to-home applications, as well as newer satellite
communications amplifiers for foreign news gathering and mobile
applications and U.S. military satellite communications programs. These
increases were partially offset by a decrease in shipments of our
traditional satellite communications products for North American
direct-to-home broadcast
applications.
|
|
·
|
Industrial: Sales in the
industrial market, one of our smallest markets, are cyclical. The decrease
in industrial sales was primarily due the timing of orders and shipments
of products used in industrial heating systems, electromagnetic
susceptibility test programs and other industrial
applications.
|
|
·
|
Scientific: Sales in the
scientific market, our smallest market, are historically one-time projects
and can fluctuate significantly from period to period. Sales in this
market were essentially unchanged.
|
Gross Profit. Gross profit was
$113.3 million, or 32.3% of sales, for fiscal year 2007 as compared to $103.7
million, or 30.5% of sales, for fiscal year 2006. Fiscal year 2006 included
non-recurring expenses of approximately $6.0 million for move-related expenses,
including unfavorable overhead absorption and manufacturing variances, from the
Eimac relocation. Fiscal year 2007, as compared to fiscal year 2006, was
favorably impacted by a 3% increase in shipment volume and the shipment of
products with higher gross margins and was unfavorably impacted by approximately
$2.6 million due to increases in our Canadian dollar denominated manufacturing
expenses resulting from the expiration of favorable foreign currency hedge
contracts in March 2006 and the further weakening of the U.S. dollar. Gross
profit for fiscal year 2007 included a reduction to cost of sales of
approximately $0.6 million to capitalize inventory that was improperly expensed
in prior periods.
Research and
Development. Customer-sponsored research and development expenses were
$8.6 million, or 2.4% of sales, for fiscal year 2007 and $8.6 million, or 2.5%
of sales for fiscal year 2006. Research and development spending was primarily
directed toward additional investments in the growth of medical diagnostic
imaging products, as well as VED products for radar, electronic warfare and
certain satellite communication markets.
Total
spending on research and development, including customer-sponsored research and
development, was as follows (in millions):
|
Year Ended
|
||||||||
|
September
28,
|
September
29,
|
|||||||
|
2007
|
2006
|
|||||||
|
Company
sponsored
|
$ | 8.6 | $ | 8.6 | ||||
|
Customer
sponsored, charged to cost of sales
|
$ | 7.7 | $ | 6.2 | ||||
| $ | 16.3 | $ | 14.8 | |||||
Selling and Marketing. Selling
and marketing expenses were $19.3 million, or 5.5% of sales, for fiscal year
2007, a $0.5 million decrease from the $19.8 million, or 5.8% of sales, for
fiscal year 2006. The reduction in selling and marketing expenses for fiscal
year 2007 compared to fiscal year 2006 was primarily due to higher spending in
fiscal year 2006 for new product introductions. Selling and marketing expenses
for fiscal year 2006 included $0.2 million of the special bonus discussed
below.
General and Administrative.
General and administrative expenses were $21.5 million, or 6.1% of sales, for
fiscal year 2007, a $0.9 million decrease from the $22.4 million, or 6.6% of
sales, for fiscal year 2006. Fiscal year 2006 included $2.75 million of the
special bonus, discussed below, and Eimac relocation expenses of $1.2 million.
Fiscal year 2007, compared to fiscal year 2006, included approximately $1.4
million of additional expenses associated with meeting the compliance
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, $0.5 million for
expenses associated with the evaluation of potential acquisition candidates,
$0.5 million higher stock-based compensation expenses and additional expenses of
$0.3 million as a result of becoming a publicly traded company in April
2006.
Special Bonus. In the first quarter of
fiscal year 2006, our board of directors approved the payment of $3.25 million
in special, one-time bonuses to our employees and directors (other than
directors who are employees or affiliates of The Cypress Group) to reward them
for the increase in company value. The special bonus was not paid pursuant to
our MIP, our 2006 Equity and Performance Incentive Plan or any of our other
formal compensation plans. The bonus amount was not determined based on a
formula, but was instead an amount determined by our board of directors to be
reasonable compensation for the increase in company value. The special bonus was
charged to the consolidated statement of operations for fiscal year 2006 in the
same lines as cash compensation paid to the same employees and directors, as
follows: $2.75 million to general and administrative, $0.3 million to cost of
sales and $0.2 million to selling and marketing.
