CPI International Reports Fiscal Year 2013 Financial Results CPI achieves record annual orders, annual sales and year-end backlog results

PALO ALTO, Calif., Dec. 10, 2013 /PRNewswire/ -- CPI International Holding Corp., the parent company of CPI International, Inc. (CPI), today announced financial results for its fiscal year ended September 27, 2013.  In comparison to the previous fiscal year, CPI notably increased its orders, sales, backlog, net income and adjusted EBITDA results in fiscal 2013.

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"Despite challenging global economic conditions and the difficult budgetary environment, demand for CPI's products has remained robust, enabling CPI to achieve strong operational and financial results during fiscal 2013.  In fact, our fiscal 2013 orders and sales were the strongest in our history, and our backlog continues to be very healthy," said Joe Caldarelli, chief executive officer of CPI.

"Additionally, our acquisition of the Codan Satcom business toward the end of fiscal 2012 and of the MCL business this summer have been well received by customers.  The Codan Satcom and MCL businesses have been integrated smoothly into our existing communications business.  Our more recent acquisition of Radant Technologies in early October is also progressing well and is expected to make a meaningful contribution to our fiscal 2014 financial results."

Orders

In fiscal 2013, CPI booked orders totaling $464 million, an increase of 21 percent from the $383 million booked in the previous year.  Notably, orders for defense and communications products increased by double digits during fiscal 2013.

CPI's book-to-bill ratio for the year was 1.11.  As of September 27, 2013, its order backlog equaled $293 million, representing the company's highest year-end backlog ever.

In comparison to fiscal 2012, CPI's fiscal 2013 orders in its three largest end markets were as follows:

  • In the defense market, orders increased 20 percent to $179 million due to higher demand for products to support military radar systems globally and U.S. electronic warfare systems. Specifically, orders of radar products to support the Aegis radar system were very strong as a result of new ship builds and the replenishment of spare and repair stocking levels; shipments for some of these orders are expected to continue through fiscal 2015.
  • In the communications market, orders increased 41 percent to $182 million, largely due to a sizeable multi-year order for advanced tactical common data link (TCDL) antenna products to support intelligence, surveillance and reconnaissance (ISR) communications applications. Additionally, orders to support other military and commercial communications applications, including broadband data communications programs, increased. CPI's communications orders in fiscal 2013 also benefited from the inclusion of orders from the Codan Satcom business, which was acquired in the fourth quarter of fiscal 2012, and the MCL business, which was acquired in the third quarter of fiscal 2013.
  • In the medical market, orders decreased four percent to $69.7 million due to the timing of orders for x-ray imaging products.

Sales

CPI generated total sales of $419 million in fiscal 2013, an increase of seven percent from the $391 million generated in the prior year.  In comparison to fiscal 2012, CPI's fiscal 2013 sales in its three largest end markets were as follows:

  • In the defense market, sales increased seven percent to $157 million due to increased sales of products to support radar systems, including the Aegis radar system, and certain airborne and shipboard electronic countermeasure systems.
  • In the communications market, sales increased 15 percent to $150 million due largely to the inclusion of sales of products from the Codan Satcom and MCL businesses. Sales of products to support commercial communications applications, including broadband data communications programs, and military communications applications also increased.
  • In the medical market, sales decreased one percent to $75.3 million due to lower sales of products to support x-ray imaging applications.

Net Income and Adjusted EBITDA

In fiscal 2013, CPI's net income totaled $10.9 million, an increase from the $3.7 million recorded in the previous fiscal year.  This increase in net income was primarily the result of higher total sales and sales of products with higher margins in fiscal 2013.  CPI's net income also benefited from a decrease in intangible asset amortization related to the acquisition of CPI by The Veritas Capital Fund IV, L.P. in February 2011.

Adjusted EBITDA for fiscal 2013 was $72.8 million, or 17.4 percent of sales, an increase from the $64.4 million, or 16.5 percent of sales, generated in the previous year.  This increase in adjusted EBITDA was primarily due to higher total sales and sales of products with higher margins in fiscal 2013.

