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CPI International Announces Second Quarter 2008 Financial Results

Sales and net income each increase seven percent from same quarter of prior year

PALO ALTO, Calif., May 7, 2008 /PRNewswire-FirstCall via COMTEX News Network/ -- 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 second quarter of fiscal 2008 ended March 28, 2008.

(Logo: http://www.newscom.com/cgi-bin/prnh/20060426/CPILOGO)

In the second quarter, CPI International (CPI) generated net income of $6.2 million, a seven percent increase from the $5.8 million generated in the same quarter of fiscal 2007. On a diluted basis, CPI generated net income of $0.35 per share in the second quarter of fiscal 2008, an increase from the $0.32 per share in the same quarter of the prior year.

During the first six months of fiscal 2008, CPI generated cash flow from operating activities of $10.4 million and made debt repayments, in aggregate, of $10.0 million. For the 12 month period ended March 28, 2008, CPI generated $20.3 million in free cash flow, or $1.14 per share on a diluted basis.

CPI generated total sales of $94.8 million in the second quarter of fiscal 2008, a seven percent increase from the $88.4 million generated in the same quarter of the previous year. In the first six months of fiscal 2008, CPI recorded orders totaling $185.2 million, slightly above the $184.2 million in orders booked during the same period of the prior year.

CPI's financial results in the second quarter of fiscal 2007 did not include CPI's Malibu Division, which was acquired in August 2007. The Malibu Division contributed $3.9 million in sales in the second quarter of fiscal 2008 and $11.6 million in orders in the first six months of fiscal 2008.

"CPI's performance in the second quarter exceeded our expectations," said Joe Caldarelli, chief executive officer of CPI. "Our businesses continue to execute well. During the quarter, we grew our sales and net income, set a new record high quarterly sales level and generated healthy cash flow, enabling us to continue to pay down our debt. We are continuing to invest in CPI's new business development programs this year, with the expectation of establishing additional future profitable products to grow our business for the long term. This work is in support of notable programs such as the WIN-T military communications program, the EarthCARE cloud-profiling radar program, cargo screening programs, high-resolution nuclear magnetic resonance programs, next generation weather radar systems, higher-power medical applications and a number of advanced antenna programs at our new Malibu Division."

CPI generated EBITDA of $15.8 million, or 17 percent of sales, in the second quarter of fiscal 2008, a decrease from the $16.3 million, or 18 percent of sales, generated in the same quarter of the prior year.

Compared to the second quarter of fiscal 2007, CPI's net income and EBITDA in the most recent quarter were positively impacted by additional gross profit generated by the seven percent increase in sales. CPI's net income for the second quarter of fiscal 2008 also benefited from a lower effective tax rate of approximately 26 percent, as compared to 35 percent for the same period of the previous year; the second quarter fiscal 2008 tax rate included a $0.4 million tax benefit related to foreign tax filings for fiscal 2007. Offsetting these positive factors, the effect of CPI's increased development activity, including higher company-funded research and development costs and increased revenue from customer-funded development programs, which commonly have lower gross margins, negatively impacted CPI's net income by $0.9 million and CPI's EBITDA by $1.4 million in the second quarter of fiscal 2008 as compared to the same quarter of the previous year.

In fiscal 2008, CPI has engaged in an unusually high number of development programs, which typically have lower gross margins than production programs. In comparison to the second quarter of fiscal 2007, CPI's total research and development spending in the second quarter of fiscal 2008 increased from $4.2 million to $6.4 million, of which $2.9 million was company funded. CPI expects the high level of development work to continue for the foreseeable future. CPI believes that, although investing in promising business development programs brings higher short-term costs, reduced gross margins and increased variability to its interim financial results, these near-term sacrifices are necessary and advisable, as the development programs are expected to result in profitable products and increased future growth potential throughout CPI's businesses.

As of March 28, 2008, CPI's cash and cash equivalents totaled $20.2 million, as compared to the $20.5 million reported as of September 28, 2007. For the 12 month period ended March 28, 2008, net cash provided by operating activities totaled $25.8 million, free cash flow totaled $20.3 million, or $1.14 per share on a diluted basis, and adjusted free cash flow totaled $22.1 million. During the same 12 month period, net income totaled $19.6 million, with a resulting ratio of free cash flow to net income, or free cash flow conversion, of slightly greater than 100 percent.

