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CPI International Announces First Quarter 2008 Financial Results

PALO ALTO, Calif., Feb. 6 /PRNewswire-FirstCall/ -- CPI International, Inc. (Nasdaq: CPII), the parent company of Communications & Power Industries, Inc., a leading provider of microwave, radio frequency, power and control solutions for critical defense, communications, medical, scientific and other applications, today announced financial results for its first quarter of fiscal 2008 ended December 28, 2007.



CPI International (CPI) generated net income of $2.5 million in the first quarter of fiscal 2008, a decrease from the $5.8 million generated in the same quarter of fiscal 2007. On a diluted basis, CPI's net income was $0.14 per share in the first quarter of fiscal 2008, a decrease from the $0.33 per share in the first quarter of the previous year.

In the first quarter of fiscal 2008, CPI generated total sales of $85.9 million, a three percent increase from the $83.7 million in the same quarter of the previous year. Orders booked during the quarter totaled $89.9 million, a seven percent increase from the $84.3 million booked during the first quarter of fiscal 2007.

CPI's financial results in the first quarter of fiscal 2008 included $4.3 million of sales and $8.0 million of orders from the Malibu Division, which was acquired in August 2007 and which was not included in CPI's financial results in the first quarter of fiscal 2007. Excluding the Malibu Division, CPI's sales and orders each would have decreased approximately three percent in the first quarter of fiscal 2008 as compared to the same quarter of the previous year.

"We were disappointed in our in first quarter financial results, which were negatively affected by delays in order placement, delaying subsequent sales for those programs. We do not believe that we are losing orders, but we are seeing delays in requests for quotations and longer intervals between the initiation and finalization of certain orders, causing delays in sales for those programs," said Joe Caldarelli, chief executive officer of CPI. "In addition, our financial results were negatively impacted by an increase in the number of development programs CPI has underway. We are excited by this high level of development activity, despite the short-term impact to our earnings, and we believe these programs position CPI well for the future."

CPI generated EBITDA of $11.9 million, or 14 percent of sales, in the first quarter of fiscal 2008, a decrease from the $17.1 million, or 20 percent of sales, in the same quarter of the previous year.

CPI's net income and EBITDA in the most recent quarter were negatively impacted by delays in certain sales totaling approximately $5 million, primarily due to delays in the receipt of orders, customer source inspections and the availability of customer funds. These delays negatively impacted net income by approximately $0.07 per share and EBITDA by approximately $2.0 million.



CPI is currently working with customers on an unusually high number of development programs in its defense and commercial markets as the company continues to develop higher-power, higher-efficiency, broader-bandwidth and higher-frequency products. CPI expects development programs, which typically have lower gross margins, to result in profitable manufacturing programs in the long term. In the first quarter of fiscal 2008, customer-funded development programs contributed to the shipment of products with lower gross margins as compared to the same quarter of the previous year, and the increase in expenses related to these programs, as well as increased company-funded research and development expenses, resulted in an approximately $0.05 reduction in net income per share and a $1.4 million reduction in EBITDA.

As of December 28, 2007, CPI's cash and cash equivalents totaled $27.4 million, an increase of $6.9 million as compared to the $20.5 million reported as of September 28. 2007. For the 12 month period ended December 28, 2007, net cash provided by operating activities totaled $21.2 million, free cash flow totaled $14.0 million and adjusted free cash flow totaled $17.2 million.

First Quarter Fiscal 2008 Sales and Orders Highlights

CPI serves the defense (radar and electronic warfare), medical, communications, industrial and scientific markets. In the first quarter of fiscal 2008, key sales and orders highlights in these markets included:



Fiscal 2008 Outlook

"Delays in the placement of certain orders, which resulted in delayed and reduced shipments in the first quarter, appear to be continuing into the second quarter, shifting the corresponding sales to later periods. Therefore, in fiscal 2008, we do not expect to make up the amount by which we missed our guidance in the first quarter," said Caldarelli. "In addition, the U.S. dollar to Canadian dollar exchange rate has remained worse than our original forecast. As a result, we are subtracting the amount of our first quarter shortfall from the top end of our guidance ranges and reducing our guidance for fiscal 2008."



                                              Previous             Updated
   (in millions, except per share data)      Outlook(a)           Outlook(a)


    Total sales:                              $382 - $390        $375 - $385
    Earnings per share on a diluted basis:   $1.40 - $1.46      $1.23 - $1.34
    Net income:                              $25.0 - $26.0      $22.0 - $24.0
    Adjusted EBITDA:                         $72.5 - $74.5      $68.2 - $71.0
    Adjusted free cash flow:                   $24 - $28          $20 - $24

    (a)  The assumptions for tax rate, amortization of intangible assets,
         stock-based compensation expense, net interest expense and capital
         expenditures underlying CPI's updated financial projections for
         fiscal 2008 remain essentially unchanged from the assumptions
         underlying its previous projections issued on December 12, 2007.