Cash Flow

As of September 27, 2013, CPI had cash and cash equivalents totaling $67.1 million.  For fiscal 2013, CPI's cash flow from operating activities was $38.2 million, its free cash flow was $33.2 million and its adjusted free cash flow was $35.1 million.

Fiscal 2014 Outlook

"We expect no significant changes to market conditions in fiscal 2014.  We will continue to be mindful of fluctuations and unpredictability in government funding, and will react accordingly, but we do not expect these fluctuations to have a meaningful impact on our results in the coming year.  Typically, more than half of our defense sales are for spare and repair products for numerous already fielded programs, protecting our defense business from large cuts to new programs," said Caldarelli.  "Our fiscal 2014 results will benefit, of course, from the inclusion of the Radant business for the entire fiscal year."

For fiscal 2014, CPI expects:

  • Total sales of between $475 million and $500 million;
  • Adjusted EBITDA of between $80 million and $85 million; and
  • Adjusted free cash flow of more than $21 million.

The effective tax rate for fiscal 2013 is expected to be approximately 38 percent, excluding discrete tax adjustments.

Financial Community Conference Call

In conjunction with this announcement, CPI will hold a conference call on Wednesday, December 11, 2013 at 11:00 a.m. (EST) that simultaneously will be broadcast live over the Internet on the company's Web site.  To participate in the conference call, please dial (800) 649-5127, or (253) 237-1144 for international callers, enter conference ID 11351999 and ask for the CPI International Fiscal 2013 Financial Results Conference Call.  To access the call via the Internet, please visit http://investor.cpii.com and click "Events."

About CPI International Holding Corp.

CPI International Holding Corp., headquartered in Palo Alto, California, is the parent company of CPI International, Inc., which is the parent company of Communications & Power Industries LLC and Communications & Power Industries Canada Inc., which together are a leading provider of microwave, radio frequency, power and control solutions for critical defense, communications, medical, scientific and other applications.  Communications & Power Industries LLC and Communications & Power Industries Canada Inc. develop, manufacture and distribute 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 and adjusted free cash flow presented here are non-generally accepted accounting principles (GAAP) financial measures.  EBITDA represents earnings before net interest expense, provision for income taxes and depreciation and amortization.  Adjusted EBITDA represents EBITDA further adjusted to exclude certain non-recurring, non-cash, unusual or other 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.  Adjusted free cash flow represents free cash flow further adjusted to exclude certain non-recurring, unusual or other items.

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 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 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 and adjusted free cash flow of other companies.  Because EBITDA, adjusted EBITDA, EBITDA margin, adjusted EBITDA margin, free cash flow 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; our significant amount of debt; changes or reductions in the U.S. defense budget; currency fluctuations; goodwill impairment considerations; customer cancellations of sales contracts; U.S. Government contracts; export restrictions and other laws and regulations; international laws; changes in technology; the impact of unexpected costs; the impact of a general slowdown in the global economy; the impact of environmental or zoning 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 Holding Corp.

and Subsidiaries


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



Three Months Ended


Twelve Months Ended


September 27,


September 28,


September 27,


September 28,


2013


2012


2013


2012

Sales

$

110,012


$

104,519


$

419,408


$

391,150

Cost of sales, including  $130, $228, $391 and $248 of utilization of net increase in cost basis of inventory due to purchase accounting, respectively


80,511



75,756



301,321



282,391

Gross profit


29,501



28,763



118,087



108,759

Operating costs and expenses:












Research and development


3,521



3,102



14,602



13,499

Selling and marketing


5,470



5,393



21,925



21,738

General and administrative


8,229



6,726



29,034



25,209

Amortization of acquisition-related intangible assets


1,975



2,731



8,994



13,983

Total operating costs and expenses


19,195



17,952



74,555



74,429

Operating income


10,306



10,811



43,532



34,330

Interest expense, net


6,770



6,793



27,237



27,230

Income before income taxes


3,536



4,018



16,295



7,100

Income tax expense


1,549



1,322



5,406



3,415

Net income


1,987



2,696



10,889



3,685













Other comprehensive income (loss), net of tax












Unrealized gain (loss) on cash flow hedges, net of tax


729



989



(795)