In March 2008, CPI completed the redemption of $6.0 million in principal amount of its Floating Rate Senior Notes due 2015. In addition, Communications & Power Industries, Inc. has made repayments of $6.0 million on its senior term loan in fiscal 2008, including a $2.0 million optional prepayment in April 2008, resulting in aggregate debt repayments of $12.0 million in fiscal 2008 to date.

Second Quarter 2008 Sales and Orders Highlights

In the second quarter of fiscal 2008, key sales and orders highlights in the end markets that CPI serves included:

    -- In the defense markets, which consist of CPI's radar and electronic
       warfare markets on a combined basis, sales increased 12 percent from
       $36.3 million in the second quarter of fiscal 2007 to $40.5 million in
       the second quarter of fiscal 2008.  This increase was primarily due to
       increased sales of radar products to support the HAWK missile system
       and other military and weather radar systems.  CPI received a
       $3.9 million order to support the radar system on the HAWK
       surface-to-air missile system in the first week of the second quarter
       of fiscal 2008, and made shipments of approximately $2.4 million to
       support this program during the quarter.  This order had been expected
       in the previous quarter, and corresponding shipments had been expected
       to start in that quarter.  The inclusion of sales of radar products
       made by CPI's new Malibu Division in the second quarter of fiscal 2008
       also contributed to the increase in defense sales.
    -- In the medical market, sales were essentially unchanged, increasing
       from $17.0 million in the second quarter of fiscal 2007 to
       $17.1 million in the most recent quarter.  In fiscal 2007, CPI
       participated in a Russian tender program, which will not repeat in
       fiscal 2008.  Additionally, demand for magnetic resonance imaging (MRI)
       products was higher in fiscal 2007 than it is expected to be in fiscal
       2008, as a significant customer ordered a two-year supply of MRI
       products in fiscal 2007; CPI shipped a significant amount of these
       products in fiscal 2007.  In the second quarter of fiscal 2008, a
       $0.6 million decrease in sales of x-ray generators for the Russian
       tender program was offset by an increase in sales of x-ray generators
       for other international customers.  During the second quarter of fiscal
       2008, CPI received a large, annual order for radiation therapy products
       from a significant customer, as expected.
    -- In the communications market, sales increased two percent from
       $27.0 million in the second quarter of fiscal 2007 to $27.6 million in
       the second quarter of fiscal 2008.  This increase was primarily due to
       the inclusion of communications sales made by CPI's new Malibu Division
       in the second quarter of fiscal 2008, as well as the start of CPI's
       first production shipments for Increment One of the U.S. Army's
       Warfighter Information Network Tactical (WIN-T) military communications
       program and increased sales for certain foreign broadcast network
       applications and military communications programs.  These increases
       were partially offset by a decrease in sales for certain Ka-band
       satellite communications programs.


Fiscal 2008 Outlook

"As demonstrated by our strong second quarter results, CPI's operations are running smoothly and executing well. Business in our commercial markets has continued to grow, and we continue to generate solid profits and cash flow," said Caldarelli. "However, we are facing several external factors that are making fiscal 2008 more challenging than we had anticipated. These factors include ongoing delays in orders and ensuing sales for certain defense programs, challenges for some of our U.S. medical customers stemming from the Deficit Reduction Act of 2005 and the difficult credit markets, and the continued weakness of the U.S. dollar. In addition, we have increased our commitment to new business development this year, which negatively impacts our profit margins. As a result of the cumulative impact of these factors, we believe it is prudent to reduce our guidance for fiscal 2008."



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

    Total sales:                    $375 - $385         $365 - $375
    Earnings per share on a
     diluted basis:                $1.23 - $1.34       $1.15 - $1.25
    Net income:                    $22.0 - $24.0       $20.3 - $22.1
    Adjusted EBITDA:               $68.2 - $71.0       $64.5 - $67.0
    Adjusted free cash
     flow:                           $20 - $24           $20 - $24

    (a) CPI's updated financial projections for fiscal 2008
        assume an overall effective income tax rate of
        approximately 37 percent for the second half of fiscal
        2008 and approximately 17.7 million weighted average
        shares outstanding on a diluted basis.



CPI expects its financial results in the fourth quarter of fiscal 2008 to be higher than in the preceding three quarters.

CPI's financial projections for the second half of fiscal 2008 assume an average effective exchange rate, including hedging, of U.S. $0.98 to one Canadian dollar. As of March 28, 2008, approximately 70 percent of CPI's estimated Canadian dollar denominated expenses for April through September 2008 are hedged at an average rate of approximately U.S. $0.98 to one Canadian dollar.