Amortization of Acquisition-Related
Intangibles. Amortization of acquisition-related intangibles consists of
purchase accounting charges for technology and other intangible assets.
Amortization of acquisition-related intangibles was $2.3 million for fiscal year
2007 and $2.2 million for fiscal year 2006. The $0.1 million increase in
amortization of acquisition-related intangibles was due to additional
amortization expenses related to the acquisition of Malibu.
Interest Expense, net (“Interest
Expense”). Interest expense of $20.9 million for fiscal year 2007 was
$2.9 million lower than interest expense of $23.8 million for fiscal year 2006.
The reduction in interest expense for fiscal year 2007 compared to fiscal year
2006 was primarily due to lower debt levels resulting from the term loan
prepayments of $5.0 million in December 2006 and $47.5 million in May 2006 using
proceeds from the initial public offering of our common stock.
Loss on Debt
Extinguishment. Loss on debt extinguishment of $6.3 million in fiscal
year 2007 resulted from our refinancings during the year. The loss on debt
extinguishment consists of $2.6 million in non-cash write-offs of deferred debt
issue costs and issue discount costs and $1.9 million in cash payments for call
premiums from the early retirement of $58.0 million of our floating rate senior
notes, and $2.1 million in non-cash write-offs of deferred debt issue costs for
the termination of our previous $130 million senior credit facilities in
connection with the amendment and restatement of such facilities, partially
offset by $0.3 million of cash proceeds from the early termination of our
interest rate swap on our floating rate senior notes.
Income Tax Expense. We
recorded an income tax expense of $11.7 million and $9.1 million for fiscal
years 2007 and 2006, respectively. Our effective tax rate was approximately
34.3% for fiscal year 2007 as compared to approximately 34.5% for fiscal year
2006. The effective tax rate for fiscal year 2007 included a discrete tax
benefit of $1.8 million related to the filing of amended income tax returns for
prior years to reflect a change in estimate with regard to reporting Canadian
income earned in the U.S., offset by a charge to deferred income tax expense of
approximately $0.9 million that should have been reported during the last
quarter of fiscal year 2006.
The U.S.
income tax expense for fiscal year 2006 included a $1.3 million discrete tax
benefit related to a change in estimate with regard to reporting Canadian income
earned in the U.S. for fiscal year 2005 based on a determination of the
character of such income. Income tax expense for fiscal year 2006 also included
a $0.3 million charge attributable to the fourth quarter of fiscal year 2005 and
consisting of $0.5 million to correct the overstatement of tax benefits recorded
in the fourth quarter of fiscal year 2005 for stock-based compensation expense
that is not deductible for income tax purposes in a foreign tax jurisdiction,
offset by the reversal of a $0.2 million tax contingency reserve.
Net Income. Net income was
$22.5 million, or 6.4% of sales, for fiscal year 2007 as compared to $17.2
million, or 5.1% of sales, for fiscal year 2006. The increase in net income for
fiscal year 2007 was primarily due to the absence in fiscal year 2007 of
non-recurring expenses for the Eimac relocation and the special bonus and higher
gross profit in fiscal year 2007 due to the increase in shipment volume which
was partially offset by higher expenses for the extinguishment of debt, higher
Canadian dollar denominated expenses and higher income tax expense.
EBITDA. EBITDA was $64.3
million, or 18.3% of sales, for fiscal year 2007 as compared to $59.1 million,
or 17.4% of sales, in fiscal year 2006. The increase in EBITDA for fiscal year
2007 was primarily due to the absence in fiscal year 2007 of Eimac move-related
expenses of $7.6 million, including unfavorable overhead absorption and
manufacturing variances for the Eimac relocation, the absence in fiscal year
2007 of non-recurring expenses for the special bonus of $3.25 million and higher
sales volume and the shipment of products with higher gross margins in fiscal
year 2007, partially offset by the loss on debt extinguishment of $6.3 million
for fiscal year 2007 and increases in our Canadian dollar denominated expenses
of $2.6 million resulting from the weakening of the U.S. dollar and expiration
of favorable foreign currency hedge contracts in March 2006.