1,677

Unrealized actuarial gain (loss) and amortization of prior service cost for pension liability, net of tax


432



(43)



432



(43)

Total other comprehensive income (loss), net of tax


1,161



946



(363)



1,634

Comprehensive income

$

3,148


$

3,642


$

10,526


$

5,319

 

CPI International Holding Corp.

and Subsidiaries


CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



September 27,


September 28,


2013


2012

Assets




Current Assets:




Cash and cash equivalents

$

67,051


$

43,006

Restricted cash


2,571



1,926

Accounts receivable, net


52,160



51,076

Inventories


89,832



83,937

Deferred tax assets


13,486



14,186

Prepaid and other current assets


7,068



10,400

Total current assets


232,168



204,531

Property, plant, and equipment, net


76,333



81,601

Deferred debt issue costs, net


9,713



11,954

Intangible assets, net


239,495



248,877

Goodwill


179,727



178,934

Other long-term assets


935



1,105

Total assets

$

738,371


$

727,002







Liabilities and stockholders' equity






Current Liabilities:






Current portion of long-term debt

$

5,500


$

3,200

Accounts payable


26,742



26,331

Accrued expenses


27,348



26,707

Product warranty


4,706



4,066

Income taxes payable


98



2,852

Advance payments from customers


17,996



14,434

Total current liabilities


82,390



77,590

Deferred income taxes


89,178



88,879

Long-term debt, less current portion


353,233



358,613

Other long-term liabilities


5,818



5,704

Total liabilities


530,619



530,786

Commitments and contingencies






Stockholders' equity






Common stock ($0.01 par value, 2 shares authorized: 1 share issued and outstanding)




Additional paid-in capital


199,575



198,565

Accumulated other comprehensive income


86



449

Retained earnings (accumulated deficit)


8,091



(2,798)

Total stockholders' equity


207,752



196,216

Total liabilities and stockholders' equity

$

738,371


$

727,002

 

CPI International Holding Corp.

and Subsidiaries


CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



Twelve Months Ended


September 27,


September 28,


2013


2012

Cash flows from operating activities




Net income


10,889



3,685

Adjustments to reconcile net income to net cash provided by operating activities:






Depreciation


11,655



10,356

Amortization of intangible assets


9,972



14,961

Write-off of patent application fees


-



-

Amortization of deferred debt issue costs


2,241



2,119

Amortization of discount on long-term debt


120



116

Utilization of net increase in cost basis of inventory due to purchase accounting


391



248

Non-cash defined benefit pension expense


80



26

Stock-based compensation expense


1,010



1,001

Allowance for (recovery of) doubtful accounts


76



(75)

Deferred income taxes


967



421

Net loss on the disposition of assets


122



193

Net (gain) loss on derivative contracts


(242)



52

Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:






   Restricted cash


(645)



444

   Accounts receivable


1,090



(5,061)

   Inventories


(3,193)



(2,902)

   Prepaid and other current assets


359



63

   Other long-term assets


15



-

   Accounts payable


(1,291)



(867)

   Accrued expenses


396



(157)

   Product warranty


440



(1,861)

   Income tax payable, net


19



2,130

   Advance payments from customers


3,450



(230)

   Other long-term liabilities


244



388

   Net cash provided by operating activities

$

38,165


$

25,050





Cash flows from investing activities




Capital expenditures


(4,938)



(7,584)

Acquisitions, net of cash acquired


(5,982)



(7,915)

Net cash used in investing activities


(10,920)



(15,499)







Cash flows from financing activities






Repayment of borrowings under CPII's term loan facility


(3,200)



(1,500)

Net cash used in financing activities


(3,200)



(1,500)







