CPI International Announces Fourth Quarter and Fiscal Year 2008 Financial Results
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 fourth quarter and
fiscal year 2008, which ended
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In fiscal 2008, CPI International (CPI) generated total sales of
million
2007. Sales increased in the defense (radar and electronic warfare),
communications, industrial and scientific markets. Orders booked in fiscal
2008 totaled
booked in the prior fiscal year. Orders increased in all of CPI’s markets.
In fiscal 2008, CPI generated cash flow from operating activities totaling
totaling
fiscal year, the company made debt repayments of
Net income for fiscal 2008 totaled
diluted basis, a decrease from the
diluted basis, generated in fiscal 2007. The decrease in net income was
primarily due to the shipment of products with lower margins, including a
significantly greater percentage of new products and products from engineering
development programs, particularly from the CPI Malibu Division, which was
acquired in
dollar in relation to the Canadian dollar; and higher research and development
expenses. Net income for fiscal 2008, as compared to fiscal 2007, was
favorably impacted by higher sales volume, lower debt-extinguishment costs and
lower interest expense.
EBITDA equaled
decreasing from
year. The decrease in EBITDA was primarily due to the same factors that
impacted net income.
“Despite challenging global economic conditions, CPI maintained our
traditionally strong operating performance in fiscal 2008,” said
Caldarelli
levels and remained solidly profitable. Fiscal 2008′s profitability was
especially noteworthy because a larger portion of our sales were for lower-
margin development programs and products than has historically been the case.
CPI’s total spending on research and development, which includes both
customer-sponsored and company-funded activities, increased approximately 40
percent in fiscal 2008 compared to fiscal 2007. Furthermore, in fiscal 2008,
we again generated very strong cash flow, which was used to retire a
significant amount of our debt and repurchase
stock. CPI’s free cash flow conversion, which represents the amount of net
income we were able to convert to free cash flow during the fiscal year, was
exceptionally strong at 144 percent. In
recapitalized our debt, and the resulting senior credit facility has one
significant financial covenant, requiring that we maintain a senior secured
leverage ratio of 3.75-to-one; our actual ratio is approximately one-to-one,
well within the required ratio. With this low senior secured leverage ratio
and our healthy levels of profitability and cash generation, we do not
anticipate any need to restructure our debt or reenter the capital markets
before fiscal 2011.”
CPI engaged in higher levels of research, development and engineering
activities throughout the organization in fiscal 2008. In fiscal 2008, CPI
increased its investment in company-funded research and development programs
from
customer-funded research and development activities increased from
million to $12.0 million
should result in profitable products and increased future growth potential
throughout CPI’s markets and businesses, and expects the elevated levels of
development activity to continue for the foreseeable future.
As of
million
2008, CPI used its cash to make aggregate debt repayments totaling
million
under the stock repurchase program the company implemented in the third
quarter of fiscal 2008, for an aggregate cost of approximately
Fiscal 2008 Sales Highlights
In fiscal 2008, key sales 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 $144.2 million in fiscal 2007 to $151.8 million in 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 CPI Malibu Division in fiscal 2008.
* In the medical market, sales decreased three percent from
$67.6 million in fiscal 2007 to $65.8 million in fiscal 2008,
primarily due to a $5.5 million decrease in medical sales caused by
the absence of a Russian tender program in which CPI participated in
fiscal 2006 and 2007, but which did not recur in fiscal 2008.
Excluding the Russian tender program, CPI's medical sales increased
$3.7 million, or six percent, in fiscal 2008 as compared to the
previous fiscal year.
* In the communications market, sales increased five percent from
$112.3 million in fiscal 2007 to $117.8 million in fiscal 2008.
This increase was primarily due to the inclusion of sales of
telemetry and TCDL products by the CPI Malibu Division, as well as
the start of production shipments for Increment One of the
Warfighter Information Network Tactical (WIN-T) military
communications program.
Fourth Quarter 2008 Financial Results
In the fourth quarter of fiscal 2008, CPI generated total sales of
million
same quarter of fiscal 2007. Sales increased in the defense (radar and
electronic warfare), medical, communications and industrial end markets.
Fourth quarter net income totaled
diluted basis, an increase from the
diluted basis, in the same quarter of fiscal 2007. Net income in the fourth
quarter of fiscal 2007 was negatively impacted by
share on a diluted basis, in expenses, after taxes, related to debt
refinancing implemented during that quarter.
CPI’s EBITDA in the fourth quarter of 2008 equaled
percent of sales, as compared to
fourth quarter of fiscal 2007. Expenses related to the debt refinancing
implemented in the fourth quarter of fiscal 2007 had a
impact on CPI’s EBITDA in that quarter.
