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CPI International Announces Third Quarter 2008 Financial Results

Q3 sales and year-to-date orders increase four percent from prior year's periods, strong cash flow generation continues

PALO ALTO, Calif., Aug 06, 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 third quarter of fiscal 2008, which ended June 27, 2008.

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

CPI International (CPI) generated total sales of $90.7 million in the third quarter of fiscal 2008, a four percent increase from the $87.3 million generated in the same quarter of the previous year. Sales grew in CPI's defense, communications, industrial and scientific markets. CPI booked orders in the first nine months of fiscal 2008 totaling $279.9 million, a four percent increase from the $269.4 million in orders booked during the same period of the previous year. Orders grew in the communications, industrial and scientific markets and remained unchanged in CPI's defense markets.

In the third quarter of fiscal 2008, CPI generated net income of $5.8 million, or $0.33 per share on a diluted basis, a decrease from the $8.1 million, or $0.46 per share on a diluted basis, generated in the same quarter of fiscal 2007. The largest factor contributing to the decrease in net income was a discrete tax benefit of $1.8 million, which contributed $0.10 per share on a diluted basis to CPI's net income in the third quarter of fiscal 2007, but which did not recur in fiscal 2008's third quarter.

During the first nine months of fiscal 2008, CPI generated cash flow from operating activities of $24.7 million and made debt repayments, in aggregate, of $16.0 million. For the 12 month period ended June 27, 2008, CPI generated $27.1 million in cash flow from operating activities, or $1.53 per share on a diluted basis, and $21.9 million in free cash flow, or $1.23 per share on a diluted basis.

"CPI's business environment remained stable, and our operations remained fundamentally strong in the third quarter of fiscal 2008. Our sales increased, and we generated strong cash flow and continued to pay down our debt during the quarter. In addition, we maintained our commitment to investing in CPI's future by sustaining our high level of company-funded and customer-funded research and development activity," said Joe Caldarelli, chief executive officer of CPI. "We remain solidly profitable, and our operations continue to execute smoothly. We are encouraged that, after some softening earlier in the fiscal year, our markets have remained steady, and we are pleased by the continuing demand from customers for CPI's products."

In the third quarter, CPI generated EBITDA of $16.1 million, or 18 percent of sales, a decrease from the $17.3 million, or 20 percent of sales, generated in the same quarter of fiscal 2007.

In fiscal 2008, CPI has engaged in higher levels of research, development and engineering activities throughout the company, including significant activities at CPI Malibu Division, which was acquired in August 2007. CPI has increased its investment in company-funded research and development programs from $6.5 million in the first nine months of fiscal 2007 to $8.4 million in the first nine months of fiscal 2008. CPI's customer-funded research and development programs have also increased during this time from $5.0 million to $9.5 million. Although customer-funded development programs commonly have lower gross margins than manufacturing programs, CPI believes that its development programs will result in profitable products and increased future growth potential throughout the company's businesses. CPI expects the higher levels of development work to continue for the foreseeable future.

In the third quarter of fiscal 2008, CPI's net income and EBITDA were negatively impacted by the higher proportion of sales that were for products from development programs. This impact was partially offset by the positive impact of the additional gross profit generated by increased sales in the most recent quarter.

As of June 27, 2008, CPI's cash and cash equivalents totaled $26.2 million, as compared to the $20.5 million reported as of September 28, 2007. CPI has continued to use its cash to repay debt, making debt repayments of $6.0 million in the third quarter and an additional $2.0 million on July 30, 2008. In fiscal 2008 to date, CPI's aggregate debt repayments total $18.0 million. In addition to debt repayments, in the third quarter, CPI used $1.8 million of its cash to repurchase approximately 136,000 shares of its common stock under its newly implemented stock repurchase program.