Calculation of
Management Bonuses. Management bonuses were $2.7 million in
fiscal year 2007 compared to $2.5 million in fiscal year 2006. Management
bonuses for fiscal years 2007 and 2006 were calculated pursuant to our MIP and
were based on three factors: (1) EBITDA as adjusted for purposes of calculating
management bonuses; (2) a measure of cash generated by operations; and (3)
individual goals that were customized for certain participating members of
management. The weight given to each of these factors varied for each person.
Generally, for our officers, equal weight was given to the first two factors,
and the third factor was not applicable. For our other members of management,
equal weight was given to each of the three factors described above. Management
bonuses are paid in cash approximately three months after the end of the fiscal
year. EBITDA as adjusted for purposes of
calculating
management bonuses is equal to EBITDA for the fiscal year adjusted to exclude
the impact of certain non-recurring or non-cash charges as pre-determined in our
MIP for the fiscal year. EBITDA for purposes of calculating management bonuses
for fiscal year 2007 was $71.2 million compared to $67.2 million in fiscal year
2006. The non-recurring and non-cash charges that were excluded from EBITDA in
calculating management bonuses (a) for fiscal year 2007 were loss on debt
extinguishment of $6.3 million, stock-based compensation expense of $1.2
million, offset by the inventory correction of $0.6 million, and (b) for fiscal
year 2006 were direct costs for the Eimac relocation of $4.6 million,
stock-based compensation expense of $0.3 million and the special bonus of $3.25
million. We are presenting EBITDA as adjusted for purposes of calculating
management bonuses here to help investors understand how our management bonuses
were calculated, and not as a measure to be used by investors to evaluate our
operating results or liquidity.
Overview
Our liquidity is
affected by many factors, some of which are based on normal ongoing operations
of our business and others that are related to uncertainties in the markets in
which we compete and other global economic factors. We have historically
financed, and intend to continue to finance, our capital and working capital
requirements including debt service and internal growth, through a combination
of cash flows from our operations and borrowings under our senior credit
facilities. Our primary uses of cash are cost of sales, operating expenses,
debt service and capital expenditures.
We
believe that we have the financial resources to meet our business requirements,
including capital expenditures and working capital requirements, for the next 12
months.
|
Cash
and Working Capital
|
The following
summarizes our cash and cash equivalents and working capital (in
millions):
|
October
3,
|
September
28,
|
September
29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
and cash equivalents
|
$ | 28.7 | $ | 20.5 | $ | 30.2 | ||||||
|
Working
capital
|
$ | 88.1 | $ | 81.5 | $ | 77.1 | ||||||
We invest
cash balances in excess of operating requirements in overnight U.S. Government
securities and money market accounts. In addition to the above cash and cash
equivalents, we have restricted cash of $0.8 million as of October 3, 2008,
consisting primarily of bank guarantees from customer advance payments to our
international subsidiaries. The bank guarantees become unrestricted cash when
performance under the sales or supply contract is complete.
The
significant factors underlying the $8.2 million net increase in cash and cash
equivalents during fiscal
year 2008 were the net cash provided by our operating activities of
$33.9 million, an escrow refund of $1.6 million related to the Malibu
acquisition and $0.9 million proceeds from employee stock purchases, partially
offset by repayment of $11.0 million of the outstanding balance on our senior
term loan, the redemption of $10.0 million in principal amount of our floating
rate senior notes, capital expenditures of $4.3 million and purchase of
treasury stock for $2.8 million.
We had
total principal amount of debt outstanding of $225.75 million and
$246.75 million as of October 3, 2008 and September 28, 2007,
respectively. As of October 3, 2008, we had borrowing availability of
$55.4 million under the revolver under our senior credit
facilities.
As of
October 15, 2008, after giving effect to an additional optional prepayment of
$1.0 million on our senior term loan on such date, we had $224.75 million
in total principal amount of debt outstanding.