CPI's previous financial projections for fiscal 2008 had assumed an average effective exchange rate for fiscal 2008, including hedging, of U.S. $0.95 to one Canadian dollar. As a result of the continued weakness of the U.S. dollar in comparison to the Canadian dollar, however, CPI's exchange rate, including hedging currently in place, for the second quarter of fiscal 2008 is approximately U.S. $0.98 to one Canadian dollar, reducing the previously expected net income by approximately $0.02 per share on a diluted basis for the quarter. As of January 16, 2008, approximately 88 percent of CPI's estimated Canadian dollar denominated expenses for January through June 2008 are hedged at an average rate of approximately U.S. $0.98 to one Canadian dollar.

On a diluted basis, CPI expects to generate second quarter net income of $0.24 to $0.29 per share. Net income in the third and fourth quarters of fiscal 2008 are expected to be relatively equal to each other.



Financial Community Conference Call

In conjunction with this announcement, CPI will hold a conference call on Thursday, February 7, 2008 at 11:00 a.m. (EST) that will be simultaneously broadcast live over the Internet on the company's Web site. To participate in the conference call, please dial (800) 435-1261, or (617) 614-4076 for international callers, enter participant pass code 40442853 and ask for the CPI International First Quarter 2008 Financial Results Conference Call. To access the call via the Internet, please visit http://investor.cpii.com.

About CPI International, Inc.

CPI International, Inc., headquartered in Palo Alto, California, is the parent company of Communications & Power Industries, Inc., a leading provider of microwave, radio frequency, power and control solutions for critical defense, communications, medical, scientific and other applications. Communications & Power Industries, Inc. develops, manufactures and distributes products used to generate, amplify and transmit 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.

Non-GAAP Supplemental Information



EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted free cash flow presented above and in the financial information attached hereto are non-generally accepted accounting principles (GAAP) financial measures. EBITDA represents earnings before provisions for income taxes, net interest expense and depreciation and amortization. Adjusted EBITDA represents EBITDA further adjusted to exclude certain non-cash and non-recurring items. Adjusted EBITDA margin represents adjusted EBITDA divided by sales. Free cash flow represents net cash provided by operating activities minus capital expenditures. Adjusted free cash flow represents free cash flow further adjusted to exclude certain non-recurring items. For more information regarding these non-GAAP financial measures for the periods presented and a reconciliation of these measures to GAAP financial information, please see the attached financial information. In addition, this press release and the attached financial information are available in the investor relations section of the company's Web site at http://investor.cpii.com.

CPI believes that GAAP-based financial information for leveraged businesses, such as the company's business, should be supplemented by EBITDA, adjusted EBITDA, 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, 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, adjusted EBITDA margin, free cash flow and adjusted free cash flow of other companies. Because EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow and adjusted free cash flow do not include certain material costs, such as interest and taxes, 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 operations 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; U.S. government contracts laws and regulations; changes in technology; the impact of unexpected costs; 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.



                             CPI International, Inc.
                                and Subsidiaries

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except per share data - unaudited)

                                                        Quarter Ended
                                                December 28,      December 29,
                                                     2007             2006

     Sales                                        $85,910            $83,723
     Cost of sales                                 61,774             57,142
     Gross profit                                  24,136             26,581
     Operating costs and expenses:
        Research and development                    2,724              1,891
        Selling and marketing                       5,172              4,829
        General and administrative                  6,153              4,404
        Amortization of acquisition-related
         intangible assets                            781                548
        Net loss on disposition of assets              34                 18
     Total operating costs and expenses            14,864             11,690
     Operating income                               9,272             14,891
     Interest expense, net                          4,812              5,339
     Income before income taxes                     4,460              9,552
     Income tax expense                             1,950              3,717
     Net income                                    $2,510             $5,835


     Earnings per share:
       Basic                                        $0.15              $0.36
       Diluted                                      $0.14              $0.33
     Shares used to compute earnings per share:
       Basic                                       16,371             16,063
       Diluted                                     17,832             17,544



                             CPI International, Inc.
                                and Subsidiaries

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                (in thousands, except per share data - unaudited)

