Document


 
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549

_____________________________________________________________
FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported): August 9, 2016
_____________________________________________________________

CPI INTERNATIONAL HOLDING CORP.
(Exact Name of Registrant as Specified in Charter)

Delaware
(State or Other Jurisdiction of Incorporation)
333-173372-07
(Commission File Number)

90-0649687
(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) 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2.):
 
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) 
 
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (7 CFR 240.13e-4(c))
 








Item 2.02.    Results of Operations and Financial Condition.
 
On August 9, 2016, CPI International Holding Corp. issued a press release announcing its financial results for its third quarter of fiscal year 2016 ended July 1, 2016. A copy of the press release is furnished as Exhibit 99.1 to this report. 

The information in this Form 8-K and the exhibit attached hereto pursuant to Item 9.01 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act by CPI International Holding Corp., except as expressly set forth by specific reference in such a filing.


Item 9.01.         Financial Statements and Exhibits. 

(d)     Exhibit 99.1    CPI International Holding Corp. press release dated August 9, 2016 









SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 

 
 
 
CPI INTERNATIONAL HOLDING CORP.
 
 
(Registrant)
 
 
 
 
 
 
Dated:
August 9, 2016
/s/ JOEL A. LITTMAN
 
 
Joel A. Littman
Chief Financial Officer









EXHIBIT INDEX

 
Exhibit No.
 
Description
 
 
 
 
99.1
 
CPI International Holding Corp. press release dated August 9, 2016



Exhibit


Exhibit 99.1


CPI INTERNATIONAL ANNOUNCES THIRD QUARTER 2016 FINANCIAL RESULTS

PALO ALTO, Calif. - August 9, 2016 - CPI International Holding Corp., the parent company of CPI International, Inc. (CPI), today announced financial results for the fiscal year 2016 third quarter ended July 1, 2016.
“As anticipated, our business has continued to strengthen as the year has progressed. In the third quarter of fiscal 2016, CPI delivered higher sales and profit results than in the same quarter of last year and in the previous two quarters of this year,” said Joe Caldarelli, chief executive officer of CPI. “Although we are still seeing delays in the release of certain orders, particularly in programs dependent on government funding, our third quarter results demonstrate that we have sufficient resources and backlog to be able to efficiently generate profitable sales in a less than optimal environment.”
Orders and Sales
CPI booked orders totaling $349 million in the first nine months of fiscal 2016, a four percent increase from the $336 million generated in the same period of the previous fiscal year. Orders in the communications market increased to the highest third quarter year-to-date level recorded in the company’s history, while orders in the defense and medical markets decreased. The decrease in defense orders was primarily due to timing considerations.
CPI generated sales totaling $130 million in the third quarter of fiscal 2016, an 18 percent increase over the $110 million generated in the same quarter of the previous year. Communications sales increased to the highest quarterly level in the company’s history and defense sales also increased; sales in the medical market decreased modestly.
CPI’s results for the first nine months and third quarter of fiscal 2016 include contributions from its new ASC Signal Division, which was acquired in September 2015. The acquisition of the ASC Signal operations broadened CPI’s portfolio of advanced antenna offerings for communications and radar customers globally. In the first nine months of fiscal 2016, CPI ASC Signal Division contributed approximately $33 million in orders and approximately $32 million in sales to CPI. The significant majority of these orders and sales were in the communications market.
Net Income and Adjusted EBITDA
CPI generated net income totaling $4.5 million in the third quarter of fiscal 2016, a significant increase from the $1.2 million generated in the same quarter of the previous year.
Adjusted EBITDA totaled $26.3 million in the third quarter of fiscal 2016, a 46 percent increase from the $18.1 million recorded in the same quarter of the previous year.
The increases in the most recent quarter’s net income and adjusted EBITDA were primarily the result of higher sales volume, a favorable mix of product shipments, the inclusion of contributions from the ASC Signal operations and beneficial changes in the exchange rate between the U.S. dollar and the Canadian dollar.
As stated previously, CPI expects its financial results to continue to improve as the year progresses. The net income and adjusted EBITDA results reported for the third quarter of fiscal 2016 represent increases over both of the prior two quarters. CPI reported a $1.2 million net loss and adjusted EBITDA of $16.3 million in the first quarter and net income of $0.5 million and adjusted EBITDA of $18.4 million in the second quarter.