Fiscal 2009 Outlook
In fiscal 2009, despite the challenging economic environment, CPI expects
to continue to generate free cash flow in excess of
with the company’s long-term guidance. “We plan to continue to manage our
business in a prudent and conservative manner, and are actively managing our
expenses,” said Caldarelli. “However, we are concerned that our customers and
end markets may be negatively affected in fiscal 2009 by the current economic
conditions. We continue to experience some delays in the placement of orders
and a softening in demand for some of our products and programs, and customer
expectations for a number of our products and programs are changing on a
regular basis. Consequently, our visibility into CPI’s performance in fiscal
2009 is considerably less clear than we would like, and we do not feel that we
can provide meaningful financial projections for the entire 2009 fiscal year
at this time with any confidence. We currently do not have reliable
visibility into the second half of the fiscal year that would allow us to
provide guidance within useful ranges.”
Caldarelli continued, “We expect that our financial performance in the
first and second quarters of fiscal 2009 will be weaker than our performance
in the corresponding quarters of fiscal 2008, based on the delays we have
already experienced in the placement of certain orders in the first few months
of the new fiscal year.”
Financial Community Conference Call
In conjunction with this announcement, CPI will hold a conference call on
broadcast live over the Internet on the company’s Web site. To participate in
the conference call, please dial (877) 795-3646, or (719) 325-4750 for
international callers, enter participant pass code 4467659 and ask for the CPI
International Fourth Quarter and Fiscal Year 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
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, 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
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Three Months Ended Twelve Months Ended
Oct. 3, Sept. 28, Oct. 3, Sept. 28,
2008 2007 2008 2007
Sales $98,566 $91,605 $370,014 $351,090
Cost of sales 69,072 61,241 261,086 237,789
Gross profit 29,494 30,364 108,928 113,301
Operating costs and expenses:
Research and development 2,369 2,083 10,789 8,558
Selling and marketing 5,632 4,719 21,144 19,258
General and administrative 5,965 5,434 22,746 21,519
Amortization of acquisition-
related intangible assets 759 674 3,103 2,316
Net loss on disposition of fixed
assets 2 55 205 129
Total operating costs and expenses 14,727 12,965 57,987 51,780
Operating income 14,767 17,399 50,941 61,521
Interest expense, net 4,811 5,182 19,055 20,939
Loss on debt extinguishment 119 6,331 633 6,331
Income before income taxes 9,837 5,886 31,253 34,251
Income tax expense 3,876 3,109 10,804 11,748
Net income $5,961 $2,777 $20,449 $22,503
Other comprehensive income, net of
tax
Net unrealized (loss) gain on cash
flow hedges and other (812) 17 (2,746) 431
Comprehensive income $5,149 $2,794 $17,703 $22,934
Earnings per share - Basic $0.37 $0.17 $1.25 $1.39
Earnings per share - Diluted $0.34 $0.16 $1.16 $1.27
Shares used to compute earnings per
share - Basic 16,278 16,347 16,356 16,242
Shares used to compute earnings per
share - Diluted 17,637 17,799 17,697 17,721
CPI International, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
October 3, September 28,
2008 2007
Assets
Current Assets:
Cash and cash equivalents $28,670 $20,474
Restricted cash 776 2,255
Accounts receivable, net 47,348 52,589
Inventories 65,488 67,447
Deferred tax assets 11,411 9,744
Prepaid and other current assets 3,823 4,639
Total current assets 157,516 157,148
Property, plant, and equipment, net 62,487 66,048
Deferred debt issue costs, net 4,994 6,533
Intangible assets, net 78,534 81,743
Goodwill 162,611 161,573
Other long-term assets 806 3,177
Total assets $466,948 $476,222
Liabilities and stockholders' equity
Current Liabilities:
Current portion of long-term debt $1,000 $1,000
Accounts payable 21,109 21,794
Accrued expenses 23,044 26,349
Product warranty 4,159 5,578
Income taxes payable 7,766 8,748
Advance payments from customers 12,335 12,132
Total current liabilities 69,413 75,601
Deferred income taxes 27,321 28,394
Long-term debt, less current portion 224,660 245,567
Other long-term liabilities 1,689 754
Total liabilities 323,083 350,316
Commitments and contingencies
Stockholders' equity
Preferred stock ($0.01 par value;
10,000 shares authorized and none
issued and outstanding) - -
Common stock ($0.01 par value,
90,000 shares authorized; 16,538 and 16,370
shares issued; 16,332 and 16,370 shares
outstanding) 165 164
Additional paid-in capital 71,818 68,763
Accumulated other comprehensive
(loss) income (1,809) 937
Retained earnings 76,491 56,042
Treasury stock, at cost (206 and 0 shares) (2,800) -
Total stockholders' equity 143,865 125,906
Total liabilities and
stockholders' equity $466,948 $476,222
