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CPI International Announces Third Quarter 2010 Financial Results

Sales, orders and net income increase over previous year's results

PALO ALTO, Calif., Aug 11, 2010 /PRNewswire via COMTEX News Network/ -- CPI International, Inc. (Nasdaq: CPII), the parent company of Communications & Power Industries, Inc. (CPI), today announced its financial results for the third quarter of fiscal 2010 ended July 2, 2010.

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CPI's business continued to gain momentum in the third quarter of fiscal 2010. In comparison to the same periods of the prior fiscal year, the company:

In addition, during the most recent quarter, CPI:

"In the third quarter, CPI's end markets continued to strengthen and our top and bottom lines continued to improve as compared to last year and prior quarters," said Joe Caldarelli, chief executive officer. "Business in our defense markets remained stable, and our commercial markets continued to advance. In particular, our commercial communications business has recovered nicely from last year's economic downturn, and demand for our military communications products has remained strong. In our medical market, our x-ray imaging business is growing again, our radiation therapy business continues to be a solid performer and we are enjoying robust demand for products to support MRI applications."

The company's net income results in the third quarter of fiscal 2010 included $3.6 million in expenses related to its proposed merger with Comtech Telecommunications Corp.; there were no such expenses recorded in the same quarter of fiscal 2009. These merger-related expenses, which were for non-recurring transaction costs, reduced CPI's net income in the most recent quarter by approximately $0.12 per share on a diluted basis.

Excluding these non-recurring merger-related expenses, CPI's net income totaled $6.5 million, or $0.35 per share on a diluted basis, in the third quarter of fiscal 2010, representing an increase from the $3.9 million, or $0.22 per share on a diluted basis, generated in the same quarter of the previous year. This increase was primarily due to higher sales volume in the most recent quarter. Including non-recurring merger-related expenses, CPI's net income totaled $4.2 million, or $0.23 per share on a diluted basis, in the third quarter of fiscal 2010.

CPI generated total sales of $93.9 million in the third quarter of fiscal 2010, an increase from the $82.5 million generated in the prior year's third quarter. Sales were essentially unchanged in the company's defense markets and increased in its communications and medical markets.

During the first nine months of fiscal 2010, CPI booked orders totaling $283 million, an increase from the $271 million in orders booked during the same period of the previous year. Orders increased in all of the company's commercial markets but decreased in its defense markets due to the timing of orders to support certain radar and electronic warfare programs.

Third quarter adjusted EBITDA equaled $16.7 million, or 17.8 percent of sales, in fiscal 2010. In the prior year's third quarter, adjusted EBITDA totaled $14.4 million, or 17.5 percent of sales. This increase in adjusted EBITDA was primarily due to higher sales volume in the most recent quarter.

As of July 2, 2010, CPI's cash and cash equivalents equaled $47.2 million. For the 12 month period ended on that day, cash flow from operating activities totaled $32.3 million, or $1.82 per share on a diluted basis. Free cash flow for the same period totaled $28.4 million, or $1.60 per share on a diluted basis.

Fiscal 2010 Outlook

Excluding the impact of merger-related expenses, CPI expects its fourth quarter results to be comparable to those of its third quarter and continues to expect its fiscal 2010 financial results to fall within its previously issued guidance ranges.

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, transmit and receive 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, EBITDA margin, 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. 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. 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, EBITDA margin, 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, EBITDA margin, 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, EBITDA margin, 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, EBITDA margin, 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 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; the impact of a general slowdown in the global economy; our significant amount of debt; changes or reductions in the U.S. defense budget; currency fluctuations; goodwill impairment considerations; U.S. government contracts laws and regulations; changes in technology; the impact of unexpected costs; the impact of environmental 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.

                            CPI International, Inc.
                                and Subsidiaries

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


                                     Three Months        Nine Months
                                        Ended               Ended
                                      ------------          -----------
                                  July 2,     July 3,  July 2,     July 3,
                                        2010     2009        2010      2009
                                        ----     ----        ----      ----
     Sales                           $93,876  $82,520    $264,995  $241,569
     Cost of sales                    64,953   58,236     185,910   175,603
                                      ------   ------     -------   -------
     Gross profit                     28,923   24,284      79,085    65,966
                                      ------   ------      ------    ------
     Operating costs and
      expenses:
       Research and development        3,542    2,731       9,287     8,071
       Selling and marketing           5,178    4,762      15,392    14,552
       General and administrative      6,373    5,073      18,560    15,537
       Amortization of
        acquisition-related
        intangible assets                688      691       2,062     2,076
       Merger expenses                 3,589        -       3,800         -
                                       -----                -----
     Total operating costs and
      expenses                        19,370   13,257      49,101    40,236
                                      ------   ------      ------    ------
     Operating income                  9,553   11,027      29,984    25,730
     Interest expense, net             3,780    4,204      11,516    12,965
     Gain on debt
      extinguishment                              (51)                 (248)
                                         ---      ---         ---      ----
     Income before income taxes        5,773    6,874      18,468    13,013
     Income tax expense
      (benefit)                        1,562    3,004       5,924    (2,201)
                                       -----    -----       -----    ------
     Net income                       $4,211   $3,870     $12,544   $15,214
                                      ======   ======     =======   =======