Communications Market
In the communications market, CPI’s orders increased 29 percent to $160 million in the first nine months of fiscal 2016. CPI ASC Signal Division’s orders for commercial and military communications programs accounted for of the majority of this increase; however, the company also benefitted from higher orders for commercial satellite communications programs, particularly fixed satellite services applications, and continued demand for advanced tactical common data link (TCDL) antenna products for unmanned aerial vehicle (UAV) programs.
Communications sales increased 41 percent to $57.6 million in the third quarter of fiscal 2016. Contributions from CPI’s ASC Signal Division provided approximately 70 percent of this increase. The remainder of the increase was primarily due to higher sales for military communications applications.
Defense Market
In the defense market, CPI’s orders decreased 14 percent to $116 million in the first nine months of fiscal 2016. This decrease was primarily due to the timing of orders for certain naval radar programs and an airborne radome program for which the company typically receives multiyear orders.
Defense sales increased seven percent to $48.8 million in the third quarter of fiscal 2016. This increase was primarily due to higher sales to support a variety of radar programs and the inclusion of sales from the ASC Signal operations.
Orders and sales for CPI’s largest recurring defense program, the Aegis radar systems, were essentially unchanged during the most recent periods. Demand for products to support this long-running and stable program remains very strong, and the first nine months of fiscal 2016 included CPI’s highest year-to-date sales for this program in the company’s history.
Medical Market
In the medical market, CPI’s orders decreased six percent to $53.3 million in the first nine months of fiscal 2016. This decrease was primarily due to lower orders of x-ray imaging products for foreign customers, largely resulting from challenging global economic conditions, as well as lower orders of MRI products. Orders for radiation therapy applications increased.
Medical sales decreased five percent, or approximately $0.8 million, to $14.7 million. This decrease was primarily due to lower sales of x-ray imaging products for foreign customers, largely resulting from challenging global economic conditions, as well as lower sales of MRI products. Sales for radiation therapy applications increased.
Cash Flow
As of July 1, 2016, CPI’s cash and cash equivalents totaled $39.2 million. For the 12-month period ending on that date, cash flow from operating activities totaled $16.5 million, free cash flow totaled $9.8 million and adjusted free cash flow totaled $18.5 million.
Financial Community Conference Call
In conjunction with this announcement, CPI will hold a conference call on Wednesday, August 10, 2016 at 11:00 a.m. (EDT) that will be broadcast simultaneously on the company’s Web site. To participate in this conference call, please dial (800) 649-5127, or (253) 237-1144 for international callers, enter conference ID 54500822 and ask for the CPI International Third Quarter 2016 Financial Results Conference Call. To access the Web cast, please visit http://investor.cpii.com and click “Events.”