Third Quarter 2008 Sales and Orders Highlights

In the third 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 five percent from
       $36.5 million in the third quarter of fiscal 2007 to $38.2 million in
       the third quarter of fiscal 2008.  This increase was primarily due to
       increased sales of products to support military radar systems,
       including the HAWK surface-to-air missile system, as well as the
       inclusion of sales of radar products by the recently acquired CPI
       Malibu Division in the third quarter of fiscal 2008.
    -- In the medical market, sales decreased from $18.0 million in the third
       quarter of fiscal 2007 to $16.8 million in the third quarter of fiscal
       2008, primarily due to the absence of a Russian tender program in which
       CPI participated in fiscal 2006 and 2007, but which will not recur in
       fiscal 2008.  In the third quarter of fiscal 2007, CPI shipped
       $2.9 million of x-ray generators for the Russian tender program; the
       company shipped no products for this program in the third quarter of
       fiscal 2008.  Excluding the Russian tender program, CPI's medical sales
       increased $1.7 million, or 11 percent, in the third quarter of fiscal
       2008 as compared to the same quarter of the previous year.
    -- In the communications market, sales increased three percent from
       $27.3 million in the third quarter of fiscal 2007 to $28.0 million in
       the third quarter of fiscal 2008.  This increase was primarily due to
       the inclusion of communications sales made by the recently acquired CPI
       Malibu Division in the third quarter of fiscal 2008, as well as
       recently begun production shipments for Increment One of the U.S.
       Army's Warfighter Information Network Tactical (WIN-T) military
       communications program.  These increases were partially offset by a
       decrease in sales of products to support certain broadcast applications
       and a decrease in sales for the now completed predecessor to the WIN-T
       program.
    -- In April 2008, General Dynamics SATCOM Technologies awarded CPI
       approximately $8.6 million in follow-on orders for Ku-band, high-power
       satellite communications amplifiers to support Increment One of WIN-T.
       In the first three quarters of fiscal 2008, CPI received a total of
       approximately $12 million of follow-on orders for the WIN-T program.
    -- CPI was awarded a $12.8 million indefinite-delivery/indefinite-quantity
       contract from the U.S. Navy for the major repair/remanufacture and
       production of new traveling wave tubes to support the AN/SLQ-32
       Electronic Countermeasures System.
    -- In April 2008, CPI received a $2.0 million, one-year contract for the
       production of klystrons to support the radar systems on the HAWK
       surface-to-air missile system.  This contract was the second
       significant contract the company received in fiscal 2008 to support the
       radar system.  CPI was also awarded a $3.9 million order from a
       different customer in December 2007.


Fiscal 2008 Outlook

"Our third quarter results contained no surprises, and our business conditions have held steady in recent months," said Caldarelli. "We do not anticipate significant changes to CPI's business environment in the foreseeable future. Therefore, we are leaving our previously issued guidance for fiscal 2008 unchanged."

    (in millions, except per share data)                 Outlook

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


Financial Community Conference Call

In conjunction with this announcement, CPI will hold a conference call on Thursday, August 7, 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) 397-0292, or (719) 325-4861 for international callers, enter participant pass code 2664596 and ask for the CPI International Third 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 net interest expense, provisions for income taxes 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 AND COMPREHENSIVE INCOME
              (in thousands, except per share data - unaudited)

                                              Three              Nine
                                           Months Ended      Months Ended
                                         June 27, June 29, June 27,  June 29,
                                          2008     2007     2008      2007
    Sales                               $90,734  $87,318  $271,448  $259,485
    Cost of sales                        63,502   58,667   192,014   176,548
    Gross profit                         27,232   28,651    79,434    82,937
    Operating costs and expenses:
      Research and development            2,766    2,232     8,420     6,475
      Selling and marketing               5,012    4,911    15,512    14,539
      General and administrative          5,136    5,835    16,781    16,085
      Amortization of acquisition-
       related intangible assets            782      548     2,344     1,642
      Net loss on disposition of fixed
       assets                               128       16       203        74
    Total operating costs and expenses   13,824   13,542    43,260    38,815
    Operating income                     13,408   15,109    36,174    44,122
    Interest expense, net                 4,627    5,143    14,244    15,757
    Loss on debt extinguishment             121      -         514       -
    Income before income taxes            8,660    9,966    21,416    28,365
    Income tax expense                    2,836    1,835     6,928     8,639
    Net income                           $5,824   $8,131   $14,488   $19,726

    Other comprehensive income, net of
     tax
      Net unrealized gain (loss) on cash
       flow hedges                        1,268      820    (1,934)      414
    Comprehensive income                 $7,092   $8,951   $12,554   $20,140

    Earnings per share - Basic            $0.36    $0.50     $0.88     $1.22
    Earnings per share - Diluted          $0.33    $0.46     $0.82     $1.11

    Shares used to compute earnings per
     share - Basic                       16,395   16,306    16,384    16,207
    Shares used to compute earnings per
     share - Diluted                     17,669   17,796    17,719    17,696



                           CPI INTERNATIONAL, INC.
                               and Subsidiaries
                    CONDENSED CONSOLIDATED BALANCE SHEETS
              (in thousands, except per share data - unaudited)

                                                   June 27,    September 28,
                                                     2008          2007
    Assets
    Current Assets:
      Cash and cash equivalents                    $26,197       $20,474
      Restricted cash                                1,205         2,255
      Accounts receivable, net                      48,379        52,589
      Inventories                                   67,868        67,447
      Deferred tax assets                           10,023         9,744
      Prepaid and other current assets               5,057         4,639
        Total current assets                       158,729       157,148
    Property, plant, and equipment, net             63,487        66,048
    Deferred debt issue costs, net                   5,362         6,533
    Intangible assets, net                          79,355        81,743
    Goodwill                                       162,392       161,573
    Other long-term assets                             795         3,177
        Total assets                              $470,120      $476,222

