Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. CPI INTERNATIONAL, INC. (1279176) 10-Q published on Feb 09, 2011 at 3:00 pm
Reporting Period: Dec 30, 2010
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, risks associated with our pending merger agreement with an affiliate of The Veritas Capital Fund IV, L.P. (including the risk that the merger may not be consummated); competition in our end markets; our significant amount of debt and our ability to refi nance our debt; changes or reductions in the United States defense budget; currency fluctuations; goodwill impairment considerations; customer cancellations of sales contracts; U.S. Government contracts; export restrictions and other laws and regulations; international laws; changes in technology; the impact of unexpected costs; the impact of a general slowdown in the global economy; 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 Company’s Canadian dollar forward contracts in effect as of December 31, 2010 have durations of 3 to 12 months. These contracts are designated as a cash flow hedge and are considered highly effective, as defined by FASB ASC 815, “Derivatives and Hedging.” Unrealized gains and losses from foreign exchange forward contracts are included in accumulated other comprehensive income in the condensed consolidated balance sheets. At December 31, 2010, the unrealized gain, net of tax of $0.3 million, was $0.6 million. The Company anticipates recognizing the entire unrealized gain or loss in operating earnings within the next four fiscal quarters. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are immediately recognized in gener al and administrative expenses in the consolidated statements of income. The time value was not material for the first quarter of fiscal years 2011 and 2010. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, then the Company immediately recognizes the gain or loss on the associated financial instrument in general and administrative in the consolidated statements of income. No ineffective amounts were recognized due to hedge ineffectiveness in the first quarter of fiscal year 2011. The gain recognized in general and administrative due to hedge ineffectiveness was insignificant for the first quarter of fiscal year 2010.
Interest Rate Contracts: The Company also uses derivative instruments in order to manage interest costs and risk associated with its long-term debt. During fiscal year 2007, the Company entered into an interest rate swap contract (the “2007 Swap”) to receive three-month USD-LIBOR-BBA (British Bankers’ Association) interest and pay 4.77% fixed rate interest. Net interest positions are settled quarterly. The Company has structured the 2007 Swap with decreasing notional amounts such that it is less than the balance of its term loan under its senior credit facilities. The notional value of the 2007 Swap was $25.0 million at December 31, 2010 and represented approximately 38% of the aggregate term loan balance. The Swap agreement is effective throu gh June 30, 2011. Under the provisions of ASC 815, this arrangement was initially designated and qualified as an effective cash flow hedge of interest rate risk related to the term loan, which permitted recording the fair value of the 2007 Swap and corresponding unrealized gain or loss to accumulated other comprehensive income in the consolidated balance sheets. At December 31, 2010, the unrealized loss, net of tax of $0.2 million, was $0.3 million. The interest rate swap gain or loss is included in the assessment of hedge effectiveness. Gains and losses representing hedge ineffectiveness are immediately recognized in interest expense, net in the consolidated statements of income.
See Note 5, Financial Instruments, for further information regarding the Company’s derivative instruments.
On July 1, 2010, a putative stockholder class action complaint was filed against the Company, the members of the Company’s board of directors, and Comtech Telecommunications Corp. (“Comtech”) in the Superior Court of the State of California in and for the County of Santa Clara, entitled Continuum Capital v. Michael Targoff, et al. (Case No. 110CV175940). The lawsuit concerned the proposed merger between the Company and Comtech, and generally asserted claims alleging, among other things, that each member of the Company’s board of directors breached his fiduciary duties by agreeing to the terms of the previously proposed merger and by failing to provide stockholders with allegedly material information related to the proposed merger, and that Comtech ai ded and abetted the breaches of fiduciary duty allegedly committed by the members of the Company’s board of directors. The lawsuit sought, among other things, class action certification and monetary relief. On July 28, 2010, the plaintiff filed an amended complaint, making generally the same claims against the same defendants, and seeking the same relief. In addition, the amended complaint generally alleged that the consideration that would have been paid to the Company’s stockholders under the terms of the proposed merger was inadequate. On September 7, 2010, the Company terminated the Comtech sale agreement. On November 24, 2010, as described in Note 4, the Company entered into an agreement and plan of merger with Merger Sub and CPI International Acquisition, Inc. (formerly Catalyst Holdings, Inc.), which are affiliates of the Veritas Fund. On December 15, 2010, the plaintiff filed a second amended complaint, which removed Comtech as a defendant, added allegations related to the Merger and to t he Veritas Fund, and added a claim for attorneys' fees. On December 23, 2010, after the Company filed its preliminary proxy statement relating to a special meeting in connection with the approval of the Merger, the plaintiff filed a third amended complaint, adding allegations related to the disclosures in the preliminary proxy statement. The third amended complaint seeks, among other things, class action certification and monetary relief.
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.
If our current pending merger with Catalyst Acquisition, Inc. (as described above under the heading “Merger Agreement”) closes, we expect to receive funding through an equity contribution from the Veritas Fund and certain of its affiliates and net proceeds from the public offering of senior notes and borrowings under the new senior credit facilities expected to be entered into by CPI International Acquisition, Inc. See Note 4 to the accompanying unaudited condensed consolidated financial statements for more details. We believe that if the merger closes, the financial resources from the merger, our cash on hand, and expected cash flows from operations will be sufficient to meet our business requirements, in cluding capital expenditures and working capital requirements for the next 12 months, and to repay the $66.0 million outstanding under our senior credit facilities scheduled to come due on August 1, 2011, as well as the $117.0 million of our outstanding 8% senior subordinated notes and the $12.0 million of our outstanding floating rate senior notes prior to their scheduled maturity dates in connection with the merger. It is anticipated that the amounts outstanding under our existing senior credit facility term loan and under its currently outstanding notes will be repaid in connection with the merger.