About CPI International Holding Corp.
CPI International Holding Corp., headquartered in Palo Alto, California, is the parent company of CPI International, Inc., which is the parent company of Communications & Power Industries LLC and Communications & Power Industries Canada Inc. Together, Communications & Power Industries LLC and Communications & Power Industries Canada Inc. develop, manufacture and globally distribute components and subsystems used in the generation, amplification, transmission and reception of microwave signals for a wide variety of systems including radar, electronic warfare and communications (satellite and point-to-point) systems for military and commercial applications, specialty products for medical diagnostic imaging and the treatment of cancer, as well as microwave and RF energy generating products for various industrial and scientific pursuits.
Non-GAAP Supplemental Information
EBITDA, adjusted EBITDA, EBITDA margin, adjusted EBITDA margin, free cash flow and adjusted free cash flow presented here are non-generally accepted accounting principles (GAAP) financial measures. EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA further adjusted to exclude stock-based compensation expenses, certain acquisition-related expenses and sponsor management fees, as well as certain other items. EBITDA margin represents EBITDA divided by sales. Adjusted EBITDA margin represents adjusted EBITDA divided by sales. Free cash flow represents net cash provided by operating activities minus capital expenditures and patent application fees. Adjusted free cash flow represents free cash flow further adjusted to exclude certain acquisition-related items and sponsor management fees, net of any tax benefits, and cash received for prior year transfer pricing audits, as well as certain other items.
CPI believes that GAAP-based financial information for leveraged businesses, such as the company’s business, should be supplemented by EBITDA, adjusted EBITDA, EBITDA margin, adjusted EBITDA margin, free cash flow and adjusted free cash flow so that investors better understand the company’s operating performance in connection with their analysis of the company’s business. In addition, CPI’s management team uses EBITDA and adjusted EBITDA to evaluate the company’s operating performance, to monitor compliance with its senior credit facility, to make day-to-day operating decisions and as a component in the calculation of management bonuses. Other companies may define EBITDA, adjusted EBITDA, EBITDA margin, adjusted EBITDA margin, free cash flow and adjusted free cash flow differently and, as a result, the company’s measures may not be directly comparable to EBITDA, adjusted EBITDA, EBITDA margin, adjusted EBITDA margin, free cash flow and adjusted free cash flow of other companies. Because EBITDA, adjusted EBITDA, EBITDA margin, adjusted EBITDA margin, free cash flow and adjusted free cash flow do not include certain material costs, such as interest and taxes in the case of EBITDA-based measures, necessary to operate the company’s business, when analyzing the company’s business, these non-GAAP measures should be considered in addition to, and not as a substitute for, net income (loss), net cash provided by (used in) operating activities, net income margin or other statements of income or statements of cash flows data prepared in accordance with GAAP.

###

Certain statements included above constitute “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. Forward-looking statements provide our current expectations, beliefs or forecasts of future events. Forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual events or results to differ materially from the results projected, expected or implied by these forward-looking statements. These factors include, but are not limited to, competition in our end markets; our significant amount of debt; changes or reductions in the U.S. 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 or zoning laws and regulations; and inability to obtain raw materials and components. These and other risks are described in more detail in our periodic filings with the Securities and Exchange Commission. As a result of these uncertainties, you should not place undue reliance on these forward-looking statements. All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We undertake no duty or obligation to publicly revise any forward-looking statement to reflect circumstances or events occurring after the date hereof or to reflect the occurrence of unanticipated events or changes in our expectations.

Contact:
Amanda Mogin, Communications & Power Industries, investor relations, 650.846.3998, amanda.mogin@cpii.com






CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries




CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(All dollar amounts in thousands – unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
July 1,
2016
 
July 3,
2015
 
July 1,
2016
 
July 3,
2015
Sales
$
129,612

 
$
109,645

 
$
360,579

 
$
328,283

Cost of sales, including $0, $0, $906 and $0 of utilization of net increase in cost basis of inventory due to purchase accounting, respectively
89,820

 
79,831

 
259,411

 
236,978

Gross profit
39,792

 
29,814

 
101,168

 
91,305

Operating costs and expenses:
 

 
 
 
 

 
 
Research and development
4,001

 
3,813

 
12,236

 
11,370

Selling and marketing
6,368

 
5,518

 
19,426

 
17,018

General and administrative
7,650

 
7,572

 
23,132

 
23,234

Amortization of acquisition-related intangible assets
3,299

 
2,546

 
10,414

 
7,637

Total operating costs and expenses
21,318

 
19,449

 
65,208

 
59,259

Operating income
18,474

 
10,365

 
35,960

 
32,046

Interest expense, net
9,800

 
9,119

 
29,308

 
27,312

Income before income taxes
8,674

 
1,246

 
6,652

 
4,734

Income tax expense
4,161

 
27

 
2,875

 
1,402

Net income
4,513

 
1,219

 
3,777

 
3,332

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Unrealized income (loss) on cash flow hedges, net of tax
818