Financial Community Conference Call

In conjunction with this announcement, CPI will hold a conference call on Thursday, May 8, 2008 at 11:00 a.m. (EDT) that will be simultaneously broadcast live over the Internet on the company's Web site. To participate in the conference call, please dial (877) 440-5807, or (719) 325-4863 for international callers, enter participant pass code 4424972 and ask for the CPI International Second 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, free cash flow per share, free cash flow conversion 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-recurring or non-cash items. 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. Free cash flow per share represents free cash flow divided by average shares outstanding on a fully diluted basis. Free cash flow conversion represents free cash flow divided by net income, expressed as a percentage. 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, free cash flow per share, free cash flow conversion 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, free cash flow per share, free cash flow conversion 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, free cash flow per share, free cash flow conversion and adjusted free cash flow of other companies. Because EBITDA, adjusted EBITDA, adjusted EBITDA margin, free cash flow, free cash flow per share, free cash flow conversion 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)

                                     Three Months Ended     Six Months Ended
                                     March 28,  March 30,  March 28, March 30,
                                       2008       2007       2008      2007
     Sales                            $94,804   $88,444   $180,714   $172,167
     Cost of sales                     66,738    60,739    128,512    117,881
     Gross profit                      28,066    27,705     52,202     54,286
     Operating costs and expenses:
       Research and development         2,930     2,352      5,654      4,243
       Selling and marketing            5,328     4,799     10,500      9,628
       General and administrative       5,492     5,846     11,645     10,250
       Amortization of acquisition-
        related intangible assets         781       546      1,562      1,094
       Net loss on disposition of
        fixed assets                       41        40         75         58
     Total operating costs and
      expenses                         14,572    13,583     29,436     25,273
     Operating income                  13,494    14,122     22,766     29,013
     Interest expense, net              4,805     5,275      9,617     10,614
     Loss on debt extinguishment          393       -          393        -
     Income before income taxes         8,296     8,847     12,756     18,399
     Income tax expense                 2,142     3,087      4,092      6,804
     Net income                        $6,154    $5,760     $8,664    $11,595


     Earnings per share:
       Basic                            $0.38     $0.35      $0.53      $0.72
       Diluted                          $0.35     $0.32      $0.49      $0.66
     Shares used to compute
      earnings per share:
       Basic                           16,387    16,253     16,379     16,161
       Diluted                         17,656    17,730     17,744     17,646



                             CPI International, Inc.
                                and Subsidiaries

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

                                                March 28,       September 28,
                                                  2008               2007
    Assets
    Current Assets:
      Cash and cash equivalents                  $20,241           $20,474
      Restricted cash                              1,790             2,255
      Accounts receivable, net                    50,719            52,589
      Inventories                                 66,861            67,447
      Deferred tax assets                          9,948             9,744
      Prepaid and other current assets             3,787             4,639
        Total current assets                     153,346           157,148
    Property, plant, and equipment, net           64,819            66,048
    Deferred debt issue costs, net                 5,728             6,533
    Intangible assets, net                        80,201            81,743
    Goodwill                                     162,535           161,573
    Other long-term assets                           796             3,177
        Total assets                            $467,425          $476,222

    Liabilities and stockholders' equity
    Current Liabilities:
      Current portion of long-term debt           $2,000            $1,000
      Accounts payable                            21,849            21,794
      Accrued expenses                            26,045            26,349
      Product warranty                             4,952             5,578
      Income taxes payable                         5,100             8,748
      Advance payments from customers             11,655            12,132
        Total current liabilities                 71,601            75,601
    Deferred income taxes                         26,310            28,394
    Long-term debt, less current portion         234,623           245,567
    Other long-term liabilities                    2,120               754
        Total liabilities                        334,654           350,316
    Commitments and contingencies
    Stockholders' equity
      Common stock ($0.01 par value, 90,000
       shares authorized; 16,485 and 16,370
         shares issued and outstanding)              165               164
      Additional paid-in capital                  70,165            68,763
      Accumulated other comprehensive
       (loss) income                              (2,265)              937
      Retained earnings                           64,706            56,042
        Total stockholders' equity               132,771           125,906
        Total liabilities and
         stockholders' equity                   $467,425          $476,222



                             CPI International, Inc.
                                and Subsidiaries

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

                                                          Six Months Ended
                                                       March 28,    March 30,
                                                         2008          2007
    Cash flows from operating activities
      Net cash provided by operating activities        $10,439        $6,299

