CPI International Announces Third Quarter 2008 Financial Results
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.
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.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share data - unaudited) 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 CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data - unaudited) 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 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 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 NON-GAAP SUPPLEMENTAL INFORMATION 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. 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 $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.
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