CPI International Announces Fourth Quarter and Fiscal Year 2008 Financial Results
PALO ALTO, Calif., Dec 15, 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 fourth quarter and fiscal year 2008, which ended October 3, 2008.
In fiscal 2008, CPI International (CPI) generated total sales of $370.0 million, a five percent increase from the $351.1 million generated in fiscal 2007. Sales increased in the defense (radar and electronic warfare), communications, industrial and scientific markets. Orders booked in fiscal 2008 totaled $374.2 million, a nine percent increase from the $343.7 million 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 $33.9 million, or $1.91 per share on a diluted basis, and free cash flow totaling $29.5 million, or $1.67 per share on a diluted basis. During the fiscal year, the company made debt repayments of $21.0 million, in aggregate.
Net income for fiscal 2008 totaled $20.4 million, or $1.16 per share on a diluted basis, a decrease from the $22.5 million, or $1.27 per share on a 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 August 2007; the unfavorable impact from the weakness of the U.S. 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 $61.3 million, or 17 percent of sales, in fiscal 2008, decreasing from $64.3 million, or 18 percent of sales in the previous fiscal 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 Joe Caldarelli, chief executive officer of CPI. "We grew our sales and orders 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 $2.8 million of our common 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 August 2007, we successfully 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 $8.6 million in fiscal 2007 to $10.8 million and, simultaneously, customer-funded research and development activities increased from $7.7 million to $12.0 million. The company believes that its development programs 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 October 3, 2008, CPI's cash and cash equivalents totaled $28.7 million, as compared to $20.5 million as of September 28, 2007. In fiscal 2008, CPI used its cash to make aggregate debt repayments totaling $21.0 million and to repurchase approximately 206,000 shares of its common stock under the stock repurchase program the company implemented in the third quarter of fiscal 2008, for an aggregate cost of approximately $2.8 million.
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 $98.6 million, an eight percent increase from the $91.6 million generated in the 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 $6.0 million, or $0.34 per share on a diluted basis, an increase from the $2.8 million, or $0.16 per share on a diluted basis, in the same quarter of fiscal 2007. Net income in the fourth quarter of fiscal 2007 was negatively impacted by $3.9 million, or $0.22 per 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 $17.4 million, or 18 percent of sales, as compared to $13.6 million, or 15 percent of sales, in the fourth quarter of fiscal 2007. Expenses related to the debt refinancing implemented in the fourth quarter of fiscal 2007 had a $6.3 million negative 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 $20 million, consistent 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 Tuesday, December 16, 2008 at 11:00 a.m. (EST) that will be simultaneously broadcast live over the Internet on the company's Web site. To participate in the conference call, please dial (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 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, 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.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share data) 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 (in thousands, except per share data) 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 CONSOLIDATED STATEMENTS OF CASH FLOWS 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 NON-GAAP SUPPLEMENTAL INFORMATION 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. NON-GAAP SUPPLEMENTAL INFORMATION Free Cash Flow, Adjusted Free Cash Flow, Free Cash Flow Conversion (in thousands, except per share and percent data - unaudited) 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.
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