CPI International, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
October 3, September 28,
2008 2007
Cash flows from operating activities
Net income $20,449 $22,503
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,607 6,562
Amortization of intangibles 3,356 2,536
Amortization of deferred debt issue costs 1,197 1,401
Amortization of discount on floating rate
senior notes 15 49
Non-cash loss on debt extinguishment 420 4,659
Non-cash defined benefit pension expense 55 -
Stock-based compensation expense 2,135 1,239
Allowance for doubtful accounts - (329)
Deferred income taxes (1,360) (561)
Net loss on the disposition of assets 205 129
Tax benefit from stock option exercises 50 1,281
Excess tax benefit on stock option exercises (18) (781)
Changes in operating assets and liabilities,
net of acquired assets and assumed
liabilities:
Restricted cash 1,479 (509)
Accounts receivable 5,241 (7,388)
Inventories 1,986 (8,473)
Prepaid and other current assets (470) (811)
Other long-term assets (208) 476
Accounts payable (685) (215)
Accrued expenses (4,953) (320)
Product warranty (1,419) (653)
Income taxes payable (779) (2,262)
Advance payments from customers 203 2,202
Other long-term liabilities (625) 924
Net cash provided by operating activities 33,881 21,659
Cash flows from investing activities
Capital expenditures (4,262) (8,169)
Acquisitions, net of cash acquired 1,615 (22,174)
Payment of patent application fees (147) -
Net cash used in investing activities (2,794) (30,343)
Cash flows from financing activities
Proceeds from issuance of debt - 100,000
Proceeds from stock purchase plan and
exercises of stock options 891 1,436
Repayments of debt (21,000) (100,750)
Debt issuance costs - (2,462)
Purchase of treasury stock (2,800) -
Excess tax benefit on stock option exercises 18 781
Net cash used in financing activities (22,891) (995)
Net increase (decrease) in cash and
cash equivalents 8,196 (9,679)
Cash and cash equivalents at
beginning of year 20,474 30,153
Cash and cash equivalents at end of year $28,670 $20,474
Supplemental cash flow disclosures
Cash paid for interest $18,720 $22,255
Cash paid for income taxes, net of refunds $13,099 $13,631
CPI International, Inc.
and Subsidiaries
NON-GAAP SUPPLEMENTAL INFORMATION
EBITDA and Adjusted EBITDA
(in thousands - unaudited)
Three Months Ended Year Ended
Oct. 3, Sept. 28, Oct. 3, Sept. 28,
2008 2007 2008 2007
Net income $5,961 $2,777 $20,449 $22,503
Depreciation and amortization 2,792 2,491 10,963 9,098
Interest expense, net 4,811 5,182 19,055 20,939
Income tax expense 3,876 3,109 10,804 11,748
EBITDA 17,440 13,559 61,271 64,288
Adjustments to exclude certain non-
recurring or non-cash items:
Stock-based compensation expense (1) 567 350 2,135 1,239
Loss on debt extinguishment (2) 119 6,331 633 6,331
Inventory correction (3) - (571) - (571)
Total adjustments 686 6,110 2,768 6,999
Adjusted EBITDA $18,126 $19,669 $64,039 $71,287
EBITDA margin (4) 17.7% 14.8% 16.6% 18.3%
Adjusted EBITDA margin (5) 18.4% 21.5% 17.3% 20.3%
Net income margin (6) 6.0% 3.0% 5.5% 6.4%
(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: $0.081 million and $0.420 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
year ended October 3, 2008, respectively; and $0.038 million and
$0.213 million in cash payments for redemption premiums and other
expenses for the three months and year ended October 3, 2008,
respectively. For the three months and year ended September 28,
2007, represents expenses related to debt refinancing consisting of
$4.659 million for non-cash costs associated with the write-off of
unamortized deferred debt issue costs and $1.952 million in cash
payments for redemption premiums and other expenses associated with
the repurchase and redemption of the floating rate senior notes,
partially offset by $0.280 million of cash proceeds from the early
termination of the interest rate swap on CPI's floating rate senior
note.
(3) Represents a one-time, non-cash, reduction to cost of sales to
correct inventory that was expensed in prior periods.
(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
October 3,
2008
Net cash provided by operating activities $33,881
Capital expenditures (4,262)
Payment of patent application fees (147)
Free cash flow 29,472
Adjustments to exclude certain non-recurring items:
Cash paid for debt extinguishment costs, net of
taxes (1) 132
Total adjustments 132
Adjusted free cash flow $29,604
Free cash flow $29,472
Net income $20,449
Free cash flow conversion (2) 144%
Free cash flow per share (3) $1.67
(1) Represents redemption premiums and other expenses associated with
the repurchase and redemption of CPI's floating rate senior notes,
net of taxes.
(2) Represents free cash flow divided by net income, expressed as a
percentage.
(3) Represents free cash flow divided by the "Shares used to compute
earnings per share: Diluted" for the year ended October 3, 2008, or
17,697,000 shares.
SOURCE CPI International, Inc.