     Other comprehensive
      income, net of tax
      Net unrealized (loss) gain
       on cash flow hedges and
        minimum pension liability
         adjustment                   (1,096)   3,346         (92)       84
                                      ------    -----         ---       ---
    Comprehensive income              $3,115   $7,216     $12,452   $15,298
                                      ======   ======     =======   =======

     Earnings per common share
      -Basic                           $0.25    $0.23       $0.75     $0.92
                                       =====    =====       =====     =====
     Earnings per common share
      -Diluted                         $0.23    $0.22       $0.69     $0.86
                                       =====    =====       =====     =====

     Shares used to compute
      earnings per common share
      -Basic                          16,631   16,362      16,534    16,316
                                      ======   ======      ======    ======
     Shares used to compute
      earnings per common share
      -Diluted                        17,961   17,535      17,787    17,402
                                      ======   ======      ======    ======


                   CPI International, Inc.
                       and Subsidiaries

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


                                                        October
                                             July 2,       2,
                                                 2010       2009
                                                 ----       ----
    Assets
    Current Assets:
      Cash and cash equivalents               $47,183    $26,152
      Restricted cash                           1,040      1,561
      Accounts receivable, net                 43,433     45,145
      Inventories                              78,407     66,996
      Deferred tax assets                      10,485      8,652
      Prepaid and other current assets          4,321      6,700
                                                -----      -----
        Total current assets                  184,869    155,206
    Property, plant, and equipment, net        54,650     57,912
    Deferred debt issue costs, net              2,607      3,609
    Intangible assets, net                     73,218     75,430
    Goodwill                                  162,225    162,225
    Other long-term assets                      3,786      3,872
                                                -----      -----
        Total assets                         $481,355   $458,254
                                             ========   ========

    Liabilities and stockholders' equity
    Current Liabilities:
      Accounts payable                        $21,164    $22,665
      Accrued expenses                         27,955     19,015
      Product warranty                          4,830      3,845
      Income taxes payable                      3,608      4,305
      Deferred income taxes                       328          -
      Advance payments from customers          12,899     12,996
                                               ------     ------
        Total current liabilities              70,784     62,826
    Deferred income taxes, non-current         23,997     24,726
    Long-term debt                            194,931    194,922
    Other long-term liabilities                 2,009      2,227
                                                -----      -----
        Total liabilities                     291,721    284,701
                                              -------    -------
    Commitments and contingencies
    Stockholders' equity
      Common stock ($0.01 par value, 90,000 shares
        authorized; 17,016 and 16,807 shares issued;
        16,810 and 16,601 shares
         outstanding)                             170        168
      Additional paid-in capital               79,257     75,630
      Accumulated other comprehensive
       income                                     506        598
      Retained earnings                       112,501     99,957
      Treasury stock, at cost (206 shares)     (2,800)    (2,800)
                                               ------     ------
        Total stockholders' equity            189,634    173,553
                                              -------    -------
        Total liabilities and stockholders'
         equity                              $481,355   $458,254
                                             ========   ========


                       CPI International, Inc.
                          and Subsidiaries

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



                                                         Nine Months
                                                            Ended
                                                         -----------
                                                   July 2,      July 3,
                                                      2010           2009
                                                       ---            ---

    Cash flows from operating activities
        Net cash provided by operating
         activities                                $22,516        $20,308
                                                   -------        -------

    Cash flows from investing activities
      Capital expenditures                          (2,824)        (2,349)
      Payment of patent application fees               (36)
                                                       ---            ---
        Net cash used in investing activities       (2,860)        (2,349)
                                                    ------         ------

    Cash flows from financing activities
      Repayments of debt                                 -        (12,358)
      Proceeds from issuance of common stock
       to employees                                    579            781
      Proceeds from exercise of stock options          214             82
      Excess tax benefit on stock option
       exercises                                       582             51
                                                       ---            ---
        Net cash provided by (used in) financing
         activities                                  1,375        (11,444)
                                                     -----        -------