As more
fully described below, our most significant debt covenant compliance requirement
is maintaining a secured leverage ratio of 3.75:1; our current secured leverage
ratio is approximately 1:1. With this low secured leverage ratio, we do
not anticipate any need to restructure our debt or reenter the capital markets
until fiscal year 2011 when our Senior Credit Facilities will likely
expire.
Historical
Operating, Investing and Financing Activities
In
summary, our cash flows were as follows (in millions):
|
October
3,
|
September
28,
|
September 29,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 33.9 | $ | 21.7 | $ | 10.9 | ||||||
|
Net
cash used in investing activities
|
$ | (2.8 | ) | $ | (30.4 | ) | $ | (0.2 | ) | |||
|
Net
cash used in financing activities
|
$ | (22.9 | ) | $ | (1.0 | ) | $ | (7.1 | ) | |||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 8.2 | $ | (9.7 | ) | $ | 3.6 | |||||
Operating
Activities
In fiscal years
2008, 2007 and 2006, we funded our operating activities through cash generated
internally. Cash provided by operating activities is net income adjusted for
certain non-cash items and changes to working capital items.
Net cash
provided by operating activities of $33.9 million in fiscal year 2008 was
attributable to net income of $20.4 million and depreciation, amortization and
other non-cash charges of $13.7 million, slightly offset by $0.2 million net
cash used for working capital. The primary working capital uses of cash in
fiscal year 2008 were decreases in accrued expenses, product warranty and income
taxes payable. The decrease in accrued expenses related primarily to the timing
of payroll and employee vacations, combined with lower incentive compensation
and a decrease in consulting and professional costs. These uses of cash were
significantly offset by decreases in receivables and inventories and release of
restricted cash. Accounts receivables decreased due to timing and improved
collection of trade receivables. Inventories decreased due to an effort to
reduce inventory carrying levels.
Net cash
provided by operating activities of $21.7 million in fiscal year 2007 was
attributable to net income of $22.5 million and depreciation, amortization and
other non-cash charges of $16.2 million, partially offset by $17.0 million net
cash used for working capital. In fiscal year 2007, the primary working capital
uses of cash were increases in inventories and accounts receivables and a
decrease in income tax payable. The higher inventory level was largely due to
increasing sales volume, the timing of sales contracts and an increase in
inventory that was purchased due to sales order forecasts and to satisfy
customer delivery commitments. The increase in accounts receivable resulted from
overall higher sales. The reduction in income taxes payable was due to the
timing of payments and a discrete tax benefit related to the filing of amended
tax return for the prior years to reflect a change in reporting Canadian income
earned in the U.S.
The $10.9
million net cash provided by operating activities for fiscal year 2006 was
primarily comprised of net income of $17.2 million plus the net effect of
non-cash expenses totaling $5.5 million, partially offset by $11.8 million net
cash used for working capital. In fiscal year 2006, the primary working capital
uses were for increases in accounts receivable and inventories due to an
increase in sales volume, and the reduction of accounts payable and accrued
expenses due to the timing of payments made to our suppliers, partially offset
by increases in income tax payable due to the tax gain on the sale of our San
Carlos, California property and increases in tax contingency reserve
requirements. The working capital uses of cash also consisted of a reduction in
advance payments from customers, primarily due to the completion of
direct-to-home sale contracts.
Investing
Activities
Investing
activities for fiscal year 2008 consisted primarily of $4.3 million capital
expenditures and $0.1 million payment of patent application fees. The amount of
cash used in investing activities was partially offset by a $1.6 million escrow
refund related to the Malibu acquisition.
Investing
activities for fiscal year 2007 consisted primarily of $22.2 million for the
acquisition of Malibu, net of cash acquired, and capital expenditures of $8.2
million, including $4.1 million to complete the building expansion project at
our Canadian facility. We funded the acquisition of Malibu out of cash on hand
generated from operations.
Investing
activities for fiscal year 2006 consisted primarily of $10.9 million for capital
expenditures, including $4.7 million for capital equipment, building and land
lease improvements in Palo Alto, California related to the Eimac relocation and
$2.3 million for a building expansion project at our Canadian facility. The
capital expenditures were almost entirely offset by the net proceeds from the
sale of the San Carlos, California property of $10.7 million ($11.3 million
gross proceeds less expenses for the sale of $0.6 million). Capital expenditures
for the improvements to our Palo Alto facility were funded with proceeds from
the sale of the San Carlos property.