    Cash flows from investing activities
      Capital expenditures                              (2,558)       (5,347)
      Proceeds from adjustment to
       acquisition purchase price                        1,615           -
      Capitalized expenses relating to
       potential business acquisition                      -            (119)
      Payment of patent application fees                  (147)          -
        Net cash used in investing activities           (1,090)       (5,466)

    Cash flows from financing activities
      Repayments of debt                               (10,000)       (5,000)
      Proceeds from issuance of common
       stock to employees                                  418           398
      Proceeds from exercise of stock options              -             542
      Excess tax benefit on stock option exercises         -             679
        Net cash used in financing activities           (9,582)       (3,381)


    Net decrease in cash and cash equivalents             (233)       (2,548)
      Cash and cash equivalents at
       beginning of period                              20,474        30,153
      Cash and cash equivalents at end of
       period                                          $20,241       $27,605

    Supplemental cash flow disclosures
      Cash paid for interest                            $8,293       $10,707
      Cash paid for income taxes, net of refunds        $8,722       $10,495



                             CPI International, Inc.
                                 and Subsidiaries

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

                                       Three Months Ended   Six Months Ended
                                       March 28, March 30, March 28, March 30,
                                           2008     2007      2008     2007
    Net income                            $6,154   $5,760    $8,664  $11,595
      Depreciation and amortization        2,742    2,188     5,392    4,382
      Interest expense, net                4,805    5,275     9,617   10,614
      Income tax expense                   2,142    3,087     4,092    6,804
    EBITDA                                15,843   16,310    27,765   33,395

    Adjustments to exclude certain non-
     recurring or non-cash items:
      Stock-based compensation expense (1)   550      288       974      493
      Loss on debt extinguishment      (2    393      -         393      -
    Total adjustments                        943      288     1,367      493
    Adjusted EBITDA                      $16,786  $16,598   $29,132  $33,888

      EBITDA margin                    (3) 16.7%    18.4%     15.4%    19.4%
      Adjusted EBITDA margin           (4) 17.7%    18.8%     16.1%    19.7%
      Net income margin                (5)  6.5%     6.5%      4.8%     6.7%

    (1) For the fiscal 2007 periods, represents a non-cash charge for stock
        options, restricted stock awards and the employee discount related to
        CPI's Employee Stock Purchase Plan.  For the fiscal 2008 periods,
        represents a non-cash charge for the aforementioned items and for
        restricted stock unit awards.
    (2) Represents the following expenses related to the redemption of
        floating rate senior notes: $0.255 million for non-cash costs
        associated with the write-off of unamortized deferred debt issue costs
        and issue discount costs; and $0.138 million in cash payments for
        redemption premiums and other expenses.
    (3) Represents EBITDA divided by sales.
    (4) Represents adjusted EBITDA divided by sales.
    (5) Represents net income divided by sales.



                             CPI International, Inc.
                                and Subsidiaries

                        NON-GAAP SUPPLEMENTAL INFORMATION
       Free Cash Flow, Adjusted Free Cash Flow, Free Cash Flow Conversion
                          and Free Cash Flow per Share
          (in thousands, except per share and percent data - unaudited)

                                                           Twelve Months Ended
                                                                 March 28,
                                                                    2008
    Net cash provided by operating activities                     $25,799
    Capital expenditures                                           (5,380)
    Payment of patent application fees                               (147)
    Free cash flow                                                 20,272

    Adjustments to exclude certain non-recurring items:
      Capital expenditures for expansion of Canadian facility (1)     683
      Cash paid for debt extinguishment costs, net of taxes   (2)   1,122
    Total adjustments                                               1,805
    Adjusted free cash flow                                       $22,077

    Free cash flow                                                $20,272
    Net income                                                    $19,572
    Free cash flow conversion                                 (3)    104%

    Free cash flow per share                                  (4)   $1.14

    (1) Represents capital expenditures for the expansion of CPI's Canadian
        facility.
    (2) Represents $2.090 million in redemption premiums and other expenses
        associated with the repurchase and redemption of CPI's 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 the
        floating rate senior notes, net of taxes.
    (3) Represents free cash flow divided by net income, expressed as a
        percent.
    (4) Represents free cash flow divided by the simple average of the last
        four fiscal quarters' "Shares used to compute earnings per share:
        Diluted." The simple average of the last four fiscal quarters' "Shares
        used to compute earnings per share: Diluted" is 17,771,000 shares.

SOURCE CPI International, Inc.

http://www.cpii.com

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