    Net increase in cash and cash
     equivalents                                    21,031          6,515
      Cash and cash equivalents at beginning
       of period                                    26,152         28,670
                                                    ------         ------
      Cash and cash equivalents at end of
       period                                      $47,183        $35,185
                                                   =======        =======

    Supplemental cash flow disclosures
      Cash paid for interest                        $8,008         $9,742
                                                    ======         ======
      Cash paid for income taxes, net of
       refunds                                      $8,069         $2,417
                                                    ======         ======


                             CPI International, Inc.
                                and Subsidiaries

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


                                       Three Months
                                          Ended             Nine Months Ended
                                       ------------     -----------------
                                 July 2,      July 3,  July 2,      July 3,
                                    2010         2009     2010         2009
                                    ----         ----     ----         ----
    Net income                    $4,211       $3,870  $12,544      $15,214
      Depreciation and
       amortization                2,768        2,703    8,253        8,080
      Interest expense, net        3,780        4,204   11,516       12,965
      Income tax expense
       (benefit)                   1,562        3,004    5,924      (2,201)
                                   -----        -----    -----       ------
    EBITDA                        12,321       13,781   38,237       34,058
                                  ------       ------   ------       ------

    Adjustments to exclude
     certain non-
     recurring or non-
     cash items:
      Stock-based
       compensation expense  (1)     782          702    2,300        2,024
      Gain on debt
       extinguishment        (2)       -          (51)       -         (248)
      Merger expenses        (3)   3,589            -    3,800            -
                                   -----          ---    -----          ---
    Total adjustments              4,371          651    6,100        1,776
                                   -----          ---    -----        -----
    Adjusted EBITDA              $16,692      $14,432  $44,337      $35,834

      EBITDA margin          (4)    13.1%        16.7%    14.4%        14.1%
      Adjusted EBITDA margin (5)    17.8%        17.5%    16.7%        14.8%
      Net income margin      (6)     4.5%         4.7%     4.7%         6.3%



    (1) Represents a non-cash charge for stock options, restricted stock
     awards, restricted stock unit awards and the employee discount
     related to CPI's Employee Stock Purchase Plan.
    (2) For the three month and nine month periods ended July 3, 2009,
     respectively, represents the following related to repurchase of $5.0
     million and $8.0 million of 8% Senior Subordinated Notes at a
     discount of 2.75% and 4.9%: $0.137 million and $0.392 million
     discount, partially offset by $0.086 million $0.144 million write-
     off of unamortized deferred debt issue costs.
    (3) Represents transaction costs in connection with the proposed
     merger with Comtech, including fees for investment bankers, attorneys
     and other professional services.
    (4) Represents EBITDA divided by sales.
    (5) Represents adjusted EBITDA divided by sales.
    (6) 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
                                                             July 2,
                                                                      2010
                                                                      ----
    Net cash provided by operating
     activities                                                    $32,322
    Capital expenditures                                           $(3,840)
    Payment of patent application fees                                 (36)
                                                                       ---
    Free cash flow                                                  28,446

    Adjustments to exclude certain non-
     recurring items:
      Cash paid for prior year transfer
       pricing audit                         (1)                     1,598
      Cash paid for merger expenses, net of
       taxes                                 (2)                       352
                                                                       ---
    Total adjustments                                                1,950
                                                                     -----
    Adjusted free cash flow                                        $30,396
                                                                   =======

    Free cash flow                                                 $28,446
    Net income                                                     $20,796
    Free cash flow conversion                (3)                       137%

    Free cash flow per share                 (4)                     $1.60



    (1) Represents a payment made to the Canada Revenue Agency ("CRA")
     related to an audit of Communications & Power Industries Canada
     Inc.'s ("CPI Canada") income tax returns for fiscal years 2001 and
     2002. CPI Canada has received a tax assessment, including interest
     expense, from the CRA for fiscal years 2001 and 2002, based on tax
     deductions related to the valuation of the Satcom business, which
     was purchased by CPI Canada from Communications & Power Industries,
     Inc. in fiscal years 2001 and 2002. While the Company believes it
     has meritorious defenses and is in the process of pursuing these
     defenses, certain payments are required to be made in the meantime.
     The Company considers this a non-recurring use of cash as it
     pertains to previous years.
    (2) Represents cash paid for transaction costs in connection with the
     proposed merger with Comtech, including fees for investment bankers,
     attorneys and other professional services, net of income 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
     17,732,000 shares.


SOURCE CPI International, Inc.

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