                                                December 28,     September 28,
                                                    2007              2007
    Assets
    Current Assets:
      Cash and cash equivalents                   $27,410            $20,474
      Restricted cash                               2,455              2,255
      Accounts receivable, net                     45,946             52,589
      Inventories                                  69,183             67,447
      Deferred tax assets                           9,803              9,744
      Prepaid and other current assets              3,961              4,639
        Total current assets                      158,758            157,148
    Property, plant, and equipment, net            65,894             66,048
    Deferred debt issue costs, net                  6,230              6,533
    Intangible assets, net                         81,045             81,743
    Goodwill                                      161,548            161,573
    Other long-term assets                          3,172              3,177
        Total assets                             $476,647           $476,222

    Liabilities and stockholders' equity
    Current Liabilities:
      Current portion of long-term debt              $250             $1,000
      Accounts payable                             22,106             21,794
      Accrued expenses                             29,007             26,349
      Product warranty                              5,376              5,578
      Income taxes payable                          7,952              8,748
      Advance payments from customers               9,798             12,132
        Total current liabilities                  74,489             75,601
    Deferred income taxes                          27,395             28,394
    Long-term debt, less current portion          245,321            245,567
    Other long-term liabilities                     1,578                754
        Total liabilities                         348,783            350,316
    Commitments and contingencies
    Stockholders' equity
      Common stock ($0.01 par value, 90,000 shares
        authorized; 16,441 and 16,370 shares
        issued and outstanding)                       164                164
      Additional paid-in capital                   69,412             68,763
      Accumulated other comprehensive (loss)
       income                                        (264)               937
      Retained earnings                            58,552             56,042
        Total stockholders' equity                127,864            125,906
        Total liabilities and stockholders'
         equity                                  $476,647           $476,222



                             CPI International, Inc.
                                 and Subsidiaries

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands - unaudited)

                                                         Quarter Ended
                                                   December 28,   December 29,
                                                      2007             2006

    Cash flows from operating activities
        Net cash provided by operating
         activities                                  $9,560           $10,042

    Cash flows from investing activities
      Capital expenditures                           (1,687)           (2,871)
      Payment of patent application fees               (147)              -
        Net cash used in investing activities        (1,834)           (2,871)

    Cash flows from financing activities
      Repayments of debt                             (1,000)           (5,000)
      Proceeds from issuance of common stock
       to employees                                     210               197
      Proceeds from exercise of stock options           -                  66
      Excess tax benefit on stock option exercises      -                  42
        Net cash used in financing activities          (790)           (4,695)


    Net increase in cash and cash equivalents         6,936             2,476
      Cash and cash equivalents at beginning
       of year                                       20,474            30,153
      Cash and cash equivalents at end of year      $27,410           $32,629

    Supplemental cash flow disclosures
      Cash paid for interest                           $155              $961
      Cash paid for income taxes, net of refunds     $2,533            $5,150



                             CPI International, Inc.
                                and Subsidiaries

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

                                                      Three Months Ended
                                                   December 28,   December 29,
                                                       2007          2006

    Net income                                        $2,510        $5,835
       Depreciation and amortization                   2,650         2,194
       Interest expense, net                           4,812         5,339
       Income tax expense                              1,950         3,717
    EBITDA                                            11,922        17,085

    Add as defined adjustments:
       Stock-based compensation expense      (1)         424           206
    Total adjustments                                    424           206
    Adjusted EBITDA                                  $12,346       $17,291

       Adjusted EBITDA margin                (2)        14.4%         20.7%
       Net income margin                     (3)         2.9%          7.0%

    (1) Represents a non-cash charge for stock options, restricted stock
        awards and the employee discount related to CPI's Employee Stock
        Purchase Plan.
    (2) Represents adjusted EBITDA divided by sales.
    (3) Represents net income divided by sales.



                             CPI International, Inc.
                                 and Subsidiaries

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

                                                        Twelve Months Ended
                                                            December 28,
                                                               2007
    Net cash provided by operating activities                $21,177
    Capital expenditures                                      (6,985)
    Payment of patent application fees                          (147)
    Free cash flow                                            14,045

    Add as defined adjustments:
      Capital expenditures for expansion of Canadian
       facility                                         (1)    2,162
      Cash paid for debt
       extinguishment costs, net of
       taxes                                            (2)    1,037
    Total adjustments                                          3,199
    Adjusted free cash flow                                  $17,244

    (1) Represents capital expenditures for the expansion of CPI's Canadian
        facility.
    (2) Represents $1.952 million in redemption premiums and other expenses
        associated with the repurchase and redemption of the floating rate
        senior notes, net of taxes, partially offset by $0.280 million of cash
        proceeds from the early termination of the interest rate swap on CPI's
        floating rate senior notes, net of taxes.

SOURCE CPI International, Inc. - 02/06/2008



CONTACT:
Amanda Mogin, investor relations of Communications & Power Industries,
+1-650-846-3998, amanda.mogin@cpii.com
Web site: http://www.cpii.com

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