Financing
Activities
Net cash
used in financing activities for fiscal year 2008 consisted primarily of $2.8
million treasury stock purchases under the stock repurchase program discussed
below, redemption of $10.0 million in principal amount of our floating rate
senior notes and term loan repayments aggregating $11.0 million.
The $11.0 million term loan repayments during fiscal year 2008 comprised the
scheduled amortization payment of $250,000 for the first quarter of fiscal year
2008 and optional prepayments aggregating $10.75 million. The cash used in
financing activities for fiscal year 2008 was partially offset by $0.9 million
in proceeds from employee stock purchases.
Net cash used
in financing activities for fiscal year 2007 consisted primarily of $100.75
million repayments on the floating rate senior notes and the term loan under our
senior credit facilities and $2.5 million of debt issue costs incurred to issue
our new term loan facility. Cash used in financing activities was partially
offset by $100.0 million of proceeds from borrowings under our new term loan,
$1.4 million of proceeds from stock option exercises and employee stock
purchases and $0.8 million excess tax benefit from stock option
exercises.
For fiscal year
2006, financing activities consisted primarily of the initial public offering of
our common stock, which was completed on May 3, 2006, and the special cash
dividend paid to stockholders of CPI International. In the initial public
offering, we sold 2,941,200 shares of common stock and the selling stockholders
sold 4,117,670 shares, at an initial public offering price to the public of
$18.00 per
share,
resulting in total proceeds to us of approximately $47.3 million, net of
transaction costs of approximately $5.6 million. We used the net proceeds of the
initial public offering to repay $47.5 million of the term loan under our senior
credit facilities. In December 2005, our board of directors declared and
paid a special cash dividend of $17 million to stockholders of CPI
International. This dividend was paid using the $10 million in net proceeds
obtained from the additional borrowing under our senior credit facilities in
December 2005 and available cash.
If
the leverage ratio under our amended and restated senior credit facilities
exceeds 3.5:1 at the end of any fiscal year, then we are required to make an
annual prepayment within 90 days after the end of the fiscal year based on
a calculation of excess cash flow, as defined in the senior credit facilities,
multiplied by a factor of 50%, less any optional prepayments made during the
fiscal year. Based on the calculation of excess cash flow for fiscal year 2008,
no excess cash flow payment is expected to be made in fiscal year 2009. There
was no excess cash flow payment due for fiscal year 2007, and, therefore, no
excess cash flow payment was made in fiscal year 2008. A $1.7 million excess
cash flow payment for fiscal year 2006 was made in fiscal year
2007.
Stock
Repurchase Program
On May
28, 2008, we announced that our board of directors authorized us to implement a
program to repurchase up to $12.0 million of our common stock from time to time,
funded entirely from cash on hand. Repurchases made under the program are
subject to the terms and limitations of our debt covenants, as well as market
conditions and share price, and will be made at management's discretion in open
market trades, through block trades or in privately negotiated transactions. The
program may be modified or terminated by our board of directors at any time.
During fiscal year 2008, we repurchased 206,243 shares at an average per share
price of $13.54, plus average brokerage commissions of $0.04 per share, for an
aggregate cost of $2.8 million. Repurchased shares have been recorded as
treasury shares and will be held until our board of directors designates that
these shares be retired or used for other purposes.
Contractual
Obligations
The
following table summarizes our significant contractual obligations at October 3,
2008 and the effect that such obligations are expected to have on our liquidity
and cash flows in future periods (in thousands):
|
Total
|
Less than
1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
||||||||||||||||
|
Operating
leases
|
$ | 8,272 | $ | 2,037 | $ | 2,432 | $ | 907 | $ | 2,896 | ||||||||||
|
Purchase
commitments
|
29,394 | 28,148 | 1,234 | 12 | - | |||||||||||||||
|
Debt
obligations
|
||||||||||||||||||||