 
876

 
3,077

 
(688
)
Total other comprehensive income (loss), net of tax
818

 
876

 
3,077

 
(688
)
Comprehensive income
$
5,331

 
$
2,095

 
$
6,854

 
$
2,644






CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries



CONDENSED CONSOLIDATED BALANCE SHEETS
(All dollar amounts in thousands, except per share data – unaudited)  

 
July 1,
2016
 
October 2,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
39,168

 
$
37,514

Restricted cash
1,811

 
1,681

Accounts receivable, net
58,830

 
61,750

Inventories
115,926

 
103,276

Prepaid and other current assets
6,677

 
6,200

Total current assets
222,412

 
210,421

Property, plant, and equipment, net
74,439

 
78,592

Intangible assets, net
250,891

 
263,273

Goodwill
216,505

 
215,434

Other long-term assets
3,906

 
3,424

Total assets
$
768,153

 
$
771,144

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
3,100

 
$
3,100

Accounts payable
30,971

 
30,349

Accrued expenses
29,973

 
44,106

Product warranty
6,082

 
5,304

Income taxes payable
2,563

 
1,154

Advance payments from customers
15,390

 
13,037

Total current liabilities
88,079

 
97,050

Deferred tax liabilities
88,863

 
91,227

Long-term debt:
 
 
 
Principal, less current portion
542,925

 
545,250

Less unamortized discount
(3,056
)
 
(4,400
)
Less unamortized debt issuance costs
(8,969
)
 
(11,084
)
Long term debt, net of discount and debt issuance costs
530,900

 
529,766

Other long-term liabilities
6,168

 
6,384

Total liabilities
714,010

 
724,427

Commitments and contingencies
 

 
 

Stockholders’ equity:
 

 
 

Common stock ($0.01 par value, 2 shares authorized: 1 share issued and outstanding)

 

Additional paid-in capital
27,137

 
26,565

Accumulated other comprehensive income (loss)
1,082

 
(1,995
)
Retained earnings
25,924

 
22,147

Total stockholders’ equity
54,143

 
46,717

Total liabilities and stockholders’ equity
$
768,153

 
$
771,144






CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands – unaudited)

 
 
Nine Months Ended
 
July 1,
2016
 
July 3,
2015
Cash flows from operating activities
 
 
 
Net cash provided by operating activities
$
13,579

 
$
17,687

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(4,873
)
 
(4,695
)
Acquisition, net of cash acquired
(363
)
 

Net cash used in investing activities
(5,236
)
 
(4,695
)
 
 
 
 
Cash flows from financing activities
 

 
 

Payment of contingent consideration
(4,300
)
 

Payment of debt issue costs
(64
)
 

Repayment of borrowings under First Lien Term Loan
(2,325
)
 
(2,325
)
Net cash used in financing activities
(6,689
)
 
(2,325
)
 
 
 
 
Net increase in cash and cash equivalents
1,654

 
10,667

Cash and cash equivalents at beginning of period
37,514

 
50,617

Cash and cash equivalents at end of period
$
39,168

 
$
61,284

 
 
 
 
Supplemental cash flow disclosures
 

 
 

Cash paid for interest
$
21,249

 
$
19,531

Cash paid for income taxes, net of refunds
$
3,071

 
$
4,311

Decrease in accrued capital expenditures
$
464

 
$
9






CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries




NON-GAAP SUPPLEMENTAL INFORMATION
EBITDA and Adjusted EBITDA
(All dollar amounts in thousands - unaudited)