Net increase in cash and cash equivalents


24,045



8,051

Cash and cash equivalents at beginning of period


43,006



34,955

Cash and cash equivalents at end of period

$

67,051


$

43,006







Supplemental disclosures






Cash paid for interest

$

24,947


$

25,410

Cash paid for income taxes, net of refunds

$

4,412


$

877

Unpaid capital expenditures

$

530


$

-

 

CPI International Holding Corp.

and Subsidiaries


NON-GAAP SUPPLEMENTAL INFORMATION

EBITDA and Adjusted EBITDA

(in thousands - unaudited)





 Three Months Ended 


Twelve Months Ended 




September 27,


September 28,


September 27,


September 28,




2013


2012


2013


2012

Net income


$

1,987


$

2,696


$

10,889


$

3,685


Depreciation and amortization


5,189


5,800


21,627


25,317


Interest expense, net


6,770


6,793


27,237


27,230


Income tax expense


1,549


1,322


5,406


3,415

EBITDA


15,495


16,611


65,159


59,647











Adjustments to exclude certain non-recurring, non-cash or other unusual items:










Stock-based compensation expense

(1)

256


255


1,010


1,001


Acquisition-related expenses

(2)

1,277


767


4,063


1,489


Write-off of inventory step-up

(3)

130


228


391


248


Veritas Capital management fee

(4)

529


626


2,211


2,031

Total adjustments


2,192


1,876


7,675


4,769

Adjusted EBITDA


$

17,687


$

18,487


$

72,834


$

64,416




















EBITDA margin

(5)


14.1

%



15.9

%



15.5

%



15.2

%


Adjusted EBITDA margin

(6)


16.1

%



17.7

%



17.4

%



16.5

%


Net income margin

(7)


1.8

%



2.6

%



2.6

%



0.9

%



1)

Represents compensation expense for Class B membership interests by certain members of management and independent directors in the company's parent, CPI International Holding LLC.

2)

Represents non-recurring transaction costs related to the negotiation, closing and integration of the Radant, MCL and Codan Satcom acquisitions. Costs include fees for attorneys and other professional services and expenses related to integration of the Codan Satcom and MCL operations into those of CPI.

3)

Represents a non-cash charge for utilization of the net increase in cost basis of inventory that resulted from purchase accounting in connection with acquisitions.

4)

Represents a management fee payable to Veritas Capital for advisory and consulting services.

5)

Represents EBITDA divided by sales.

6)

Represents adjusted EBITDA divided by sales.

7)

Represents net income divided by sales.

 

CPI International Holding Corp.

and Subsidiaries


NON-GAAP SUPPLEMENTAL INFORMATION

Free Cash Flow and Adjusted Free Cash Flow

(in thousands - unaudited)





Twelve Months Ended




September 27,




2013

Net cash provided by operating activities


$

38,165

Cash capital expenditures


(4,938)

Free cash flow


33,227






Adjustments to exclude certain non-recurring or other unusual items:





Cash paid for acquisition-related expenses, net of taxes

(1)

2,015


Cash paid for Veritas Capital advisory fee, net of taxes

(2)

1,237


Cash received for prior year transfer pricing audit

(3)

(1,394)

Total adjustments


1,858

Adjusted free cash flow


$

35,085






Free cash flow


$

33,227

Net income


$

10,889



1)

Represents non-recurring transaction costs, net of income taxes, related to the negotiation, closing and integration of the Radant, MCL and Codan Satcom acquisitions. Costs include fees for attorneys and other professional services and expenses related to integration of the Codan Satcom and MCL operations into those of CPI.

2)

Represents a management fee paid to Veritas Capital for advisory and consulting services, net of income taxes.

3)

Represents the net of income tax refunds, partially offset by payments, with respect to an audit by the Canada Revenue Agency ("CRA") of Communications & Power Industries Canada Inc.'s ("CPI Canada") purchase of the Satcom Division from the Company in fiscal years 2001 and 2002. The Company considers this a non-recurring source of cash as it pertains to previous years.

 

SOURCE CPI International Holding Corp.; CPI International, Inc.



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