    Liabilities and stockholders' equity
    Current Liabilities:
      Current portion of long-term debt             $2,000        $1,000
      Accounts payable                              21,950        21,794
      Accrued expenses                              26,373        26,349
      Product warranty                               4,533         5,578
      Income taxes payable                           7,594         8,748
      Advance payments from customers               12,184        12,132
        Total current liabilities                   74,634        75,601
    Deferred income taxes                           26,760        28,394
    Long-term debt, less current portion           228,642       245,567
    Other long-term liabilities                      1,199           754
        Total liabilities                          331,235       350,316
    Commitments and contingencies
    Stockholders' equity
      Common stock ($0.01 par value,
       90,000 shares authorized; 16,511
       and 16,370 shares issued; 16,375
       and 16,370 shares outstanding)                  165           164
      Additional paid-in capital                    70,987        68,763
      Accumulated other comprehensive
       (loss) income                                  (997)          937
      Retained earnings                             70,530        56,042
      Treasury stock, at cost (136 and 0
       shares)                                      (1,800)          -
        Total stockholders' equity                 138,885       125,906
        Total liabilities and
         stockholders' equity                     $470,120      $476,222



                           CPI INTERNATIONAL, INC.
                               and Subsidiaries
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (in thousands - unaudited)

                                                       Nine Months Ended
                                                    June 27,         June 29,
                                                      2008             2007

    Cash flows from operating activities
        Net cash provided by operating
         activities                                 $24,699          $19,259

    Cash flows from investing activities
      Capital expenditures                           (3,288)          (6,392)
      Proceeds from adjustment to
       acquisition purchase price                     1,615              -
      Capitalized expenses relating to
       potential business acquisition                   -               (395)
      Payment of patent application fees               (147)             -
        Net cash used in investing
         activities                                  (1,820)          (6,787)

    Cash flows from financing activities
      Purchases of treasury stock                    (1,800)             -
      Repayments of debt                            (16,000)          (5,000)
      Proceeds from issuance of common
       stock to employees                               639              520
      Proceeds from exercise of stock
       options                                            3              604
      Excess tax benefit on stock option
       exercises                                          2              671
        Net cash used in financing
         activities                                 (17,156)          (3,205)

    Net increase in cash and cash
     equivalents                                      5,723            9,267
      Cash and cash equivalents at
       beginning of period                           20,474           30,153
      Cash and cash equivalents at end of
       period                                       $26,197          $39,420

    Supplemental cash flow disclosures
      Cash paid for interest                        $10,020          $11,562
      Cash paid for income taxes, net of
       refunds                                       $9,846          $12,799



                           CPI International, Inc.
                               and Subsidiaries

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

                                       Three Months Ended  Nine Months Ended
                                        June 27,  June 29,  June 27,  June 29,
                                          2008      2007      2008      2007
    Net income                           $5,824    $8,131   $14,488   $19,726
      Depreciation and amortization       2,779     2,225     8,171     6,607
      Interest expense, net               4,627     5,143    14,244    15,757
      Income tax expense                  2,836     1,835     6,928     8,639
    EBITDA                               16,066    17,334    43,831    50,729

    Adjustments to exclude certain
     non-recurring or non-cash
     items:
      Stock-based compensation
       expense                     (1)      594       396     1,568       889
      Loss on debt extinguishment  (2)      121       -         514       -
    Total adjustments                       715       396     2,082       889
    Adjusted EBITDA                     $16,781   $17,730   $45,913   $51,618

      EBITDA margin                (3)     17.7%     19.9%     16.1%     19.5%
      Adjusted EBITDA margin       (4)     18.5%     20.3%     16.9%     19.9%
      Net income margin            (5)      6.4%      9.3%      5.3%      7.6%


    (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: $0.084 million and $0.339 million for
        non-cash costs associated with the write-off of unamortized deferred
        debt issue costs and issue discount costs for the three months and
        nine months ended June 27, 2008, respectively; and $0.037 million and
        $0.175 million in cash payments for redemption premiums and other
        expenses for the three months and nine months ended June 27, 2008,
        respectively.
    (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
                                                             June 27,
                                                               2008
    Net cash provided by operating
     activities                                              $27,099
    Capital expenditures                                      (5,065)
    Payment of patent application fees                          (147)
    Free cash flow                                            21,887

    Adjustments to exclude certain non-
     recurring items:
      Capital expenditures for expansion
       of Canadian facility                      (1)             459
      Cash paid for debt extinguishment
       costs, net of taxes                       (2)           1,145
    Total adjustments                                          1,604
    Adjusted free cash flow                                  $23,491

    Free cash flow                                           $21,887
    Net income                                               $17,265
    Free cash flow conversion                    (3)             127%

    Free cash flow per share                     (4)           $1.23


    (1) Represents capital expenditures for the expansion of CPI's Canadian
        facility.
    (2) Represents $2.127 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
        percentage.
    (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 17,739,000
        shares.

SOURCE CPI International, Inc.

http://www.cpii.com

Copyright (C) 2008 PR Newswire. All rights reserved

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