 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
July 1,
2016
 
July 3,
2015
 
July 1,
2016
 
July 3,
2015
Net income
 
 
$
4,513

 
$
1,219

 
$
3,777

 
$
3,332

Depreciation and amortization
 
6,561

 
5,812

 
19,930

 
17,540

Interest expense, net
 
9,800

 
9,119

 
29,308

 
27,312

Income tax expense
 
4,161

 
27

 
2,875

 
1,402

EBITDA
 
 
25,035

 
16,177

 
55,890

 
49,586

 
 
 
 
 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
Stock-based compensation expense
(1)
 
127

 
244

 
617

 
737

Acquisition-related expenses
(2)
 
257

 
1,074

 
1,444

 
3,823

Purchase accounting expenses
(3)
 
99

 

 
1,203

 

Veritas Capital annual management fee
(4)
 
818

 
586

 
1,847

 
1,748

Total adjustments
 
 
1,301

 
1,904

 
5,111

 
6,308

Adjusted EBITDA
 
 
$
26,336

 
$
18,081

 
$
61,001

 
$
55,894

 
 
 
 
 
 
 
 
 
 
 
 
EBITDA margin
(5)
 
19.3
%
 
14.8
%
 
15.5
%
 
15.1
%
Adjusted EBITDA margin
(6)
 
20.3
%
 
16.5
%
 
16.9
%
 
17.0
%
Net income margin
(7)
 
3.5
%
 
1.1
%
 
1.0
%
 
1.0
%
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents compensation expense for Class B membership interests by certain members of management and independent directors in the company’s parent, CPI International Holding LLC.
(2)
Represents transaction costs related to the evaluation, negotiation, closing and integration of acquisitions. Costs include fees for attorneys and other professional services, as well as expenses related to the integration of operations into those of CPI and charges for an increase in the fair value of the Radant Technologies contingent consideration liability.
(3)
Represents non-cash charges for utilization of the net increase in cost basis of inventory and net decrease in deferred revenue that resulted from purchase accounting in connection with acquisitions.
(4)
Represents a management fee payable to Veritas Capital for advisory and consulting services.
(5)
Represents EBITDA divided by sales.
(6)
Represents adjusted EBITDA divided by sales.
(7)
Represents net income divided by sales.








CPI INTERNATIONAL HOLDING CORP.
and Subsidiaries




NON-GAAP SUPPLEMENTAL INFORMATION
Free Cash Flow and Adjusted Free Cash Flow
(All dollar amounts in thousands - unaudited)


 
 
 
 
 
Twelve Months Ended
 
 
 
 
 
July 1, 2016
Net cash provided by operating activities
 
 
$
16,476

Cash capital expenditures
 
 
(6,713
)
Free cash flow
 
 
9,763

 
 
 
 
 
 
Adjustments:
 
 
 
Cash paid for acquisition-related expenses
(1)
 
8,469

Cash paid for Veritas Capital management fee
(2)
 
2,376

Tax benefit from acquisition-related expenses and Veritas management fee
(3)
 
(1,955
)
Cash received for prior year transfer pricing audit
(4)
 
(154
)
Total adjustments
 
 
8,736

Adjusted free cash flow
 
 
$
18,499

 
 
 
 
 
 
Net income
 
 
$
5,384

 
 
 
(1)
Represents transaction costs related to the evaluation, negotiation, closing and integration of acquisitions, and payment of a contingent consideration to the former owners of Radant Technologies. Costs include fees for attorneys and other professional services, as well as expenses related to integration of acquired operations into those of CPI.
(2)
Represents a management fee paid to Veritas Capital for advisory and consulting services.
(3)
Represents the tax benefit from acquisition-related expenses and the Veritas Capital management fee.
(4)
Represents the net of income tax refunds, partially offset by payments, with respect to an audit by the Canada Revenue Agency (“CRA”) of Communications & Power Industries Canada Inc.’s (“CPI Canada”) purchase of the Satcom Division from the Company in fiscal years 2001 and 2002. The Company determined that this item should be excluded from this calculation as it pertains to prior years.